CEVA Inc (CEVA) 2009 Q1 法說會逐字稿

Good morning. My name is Kristelle, and I will be your conference operator today. At this time, I would like to welcome everyone to the CEVA first quarter 2009 earnings conference call. (Operator instructions)

Thank you. I would now like to turn the conference over to Mr. Arieli, Chief Financial Executive Officer. Please go ahead.

Thank you. I'm not yet promoted, just the Chief Financial Officer. And good morning, everyone. Welcome to CEVA's first quarter 2009 earnings conference call.

Today's conference call includes forward-looking statements that involve risks and uncertainties, as well as assumptions that, if materialized or proved 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 '09, 2009 general outlook including handset sales for the second half of '09, optimism about our market share expansion, new product introductions by our customers, their production schedules, and our ability to generate revenues from these new products, prospects for the CEVA-XC, our ability to capitalize on the smartphone, netbook, ultra-low cost cell phone, and 4G LTE trends, and the anticipated benefits of our cost containment measures.

The risks, uncertainties and assumptions include the ability of the CEVA DSP core and other technologies to continue to be strong growth drivers for us, our success in penetrating new markets and maintaining our market position in existing markets, the success of operational adjustments in producing their anticipated benefits, the possibility that the markets for our technology may not develop as expected, or that our customers' products incorporating our technology do not achieve market acceptance, our ability to timely and successfully develop and introduce new technologies, general market conditions, and competition and other risks relating to our business, including but not limited to those that are described from time to time in our SEC filings.

CEVA assumes no obligation to update any forward-looking statement or information which speak of their representative dates.

This conference will be conducted by Gideon Wertheizer, Chief Executive Officer of CEVA, and myself, Yaniv Arieli, Chief Financial Officer. Gideon will start and cover the business aspects and the highlights from this last quarter, while I will cover the financial results for the first quarter of '09 as well as the financial guidance for the second quarter of the year.

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

Thanks, Yaniv. Good morning, everyone, and thank you for joining us today. I hope you had the opportunity to review our press release with the results of the first quarter of 2009.

During the quarter, we reported total revenues of $9.5 million, which was 6% lower than the first quarter of 2008. Royalty revenue for the first quarter of 2009 was $3.8 million, compared to $3.7 million for the first quarter of 2008.

Let me take a moment to remind you that our customers report royalties one quarter in arrears, so the first quarter royalties reflect, in fact, fourth quarter of 2008 shipments, when the industry was already experiencing this severe downturn. With that said, and despite the major economic slowdown, our royalty revenue, our royalty levels, increased slightly on a year-over-year basis. This is largely due to our market share expansion in the handset, and the growing use of our technologies in the mobile multimedia space.

During the first quarter, we concluded nine new license agreements. Eight of the agreements were for our CEVA DSP cores platforms and software, and one agreement was for our SAS technology. Geographically, four of the license agreements are in Europe, three in Asia, and two in the US. Target application for the licenses concluded during the quarter are mainly 3G and 4G handset, data cards, smartphone, mobile multimedia, and storage equipment.

The first quarter of 2009 was a solid quarter for CEVA. Our revenue came close to the high end of our guidance. On the profitability front, we demonstrated record high achievement in our operating margin for both GAAP and non-GAAP measures, as well as record high achievement net income and EPS on a non-GAAP basis.

Our non-GAAP operating margin for the first quarter doubled to 20%, versus 10% for the first quarter of 2008. Non-GAAP operating margins, net income and EPS for the first quarter of 2009 exclude equity-based compensation expenses of $0.8 million. This is very encouraging in light of the global slowdown, and came as a result of continued and consistent efforts to focus on our key markets and lucrative business opportunities.

As I mentioned earlier, we concluded nine new license agreements, a noteworthy achievement in light of the cautious stance the Company has recently taken. On the agreements executed, I'd like to provide a few important highlights.

First, two of the agreements are with a major silicon supplier in the handset market that licensed our CEVA-X and Teaklite-III DSP cores. The silicon supplier plans to design the CEVA-X and the Teaklite-III into a range of products, from low end single chip baseband, to high end 3.5G and 3.9G smartphone handsets.

Another agreement is with a customer that is a pioneer of the WiMAX and 3G multimode technology. Recent reports from In-Stat predict that the percentage of 3G and 4G subscribers to reach to 30% in 2013, up from 11% last year in 2008. This projected timeframe is consistent with our customer's plan, as it usually takes around 18 months to design the chip, followed by another additional 18 months to incorporate a new 4G chip into a handset or a netbook. Therefore, with regard to the 4G market, we expect to generate license revenue during the design phase, followed by royalty revenue upon mass market expansion.

Also for the 4G market rollout, and future technology trends such as software-defined radio, we announced in February a new DSP core, the CEVA-XC, which revolutionizes next generation wireless architecture by allowing single DSP platforms to support LTE as well as WiFi, mobile TV, GPS, and WiMax II.

The last agreement that I'll elaborate on is with a leading Japanese company that selected our DSP for next generation portable consumer products. The current generation of this product, which we briefly discussed in our last conference call, is also using our technology, and is now in production with a good market traction.

First quarter royalty revenue is in line with our expectation, representing 40% of our total revenue.

Before handing the call over to Yaniv for financial and guidance, I'd like to briefly discuss two market related topics. I'll start by highlighting the positive trend in our main market, the handset market, and where we expect to benefit going forward. I will then conclude with general comments about our business for the second half.

It appears that the focus in the handset market has shifted to smartphone. Based on informal estimates, in 2009, smartphones are expected to account for around 13.5% of the -- all new handsets, growing to 38% over (inaudible) by 2013.

The smartphone segment is currently dominated mainly by Nokia, RIM and Apple. However, as the market matures, we see more players entering into the market such as LG, Samsung, ZTE, Huawei, as well as PC (inaudible) manufacturers such as ASUSTek, Acer, Gigabyte. These additional companies are expected to leverage the brand recognition and strength in (inaudible) design to rapidly commoditize the market with lower cost smartphones.

We believe CEVA will directly benefit from the smartphone trend, with its existing technology and user base, which already includes Samsung, LG, ASUSTek, Acer, Panasonic, Sharp, as well as US-based smartphone manufacturers. Also, an Asian based chip company that is one of the largest suppliers of handset chips is preparing to begin production during the second half of this year, with the highly integrated baseband and application processor chip that will fill the commoditization trend I just described.

Another positive trend is the netbook segment. [Price] supply in 2008 netbook shipment grew by more than 200%, and expect to see a rise of 68.5% this year. According to research in Gartner, by the end of 2009, netbook could account for close to 10% of the PC market. For CEVA, the netbook market possesses substantial organic growth opportunity, to which we are uniquely positioned to benefit from.

One of our key customers has already been announced cooperation with Intel, with its 3G modem chip being an integral part of the (inaudible) based (inaudible) platform. Also, NVIDIA is partnering with the same customer to enable 3G connectivity around its newly designed platform called Tegra, which is targeted for MID.

Not surprisingly, given the price point, another segment of the cell phone market that appears to be immune to the current economic slowdown is the ultra low cost phone, targeted at India, China, Southeast Asia, and Africa. The figure that was recently published by India telecom regulators suggested that the total wireless subscriber base in India stood at 376 million at the end of February 2009, and continues to grow at the rate of 10 million new subscribers per month.

We previously discussed CEVA's exposure to this segment of the market, and the market traction we get with our customers such as Infineon, ST-Ericsson, (inaudible), and (inaudible). All of these companies are strongly positioned with leading OEMs such as Nokia, Samsung, ZTE, as well as the range of local brands.

Now with regard to the second quarter revenue guidance. Nokia, Sony Ericsson and LG recently stated that they anticipate that the second half of this year will be stronger, compared to the first half of the year. Also, the latest royalty report we will see from our customer for the second quarter show that despite the overall decline in the handset market, the market shows CEVA base phone grew as compared to the prior quarter.

Our growth is defined mainly by higher shipments of GSM and CDMA ultra low cost phone. This is, however, offset by lower shipment of 3G feature phone in Europe.

In the consumer space, our second quarter royalty revenue is anticipated to be weaker, which is consistent with the seasonal trend as it reflects lower shipment during the first quarter due to the past Christmas season, as well as the negative impact of the economic slowdown.

On the licensing front, we made encouraging progress in next generation design wins, specifically in Korea and Europe. Nonetheless, companies continue to be cautious about their expenditures in R&D.

Given [thereby], we continue to be prudent with our second quarter guidance, and also refrain at this stage from providing end year guidance.

With that said, I will now turn the call over to Yaniv to review the first quarter 2009 financials and provide future guidance.

Thank you, Gideon. I will now review the results of operations for the first quarter of '09.

Revenue for the first quarter was $9.5 million, which was closer to the higher end of our guidance, and only 6% lower than $10.1 million for the first quarter of 2008. Revenue breakdown was as follows.

Licensing revenue was $4.5 million, reflecting 48% of total revenue, and essentially flat as compared to the fourth quarter of '08.

Royalty revenue was $3.8 million, reflecting 40% of total revenue, and just slightly higher than the first quarter of 2008. Compared to the fourth quarter of '08, royalty revenue showed a decrease of 12%. This may be perceived as not being in line with our seasonal trend, where Q1 royalty revenue tends to be highest, given the Christmas shipments. However, as we are all aware, Q4 was extremely weak on the demand side, due to the financial crisis.

Service revenue was $1.2 million, reflecting 13% of total revenue, and 9% higher than the fourth quarter of 2008 of revenues of $1.1 million.

Quarterly gross margins were 87% on US GAAP basis, and 88% on non-GAAP basis, excluding equity-based compensation expenses. This is slightly lower than our previous expectations.

As for the operating expenses, research and development costs were $4.1 million for the quarter, including $0.3 million of equity-based compensation expenses. Sales and marketing costs were $1.6 million, including $0.2 million of equity-based compensation expenses, and our G&A costs were $1.5 million, including $0.3 million of equity-based compensation expenses.

Total operating expenses for the quarter were $7.2 million, which include an aggregated equity-based compensation expense of approximately $0.8 million. The level of expenses was significantly lower than our guidance, and was primarily a result of better than expected impacts of our cost cutting measures taken during the prior quarter, which attributed to lower expenses associated with our SATA technology.

Other factors that had an incremental impact on operating expenses were a Company-wide salary freeze, and higher allocation to cost of goods associated with service-related deals.

Total operating expenses for the first quarter, excluding equity-based compensation, were $6.4 million, significantly lower than the average run rate of $7.6 million for the third and the fourth quarters of 2008.

As a digression from the reporting of the Q1 financial results, I want to note that at the upcoming annual shareholders' meeting in June, we have asked our shareholders to approve an increase of 650,000 shares authorized for issuance under the Employee Shares Purchase Plan, which is the ESPP. We believe that in order to incentivize our employees, especially in light of the Company-wide salary freeze and other measures we have undertook in the prior quarter to improve operating efficiency, a share increase in the ESPP is in the best interest of the Company and its shareholders.

We believe that the employees' participation in the ESPP is a motivating factor for them to continue in their efforts to help CEVA grow, build a sense of teamwork, and ultimately, benefit our shareholders.

More information about the proposed share increase story, ESPP, is set forth in the proxy statement for the annual meeting, which has been sent to all shareholders, and available for review on our website and on the SEC website.

US GAAP operating margin for the first quarter of '09 was a record high for CEVA, representing 12% of total sales, compared to an operating loss of 31% for the first quarter of '08, and a 1% loss for the fourth quarter of '08. Non-GAAP operating margins for the first quarter of '09, excluding the equity-based compensation, was also an all-time record high of 20%, compared to 10% and 14% for the first and fourth quarter of 2008, respectively.

Interest and other income for the quarter accounted for $476,000, and on the tax front, we recorded a quarterly tax expense of close to $230,000.

US GAAP net income for the quarter grew 43% sequentially, to $1.4 million, or on a fully diluted net income per share of $0.07, compared to $1 million, or $0.05, respectively, over the fourth quarter of 2008.

On a non-GAAP net income and fully diluted net income per share, excluding approximately $0.8 million of equity-based stock compensation, with an all-time record high of $2.2 million, and $0.11 per share, an increase of 17% and 22%, respectively, compared to the prior year, and a sequential increase of 39% and 38%, respectively, compared to the fourth quarter of last year.

May -- I will talk a little bit about other related data. Shipped units by CEVA licensees during the first quarter of '09 were 59 million, down 26% and 31% from the fourth quarter and first quarter of '08. The significant reduction in quantity was caused, in part, by the adverse impact of our legacy customers faced with their Q4 shipments due to the economic downturn. This was partly offset by the market share expansion and the ramp-up of new multimedia products.

In US dollar terms, the impact of the slowdown was substantially lower due to higher royalties per chip with our newest product lines. Of the 59 million units shipped in Q1, 49 million were attributed to licensees currently paying per-unit royalties, and 10 million units were shipped by licensees who were under prepaid arrangements. This compares to 80 million units shipped during the fourth quarter of '08, of which 65 million were attributed to per-unit royalties, and 15 million to prepaid arrangements.

As of March 31, 2009, the total number of shipping licensees were 27. Out of them, 21 are paying per-unit royalties, and six are under the older, prepaid arrangements.

As for the balance sheet items. As of March 31, 2009, CEVA's cash and cash equivalents, balances and marketable securities, were $85.1 million, compared to $84.6 million at the end of last year. During the first quarter, we generated positive cash flow of approximately $1.3 million before taking into account $0.8 million of cash outflow associated with our buyback program.

Our DSOs for the first quarter of '09 was 44 days, compared to 49 days for the prior quarter.

As previously discussed, our Board authorized a share repurchase program of up to 1 million shares. We purchased about 141,000 shares on an average price of $5.80 per share, and a total amount of approximately $800,000 during the first quarter of '09. As of yesterday, we reported approximately -- we repurchased, sorry, approximately 894,000 shares, at an average price of $7.74 per share, and a total amount of approximately $6.6 million. We have 106,000 shares remaining for repurchase under the existing plan.

Now for the guidance for the second quarter of '09.

As I explained to you minutes ago, the recent actions we took to run tighter expense control, and to reduce our total corporate expenditure level, seems to be yielding better results than initially forecasted. We expect to continue our efforts in this regard, but cannot promise that these low levels are sustainable in the longer term.

We continue to believe in CEVA's growth prospects, especially as it relates to market share expansion and new product introductions by our customers. In addition, as Gideon stated, due to the lack of visibility and unpredictable market trends, we currently will only provide guidance for the second quarter of '09, similar to the prior call, and we'll refrain at this point from giving annual guidance.

Now for the actual guidance. The revenue is anticipated to be in the range of $8.3 million to $9.3 million, reflecting a sequential revenue decline of approximately 7%, mainly associated with the projected lower royalties as elaborated by Gideon. Gross margin is expected to be at a range of 87% to 89%. Operating expenses, including equity-based compensation expense, is expected to be in the range of $7.1 million to $8.1 million.

Of our anticipated total operating expenses for the second quarter, $0.8 million is expected to be attributed to the equity-based compensation expenses, and therefore, non-GAAP operating expenses in the level of $6.3 million to $7.3 million.

Interest income is expected to be approximately $450,000. Tax rate for the first quarter is expected to remain at 10%. Share count for the second quarter is expected to be in the range of 20.2 million to 20.6 million shares.

And finally, US GAAP EPS is expected to be in the range of $0.01 to $0.03 per share, and a non-GAAP EPS, excluding the equity-based compensation expenses, is forecasted to be in the range of $0.05 to $0.07 per share.

I will now open the floor for questions.

(Operator instructions) Your first question comes from the line of Vijay Rakesh with ThinkEquity.

Yes, hi, guys. Just looking at the gaming platform. Can you give us an idea of how many units you see there for 2009? What are the next wins that you're seeing on the gaming side here, going forward?

No, unfortunately, we were not -- we get the reports from the customer that supplies to some of these different models, and then products, but this is all under NDA, and we can't reveal specific information about sales of our customers.

But in general, as you know, we are involved -- our multimedia platform is involved and doing quite well over the last two years, in gaining market share and design license activities. And just recently, we are seeing more and more ramp up of these types of products in the market with mass production.

Got it. Do you see any additional gaming wins here in 2009, new gaming platform wins?

You know, the relationship, without speaking specifically to the gaming console, the relationship that we have in the consumer space, in the mobile multimedia space in the long term -- I mentioned in my prepared remarks a follow-on agreement that we have with a Japanese company in the mobile multimedia space, and this shows the long term, because it's a continuous project. We have one product that recently went to the market with good traction. And now we won the second generation.

Okay. And last question here, on Nokia. Looks like Infineon is actually ramping well. And it looks Barco is starting to ship also. Can you kind of help us understand what your market share trends will be at Nokia, or the shipments you've planned, '09 versus '08?

Well, Vijay, again, we cannot be specific. One thing that I want to draw your attention and investor attention to what I said about the trend that we saw with the -- from the reports that we got for the first quarter shipment. We are gaining significant market share, or significant strength in the ultra low cost, both on the GSM and the CDMA market. They are real leading companies that engage with Tier 1 OEMs in this space, all using our technology.

And this is something that's recently started, and now, gaining momentum.

Okay, great. Thanks, guys. Good job.

Thank you.

Your next question comes from the line of Anil Doradla with William Blair.

Morning, guys. Can you give a sense of the breakdown on the royalty side, and maybe even on the licensing side between the smartphones and the non-smartphones? I know it looks like you're more weighted to the ultra low cost, but could you give us a sense -- how did you perform between these two categories?

I -- let me give you the numbers, and Gideon will add the [sauce]. From an overall royalty perspective in Q1, quantity-wise, about 60% of our royalty volume was handset driven. We -- it's more difficult to try to assess the difference, if it's a feature for a low end phone, or a mid -- or smartphone, but I think what we have seen, in the last quarter, at least, is a pretty significant ramp up in the low end type of phone. And this is one of the bigger market opportunities and volume opportunities for us.

Let me just clearly say here -- you know, we are not biased toward one segment of the market or another. Let's say, in Q1, where the ultra low cost shipments in China and India was strong, and gained momentum -- we enjoyed it. But smartphone is definitely a segment that we are well positioned, and I mentioned in my remarks, LG, Samsung, ASUSTek, and the US-based smartphones, they already use our technology. And going forward, we believe this -- the commoditization trend, and there is one big Asian company that in the second half of this year will get into mass production with a really low cost smartphone, because they managed to integrate both the communication, the baseband, and the multimedia into one chip. And this will start, starting the second half of this year.

So smartphone is indeed a segment that we expect to gain momentum.

Right. So within the 60% of the volume shipped out, would you say it was more 80-20 in favor of the ultra low cost? Or is it even higher than that?

You mean volume-wise, or dollar-wise?

Volume-wise.

Volume-wise, I would say 70 -- maybe 75-25. This is a rough.

Okay, good. And looks like most of your success has been in the baseband business. Can you give a little bit of color, of activity in the application processor space during this quarter, and maybe going forward?

You know, in the application processor space, our playground is video -- video and audio. So in the smartphone, the company that I mentioned, the Asian company that I mentioned, that is going to get into mass production, they are using us for the multimedia. I mentioned in the consumer space another company from Japan, that they make use of our technology -- again, not a baseband, but in the multimedia.

So the multimedia space is -- definitely, baseband is our main market historically, and the multimedia is something that started to gain momentum, I would say, last year, because people understand that in order to be able to support what is called Internet video, where you download or stream video directly from the Internet from YouTube, or stuff like this, you need the DSP for this purpose. So at that point, we started getting traction and customer base to this one.

One more thing -- sorry for being -- downloading here with all sort of marketing information, there is -- in China, there is one big name in the PMP -- and PMP stands for Personal Multimedia Player. But under the Personal Multimedia Player, there is a range of products like digital picture frame, and application processor, they use the same technology base. This company licenses our technology, licenses our video software, have a chip, going to ramp production -- again, second half of this year.

Okay, great. And just shifting gears to kind of the macro, can you share with us what you're hearing from your customers on the inventory levels within the channel, where -- whether it's going down, or stabilized, or you're seeing any trends of pickup? Any macro comments on that front?

Well, in the cellular space, what we are seeing is that they see -- they show, I would say, optimism. They show ramping up in the second quarter. The focus is about 10% down in overall handsets and other (inaudible) versus 2008. But people are still in a wait-and-see mode, not sure about whether there is just replenishment of -- just building up inventory again, or will -- and demand. You know, ramping up.

And so finally, if you look over the last three quarters -- months, would you say that overall, the end market, you've seen a pickup? Or did you see an acceleration and pickup in the month of March or April? Can you give us some color?

Well, you know, where we get the report, the royalty reports on a quarterly basis, and they don't have the breakdown, the monthly breakdown. It's just the numbers for the full quarter. So we don't have that type of visibility. But looking at Q1, which is both the seasonal post-Christmas and the overall slowdown, it seems that Q2 can ramp up from that in volume. And the market, of course, how -- when we -- better Q2 shipments, we will report in our next quarter, in Q3, and not in Q2 itself.

All right. Thank you very much.

Thank you.

Your next question comes from the line of Matt Robison with Wedbush.

Hi. Good morning, and congratulations. First of all, could you give the headcount and CapEx, if there was any in the quarter?

Yes. Headcount, we're about 175 employees, and CapEx was shy of $100,000.

Okay. Now, how should we view the sustainability of that high royalty ASP?

It's coming really from the mix, and as you know, the consumer-related devices tend to bear higher royalties than some of the -- have very high volume cell phone, ultra low cost cell phone. So now we need to continue to monitor the mix, and as soon as the consumer gets back to either normal or better than what it showed and performed in the prior quarters, then we hope to continue to benefit from that trend.

But you're absolutely right, that the average rate per device on the quarterly basis compared to last year, and even compared to Q4, it was higher.

Which core will that single chips, low cost smartphone that you talked about, (inaudible)?

Well, it depends. The ultra low cost is not ultra low performance. So we have the GSM, the [2G], when (inaudible), when you go to next step, and this is just recently, Infineon announced a design win for (inaudible). It's Nokia, and also BroadComm, they are using more advanced DSP.

Well, yes, you mentioned -- I'm speaking specifically to that. It sounded like the first smartphone with a single chip design.

Ah, you mean smartphone. Okay.

Yes.

Okay. But that's a CEVA, CEVA-X.

Okay. And how are you -- can you talk a little bit about the design win cycle for XC, the new one?

Well, yes. That's a good question. The CEVA-XC, it's a new architecture that -- the idea there is to have a single platform. The next generation for starting for (inaudible) will be a multipurpose one. You run on the same platform LTE, WiMAX, GPS, WiMAX II even, and we can support it in (inaudible).

Now, the production cycle -- the mass market [with PMP], we know it's about [213], three years from now. But you need to take into consideration that there is a design cycle, and there is a -- of the chip, and there is a design cycle of the (inaudible). So we -- from now on, people start getting interest in this technology. By the way, we are licensing our CEVA-X to 3Gs, 4Gs, and there are [squatters]. One of the deals was CEVA-X for 4G, or 3.9G, which is pretty close.

So overall, from now on to, let's say, two years from now, we see XC design wins coming at a rate that people will decide to. And then, starting from 2013, we'll see what.

Okay, so you think the CEVA-XC actual design wins, you may not see for another two years?

No, no --

No, no -- royalties. Royalties.

Oh, okay. Yes, that makes more sense. Now, what do you think the -- when do you think you'll get your initial customer commitment to that architecture?

Oh, that's something that we don't specifically speak, but --

We hope that in this year, overall, the later part of this year, make -- that could happen. But again, to predict on a specific deal and a specific technology is quite difficult, but that's what we are trying to aim at.

Now are you expecting it to be handsets, or base stations?

It will be both. It will be handset, data cards, base stations.

In the base station context, don't you -- isn't it a little bit different game, because on the handsets, you've obviously got a very tight power and economic template you have to work with, and the base stations, there's a little -- it would seem like there's a little more give and take. There's also, in the base stations, maybe the notion you have to compete with a road map from Texas Instruments, which may not -- where they may be selling a little bit of futures versus what you have. I know you've got pretty strong specs relative to what they have now. How do you -- how does that competitive dynamic work out?

The difference between handsets and base stations, one of the things is the power -- by the way, base station also powers the -- something that you cannot neglect.

Sure, sure.

But the performance needs to be higher. The CEVA-XC is what we call scalable architecture. We create a derivative of the architecture that is -- that has two times, or three times, or four times than the handset, for the base station purposes. So that's the XC.

Now, when it comes to TI, we are coming with a different angle. TI is using the conventional DSP approach, and associate it with SVGA and hardware. We are solving this problem differently. We give one platform, one DSP, that you can do everything with hardware. You don't need hardware -- it's only SVGA.

Software, you mean.

Yes, everything in software. Right.

Okay. Now, getting back to kind of the nuts and bolts on the numbers. Yaniv, your DSO is still low, in fact, lower, obviously. Should we look at that in terms of collections, or linearity?

No, just collections based on the deals that we signed in the previous quarter and throughout the quarter. No special rules there. Sometimes it could be back end loaded, and the payment terms different, and sometimes a deal could be in the early part of the quarter, but the payment terms will be more generous for different reasons.

So there is no, really, rules behind it, but just to make sure that you don't have any bad debts, which we do not have over the last couple of years, and we managed still to collect from our customers, which is the case again. So no specific rules.

Did you see any change in the tone of customer attitudes towards closing deals, licensing deals, during the course of the quarter?

No, not really. Some deals, we started to bake before Q1, and they were actually signed in Q1. Some deals were baked and closed during the first quarter. That's also something that we have been seeing over the last year or two. So as of today, we have not encountered any special problems.

Of course, as Gideon mentioned earlier, every company that we discuss with really needs to make sure, for its own sake, that they need the technology, that they have the road map, that they have the customer to -- or the road map to start the project. And as soon as they have that two items, then they go ahead and license it, regardless of the overall economy. But we haven't seen any push outs of deals because of that.

Okay, thanks.

Thank you, Matt.

Your next question comes from the line of Daniel Meron of RBC Capital Management.

Thank you. It's Daniel Meron, and congrats on the [size] profitability here. First of all, just trying to understand the amount of the drop in the next quarter as far as revenue. Is this what you would term as a [rigorous] seasonality, or do think that some of this sequential drop is also related to the macro backdrop?

We said that on the call. There is no doubt that the macro is hurting the consumer side more than it ever hurt before, so I compare the drop in consumer with the -- you don't have the full of the (inaudible) in the Q2, where we got a big partial report, but we have some good understanding of how this next quarter is going to look like. The drop this year is much, much more significant in the consumer side than it was in the Q2 of '08.

With that said, our prospects and market share growth was, on the handset side, is better than it was a year ago. So that manages to offset some of the consumer stuff, because it's not -- the overall number would have been lower. But traditionally, Q2 was always the lowest quarter for our royalty revenues over the last five years.

Okay, that's fair. And when it comes to the licenses business, obviously, this quarter, you had a pretty good performance there. Are you hearing any change in the sales cycle length, or any indication that customers are trying to squeeze or alter the R&D spending? Or do you feel pretty comfortable with that business time right now?

Well, Daniel, comfortable with licensing is something that is -- it depends of the person that you speak with. In general, we don't see any change in what is called sales cycle. Things are -- pretty much looks the same as the year before. The difference is, the last mile or the last yard, people have to sign an agreement.

There are -- companies are grilling engineers, their managers and VPs about the absolute need to license technology now. So we -- and that's something that we are -- we need to be careful there and prudent, because this cycle is not long, but the last mile, well, someone at the CEO level has to sign. This is -- could turn out to be last minute change, and they say, let's defer it for a quarter, or a month, or so.

So this are the difference between today and a year ago -- the fact that the whole process could stall at the last minute, because someone got cold feet.

Dan, not that we have encountered it last quarter, we have (multiple speakers) --

Yes, I know, it's something that -- you know, it's [confirmed] (multiple speakers) --

(multiple speakers) -- yes, general concern in our industry.

Okay, that's fair. And on the buyback, you have 100,000 shares left or so. Any plans on extending the buyback at this point?

I don't know. We're -- right now, because we still have a plan in place, and it's an automatic 10b5-1, so it's already -- all the parameters are all set. As soon as we execute, and when we execute the remainder, I assume the Board will discuss what will be the next steps, and we have not -- we don't have any update thus far. If we would have, we would have -- update you all, of course.

Okay, so maybe just on the use of cash. I realize that you're always looking at opportunities, but if you can share with us a little bit more on the strategic view of how you think you can utilize this cash position with M&A, or other venues.

Yes, of course. First of all, we want to make sure -- and we have done that, for the last couple of years -- that an IT business will be a very profitable IT business. And the idea here is to leverage in the 100% gross margin royalties, to adjust your expense levels on the way -- in the way that you are continuing to invest in the business, a new DSP core, the new platform, but on the other hand, come up with the results and the yields that such a business can earn, and I think the indications based on the first quarter that we came up with are very encouraging.

That has to do -- that has a direct effect of what can we do next. Of course, we do own two, and we are looking at this other market, other ideas, how to expand the portfolio of products and maybe even technologies. But whatever we do, if we do it, it has to fall under the same guidelines as I just mentioned. It has to be something profitable, it has to be something that's in a very similar business model. We're not going to be a fabless company, we're not going to be a hardware manufacturing company, so you have to put it in that context, and then you could look around and strategize if there are any ideas on the table.

There [aren't none] right now, but our brains are continuing to work even overtime, to see how could we grow the Company. And at the end of the day, of course, add value to the shareholders as we do it.

Okay. And last one for me. If you can provide us with a sense on the operating expense line on how you -- you know, that matches up with the growth that you expect, maybe, down the road. You mentioned, I think, earlier, that this is not necessarily sustainable. Can you give us a little bit more color on what is the level that we should expect with a certain revenue line, or growth, or -- you know, whatever metric we should use with that?

The problem is that we did not give an annual guidance, it's going to be a little bit more difficult for me this time around than in previous years or quarters. When you do have an annual guidance, you have -- share with you, to give you the full picture.

What I would suggest, for the time being, is take the very detailed guidance that we gave for Q2 and use that for Q2. And I remind you, the non-GAAP figure is $6.3 million to $7.3 million for Q2 operating expenses. Add about $800, same levels of Q1 for the 123R expenses, and for the time being, until we actually give more detailed guidance on the second half of the year, I would not change the existing models that you have out there, because -- and keep the older version, because we still have things to deal with.

We need to see when the slowdown will take effect, we need to decide what to do with the salary freeze that we have offhand. We really squeezed as much as we can, our operating efficiency, and maybe we will want to add some outsourcing or some other activities, professional service, in the second half of this year.

So for now, without giving any detailed guidance, I would just wait and see, because we are giving on a quarter to quarter basis, and then we'll revisit this and review it again, the second half numbers, when we get closer to that timeframe.

Okay, that's fair. Thank you. Good luck.

Okay, thank you.

Your next question comes from the line of Robert Morrison.

I've just got a couple of questions. First off, can you say anything about the reception that you're getting for the HD audio? And what you see in terms of market size and potential?

Well, reception, we are getting a good indication from customers -- I'll tell you what. The HD audio is the audio that goes into set top boxes, DVD, the one -- you know, the next generation that will be associated, also for HD video.

Now, the performance that you need for the audio purposes is, by far -- and I'm speaking about three times more performance as you are getting today with your DVD, or set top box.

And the companies that used -- in the past, used in-house developed DSP are now facing a new situation, where they need either to redesign a new DSP, like the economy slowdown, and -- or come to us and license the full package. By the way, we are offering both the DSP and the software, ready to use.

So we are getting very good indications about the suitability of the technology, and the fact that we have -- it's logical to license at this stage. Now, the timing for the license, I think what you were saying, the market size is something that -- I don't have it in front of me, but it's range of DVD, Blu-Ray DVD, set top box -- this is something above 150 million to 200 million units per year.

Now, the question is the timing. The consumer market is, right now, really depressed, and companies -- the companies that do design, there are not that many these days.

Right, okay. With regard to the HD audio as well, is this going to bring you -- sort of into a new space, in terms of who you're competing with? So for instance, I'm wondering if this will make you more into a position of direct competition versus, say, Imagination Technologies?

You know, first of all, it's indeed bringing us to a new space. We call this space home entertainment. We were not covering this space in the past. When you go to a new space, you have competitors. Imagination is not a competitor.

Okay.

Imagination is coming from the graphics space, so they complement us. We are -- there are other competitors, smaller companies than ours, companies like Transilica DSP. I think that we are better positioned.

Okay. And lastly, I'm concerned a little bit about the average license fee. Now, it's -- for the last quarter, it averages about $500,000 per license deal. My recollection is when the fee to X first came out, there were comments to the effect that those were licensing for about $1 million apiece. That might not be quite right.

But I'm wondering if -- is there an industry deterioration in terms of what kind of license fee you can charge, or is there a conscious or deliberate shift on CEVA's part towards greater royalty fees at the expense of the licensee?

In -- I'll answer that. No, I think your conclusion is wrong, and let me try to explain. I don't -- I think it's quite almost impossible to take the overall license -- the quarterly licensing revenue and divide it by the number of deals, and conclude that this is the new selling average price for the licensing business.

What we have under this -- in this quarter and any other, is usually limited, somewhere between one to three major deals that are for the DSP cores themselves -- the engines, so to speak. And then, the rest of the deals, as we count as a new deal, because it is, is complementary technologies. This could be different software -- codec, like you just mentioned, HD audio, it could be video codec, it could be Bluetooth or SATA technology. And if we close $1 million or $2 million deals for one or two engines, the DSP cores, we could have two to four smaller deals -- $200,000 to $600,000 deals for software implementation, and others.

And when -- you will see, when the 10-Q comes out this quarter, that we had four significant 10% customers, meaning that if you do the math, you will figure out that they did have a significant number of larger deals as well, and the mix here is -- again, the question is, are you buying your car or the accessories to the car that you already have, and each quarter have a different pace to it.

Okay. Okay, good. Thanks very much.

Not a problem. Thank you.

Mr. Arieli, do you have any closing remarks?

Yes, please. I want to thank everyone for joining us today, and for your continued interest in CEVA. I wanted to notify you that we'll be presenting in two investor conferences in the month of May. The first will be on May 17 at the Oppenheimer 10th Israeli Conference, and the second is on May 27 and 28, at the Cowan Annual Technology Conference in New York City, and we invite you to join us in these two conferences and in other investor events.

Thank you, and goodbye.

Thank you for joining us today. This concludes our conference call. You may now disconnect.