CEVA Inc (CEVA) 2008 Q1 法說會逐字稿

Good morning. My name is Barbara, and I will be your conference operator today. At this time, I would like to welcome everyone to the CEVA First Quarter 2008 Conference Call. (OPERATOR INSTRUCTIONS). Thank you.

It's now my pleasure to turn the floor over to your host, Mr. Arieli, Chief Financial Officer. Sir, you may begin your conference.

Thank you. Good morning, everyone, and welcome to CEVA's first quarter 2008 earnings call.

Today's 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.

Forward-looking statements include financial guidance for the second quarter of 2008 and the rest of fiscal year '08, the statements that the record-high royalty revenue in the first quarter of 2008 reflects increased shipments and market share expansion in 3G and 2G handset markets, optimism about the revenue growth due to our customers ramping up production of products incorporating our multimedia technologies in the second half of 2008, our customers starting to incorporate our CEVA-X chip in their high-volume applications, our belief that our exposure to any decline in the 3G market segment is small, and projections such as Electronic.CA new research assessments that the SSD market is about to grow a healthy 71% CAGR from 2008 to 2011, as well as In-Stat's assessments of the femtocell market that is expected to grow to 41 million units virtually from zero. In the next four years, Forward Concepts' assessments of the aggregate handset volume is expected to grow at 10% in 2008.

The risks, uncertainties, and assumptions include the availability of our CEVA DSP cores and other technologies to continue to be a strong growth driver for the Company, the possibility of our market and our technologies may not develop as expected, the possibility of our customers licensing products incorporating our technologies do not succeed as expected, our ability to timely and successfully develop and introduce new technologies, our reliance on revenue derived from a limited number of licensees, and our ability to improve our royalty revenue in future periods.

For more information, please refer to our risk factors in our 2007 Form 10-K and other prior SEC filings. CEVA assumes no obligations to update any forward-looking statements or information, which speak of their representative dates.

This conference call is conducted by Gideon Wertheizer, Chief Executive Officer of CEVA, and myself, Yaniv Arieli, Chief Financial Officer of CEVA. Gideon will start and cover the business aspects for the last quarter, and I will cover the financial results for the first quarter as well as financial guidance for the second quarter and the rest of fiscal 2008.

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

Good morning, everyone, and thanks for joining us today. I hope you managed to get hold of our press release (inaudible) other than Yahoo, which, as far as we understood, had some difficulties.

Total revenue for the first quarter was $10.1 million, a record high in CEVA's five years' history since the combination with Parthus Technologies, 22% higher compared to the fourth quarter of 2007 and 30% higher than the first quarter of 2007. Royalty revenue for the first quarter of 2008 was also all-time record high of $3.7 million, a 23% sequential increase as compared to the fourth quarter of 2007 and 91% higher than the first quarter of 2007. The record-high royalty revenue reflects increased shipments and market share expansion in 3G and 2G handset markets.

In the first quarter, we signed ten new license agreements, of which eight were for CEVA DSP cores, platform, and software and two were for CEVA's SATA technology. Geographically, three of the ten license agreements were in the U.S., six in Europe, and one in the Asia Pacific region. Target applications for the licenses concluded during the quarter are 3G smartphone, cellular femtocell, portable multimedia players, and solid-state drives, SSD.

As we stated on our last conference call, we did not perceive the revenue shortfall in Q4 2007 due to the accounting treatment of the specific license to be indicative for our business going forward. The announcement today of our first quarter of 2008 results confirms our views in terms of signed agreements, royalty revenue, and developed pipeline.

As for the specific agreement that we signed in the fourth quarter of 2007 and that we were unable to fully recognize in the fourth quarter of 2007, this agreement has now been [amendment] and bundled with two additional large-sized software service agreements that were signed in the first quarter of 2008 with the same customer. The recognition of the profits from these agreements will be recognized based on the completion of the service agreement and is expected to be over a shorter period of time than we originally planned to recognize the original core license agreement.

Before handing the discussion over to Yaniv for the financials, I would like to elaborate on a few key aspects of the business activities in the first quarter of 2008.

We signed three new license agreements for our multimedia technology. Two were with customers in Europe, and the other one was in the A-PAC region. As we pointed out in previous calls, our multimedia strategy is aimed at the growing use of internet video content, including movie trailers, music video, and user-generated content, such as YouTube. Devices such as personal multimedia players, personal navigation devices, digital picture frames, mobile internet devices, as well as smartphones, are all required to capture or play back a range of video and audio codecs, such as H.264, MPEG-4, or AVC with video JPEG to satisfy consumer demand. Our solution allows playback or capture by means of software rather than specialized hardware, as most of the current suppliers are doing and which require new silicon spin every time there is a need to support additional new standards.

Also, we are progressing with existing customers that licensed this multimedia technology and learned that-- Three of our customers already have working silicon with expected production ramp starting in the second half of 2008.

There are now more than 20 customers that have licensed our CEVA-X DSP architecture that is the engine for our multimedia technology and 3.5G and 4G baseband processor. The CEVA-X was first announced four years ago, and we are now seeing customers starting to shift this DSP in their high-volume applications.

As I pointed out earlier with regard to the agreement we deferred its revenue recognition in the first quarter of [2007], we managed to [sign an] agreement with this customer for a comprehensive set of software technologies to complement the DSP core that was licensed to this quarter, in the first quarter of [2007]. This agreement further positions us with this major customer as a solution provider, which carries incremental revenues for us with the same customer. It is a key design win for us as we manage also to migrate the customer (inaudible)-based audio development to TeakLite III development that carries substantial advantages in performance, power, and cost.

We also licensed our TeakLite III core to a customer in Europe targeting at a femtocell application. The femtocell market is aimed to leverage the trend of more and more people's desire to drop their landline service and concentrate on cell phone use only. A femtocell device addresses the challenge of poor cellular coverage at home by locating a small-sized base station that projects the signal in a similar way as the base station of a cordless phone. This is our second licensing agreement in this space. Our first customer has recently received its first working silicon and has now started field trials. Our pipeline includes a few more key companies who are considering to enter into this space using our technology. According to a market research firm, In-Stat, the femtocell market is expected to grow to 41 million units from virtually zero in the next four years. Both Verizon and Sprint announced plans and business models to deploy femtocell broadly.

In the SATA space, we are continuing with our penetration into the growing market for solid-state drive, SSD, with the follow-on of two agreements with key players in this evolving market. Currently, these two customers are within the four leading suppliers in the SSD market. According to Electronic.CA new research the SSD market is about to grow a healthy 71% CAGR from 2008 to 2011.

As for the royalty revenue, our customers continue to gain momentum in the handset market. Based on our customer fourth quarter 2007 royalty report, shipments into the handset market was the highest in CEVA's history. Our worldwide baseband market share in the global handset market in the first quarter of [2007] was 13% versus 3% in the fourth quarter of [2006]. This is even before any shipment to Nokia, as announced last year by our customer. These shipments are, of course, all different segments of the market - low-end phones used in the emerging markets such as India or China, (inaudible), and advanced 3G phones more common in developed countries. Recent announcements made by companies such as Texas Instruments or Sony Ericsson present [lower] demand, particularly in the high-end 3G phone, although analysts such as Forward Concepts believe that the aggregate handset volume is expected to grow at 10% in 2008, mainly driven by the demand in the emerging markets. At this stage, our exposure to the 3G market segment is small, as our major customer in this space just started its mass production two quarters ago. As for the low-end segment addressing the emerging market, we do not see any outstanding trend beyond the typical first quarter seasonality weakness, which is the post-Christmas holiday season.

As for new product announcements during the quarter, there were notable product introductions from a number of our customers. Here are a few highlights. Infineon, (Inaudible) InterDigital, and NXP all introduced new cell phone platforms powered by CEVA DSP. China Mobile started commercial testing of their TD-SCDMA, which is the Chinese 3G network using (inaudible). Sony Ericsson introduced their first HSDPA handset in the U.S. powered by CEVA DSP, and they are targeting the 3G U.S. market through a new phones lineup with AT&T and T-Mobile. Vodafone, Lenovo, (inaudible), Samsung, Sony Ericsson, LG, Sharp, and many others commenced shipping new CEVA-powered phones - UMPC, HSDPA, (inaudible), and more. More information about these products can be found in the CEVA-powered section in our Website.

With that said, I will now turn to Yaniv to review the first quarter financials and provide future guidance.

Thank you, Gideon. I will now review the results of operations for the first quarter of 2008.

Revenue for the first quarter was an all-time record high of $10.1 million, 30% higher than $7.7 million in the first quarter of 2007, 22% sequentially higher than the fourth quarter of 2007, and at the higher end of our guidance. The revenue breakdown was as follows. Licensing revenue was $5.1 million, reflecting 51% of total revenue. Service revenue was $1.2 million, reflecting 12% of total revenue. Royalty revenue was $3.7 million, reflecting 37% of total revenue and representing an all-time record high and the third sequentially increased new record high for royalty revenue.

Gross margin for the quarter was 88% on a U.S. GAAP basis, or $1.2 million for the first quarter expenses, slightly higher than the $0.9 million reported for the fourth quarter in 2007. This was due to higher service-oriented costs that were allocated from research and development.

Research and development costs were $5.1 million for the quarter, including $0.3 million of equity-based compensation expense. Sales and marketing costs were $1.8 million, including $0.1 million of equity-based compensation expense. And our G&A costs were $1.6 million, including $0.2 million of equity-based compensation expense.

Total operating expenses for the quarter were $12 million, which included a reorganization expense associated with the successful termination of our long-term Harcourt lease property in Ireland earlier in the quarter of approximately $3.5 million, as reported earlier in the year, as well as an aggregate equity-based compensation expense of $0.6 million.

Taxes expenses were $3 million for the quarter, including $3.1 million of expenses associated with a capital gain from the divestment of our equity investment in GloNav to NXP Semiconductors.

Net income for the quarter was $5.5 million, or fully diluted net income per share of $0.27 per share.

During the quarter, we received payments of approximately $15.1 million from the successful divestment of our equity investment in GloNav based on the first and second milestone payments in the sale agreement with NXP Semiconductors and recorded a capital gain of $10.9 million and related taxes of $3.1 million. We also surrendered and terminated the Harcourt facility and made a cash payment of approximately $5.8 million. For that, we recorded a reorganization expense of about $3.5 million in the operating expenses.

Now I will give some other related data.

Shipped units by CEVA licensees in the first quarter of 2008 was at similar all-time high records reported in the fourth quarter of 2007 and amounted to 86 million units, which is 110% higher than the 40 million units shipped in the first quarter of 2007. Of the 86 million units shipped, 60 million were attributed to licensees currently paying per-unit royalty, and 26 million were shipped by licensees who are under a prepaid arrangement. This compared to 86 million units shipped during the fourth quarter of last year, of which only 52 million were attributed to per-unit royalties and 34 million were attributed to prepaid arrangements. This represents a sequential growth of 15% in customers paying per-unit royalties and 215% on a year-over-year analysis. As of March 31, 2008, our total number of shipping licensees were 27. Of them, 20 are paying per-unit royalties, and 7 are still under prepaid arrangements.

Interest and other income for the first quarter of '08 was $11.7 million, including a capital gain of approximately $10.9 million from the divestment of our equity investment in GloNav to NXP and $800,000 interest income for foreign currency costs.

As for the balance sheet items, during the quarter, we generated positive cash flow of $9.1 million of cash. As of quarter end, CEVA's cash balances and marketable securities were $85.5 million compared to $76.4 million at the end of the fourth quarter of 2007. Our DSOs for the first quarter of '08 were 54 days compared to 28 days in the prior quarter and well below the 100-day figure during most of 2007.

Now for the guidance for the full year of 2008 and the second quarter of 2008. While we remain cautious on the macroeconomic front based on trends in our industry, specifically the handset market in developing countries and market share expansion in 3G, along with strong and healthy licensing pipeline, we're comfortable with our annual guidance given earlier this year with regards to top line growth. On the expenditure front, we have discussed at length our strategy for 2008 of continued control on expenses and overall similar headcount as we had last year, which was slightly lower than 200 employees worldwide.

With regard to the U.S. dollar, euro, Israeli shekel currency fluctuations, we see no reason at this point of time to change our basic assumption associated with FX expenses or the overall general expense level guidance. With that said, the small model changes I'm about to explain are associated with a few service-oriented deals we signed in the first quarter of '08, which will result in some allocation of research and development costs to cost of goods.

Now for the full year guidance. Our total 2008 annual revenue guidance, as I mentioned, remains unchanged and is expected to be in the range of $39 million to $41 million. Annual gross margin is expected to be also unchanged, in the range of 89% to 91%. Operating expenses, including equity-based compensation in the first quarter and the recognized expense associated with the Irish property, are expected to be between $38 million to $38.8 million. And interest income is expected to be around $3 million or slightly lower. Annual equity-based compensation expense is forecasted to be approximately $2.2 million. And annual operating expenses, excluding these expenses that I mentioned above of the capital expenditure and the 123-R option expenses, are going to be in the range of $32.3 million to $33.1 million. Tax rate for the year is expected to be approximately 10%. Share count for 2008 is expected to be approximately 21.3 million shares.

Now for the guidance for the second quarter of this year. Revenue is anticipated to be in the range of $9.4 million to $10.4 million. Gross margin is expected to be in the range of 87% to 89%. Operating expenses, including equity-based compensation, is expected to be in the range of $8.3 million to $8.9 million, and we anticipate $0.5 million will be attributed to equity-based compensation. Interest income is expected to be approximately $650,000. Tax rate for the quarter - approximately 10%. And the share count for the second quarter is expected to be similar to the first, around 20.9 million.

I will now like to open the floor for questions.

Thank you. (OPERATOR INSTRUCTIONS). Our first question is coming from Doug Whitman.

Congratulations on the strong quarter. If you could talk a little bit about-- You talked in Asia about one of your-- a new customer win. Can you talk a little bit - what the Asia customer win--? I may have missed it, but there's not a transcript following. So, is that a cellular customer, or is that a broad-base customer for other applications?

Doug, some of this-- There were (technical difficulty) - six in Europe, and one was in Asia. If you are interested specifically in Asia, this relates to a customer that is doing what is called PMP, personal multimedia player. We see a bunch of customers in this application, very much concentrated in China and Taiwan because the OEM industry is there.

Can you talk a little about--? There's been a lot of discussion on the next iPhone with being Infineon. Can you discuss a little bit of the--? Assuming it is an Infineon, is it reasonable to assume that you'll be in the next iPhone then as well?

If Infineon is there, we are also in the handset.

Doug, I believe there was an article in "EE Times" a couple of weeks ago that suggested that that's one of the options out there, probably the more realistic one.

Speaking about Infineon, I don't know if people had a chance to listen to their conference call they hosted two days ago. They are showing very impressive progress. They got a socket in Samsung for 3G. They are the first in the world with what is called EDGE single chip. They are probably-- They are making a lot of progress with LG. And, when it comes to the (inaudible), this is the market that now is growing, basically, while the other high-end stuff is still in (inaudible) integration. In my opinion, that's the best chip.

Let me add to that, Gideon. When we read their transcript, and everybody can, they were asked specifically about the Nokia design win, and the VP of Business, Executive Vice President of Communication business group said that we can assume everything is in place for Nokia in this summer.

Summer and Q4 mass production.

So that was pretty good input two days ago from one of our key customers.

Okay. And a last question would be on cash. You've had a very strong cash build over the last couple of years. Is it reasonable to assume going forward that the cash growth will be commensurate pretty much roughly with the operating earnings that you achieve from the Company?

That's correct. Over the last year, we had a pretty significant increase in cash. One of the bigger ones happened-- Now, with the NXP deal, we probably will have another one or two milestones somewhere in the late part of the summer or maybe Q3. We know there's some more cash coming in. We're not exactly sure how much (inaudible). But, other than that, in the longer-term model, yes; the operating margins or net income should be pretty much the cash we also generate.

About half the valuation is currently in cash, so we're talking-- The milestones that we're talking, I assume, single-digit-- low, single-digit millions, potentially?

Yes. Correct. To remind everybody, it was overall $110 million. $85 million was the up-front payment, which we got 10% less escrow and some deal costs from GloNav's point of view. And there should be another potentially $5 million over the next two years of additional cash coming from CEVA if GloNav will hit certain technology and business milestones within NXP.

Okay. Thank you. Congratulations on the strong quarter.

Thank you. Our next question is coming from Matt Robison.

Since you're talking about cash, I'll start there. When you look-- You've got this taxes payable liability. What of the cash that you've put on your balance sheet here in the first quarter is going to come back off with taxes and payments for the retirement of that lease, if any?

The retirement of that lease was already paid. So the $85.5 million is net of the building. That's a done deal. We paid $5.8 million, and that's something that will not repeat itself. Taxes, you mentioned and I mentioned earlier, were $3.1 million associated with the deal, and that eventually will come out over time as quarterly tax payments to the government.

Okay. On the unit volume, flat sequentially. Can you give us a little bit--? -- obviously not flat in terms of what was shipped for royalty dollars, but the overall units shipped was flat sequentially. Was there an application that went out of production? Obviously, the royalties were up quite a bit to reflect the growth in unit shipments for royalty dollars. But can you give us a little bit more flavor on that 86 million - why that was flat?

Yes. The overall 86 million-- You are correct it was flat, but, when you look at the breakdown, we could see that the reporting units have grown from 52 million to 60 million in one quarter. That growth is coming directly from the cell phone market, and I think we gave pretty interesting data for the first time of our overall worldwide baseband market share growing from 3% to 13% throughout the last year, from Q4 '06 to Q4 '07. That growth is still reflected, and this is why the dollar amount of royalties has also increased, and it is probably the most important royalty driver in growth in 2008.

What offset the overall increase of the 86 million is really coming from the prepaid arrangements. I would say maybe some consumer electronic type of devices that were hit slightly in Q4 with the start of the slowdown, so the values were less there. But, in any case, from the royalty perspective or the dollar perspective, that does not-- of course, that does not influence us because we are targeting and focusing more on the per-unit royalties. But we have no design wins that faded out or-- On the cell phone front, everything was upstream - every single customer in Q1 versus Q4.

How much sequential decline do you expect to see with the seasonality in the second quarter royalty report?

That's a good question. Historically, if you recall, usually this is around 20%, more or less. We have seen a lot of companies, or quite a few, being more cautious, taking these numbers down for Q1, which is probably quite typical. Maybe to that, there was some type of additional macro slowdown concern. To offset that typical decline, we could have additional new licensee payers and continued growth in market share from the cell phone market, especially the high-end 3G, as Gideon mentioned earlier. So we did not get all the royalty reports yet for the second quarter. We got just a partial, so we don't have the full picture yet. I'm sure that it's going to be lower than the record $3.7 million. I don't think that's much different than the typical seasonality. How much and how much exactly will offset the new ramp ups we don't even know yet until we actually get all the royalty reports.

Last year, you only had a 5% decrease in the second quarter. And so it sounds like that was drawn off of relatively small numbers and in a different economic environment, obviously. So we should-- Should we be thinking something more like the fourth quarter kind of royalty number for the second quarter?

This is something that we would be very comfortable with. Yes. That would come in the way Q4 came in.

Okay. And what was your headcount in the quarter?

185 people.

That's not going to grow much more than 10%, then, between now and the end of the year?

That's correct - even slightly less than that.

Okay. Thank you.

Thank you. Our next question is coming from Allan Mishan.

I have a couple of questions. First, if you're reallocating some costs from R&D to cost of goods sold, I don't understand why it hits Q2. But why, for the year, would you expect it to-- the gross margin to tick back up?

Because, unless we have-- It's a good question. Unless we have new deals - service-oriented deals later in the year, Q2, Q3, or Q4, then, at least for now, the model doesn't take into account as high dollar amounts. And then, in theory, Q3 and Q4 could be slightly higher in gross margins and will offset. Again, we're talking probably 1%, plus or minus, down, so those last two quarters of the year can compensate the first half, especially with the royalty buildup that we're hopefully planning to see.

Oh, so you're not shifting costs from one line to the other; it's simply that certain costs in this one quarter are going to be recorded there. Is that fair?

Both Q1 and Q2 will have more costs associated with cost of goods. Yes. Q3 and Q4, we probably have not a big deal-- not a big change in costs versus the numbers that you were used to have in our normal model.

Okay. Great. And then, of the 86 million unit shipments, how many, roughly, were basebands this quarter, and how many were baseband last quarter?

About 45 million were basebands for this quarter - this quarter, meaning we reported it in Q1. But these are actually Q4 numbers, right? These are actually shipments by our customers in Q4. And that represents around 13% of the worldwide baseband market.

Okay. So it was 45 million in terms of what you recognize for Q1. Do you have that number for Q4 as well?

I don't have it handy. No.

We can double check.

Fair enough. And then you gave a little bit more details on the large license that wasn't recognized last quarter, but can you give us a little bit more in terms of when that actually hits the P&L?

Let me make a few comments about this agreement. As we pointed out, this is beyond the technicalities of the recognition. This is a key agreement for us. So this is an agreement that we, in the quarter, signed another agreement for software with the same customer. And, in the quarter, we started to recognize it in the P&L.

So, we really-- If the original deal that we signed last quarter was for, as we said, three to five years, this, after amending it and signing the new service-oriented deal, we'll recognize it upon the completion of the service deal. We believe this could be somewhere in the range of three to four quarters, so somewhere-- A big part in '08; maybe some in '09, at the first part of '09.

Okay. Great. Thanks very much.

Thank you. Our next question is coming from Daniel Meron.

Congrats on the good quarter and execution. Can you give us a sense on where you see the Broadcom and Infineon guys moving into Nokia? This is going to be more of a 2009 ramp-up? And then what kind of ramp should we think about looking at? I know it's a long way out, but just trying to get us some color on that. Thanks.

The only thing that we can tell you at this point is basically what they said in their conference. Infineon-- About Nokia, they are saying that they're on track, and they would start shipping in the summer, and mass production will be in Q4, this year, basically. When it comes to Broadcom, they have two major customers, by the way. One is Samsung, which is 3G, and the other one is Nokia (inaudible). For both design wins there, we are part of the design or part of the development. It looks like they are facing difficulties. There is still-- They pretty much feel that they managed to get this 10% to 15% global market share with these two customers. But they didn't give any timeline when they are going to be at that level or when they are going to ship product. So we are working with them. We know that they have an active project with these customers. And ramping up production in cell phone is something that not necessarily depends on Broadcom. There are things that are between Broadcom and Nokia and Samsung. There are things between Nokia and Samsung and operators. And there are things between the operator and the consumer. This is something that Broadcom cannot pinpoint at this point on the extent of this hockey stick.

Okay. That's fair. And then maybe somebody asked it, but I missed it. Can you give us a little bit more color on the activity in the license segment of your business? Have you seen any signs whatsoever of weakness? Obviously, you executed pretty well going into the second quarter. How do you see the environment right now, and how should we think about it for the rest of the year?

We don't see sign of weakness in the licensing front. I think [profile] people are pinpointing 3G handset consumer demand as the major source for the weakness. But companies are obviously developing next-generation products. If you take, for example, the low-end segment, what is called ultra low cost, those low-cost people are now aiming to design what used to be a year ago mid to high-end phone. So they are running. You cannot sell ultra low cost phones and a year from now there will be just a phone without MP3, without video, without Bluetooth, for example. So we see active customers. We see people are trying to develop new products. 10%-- We mentioned, we had a design win this quarter. (Inaudible) people are-- We see we have in our pipeline a few customers in this respect. Digital picture frame people are active, upgrading it with Wi-Fi and speaking about larger screen and higher-resolution video. So there are a lot of things going on everywhere. I cannot pinpoint even a region that I see where people are slowing down - not in licensing.

Okay. Thanks, Gideon. And then a last one that ties into that. You beat numbers this quarter. Next quarter is a little bit higher than the Street. You left 2008, (inaudible) overall, unchanged. How much conservatism is there in your numbers? It looks like there is quite a bit. Another thing is - How do you feel about visibility or your comfort with numbers at this point in time?

Let me try and address that, Daniel. Looking at the models that are out there and our guidance, I think we're pretty much in line with all the existing models. I do not see any significant gaps, not top line. Like you mentioned, I think we're in line, and the models are in line, as well as the operating expenditure. So, from this point of time, we are overall very comfortable with this model. I think you know as well as we do what the potential is. A lot of it is the momentum in the royalties that we have talked about. As we mentioned earlier in the call we had a few design wins in the multimedia front, not just the cell phone front, that are planning to be in production in the second half of this year. This is quite exciting. We talked about on the last conference call in January about a very important design win with one of the portable gaming consoles that should come out this Christmas, so that is an exciting opportunity. So there's no doubt as to what Gideon talked about. Infineon and the low-end market and market share in 3G-- that there is a lot of big potential for CEVA in the later part of '08 and '09. For the time being, the model is the best we can and know under the circumstances.

The same goes with risks. There is overall slowdown. Gideon mentioned, I think, we're in multiple product lines and not just multiple product lines and markets but also different market segments - high-end, low-end. So I think we're very diversified there, and that's a big advantage in difficult times. If we manage to continue to execute and manage that carefully and expenses at the same time, as long as it's in our control, then the models are pretty solid models. Annually, you're talking about close to 20% growth in top line, pretty significant ramp up from the $0.15 we communicated-- we reported for 2007. I think most of the models have up to $0.27 out there for '08. And we could be very, very happy with such a milestone, at least for '08, before some of the things pick up in much higher volume in 2009.

Okay. Thank you so much, and good luck going forward.

And one housekeeping question for Allan. In Q4, we were in about 33 million baseband shipped, going up to 44 or 45 million. So this is really where we have started to see the increase in the market share we are taking in the cell phone market.

Our next question is coming from Stephen Silk.

Congratulations on the quarter. Most of my questions have been answered. But, as you accumulated cash, could you talk about your thoughts about deploying it?

Yes. I think that some of the attendees on this call could probably answer the question better than I.

Would that be a share repurchase, perhaps?

That's one option, which is a very promising option for shareholders, and that we fully appreciate and understand and may take that approach. The other, the more general one, to where we finally fixed-- We believe we have fixed the IP model for CEVA, which has not been the case maybe in the last few years or prior to 2007. It's just starting to ramp up. If we could continue and increase and sign synergetic businesses that generate very high gross margin around the highest in the semiconductor industry of 88% or 90%, then, at the end of the day, that would be, as well, if not better a return on investment to shareholders by increasing our EPS going forward. So I think these are the two avenues that we want to progress with. I don't have any share repurchase program to announce, at least not at this conference call.

And just, finally, do you expect the R&D to stay level at around $5 million per quarter?

I think the models are-- It's going to probably be slightly higher in Q2. Take, maybe, $5.1 million or so. And take into account, as we talked about, that both in Q1 and Q2, we did allocate a pretty significant few hundred thousand dollars to cost of goods because of the services that we have been doing to our customers. Q3 and Q4 R&D should go up because we will not have that allocation. But then the gross margin should improve slightly. So, overall, not too big of a change from the existing models. But this is-- The only shift that we tried to explain in the model will happen in Q1 and Q2 and get back to different levels in Q3 and Q4 because of finishing the existing products - service products.

Thank you very much.

Thank you. Our next question is coming from Matt Robison.

You answered almost all my questions. That one that-- That reallocation from R&D - what was that number - the actual number for the first quarter, from R&D to COGS?

A few hundred thousand dollars.

$200,000?

A few.

Oh, so more than $200,000.

Slightly more. Yes.

And then we'd expect that in the second quarter and then no more for the rest of the year?

No more-- We will not have similar deals. We will have a few more service-oriented deals, then we'll talk about it. And then maybe-- Usually, it's maybe around [$100,000] or so that's allocated, plus or minus. If we have more deals and more work, it could be a slightly higher number.

Okay. That's all I've got. Thanks.

(OPERATOR INSTRUCTIONS). We do have a follow-up question coming from Doug Whitman.

Yaniv, I had a quick question on-- You mentioned during your comments the economy. I know some people are kind of pushing for more aggressive guidance. Can you give us a little color - what you're seeing and hearing from your customers about what they're expecting from the economic effect going forward worldwide and also what kind of role that played in the guidance that you gave today?

Sure, Doug. I think Gideon answered that in length by talking about the overall macro environment and the different product segments. High-end and low-end cell phones are picking up. We added some marketing material that Gartner is talking about - 13% overall wireless increase - unit increase in 2008 compared to 2007-- sorry-- 10%. So I think we have-- To the best of our knowledge and capabilities, we have tried to build and keep the model fairly simple, taking all these into account. We haven't seen any deals offset or customers telling us, We're not sure where we're heading. Talk to us a year from now or six months from now after the economy will maybe get better. We have not heard any statements like that from any of our customers. So, for the time being, we're trying to build as conservative as we can. And we'll work together with you and our customers in business to see how this develops over time.

So you haven't seen a push out in deals actually occurring, but the concern here is the potential - what the volume will be, given the economy.

Q1 shipments-- I'm not talking about Q1 royalties. Q1 shipments were lower than-- but people anticipated it. Whoever we speak, and we did a significant amount of cross checks, people are speaking of recovery. And, when it comes to health, I think that we are interested in, going forward in 2008, even 3G will become a growing market again. So, when it comes to this market, we don't see any slowdown. And as a result, I believe, licensing activities proceed as usual. We have the pipeline, and we have the customers that we target going forward. So, so far, we don't see anything outstanding. Beyond, as I said, when it comes to the seasonality, that's the way people are explaining the Q1 lower shipments.

Thank you. Thanks for a great quarter, again.

There appear to be no further questions at this time.

Thank you for joining us today and for your continued interest in CEVA. We will be presenting at upcoming conferences and events during May and want to mention a few of them. First will be the Oppenheimer Israeli Conference scheduled for May 18 in the Intercontinental in Tel Aviv, followed by the Wedbush Morgan Securities Management Access Conference in New York on May 22. And then we'll be also presenting at the Cowen & Company Technology/Media Conference on May 28 in New York at the Palace. We invite you to join us there. Thank you, and goodbye.

Thank you. A replay of this call will be available using dial-in numbers 877.519.4471 or 973.341.3081, with a PIN number of 42226593. This does conclude today's CEVA and Company conference call. You may now disconnect.