CEVA Inc (CEVA) 2008 Q4 法說會逐字稿

Good morning. My name is Cynthia, and I'll be your conference operator today. At this time, we would like to welcome everyone to the CEVA Fourth Quarter 2008 Earnings Results Conference Call. (Operator Instructions).

Thank you. I'd now like to turn today's call over to Mr. Arieli, Chief Financial Officer of CEVA. Please go ahead, sir.

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

Today's conference call includes 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 first quarter of 2009, 2009 general outlook, optimism about our royalty revenue growth, market position in the handset and consumer electronic markets, industry migration to our DSP cores and technologies in the handset market, our ability to capitalize on the 3G trend and the trend towards merchant solutions and new mobile multimedia platform, and our projections about customers' productions schedules.

The risks, uncertainties and assumptions include - the ability of CEVA's DSP cores and other technologies to continue to be a strong growth driver for the Company, the continuation of our market position, the ability of our reduction in overall [2000] expenses to produce intended benefits, the effect of the intense competition within our industry, the possibility that the market for our technology may not develop as expected, the possibility that our customers' 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, our ability to improve our licensing and royalty revenue for a future period, and general market conditions.

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

This conference call will be conducted by Gideon Wertheizer, Chief Executive Officer of CEVA, and myself, Chief Financial Officer of CEVA. Gideon will cover the business aspects and the highlights from the quarter, while I will cover the financial results for the fourth quarter and fiscal 2008, as well as financial guidance for the first quarter of 2009.

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

Good morning to everyone, and thank you for joining us today. I hope you had an opportunity to review our press release with the results of the fourth quarter and fiscal 2008.

During the quarter, we reported total revenue of $10 million, which represents a 21% increase over the fourth quarter of 2007. Royalty revenue for the fourth quarter of 2008 was an all-time record high of $4.3 million, representing a 30% sequential increase as compared to the third quarter of 2008 and 41% higher than the royalty revenue for the fourth quarter of 2007.

During the fourth quarter, we concluded six new license agreements, all of which were for our CEVA DSP cores, platforms, and software. Geographically, four of the license agreements were in Europe, one in Asia, and one in the US. Target applications for the licenses concluded during the quarter are mainly for 2G and 3G handsets, smartphones, and mobile multimedia products.

The fourth quarter results introduced a new major milestone for royalty revenue. For the first time in our history, royalty revenue surpassed the $4-million benchmark, to reach to a record of $4.3 million. This reflects a significant growth in the shipment of new, advanced 3G phones and smartphones enabled by our technology.

Also during the quarter, we had a substantial royalty contribution from an OEM of the well-known, new, portable consumer products that started shipment during the quarter. This shipped product is the newest generation of an existing product that is the clear leader in its product category and has been sold in high volume for the past three years. The latest version of this product includes advanced multimedia capability for the first time which are powered by our DSP technology sales offer.

We believe these new business segments further highlight the potential for our royalty revenue growth.

Licensing activity during the fourth quarter was consistent with what we planned and projected in light of the overall economic environment and concerns regarding research and development expenditure. We managed to focus and conclude agreements with those strategic, committed customers having the financial resources and research and design competency to license our technology.

Among the new agreements executed during the fourth quarter, we would like to highlight two customers. The first one is one of the largest merchant chip suppliers in the handset market, who signed a comprehensive agreement with us for the use of CEVA DSP cores in low-end and mid-range handset products. The second strategic agreement is with a leading Asia-based semiconductor company in the consumer market that is expanding into handset market, targeting the rapidly growing 3G segment.

Overall, 2008 was a very successful year for CEVA, both for financial and strategic perspective. On the financial front, our revenue grew 22% on a year-over-year basis, and the non-GAAP net income and EPS showed a remarkable 118% and 113% growth, respectively, over 2007. These figures represent the highest growth rate in our six-year history and underscore strength in position over the last three years, despite the recessionary environment.

In 2008, we generated overall cash flow of $8.3 million and used our strong cash position to buy back 753,000 shares, amounting to $5.8 million in the second half of 2008.

On the business and strategic front, our key success factors steals from the focus on two main markets - the handset and the consumer electronic markets - where we continue to increase our market presence. I would like now to further elaborate on these success factors and our market focus.

Our royalty revenue increased 58% to $14.3 million year over year and 127% compared to the 2006 level of $6.3 million. CEVA technologies are now in mass production at Nokia, Samsung, Sony Ericsson, LG, Panasonic, ZTE, as well as within a major US-based smartphone manufacturer. We believe the full-scale migration to our DSP cores and technology in the handset market has not been fully realized and continues to progress. The recent announcement by Texas Instruments of its intent to exit the merchant business market after being the largest player in this space is a strong, positive driver for future market share expansion. The handset market possesses significant growth opportunities for CEVA.

Based on informed telecom and media estimations, as of December 2008, there were 4 billion cellular connections worldwide, which is 60% of the entire global population. Although broader markets are likely to see slowdown in 2009, based on ABI research, the 3G segment is about to grow from 39% of total shipments in 2008 to more than 50% in 2009. By 2013, more than 67% of all handsets shipped will be 3G/3G capable.

CEVA is well positioned to capitalize on these trends, as three of the largest 3G chip suppliers use our technology.

Another robust segment per ABI research is the smartphone market, which captured 14% of the 2008 market and is expected to grow, despite a challenging market environment, and comprise 31% of the market in 2013. Also, per iSuppli, the China market is expected to grow 7.7% in 2009. Cellular modem within netbooks, notebooks, and MID, femtos and picocell, and, going forward, LTE, and WiMAX II are all (inaudible) markets where CEVA technologies are a perfect fit.

Beyond the cellular market, in 2008, we saw the production start of chips based on our new, mobile multimedia platforms. These platforms enrich our licensable product offering and increase our future royalty potential. There are now three significant customers in the mobile consumer market who are in production. Furthermore, we expect at least two more to start production in the first half of 2009.

Before handing the call over to Yaniv for the financials and guidance, I would like to make a few general comments regarding our view of 2009.

In recent months, a number of major industry players, including component suppliers, handset makers, and operators, have announced their concern about handset volume in 2009 and the general lack of visibility in the industry. Most have indicated that they expect a year-over-year decrease due to the lagging global economy.

While we believe we have strong royalty potential and licensing opportunities, we cannot ignore the limited visibility and possible impacts the general economic condition could have in our business in 2009. As a result, we have adjusted our annual expense level by approximately $1 million and provide guidance only for the first quarter of 2009. Yaniv will further elaborate on this during his prepared remarks. We will continue to focus our activities on our lucrative businesses and growing emerging markets segment.

With that said, I will now turn the call over to Yaniv to review the fourth quarter and fiscal 2008 financials and provide future guidance.

Thank you, Gideon. I'll now review the results of operations for the fourth quarter of 2008.

Revenue for the fourth quarter was $10 million, similar to the third quarter 2008 level and 21% higher than the $8.2 million for the fourth quarter of 2007. The revenue breakdown was as follows. Licensing revenue was $4.6 million, reflecting 46% of total revenues and 15% higher than the fourth quarter of last year. Royalty revenue was all-time record high of $4.3 million, reflecting 43% of total revenue and 41% higher than the fourth quarter of 2007. Service revenue was $1.1 million, reflecting 11% of total revenue and 7% lower than the fourth quarter of last year, which had $1.9 million.

Quarterly gross margins were 89% on both US GAAP and non-GAAP basis for both 2007 and 2008.

As for the operating expenses, research and development costs were $5 million for the quarter, including $0.3 million of equity-based compensation expenses. Sales and marketing costs were $1.7 million, including $0.1 million for equity-based compensation expenses. And our G&A costs were $1.6 million, which included $0.4 million of equity-based compensation expenses.

Our total operating expenses for the quarter were $9 million, which include an aggregate equity-based compensation expense of approximately $800,000 and a one-time reorganization charge of about $600,000 associated with the recent cost-cutting measures taken to better align our ongoing expense relating to the SATA activities with their overall revenue contribution.

Total operating expenses for the fourth quarter, excluding equity-based compensation expenses and the one-time SATA reorganization charge, were $7.6 million, similar to the third-quarter level and significantly lower than the average run rate of $8 million that we recorded for both the first and the second quarter of 2008.

US GAAP operating margins for the fourth quarter of 2008 was a loss of 1% of sales, compared to an operating loss of 12% for the fourth quarter of last year. Non-GAAP operating margins for the fourth quarter of 2008, excluding equity-based compensation expenses and the one-time SATA reorganization charge, was 13%, compared to a 5% operating loss for the fourth quarter of 2007.

Interest and other income for the fourth quarter of '08 accounted for $1.5 million, which included about $900,000 of a pretax capital gain from our equity divestment of GloNav to NXP Semiconductors and also included a $0.1 million fixed asset write-off associated with the restructuring of our SATA activities.

On the tax front, we recorded a tax expense of $0.5 million. Our quarterly tax calculation includes, among other things, the consideration of the geographical location of the executed licensing agreements during the quarter and the overall revenue per tax jurisdiction. The recent new California tax legislation, restricting the use of state NOLs for 2008 and 2009, increased our fourth quarter tax expense compared to earlier estimates.

US GAAP net income for the fourth quarter was $1 million and a fully diluted net income per share of $0.05, compared to a net loss of $0.3 million, or a loss per share of $0.01, for the fourth quarter of 2007. Non-GAAP net income and fully diluted net income per share, excluding approximately $800,000 of equity-based compensation expenses, $900,000 of pretax capital gain, and the one-time SATA reorganization charge of about $600,000, was $1.6 million and $0.08 per share, an increase of 246% and 300%, respectively, compared to the prior year of $0.5 million and $0.02 per share, respectively.

On an annual basis, as Gideon mentioned earlier, 2008 was a successful year for us and is clearly reflected by our financials. Comparing 2008 to 2007, our total revenue line increased by 22%. Operating income margin on a non-GAAP basis, excluding capital gains associated with our equity divestment of GloNav, the expense associated with the exit of the Dublin long-term lease, and restructuring expenses associated with our SATA activities, improved from breakeven 1% last year to a healthy 12% for 2008. Non-GAAP net income and fully diluted earnings per share, excluding the same items I just described, increased dramatically - by 118% and 113%, respectively, to $6.7 million, or $0.32 per share.

And on [US basis in 2009], we managed to achieve the following items. We successfully divested our equity investment in GloNav to NXP Semiconductor and recorded on an annual basis a pretax capital gain of $12.2 million. We successfully exited our long-term lease obligations in Dublin and recorded an expense of $3.5 million for the first quarter of '08. And, finally, we successfully restructured our SATA activity and reduced our ongoing expenses and recorded a restructuring expense of about $600,000.

Taking into account all these activities, net income and fully diluted earnings per share for 2008 compared to 2007 increased 563% and 600% to $8.6 million and $0.42, respectively.

Now we'll talk about some other related data.

Shipped units by CEVA licensees during the fourth quarter of 2008 were 80 million. This is up sequentially 11% from the third quarter of 2008 and 7% lower than the fourth quarter of 2007. The continued sequential growth reflects market share expansion and ramp up of the multimedia product. For the full 2008, shipped units by our licensees surpassed 300 million units for the first time ever, reaching 307 million units overall, a 36% increase year over year.

Of the total 80 million units shipped in Q4, 65 million units were attributed to licensees currently paying royalties, and 15 million units were shipped by licensees who are under a prepaid arrangement. This compares to 72 million units shipped during the third quarter of '08, of which 54 million units were attributed to per-unit royalties and 18 million were attributed to prepaid arrangements. Units reported for customers paying per-unit royalties increased 20% sequentially and 25% on a year-over-year basis.

As of December 31, 2008, the total number of shipping licensees were 27. Of them, 21 customers are paying per-unit royalties, and 6 are under a prepaid arrangement. During the year, one customer exhausted its prepaid quota and started to pay per-unit royalties.

As for the balance sheet items, during 2008, we generated positive cash flow of $8.3 million. As of yearend, CEVA's cash and cash equivalent balance and marketable securities were $84.6 million compared to $76.4 million for the end of 2007. During the fourth quarter of '08, we generated overall positive cash flow of $1.4 million, offset by $4.6 million for our buyback program. Our DSO for the fourth quarter of '08 was 49 days, compared to 35 days for the prior quarter.

As previously discussed, our board authorized a share repurchase program up to 1 million shares. We repurchased approximately 554,000 shares at an average price of $7.5 per share for a total amount of approximately $4.2 million during the fourth quarter of 2008. As of yesterday, we repurchased approximately 753,000 shares at an average price of $7.7 per share and a total amount of approximately $5.8 million and have an additional, about, 0.25 million shares available for repurchase under the existing plan.

Now for the guidance for the first quarter of 2009. As Gideon explained in detail a few minutes ago, we believe strongly in CEVA's growth prospects, especially in regards to market share expansion and new product introduction by our customers. We anticipate that our royalty revenue will continue to grow on an annual basis.

With respect to our licensing business, although our pipeline remains solid, given the current economic environment, visibility into this segment of our business is lower. Therefore, we have taken swift actions to reduce our total corporate expense levels for 2009 by approximately $1 million through a tighter expense control and, as stated earlier, fewer expenses associated with our SATA activities.

In addition, we will provide guidance only for the first quarter of 2009 and, at this point, refrain from providing annual guidance.

So, for the guidance for the first quarter of 2009, revenue is anticipated to be in the range of $8.7 million to $9.7 million. Gross margin is expected to be approximately 89%.

Operating expenses, including quarterly based compensation expenses, is expected to be in the range of $8.2 million to $8.7 million. Of our anticipated total operating expenses in the first quarter, $0.7 million is expected to be attributable to equity-based compensation expenses. Excluding that, our non-GAAP operating expenses will be in the range of $7.2 million to $7.8 million.

Interest income, net, is expected to be approximately $600,000. Tax rate for the first quarter - approximately 10%. And share count for the first quarter of '09 is expected to be approximately 20.3 million shares, after taking into account our buyback program. US GAAP EPS is expected to be in the range of $0.01 to $0.03 per share, and our non-GAAP EPS, excluding the $700,000 of equity-based compensation expenses forecasted, is expected to be in the range of $0.05 to $0.07 per share.

We will now open the floor for questions.

(Operator Instructions). Matt Robison, Pacific Growth Equities.

First of all, what was your headcount?

We are 175 employees worldwide, after taking into account all the activities and the downsizing we talked about.

Okay. So you dropped 5. When you look at the royalties and the units shipped, they were down year over year. What was the reason for that? I know that units that were paid royalties were up, but the overall number was down.

Yes. I think you answered yourself. The most important aspect is 20% growth in our customers that are paying royalties. The ones that are under prepaid or some old arrangement, whether it's the economy or just the fading out of some of these product lines, that number has decreased. So, on per-paying-royalty units, we have increased both year over year, 25%, and sequentially, 20%.

The handheld product you talk about sounds like a game console. Was that--? The royalty that you saw for the fourth quarter-- Was that really to fill the supply chain? Should we look for that to continue to grow in your perspective this quarter?

Yes. The initial shipments and the initial ramp-up happened in Q3, which we recorded in Q4. And we continue to expect that specific product line to continue to grow quite significantly.

I recognize the challenges of trying to close deals. Every company is talking about stretching sales cycles and so forth. It's clear in your commentary, particularly as it relates to licensing-- You mentioned your pipeline was still strong. Is it as strong as it was three months ago - the range of licensing opportunities?

Yes. The pipeline is as strong as it used to be. The concern that we have is the decision-- You pinpointed it. The decision process could be lengthened because people are more concerned.

Now, your royalties-- Even though a lot of companies did see fairly strong activity in the third quarter and all the really troubling guidance that we're seeing in the semiconductor business had to do with the March quarter, what--? Even though we already saw some pretty decent numbers for the third quarter that would lead to your December quarter results in terms of royalty accounting, you still had much stronger percentage growth than I think the industry would imply. Is that just because, within the customers you have, your products are in earlier stages of growth, and so you're growing off of relatively small numbers still in the market share gains even within your customers? And, if that's the case, do you have a way to continue--? Is the adoption early enough that you can continue to grow units in the first quarter?

It's a complex question. And, as we all know, there are so many different aspects to it and moving pieces that I'm not sure if there is one right answer. Of course, there are quite a few new product introductions, like one that we mentioned - the portable device that we mentioned. They are netbooks and notebooks that came out to the market and are coming now to the market, including Toshiba, Dell, which is a new product introduction for us. And they're also more mature product lines for us, both in the cellular industry and, of course, in the consumer electronics, whether it's DVD, set-top box, flat-screen TV type.

So I think all the different segments-- Our Q1 royalty number will be lower than the Q4 royalty number. It will not reach the $4.3 million because of the Christmas season and the very difficult Q4. That's specifically for Q1. But on an overall, yearly basis and taking into account the ramp-up in a lot of these new products, and some of them are very high-volume type of products, we are quite confident that, on an annual basis, we should see continue growth like we have seen over the last two years; I'm not sure if in the same magnitude or not. Time will tell. But, for sure, the royalties need to continue to grow.

Let me just add, Matt, a few more. First of all, 3G becomes now a contributor to our royalty stream. If you go to the market, 3G phones-- the advanced ones-- the ones that are coming from the leading companies are with our technology, and this was not the case. This is now growing in more substantial ways. So 3G phone-- 3G market, 3G-plus is a market that we are looking forward and expect to see (inaudible).

We have also the mobile multimedia. Yaniv mentioned we have three or four customers now starting to ship product, and this will take us further in 2009.

The lower-end products-- Companies like ZTE and the new, ultra-low-cost products from Nokia-- Have they started to register significantly?

I wouldn't say significantly. You start seeing-- You see the progress. You see the ramp-up going. And it will progress. We know the pattern. You start with a few hundred and then going to a few tens of thousands and then, if things go in the right direction, you see-- We see these patterns going forward. In general, the China market with the expectation-- Analyst house like iSuppli is saying that the markets will grow. They speak about 7.7% handsets in China specifically. And we will be there with our customer.

A product like the NXP aerophone chipset-- that's really more in a new cycle of 2G and 2.5G phones, right?

It's 2.5G now. Aerophone is an interesting product because it's a major part in, as far as we can understand, the Samsung product. Samsung is now increasing their share in the ultra-low-cost phone. They were-- The $100 phones are coming down to $70 phones and now going to $50 phones. And it is based on that also.

Right. But that's only been a royalty contributor for a few months for you guys. Right?

Yes. That just started. Yes.

It's still not at the level, but it's-- As far as we understand, it's a major element in Samsung's strategy to compete with Nokia at the branded, low-end market in China.

Okay. I'll let somebody else ask a question. Congrats on your success.

Vijay Rakesh, ThinkEquity.

Just a couple of things. It looks like the top line guidance was much better, down only, like, 8%, it looks like, on the midpoint, given that Apple is down like 30% in units. Looking at the first quarter, can you talk a little bit more on what you're seeing in terms of netbooks? How many models are you in? How many units do you think netbooks will be for you guys in 2009?

We don't know the specific because there are design wins, and we don't know exactly the pattern there. As far as we can understand, this market will grow 50%. But, today, we are at Dell, MSI-- I see here netbook with our-- LG, Toshiba. That's as far as we know-- just kind of make up our mind.

And, will you be probably 25% of the netbooks? Is that a fair assumption, if you're in Dell, MSI-- These are probably the major ones.

Gideon, maybe we'll talk about the overall industry potential. What we are seeing in HSDPA, like an Ericsson platform, shipping in the Dell and Infineon Mini 9, for example. This is now giving, in the UK, (inaudible) through Vodafone for free for the first three months. So, all the numbers right now of connecting these types of mini-type netbooks are expected to grow quite significantly over the next couple of years. I believe we'll sell 400 million by 2012 or 2013.

Vijay, I want to draw attention to the announcement that was made by Intel and Ericsson. You know, the inter-strategy where they want to combine in the multiple chipset that we'll have the 3G side. They are focusing on the WiMAX. But, in order to get a foothold in the 3G/(inaudible), they had to adopt a partner, and this partner is a customer of ours.

Okay.

In the context of atom chip with the wireless connectivity, we are there.

And, going on to the handset side outside of Apple, can you give a little bit more color on Nokia? I mean, how many units in ultra-low-cost are they looking to ramp in 2009 versus 2008?

We cannot be specific. The only thing that we can say is, as far as we know, there are currently two models out there - 1202 and 1203. These are low-cost-- at around $20--phones. And, as far as we know, there are other models now ramping up in production. But we cannot be specific on the quantity.

Okay. Previously, they have said 80 million units for 2009. Do you think there's a change to that here?

For Nokia, this is the biggest segment. Last year, they had north of 200 million in the low-end type of phone. This is their biggest market. As you know, in the last-- From the first Nokia-ever phone, it was all TI based, essentially. So, the ramp up will be significant. We don't know exactly yet the color and the magnitude. And this is-- We just know that that has begun. There are two, and potentially more, designs in the queue and in SKU. But, right now, two designs that are already out there shipping, and we will monitor their success through our royalty reports and the other data points.

Today, in the ultra-low-cost segment, as far as we know, the ultimate BOM, build of material, is $8. You can get to $8 only with two solutions today - the aerophone and Infineon-- ultra (inaudible). These both are based on our technology.

Okay. And a last question. On the OpEx side, you said a $1-million reduction on OpEx. Is that effective in the first quarter here - for the March quarter going forward?

Yes. Essentially, yes. The $1 million is throughout the year, starting in Q1. We did give a range for Q1 operating expenses. But it's going to be contributed throughout the year.

Okay. Great. Thanks.

Daniel Meron, RBC Capital Markets.

I just wanted to clarify a few things. I might have missed it earlier. When you think about 2009, obviously-- Usually the December quarter and the March quarter are usually the strongest ones. How much of the guidance for the March quarter is coming from licenses? Is that a base to build from in out quarters? And, then, what kind of variability could we be expecting in the licensing business? If you can just give us a little bit more color on how the outlook might shake out.

Yes. When we guide our revenues, we never break out in too much detail the different sources of revenue. But there are three, so it's not that difficult. We mentioned earlier the royalties for Q1 are going to be lower than the $4.3 million, which we reached a record high. That's what we believe so far. And the rest of the guidance will be based both on licensing and in support fees. I don't think there is anything special in this first quarter guidance over the regular guidance that we are giving. Q1, we have a good pipeline - a very strong pipeline, as Gideon mentioned earlier. And, other than that, there is nothing that has changed in the business practices.

Okay. But we're assuming-- Typically, March quarter is usually one of your strongest quarters, given the fact that you report numbers with lag of one quarter over the holiday season. And you still think that royalty is coming down. So, what is the base that we should think about for 2009 as a whole? And to what extent do you think there is more downside to the licensing business down the road, or is it pretty much where things should kind of stabilize?

Again, I'm not sure. Let me try to explain this again. On an annual basis, because of what we explained in the economy and the visibility that we have for the later parts of the year, we just think it's not prudent to give guidance because of a lot of question marks out there.

For the first quarter, the story is different. We have a pipeline. We have customers that are negotiating with us. We have customers that are evaluating our technology as we speak. This is a normal type of visibility and guidance that we always give.

So, unfortunately, this time around, we cannot give you-- We decided not to give the annual guidance, so I cannot quantify on the licensing and on the royalties, other than what you have already said - that royalties-- And you saw how we ended out the year and all the potential design wins and ramp-ups that we have. We think that's going to be a significant contributor both on an annual basis as well as on the Q1 basis but not as high as the record number we came up in the last quarter.

You are right that, usually, Q1 is strong in royalties because it represents the Christmas sales, which is the best quarter of the year. Unfortunately, this was not the economy and not the situation that we are facing right now in Q4 shipments.

I hope I gave you some color there.

Yes. That's fair. And, then, the next question relates to the cost-containment measures of $1 million. Again, I might have missed it earlier, but what kind of measure you're taking-- What's the change in the headcount here? What other measure you're implementing? When are we expected to see the impact? Is it more-- already in the March quarter? Or did you already start it in December quarter? And are there going to be--? What's the base that the Company requires, or what is the underlying assumption in your current cost structure?

Yes. We have talked about that. We guided, non-GAAP, $7.2 million to $7.8 million for Q1. That takes into account the cost-cutting measures that we have taken. Today, after taking those actions, there are 175 employees worldwide. We have aligned some of our staff activities to be less service-oriented and more IP/royalties/high-margin oriented, like we have done with all the other parts of the business, which, in 2008, contributed very nicely. That's something that we also want to give more emphasis on the SATA business specifically. So that will save on an annual basis quite a few hundred thousand dollars. Compared to FX and compared to other expense measures and cost measures that we have taken-- And, you know what? For a long time, we have always been quite lean and mean as much as we can. We came up with about $1 million on an annual basis that will start immediately. (Inaudible).

(Inaudible)?

Pardon?

What was the headcount before these trends?

At the end of the last quarter, we were 182, I think, people or 190 people worldwide.

Okay. So it's not a huge change in the headcount; it's more of changing the processes and organizations.

Overall, non-GAAP expenses last year were at $31.1 million in operating numbers and $4.6 million in cost of goods. From these two numbers, we are planning on reducing about $1 million for this year, '09.

And, then, the last question on my end. Can you give us a little bit of a sense on what is-- Out of the royalty revenue, how much of that is based on handsets, and how much of that is the game console that you mentioned before? And how should we think about it going forward? Also, in this respect, if you can just give us a little bit more color on the Nintendo win that you talked about.

On the handset side, we said that about-- Similar to the past, about 55% of our royalties are derived from handsets. Multimedia devices represented a few different devices and talked about SunPlus coming out with a PMP, personal media player. We showed that at AeA two or three months ago. Now we were talking about a portable handset game console that is usually selling, and has been for the last three years, in very, very high volume. That's just started to ramp up. So all these are still small, but that will increase in 2009.

In 2008, there were zero multimedia devices for us on the royalty front. In 2009, that should start being a more significant number.

Okay. So, if 55% was handsets, how much was the rest of it - communications, et cetera?

The rest of the consumer electronics - DVDs, set-top boxes, hard disk drives-- The rest of the-- portable multimedia players-- This is the rest of-- I don't have a specific breakdown between TVs and DVDs and set-top boxes, but all the other consumer electronic devices fall in the 40% to 45%.

Okay. Thank you. Good luck.

Thank you.

Bob Sales, LMK Capital Management.

Just a few questions. The $84 million in cash and short-term investments-- What do you think your plans with that cash are for the next year or so?

First of all, we are focusing on growing our business and, of course, the shareholders' value. In our daily practice, first and most important, positive cash flow generation. This is on the business front. And, in terms of the cash, as we mentioned earlier, the board has adopted a 1-million-share buyback program, which is in process these days. This is something that we'll continue to execute-- and have the rest for longer-term, strategic opportunities and goals.

And the last thing-- You said strategic opportunities. Are you actively looking for strategic acquisitions? And, if you--? The types of acquisitions you're looking for are in what type of range in terms of cash consumption?

I wouldn't use the term intensively. We're exploring. We are monitoring the market. That's supposed to answer your question. IP is the segment that we believe we should focus. When we feel that it makes sense and offers the right value proposition to our shareholders, we'll do something. It is exploring, not intensively looking or-- You know.

Well, I only asked the question because-- My concern would be using a significant chunk of that cash and making a mistake in terms of an acquisition that doesn't work out because, at this point, cash makes up two-thirds of your equity value, which we would view as a high level of security as shareholders.

Well, we totally understand and, I think, agree with your assumptions there as well.

The second question I had-- Is the cash that you have--? It looks like you're yielding somewhere in the low 2% annualized interest rate on it. Where is that cash invested - in what types of securities?

We have-- Our investment policy allows us only to invest in corporate bonds with A ratings, so that's all the different A ratings but nothing less. Anything below that needs special audit committee and investment committee approvals, and that's rare. We have been mainly investing in CDs and deposits. I would say right now the average maturity is shy or around a year or so-- shy of a year, or 12 months.

And, if you recall, we mentioned about $700,000 of unrealized losses at the end of September of last year. At the end of December of last year, that number was $170,000. So, as of today, we're not aware of any special problems, write-offs, or any concerns that we have with any of our corporate bonds.

Okay. And then, in the handset business, you mentioned that it was about 55% that was of your royalty revenue?

That's correct. The overall licensing revenue may be somewhere around 60% or 65% that are coming from the handset side.

Okay. And when you--? The handset revenue has been running at what percentage? The handset royalty revenue has been running at what percentage of total royalty revenue during 2008? Has it been about 50% or 55%, roughly?

Yes.

So, given that you're in the baseband suppliers that are likely to gain share through 2009, is it--? Do you expect that your handset revenue royalty revenue will hit an inflection point where it becomes a much larger percentage of your royalty?

I think that in 2009 there should be a trend. I'm not sure if it's major, but there should be a trend of increased portion of our handset business because the volumes-- We're talking about volumes mainly. The volumes are very significant. On the other hand, what we could see down the road - maybe 2010 and 2011 - is a shift back towards more consumer electronic devices, which we have done quite nicely over the last three years of signing new deals. And, in 2008-- Ending 2008, there were the first four multimedia type of devices that came into production.

So, for now, those portion of royalties were very minor. But, going forward and with the ramp-up of some of these new devices, that should kick off-- probably stronger in 2010 from the market share in handsets.

One more note, which, in a way, relates to the share of handset versus other. Usually, the royalty from handsets is between $0.05 to $0.10, where the consumer product is between $0.08 to $0.15. So the royalties coming from the consumer market is higher, though the volume is not as big in handsets.

Right. Why wouldn't--? Given that TI has made it pretty clear that they're putting less emphasis on the baseband market, and that gap looks to be filled, and Freescale is in trouble, so that gap looks to be filled by the players that are using your IP, why wouldn't--? Why shouldn't we expect a more pronounced inflection point in your handset royalty revenue at some point in the next 12 months?

It's just a matter of time. Let's take TI, for example. They said they are exiting. They are not exiting now from the market; it's a process, because they have customers to support. And I believe that customers that used to work with TI will switch to Infineon, NXP, Broadcom, and others that use our technology. But the process of qualifying, QAing, certifying-- It takes time. It could take between a year-- It could take 15 months, and, in the case of Nokia, it could end up a two-year process. Nokia, it looks like we are through that, but it takes time. And that's the reason that the inflection point is not immediately after TI announcement but in a year or two.

Okay. I'll ask one more question, and then I'll hand over the mike. Do you have something you could communicate as a fair market share that you think you could obtain in handsets as you look out 12 to 18 months?

Yes. I think we said this not once and not twice. If we look out 24 to 36 months down the road-- not 12 months-- we believe that, with all these different design wins that we talked about and you're aware of, we should be able to reach somewhere between 30% to 50% of the worldwide market and baseband market over the next two to three years.

And that's versus what today?

That's around from about 12% or 13% today.

Okay. Thank you very much.

Robert Katz, Senvest.

Very nice quarter. I have a question. What will the impact of the shekel be on your OpEx in the upcoming year? How much of that have you already hedged out, and how long does that hedge go out?

Thanks. Good question. I forgot to mention that. We are essentially-- The $1 million that we gave only takes and bakes into account all the different cost savings that we are planning. That also includes the effects. And I would say that we are essentially covered for the entire 2009. So whenever it goes up or down, our budget and forecast takes all that into account.

And at what price are you hedged?

You don't hedge your full year on a single day; you do it on an ongoing, 9- to 12-month basis. So some of it is at ILS3.7, and some-- In the later quarters, it's as high as ILS3.9 to ILS4 per dollar. It's continuously improving throughout 2009 because we do our hedging, again, on an ongoing basis.

Okay. And I would assume that, going forward, now that it's above ILS4, you're hedging to 2010?

Not yet. (Inaudible).

Sure. Another question. The share compensation-- Stock-based compensation is pretty high. How many options do you issue in a given year, and how many options are in your option pool?

In previous years 2007 and 2008, we have issued to employees somewhere around 500,000 to 600,000 shares a year. This is going to drop significantly in 2009 - probably by half. And our current expenses are somewhere around $700,000 a quarter for 123-R. The pool as of today has about 1.4 million options un-granted yet.

Great. And, in terms of the share buyback, are you still active in that in this market at these prices, given your performance? Or, with the economic uncertainties, have you pulled back from that?

No. We have the program. We're active with the program. We'll continue to be active with the program based on all the rules that exist out there.

And you're nearing the end of that program. Do you have to go back to--? I guess you have to get government approval to get another buyback program in place?

Not government, but board approval, you meant.

Board approval.

Yes. That's correct. As soon as we utilize the 0.25 million shares that are out there, we will convene the board and discuss about the next plan.

And, just in terms of stepping back a bit, it seems like there's great growth opportunity from the handset business, even though there's some pressure on it in the near term. In the CE business, you have a great footprint. And, when that recovers, that should drive revenues. Are there any other growth drivers, outside of-- I guess you also highlighted the HSDPA/LTE market. But are there any other markets that would be high-volume markets?

Yes. I think I mentioned it in my prepared remarks. If you take just market of cellular, picocell, femtocell, the MIDs-- I think I was asked a question about the netbook market, and I said that, when it comes to the netbooks that are going to be 3G-based or wideband CDMA-based, we will be there together with Intel with the atom chip. These are just cellular (inaudible) activities. From our standpoint, this is agnostic because we are using the same technology that way also. In the consumer electronics, game console-- It's a market. Consumer product is a substantial opportunity for us. Set-top box, DVD, Blu-ray DVD-- even DVDs that are now being upgraded to-- and going through areas like China or India. And this is the growth engine for the DVD supplier. So these are territories that we have in place.

Going forward, we are looking into LTE and WiMAX II, and let's keep watching us on the NWC and see what are we doing there.

And, in terms of number of units-- If you aggregate all these end markets and the number of units you're chasing right now, what would you say the total addressable unit would be for looking out a year?

Total addressable unit?

Yes.

So, if you compare-- You take cell phone; it's a 1-billion unit. Just the MID and the netbooks is 300 million units. We are talking about above 2 billion units addressable market.

Now, the handset market is 1 billion units per year, but the handset market today is 4 billion handsets worldwide. So 2 billion people don't have a handset and can go and buy these $20 ultra-low-cost phones. And what about these 4 billion units? They are going to replace these phones.

Okay. Very good. Thank you very much.

At this time, there are no further questions. Management, are there any closing remarks?

Yes. Thanks again for joining us today and for your continued interest in CEVA. We will be showcasing at the upcoming Mobile World Congress in Barcelona. This is the 3GSM show in Spain on February 16 to February 19. We have a nice booth, a nice demo, and technologies that there are going to be shown and released there. And we invite you to join us there in Barcelona.

Thank you, and good-bye.

Thank you for participating in today's CEVA Fourth Quarter 2008 Earnings Release Conference Call. This call will be available for replay beginning at 11:00 eastern time today through 11:59 p.m. eastern on Tuesday, February 10, 2009. The conference ID number for the replay is 79622372. Again, the conference ID number for the replay is 79622372. The number to dial for the replay is 1-800-642-1687 or 706-645-9291.

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