CEVA Inc (CEVA) 2007 Q3 法說會逐字稿

Good morning. My name is Melissa and I'll be your conference operator today. At this time, I would like to welcome everyone to the CEVA third quarter financial results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question and answer period. (Operator instructions). It is now my pleasure to turn the floor over to your host, Yaniv Arieli, Chief Financial Officer. Sir, you may begin your conference.

Thank you. Good morning everyone and welcome to CEVA's third quarter 2007 conference call. Today's conference call contains forward looking statements that involve risks and uncertainties as well as assumptions that if materialize or prove incorrect could cause the results of CEVA to differ materially from those expressed or implied by such forward looking statements and assumptions. All statements, other than statements of historical facts are statements that could be deemed forward looking statements, including financial guidance for the fourth quarter and fiscal '07, optimism about the pipeline build up of our potential royalty revenue growth based on customers adopting our new technologies and achieving major design wins with OEM, as well as the success of products incorporating our technologies, growth in the digital camera market, biomedic market, the SSD market and the cell phone market in China, as well as potential to capture market share in such markets and capitalize on such trends, as well as the [Harcourt] update.

The risks, uncertainties and assumptions include the ability of the CEVA DSP cores and other technologies to continue to be growth drivers for the company, the effects of the intense competition within our industry, the effect of the challenging period of growth experienced by our industry in which we license our technology to, the possibility that the market of our technology may not develop as expected, the possibility that our customers licensing our products incorporating our technologies did not succeed as expected, our ability to timely and successfully develop and introduce new technologies, our reliance on revenue derived from limited number of licensees, our ability to improve our royalty revenue in the future periods and other risks related to our business and the pipeline of companies interested in our technologies, including but not limited to those that are described from time to time in the companies Securities and Exchange Commission filing.

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

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 later on cover the financial results for the third quarter as well as the financial guidance for the fourth quarter and fiscal 2007. With that said, I would like to turn the call to Gideon. Gideon, please.

Thanks, Yaniv and good morning everyone and thanks for joining us today. I hope you took the time to read our press release contains the results of the third quarter of 2007. Total revenue for the third quarter was $8.7 million within the mid-range of our guidance, slightly higher than $8.5 million for the second quarter of 2007 and 11% higher than the $7.9 million for the third quarter of 2006. We completed 10 license agreements during the quarter; eight were for CEVA DSP cores and platforms and two for CEVA SATA technology.

Target application for customers are 2G/3G/4G phones, wireless headsets, solid state drive, SSD devices, surveillance equipment and fingerprint recognition systems. Geographically we signed two licensing agreements in the U.S., five in Europe and three in the Asia Pacific region.

During the third quarter of 2007 royalty revenue bust the $2 million mark for the first time in CEVA's history. It was $2.2 million, an increase of 14% and 55% compared to the second quarter of 2007 and to the third quarter of 2006 respectively. During the quarter, we collected our first royalty payment from one of the leaders in the 3G chipset market which prompted a shipment of product incorporated our CEVA-X technology. Contribution from our wireless based customer demonstrated sequential growth.

The third quarter of 2007 was another solid quarter in terms of expanding the licensee base, increasing the royalty revenue and beating the pipeline. Q3 was also very successful in terms of design wins and much production ramp with leading OEMs.

I'd like now to elaborate on the highlights of the quarter. We signed a major comprehensive agreement with one of our largest customers that extended the use of the CEVA-X technology in its wireless product line. Recent discussion with the same customer also suggested adoption of our newest DSP technology in the near future. We concluded a license agreement for our CEVA-X DSP cores and multimedia platform with a major branded Japanese OEM who plans to use our technology for image processing and surveillance cameras. The surveillance market is rapidly transitioning from analog to digital based IT network. Market research film supply (inaudible) of 100% during the next four years for digital base cameras for 11 of 34 million units annually in 2011.

Another growing market where we believe we can extend the use of our technologies and solutions is a biometric market, specifically its largest segment single (inaudible) systems that are used in local digital signature base and more. Based on market research from (inaudible) estimates that signle-based local segment is expected to grow at (inaudible) 45% during the next four years to 11 or 15 million units annually in 2011. Our new customer for this application is a China based company leader in this space who decided to use the CEVA-X in its next generation product instead of the DSP of one of our competitors as originally designed.

Also in China, we signed a TeakLite agreement with one of the larger original design manufacturers or DM. We incorporate a variety of Bluetooth products using our TeakLite core and other DSP technology. This customer is a major supplier of Bluetooth headsets to the largest headset manufacturer who then sell the headset under their own brands. A TeakLite based headset allows advanced features such as noise cancellation and MP3 music playback, as well as also substantial cost savings since the TeakLite also takes the role of the (inaudible) as the system controller.

In the SATA space, we signed an agreement with one of the largest flash disk providers which aims to use the SATA controllers for its solid state drive, SSD devices. An alternative for the convention and housing drive with significant lower part consumption and attractive prices as its land-based flash design.

Let me go to expected SSD market with introduction of new product categories, such as OMPC, also known as the (inaudible) and Mobile Internet Terminal, MIT, a low power internet accessible multimedia device promoted by Intel. For this market we're also offering our multimedia and Bluetooth platform with significant lower power consumption as compared to a CPU processing.

During the quarter our customers announced a major win with leading OEMs in the handset market. Broadcom announced that they secured a design edge with Nokia. It is the second major design win at Nokia by a CEVA customer, also Infineon won GPS design earlier in the year. Broadcom also announced two weeks ago that it will supply rigid chipsets, which also is a very (inaudible) for Samsung's advanced phone. (Inaudible) single chip solution for all the local calls that is based around Teak technology to Samsung. It is our second major design win at Samsung.

Also our leading (inaudible) customer extended its product shipment based on our CEVA-X DSP core and started during the third quarter to monitor the product from second customer, a Tier 1 blended handset manufacturer. As a result of this major milestone, CEVA DSP currently are designing an introduction that four out of five larger OEM, namely Nokia, Samsung, Sony and [NIG], as well as numerous second tier OEM.

In addition to our recent success in the handset market, we are expanding in the consumer market. During the quarter, one of our licensees secured a major design win for usage of our multimedia platform for next generation (inaudible) and gaming consoles. The design win will continue to award growth when the product goes into production around the 2008 Christmas season.

I would like now to share with you key development with regard to the product of CEVA customers in the marketplace today. Let's start with CEVA HD (inaudible) in the market continues this quarter with the introduction of many new models of [CG] phones from (inaudible) including [AJ] Electronics, Sharp, (inaudible) and (inaudible). Also (inaudible) supplies with its largest customer yet.

On the topic of multi TV enhanced, Samsung has recently introduced new mobile TV handsets featuring CEVA [MA1000] multimedia platform in the market. Products featuring CEVA multimedia technology available today in Korea include the SCH, D730 and STH-B5800. China further announced a number of new CEVA product multimedia chipsets this quarter, mainly the ST6300-H and ST6600-R. China mobile phone market is experiencing an explosive growth with an estimated (inaudible) each quarter.

(Inaudible) estimates cell phone makers are only using CEVA chips in their handsets. (inaudible) strategic partnership with DPE or TDS-made products during the quarter which is aimed at developing China TDS Network Development. (inaudible) is featured in (inaudible) chipsets and CEVA has been designing it to the next generation chip. We announced two new customers in the quarter advanced global leader in the biometrics with licensed and deployed, the CEVA TeakLite DSP with harmony high resolution dynamic system.

In Korea, a developer of solid state drive application has licensed CEVA (inaudible) technology for its next generation SSD products. I will now turn to Yaniv again to review the third quarter results and provide guidance for the fourth quarter and the fiscal year 2007.

Thank you, Gideon. I will now review the results of operations for the third quarter of 2007. Revenue for the second quarter was $8.7 million within our revenue guidance, higher than the previous eight quarters and 11% higher than the $7.9 million for the third quarter of 2006. The revenue breakdown is as follows. Licensing revenue was $5.3 million reflecting 61% of our total revenue. Royalty revenues were $2.2 million reflecting 25% of our total revenue. Service revenue was $1.2 million reflecting 14% of total revenue.

Gross margins for the quarter was 89% at the mid range of our guidance. R&D costs were $4.7 million for the quarter including $200,000 for equity based compensation expenses. As the marketing costs were $1.5 million including about $100,000 of equity based compensation expense. G&A costs were $1.5 million including around $200,000 of equity based compensation expense.

Total operating expenses for the quarter were $7.7 million, which included an aggregate equity based compensation expense of $0.5 million. Non GAAP operating expenses, excluding the above mentioned expenses, were $7.2 million, slightly below the mid range of our guidance. Tax expenses were about $100,000 for the quarter and net income was $1.1 million, or fully diluted net income per share of $0.05 per share, an increase of 226% and 50% respectively compared to the third quarter of 2006.

Non GAAP income and net income per share for the third quarter of 2007, excluding equity based compensation expenses and equity gain from a disposal of investment of $400,000 reported in interest and other income was $1.2 million and $0.06 per share respectively. Non GAAP net income and net income per share for the third quarter of '06 excluding equity based compensation was $900,000 or $0.04 per share respectively, an increase of 42% and 50% compared to the third quarter of 2006. Please see the current report and Form 8K that we filed with the SEC this morning for reconciliation of the non GAAP presented to the GAAP presentation.

Other related data. I'll start with a general remark stating that in the third quarter we achieved few important financial milestones, including positive royalty revenue trends, profitability continues to improve during the first three quarters of 2007, and net income and EPS increased sequentially during the same time period.

Shipped units by CEVA licensees in the third quarter of '07 were 54.3 million units, 19% higher than the 45.6 million units shipped in the second quarter of 2007 and 17% higher than the 46.5 million shipped in the third quarter of '06. Of the total of the 54 million units shipped, 32 million units were attributed to licensees currently paying a royalty and 22 million units were shipped by licensees who are under prepaid arrangements. This compares to 46 million units shipped during the second quarter of 2007, of which 24 million were attributed to per unit royalties and 21 million units were attributed to prepaid arrangements. This represents a sequential growth of 33% in customers paying per unit royalties and 86% on a year over year analysis.

During the third quarter of 2007, we added one new shipping licensee, which brings the total number of shipping licensees and customers to 27. Of the 27 customers, 20 are paying per unit royalties and seven, as in the previous quarter, are under prepaid arrangements. One new major European customer was added in the third quarter of '07, who started to pay royalties for products utilizing our CEVA-X or 3G based chipset for mobile phones as Gideon explained earlier.

Interest and other income for the third quarter of '07 was $1.2 million. This amount includes about $400,000 gain associated with the disposal of an investment. Interest and other income for the second quarter of '07 was about $600,000, an increase from the previous quarter was mainly due to the fluctuations in the market value of our bonds invested.

As for the balance sheet. During the quarter, we generated positive cash flow of $1.1 million. As of September 30, 2007, CEVA's cash balances and marketable securities were $66 million compared to $64.9 million at the end of the second quarter. Our DSOs for the third quarter were 116 days. The quarter ended on a Sunday, which negatively affected our cash position. Recalculating our DSO level on October 2nd, just two days after quarter end, our DSO level would have been 76 days. Approximately $3.8 million were received from our customers in the first two days of October.

As we discussed at previous times in the last two years, one significant item remaining unsolved from the prior to CEVA days is the long term [Harcourt Street] lease in Dublin. The annual lease payment for [Harcourt Street] is approximately $1.3 million a year and it has 14 years remaining under the lease. In the last few weeks, we have been positive progress made in negotiations with the landlord; however, nothing is final until termination on negotiation of this agreement is executed. As you know, we have engaged in similar termination negotiations in the past which has not been successful. If we do succeed to terminate the [Harcourt] lease, we will need to record an additional reorganization expense and make a significant cash payment.

Now we will discuss the guidance for the full year and the last quarter of the year. We continue to be optimistic about the trend and changes in the wireless market and new market segments which Gideon discussed earlier, which we anticipate will contribute positively to our royalty revenue growth. Initial royalty reports received for the fourth quarter support our optimism. At this point of time, we would like to be prudent for our Q4 and licensing revenue guidance and overall sequential revenue growth for the fourth quarter compared to the third quarter of this year.

As for the full year guidance, our total consolidated annual revenue guidance is expected to be in the range of $34.1 million to $35.1 million. Gross margin is expected to be in the range of 87% to 89%. Operating expenses including equity based compensation are expected to be in the range of $30.9 million to $31.9 million and interest income net is expected to be around $2.7 million for the year.

Annual equity based compensation expenses is forecasted to be about $2 million and the annual operating expenses excluding these expenses are expected to be in the range of $28.6 million to $30.2 million. Tax rate for the year is expected to be lower than 10% and the share count is expected to be about 20.2 million shares.

Now, for the fourth quarter guidance. Revenue is anticipated to be in the range of $9 million to $10 million. Gross margin 88% to 90%. Operating expenses including equity based compensation is expected to be in the range of $7.6 million to $8.2 million and we anticipate total operating expense of the total operating expense, $0.5 million will be attributed to equity based compensation. Interest income net is expected to be about $650,000. Tax rate shy of 10% and the share count for the last quarter is expected to be approximately 20.5 million shares. I will now open the floor for questions.

Thank you. (Operator instructions). Your first question is coming from Daniel Gelbtuch with CIBC. Please go ahead.

Hey, congratulations on an excellent quarter and guidance. With regard to the TV market, I know that you were able to secure a win last quarter in the audio portion. Can you just elaborate on what the trends are in that space and what kind of licensing activity you're seeing?

At this time I think we have TeakLite in that space. We are offering the audio part; a very good solution. This is what is called HDL. The trend is to integrate video into the TV (inaudible) on the (inaudible) box. We are offering the other portion for the TV. We are exploring going forward to offer also the video. We have the capability in the company where we're focusing on the mobile part. Going forward we are planning to offer the video part for the DVD.

And what kind of time frame do you have for rolling out a video-based product?

This will become the end of 2008.

I would assume that the resolutions would be QVGA, VGA and any higher than that?

No. We are offering VGA D1 which is called SD. (inaudible). The next step is DVD is HD.

Now switching gears a little with regard to the handset space. Obviously, in the last few months there's been a fair amount of turnover of assets on the base band side. What kind of -- and also new developments and momentum away from some of the incumbents. What kind of activity do you see on the DSP licensing front as a result of these moves and this momentum?

First of all, the focus now from our standpoint is to leverage on the adoption of our design. What we have with Nokia, with Infineon, Samsung which we reported now, LG and also the company that unfortunately we cannot mention their name. The focus is to make sure that this large OEM, the leading OEMs will get into mass production. When it comes down to it, it will be substantial. That is what we are used to. In addition, we are discussing with our semiconductor company and going to the next step and this is the HP and the (inaudible)

Got you. And a final question would be on the licensee front, you mentioned that you have 20 licensees who are generating royalties and seven are still prepaid. Is there a time frame that we should be looking for the seventh to be moving off prepaid or should we expect a few to move over to royalty generation in the next few quarters?

Hi, Daniel. It's Yaniv. I think that usually we don't name who is in the list and who is not. At the end of the day, it's up to the volume to get them to use up their prepaid amounts and then they start paying royalties. I think the question is more for them or those specific accounts to succeed in their own businesses and market and to utilize their prepaid. I think it's going to take some of the bigger ones that maybe are only now getting into new markets for them, it can take a little bit longer than a few quarters, but those also are not the customers that we are accounting for the royalty growth for 2008. So, I think gradually we'll see them leaving the prepaid and moving to payers. I think all the rest that we are looking and counting and monitoring very closely are really the customer that are already paying royalties and those are the high runners for 2008 and beyond.

Okay. Thank you very much.

Thank you.

Thank you. (Operator instructions). Your next question is coming from Matt Robison with Ferris, Baker, Watts. Please go ahead.

Hey, good morning. Nice quarter. If you look at the mid range of your guidance, do you expect more growth to come from royalties or from licensing on a dollar basis sequentially?

From royalties. As we said, this was the first time after many, many years. You know and other investors know that we have never crossed the $2 million mark. This is the first time we are and the way we see both this quarter and the quarters after that in 2008, we should see sequential growth even from time of significant growth coming dollar-wise from the royalty line. This all has to do with what we talked about. Some of the new design wins and some of the adoption of customers that ship out of new volume.

So, you've got you're looking at about $800,000 of sequential increase if you look at the mid range? Could you see that kind of an increase in the royalty number potentially?

Yes, we could see a significant amount of royalty increase. We did not get, of course yet, all the royalty reports, so we don't have a definite number, but we could be looking at a significant amount.

Do you think are those - is it primarily the kind of products that we're pretty familiar with with you guys or are you also seeing a lot of ramp in products that might be more well known overseas, like maybe the [Spreadtrum] and some of the Japanese 3G or is it the kind of things like iPhone and that sort of thing? What do you think is really driving it at this point?

First of all, the things you mentioned have definitely grown. iPhone cannot (inaudible). I think I mentioned during my part in the conference call that there are 3G customers now moving into production with second customers. The second customer is a Tier 1 customer.

And that might be in the report for fourth quarter or will we have to wait for first quarter to see that?

You will see it in the fourth quarter and of course going forward.

These wins that you mentioned about with Samsung, they don't go into production until sometime next year, do they?

Samsung, yes, you're right. With Samsung was three customer -- I mean three revenues. It's NXP. It's Broadcom and (inaudible).

Matt, these new design wins list as long as some of the Nokia design wins are really in 2008 story. I think its public information of the time frame that both Infinity and Broadcom talked about deploying their products with Nokia so this is on top of what we're talking now for Q4.

You've got a lot of the transitions that you kind of got circled with your design with companies you just mentioned. Now there's been some shifts with some consolidation in the industry assets in places like (inaudible) purchased by others and you've also got perhaps SG micro becoming a bigger factor at Nokia. I don't know if they're a licensee. Can you maybe talk about how those dynamics of the consolidation industry are going to affect you guys?

The companies that you mentioned and also you should mention ADI and Media Play. The companies that were acquired did not have DSP or have (inaudible) DSP. How come they switched to us, we don't want to comment on this, but eventually today if you're a company and you don't have a DSP, we are the company that offers the most attractive and the largest portfolio of DSP that people need. We have a good track record.

I think overall this market dynamic is very positive because it really gives new light on the DSP chip companies and really opens the door for potential more business with open source DSP like CEVA is offering and advancement in this market over others is that we don't stop at just offering DSP technologies, but we have much more on top of that like Bluetooth, like video, like audio, like SATA communication technologies. So that's where we see our added value compared to competition as well in this changing market condition.

What do you think -- do you think that we're going to see an acceleration in licensing next year results reflecting some of this?

We believe so. We believe the company will come to (inaudible). This is one of the reasons that we recently accelerated new development of DSP (inaudible) to get to the market with new development. People are now integrating advanced audio into cell phones. People are integrating advanced video something like the NMA2000. People are going to 3G -- excuse me, (inaudible). We saw this trend. We saw this consolidation and we understood it. We wanted to be able to offer them DSP that they need.

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

Thank you. (Operator instructions). There appear to be no further questions in queue. I'd like to turn the floor back over for closing comments.

Thank you, again for joining us today and for your continued interest and support in CEVA. We'll be presenting an upcoming AeA Micro Cap Investment conference in Monterey, California, November 6 and 7 next week and invite you to join us there at one of our presentations. Thank you and goodbye.

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