CEVA Inc (CEVA) 2009 Q2 法說會逐字稿

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

Thank you. I would now like to turn the conference over to Mr. Yaniv Arieli. Please go ahead, sir.

Thank you. Good morning, everyone, and welcome to CEVA's second quarter 2009 earnings conference call.

Today's conference call contains forward-looking statements that involve risks and uncertainties, as well as assumptions that if they materialize or prove incorrect, could cause the results of CEVA to differ materially from those expressed or implied by such forward-looking statements and assumptions.

Forward-looking statements include financial guidance for the third quarter of '09, general outlook for the second half of the year, market statistics gathered from analysts, increasing our market share expansion, new product introductions by our customers, their production schedules, and our ability to generate revenue from those new products, as well as our ability to capitalize on the ultra-low cost phone, CDMA, Netbook, 4G, LTE, and high definition video trends.

The risks, uncertainties and assumptions include the ability for the CEVA DSP cores and other technologies to continue to be a strong growth driver for us. Our success in penetrating new markets and maintaining our market position in existing markets, the effect of the intense competition within our industry, the effect of the challenging period of growth experienced by our industries in which we license our technologies to, the possibility that the markets for our technologies may not develop as expected, or that our products incorporating our technologies do not achieve market acceptance, our ability to timely and successfully develop and introduce new products and technologies, our ability to continue to monitor our royalty revenue in future periods and improve them, and general market conditions 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 statements or information, which speak on their own representative dates.

This conference call will be conducted by Gideon Wertheizer, Chief Executive Officer of CEVA, and I, Yaniv Arieli, Chief Financial Officer of CEVA. Gideon will cover the business aspects and the highlights for the recent quarter, and I will cover the financial results for the second quarter, [third] quarter 2009, as well as financial guidance for the third quarter of '09.

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

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

During the quarter, we achieved total revenue of $9.1 million, compared to $10.1 million recorded for the second quarter of 2008. Royalty revenue for the second quarter of 2009 was $4 million, significantly higher than the $3 million reported for the second quarter of 2008, and 5% higher than the first quarter of 2009. We should note that the royalty revenue for the second quarter of 2009 includes approximately $0.9 million of catch-up royalties on past shipments resulting from a single customer.

Excluding the catch-up royalty, our royalty revenue was $3.1 million. I would like to remind you that our customer reports royalty one quarter in arrears, so the second quarter royalty revenue for CEVA reflects, in fact, the first quarter of 2009 shipments, during which time the industry was experiencing substantially lower demand in our primary market, the cellular handset and the consumer electronics.

During the second quarter, we concluded ten new license agreements. Eight of the agreements were for our CEVA DSP cores platforms, and software, and two agreements were for our SATA and PLL technologies. Geographically, four of the license agreements are in Europe, four in Asia which [in two are Japan], and two in the US. Target applications for the licenses concluded during the quarter are primarily 4G handsets, HSPA Plus, femtocells, Passive Optical Network, and Media Phones.

In the second quarter, we continued to experience the impact of the global recession. Depressed R&D budgets that was set at the beginning of the year based on the assumption of prolonged downturn continued to impact new development and IP licensing. Our royalty revenue, excluding the recovery from the unreported royalties, reflect significantly lower shipment of consumer products during the first quarter.

On the other end, in our main market, the handset space, our market share significantly increased, from 12% in the previous quarter to a record high of 18% for this quarter, mainly due to growing shipments in the emerging markets. In a few minutes, I will further elaborate on this trend.

Despite the challenging environment, we were able to generate revenue at the high range of our guidance, and continued to show healthy profitability and metrics. For example, non-GAAP operating margin doubled to 16%, compared to 8% for the same period in 2008, while non-GAAP EPS increased by 14%, to $0.08 per share, compared to the same period in 2008.

During the quarter, we continued to build our strong cash position, achieving free cash flow generation of $2.7 million. As I mentioned earlier, we concluded ten new license agreements during the quarter, a noteworthy achievement in light of the cautious stance companies are taking with R&D expenditure.

Of the agreements executed, we see increasing momentum to our LTE development. Specifically for handsets and femtocells, which are small residential gateways, they're [cheap] to provide better cellular coverage in a residential setting, or at enterprise [prices].

Our customers are considered to be leaders in the baseband space, and are using CEVA best of breed DSP core, the CEVA-X1641 for these developments. We also are taking advantage of these strategic relationships to enable adoption of our next generation DSP, the CEVA-XC, for next wave of LTE products that will offer substantially higher bitrate and more complexity.

Now, a few key observations about the cellular handset market. As I stated earlier, we continued -- the continued slowdown in demand for handsets had no adverse impact on our continued market share expansion, and the shipments of phones containing our DSP core. Our worldwide baseband market share, as of the first quarter of 2009, grew to a record of 18% versus 12% at the end of 2008.

During the quarter, 46 million chips were shipped with our DSP cores, a record quarterly high for CEVA, and up 29% versus 26 million in Q1 2009. This is an outstanding achievement, given the (inaudible) during the first quarter. The industry experienced the highest quarter over quarter decline, since government started to cover industry back in 2001.

The main contributor to our market share expansion are, one, ultra low-cost phones in emerging markets. A new report from Juniper Research forecast that between 2009 and 2014, any (inaudible) sales of low-cost mobile handsets will rise by 22% to over 700 million units. Furthermore, it's expected that over the next six years, nearly 80% of new mobile phone users will come from emerging markets.

Two, CDMA handsets in China. The CDMA space was originally invented and dominated by Qualcomm. Although CDMA deployments are substantially smaller than GSM deployments, CDMA is broadly used in larger markets such as US, Korea, and most recently in China. (inaudible) supply branded CDMA base phone sets in China reached 5.8 million units in the first quarter, up 200% versus the same period in 2008.

Also, China Telecom, one of the big three integrated telecom operators in China, announced recently that it entered into a strategic partnership agreement with our customer, VIA [Technologies], to cooperate on a CDMA technology development.

Per Ker Zhang, VIA Telecom's CEO, the company had 3.7% market share last year, and expects to extend its market share to 25% this year if China 3G services take off. VIA has more than ten customers, including the three largest suppliers in this space -- Nokia, Samsung, and LG.

Going forward, we expect our market share to increase further, as a result of the following recent customer announcements. One, for the first Broadcom -- the first Broadcom power phone at Nokia was announced during the quarter, signaling the start of a highly anticipated ramp-up at Nokia. The Nokia 7020 uses a single chip EDGE solution powered by CEVA DSP, and is expected to be introduced to the market in Q4 this year.

Two, Infineon announced a new design win for EDGE phones at Nokia, bringing the number of design [sockets] for CEVA DSP powered vendors at Nokia to five, and further strengthening our presence as the world number one handset OEM.

Broadcom also began volume shipment to Samsung during the quarter with their single chip EDGE solution. The high profile Samsung Star S5230 has achieved strong sales today, and the Samsung Taiwan division reported that the company expects to ship 10 million units of this phone worldwide by the end of 2009.

During the quarter, Ericsson announced the F3307 embedded mobile broadband module for Netbook, enabled by our CEVA-X DSP. Ericsson is working closely with Intel to validate the F3307 with Intel next generation Netbook platform, named Pine Trail-M. Ericsson estimates that more than 300 million Netbooks will be sold between 2009 and 2014, with the majority of such Netbooks having mobile broadband capabilities.

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

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

Revenue for the second quarter was $9.1 million, which was closer to the higher end of our guidance, compared to $10.1 million for the second quarter of 2008. The revenue breakdown was as follows.

Licensing revenue was $4.3 million, reflecting 47% of total revenues, lower than our five-year record high of $6 million reported in the second quarter of '08. The decrease was primarily due to lower corporate R&D investments by our customers as a result of the market downturn.

Royalty revenue was $4 million, representing 43% of total revenue, and significantly higher than the second quarter of 2008, of which we recorded royalty revenues of $3 million. The royalty revenue for the second quarter of '09 includes approximately $0.9 million resulting from a catch-up royalty on past shipments resulting from a single customer. Excluding the catch-up royalties, our royalty revenue was $3.1 million, slightly higher than the same period in 2008.

Our royalty revenue results are in line with our seasonal trend, in which Q2 royalty revenue tends to be the lowest of the year, reflecting Q1 post-Christmas low shipments. This seasonal trend was further impacted by the extremely weak Q1 '09 demand in consumer electronics, due to the economy slowdown. Service revenues of $0.9 million, reflecting 10% of total revenues, and slightly down compared to $1 million for the second quarter of '08.

Gross margins were 87% on US GAAP basis, consistent with the previous quarter and the second quarter last year. On a non-GAAP basis, which excludes equity-based compensation expenses, gross margins were 88%, also consistent with the previous quarter and the second quarter of last year.

As for the operating expenses, research and development expenses were $4 million for the quarter, including $0.2 million of equity-based compensation expenses. S&N were $1.6 million, including $0.2 million of equity-based compensation expenses, and our G&A expenses were $1.6 million, [excluding] $0.3 million of equity-based compensation.

Our total operating expenses for the quarter was $7.2 million, which include an aggregated equity-based compensation expense of approximately $0.7 million, and were in line with our guidance range. Total operating expenses for the second quarter, excluding equity-based compensation expenses, were $6.5 million, significantly lower than $8.1 million for the second quarter of last year, and slightly higher than the first quarter of '09.

US GAAP operating margins for the second quarter of '09 was 8% of total sales, significantly higher compared to only 1% for the second quarter of '08. Non-GAAP operating margins for the second quarter of '09, excluding equity-based compensation expenses, doubled from 8% during the second quarter of last year, to 16% this year. Interest and other income for the second quarter of '09 was $2.4 million, and includes a $1.9 million pretax capital gain from our equity investment in GloNav, sold to NXP Semiconductor.

On the tax front, we recorded quarterly US GAAP tax expenses of $814,000, and our US GAAP net income for the quarter grew 69%, to $2.3 million, and fully diluted net income per share grew 71% sequentially to $0.12, compared to $1.4 million and $0.07 respectively for the first quarter of 2009.

On the year-over-year basis, US GAAP net income for the quarter grew 235%, to $2.3 million, and fully diluted net income per share grew 300% to $0.12, compared to $691,000 and $0.03 respectively for the second quarter of '08. Our non-GAAP net income and fully diluted EPS, excluding approximately $0.7 million of equity-based compensation expenses, and the $1.9 million pretax capital gain, was $1.7 million, or $0.08 per share, an increase of 13% and 14% respectively, compared to the same period during last year.

Other related data. Shipped units by CEVA customers during the second quarter of '09 were 65 million units, up 10% for the first quarter of '09, and down 7% from the second quarter last year.

Out of the 65 million units shipped, 46 million units, or 71%, are for baseband chips, and reflect a significant increase from 36 million units reported in the prior quarter. Also, of the 65 million units shipped in Q2, 57 million units were attributed to licensees currently paying per-unit royalties, and 8 million units were shipped by licensees who were under prepaid arrangements. This compares to 59 million units shipped during the first quarter of '09, of which 49 million units were attributed to per-unit royalties, and 10 million were attributed to prepayment arrangements.

During the last quarter, two customers started shipping SATA SSD, solid state drive related products in low volume, generating small revenues for us for the first time. As of June 30 of this year, 21 licensees were shipping products incorporating our technologies [consisting of] 28 licensing arrangements. Of the 28 licensing arrangements, 24 are under per-unit royalties, and four are under prepaid arrangements.

As for the balance sheet, as of the end of June, our cash and cash equivalent balances and marketable securities were $87.7 million, compared to $85.1 million at the end of the first quarter. During the second quarter, we generated positive cash flow of approximately $2.7 million, including the $1.9 million of pretax capital gain from our investment in GloNav to NXP Semiconductors.

Our DSO for the second quarter of '09 was 55 days, compared to 43 days for the prior quarter. The increase is mainly due to the timing differences of closing licensing deals between the two quarters.

With regards to our share purchase program, 106,000 shares remain available for the repurchase under the existing plan. Now, I would -- now for the guidance of Q3 of 2009.

With regards to our third quarter revenue guidance, we are constantly monitoring feedback from our customers and other wireless players in the supply chain, and reviewing related market trends for the remaining of 2009. The key takeaway is that although inventory levels have bottomed, there is still limited visibility for Q3 and Q4 demand trends.

With that said, we believe our royalty revenues should increase for the upcoming quarter, compared both to the second quarter of '09, and to the third quarter of last year, mainly due to stronger signs of inventory relief in the handset market, and continued demand in the emerging markets, as well as some improvement in the consumer electronic markets.

As for the licensing revenues, despite concerns about the sustainability of the economic recovery, we anticipate a gradual improvement for the second half of this year based on our pipeline and indications from our customers. And here is the revenue guidance for the third quarter of 2009.

Revenue is anticipated to be in the range of $8.6 million to $9.6 million. Gross margin is expected to be at the level of 87% to 89%. Operating expenses, including equity-based compensation expenses, is expected to be in the range of $7.1 million to $8.1 million. Of our anticipated total operating expenses for the third quarter, $0.7 million is expected to be attributed to equity-based compensation expenses, and on a non-GAAP basis, $6.4 million to $7.4 million.

We have slightly increased our investment in R&D, partially due to projects postponed from the second quarter. We are encouraged by the pipeline of our newest technologies for the LTE and the high definition video.

Interest income is expected to be approximately $450,000. Tax rate for the third quarter is expected to be approximately 10%. Our share count for the next quarter is expected to be in the range of $20.2 million to $20.8 million.

Our EPS guidance for the third quarter is slightly higher than the guidance we gave for the second quarter. US GAAP EPS is expected to be in the range of $0.02 to $0.04 per share, and on a non-GAAP EPS basis, excluding the $0.7 million of equity-based compensation expenses forecasted, we are expecting to remain at the same level of the previous quarter of $0.06 to $0.08 per share.

We will now open the floor for questions.

(Operator Instructions) Your first question comes from Matt Robison with Wedbush.

Hey, guys, good morning. Congratulations on the good quarter. First of all, on these -- what you described as a catch-up, can you give us a better sense as to over what period those shipments occurred that you accounted for in the second quarter?

Yes. This is a few years, and this is a regular audit that we have conducted, and the catch-up royalties is considered to be a regular course of business in the IP space. We audit our customers every once in a while, and encountered a mismatch in the calculation, which was fixed, and we'll continue on an ongoing basis based on this new calculation.

Was this a consumer type of an application, or more of a cell phone type of a deal?

More consumer type.

Okay. And did you say that in terms of the gradual recovery in the back half, that was -- referred to licensing demand? Is that what you meant to say?

Yes, it's based on -- the way we saw it in the second quarter is that companies were basically very, very conservative in terms of trying -- of opening new projects that will require a higher investment, including IP. And you know, the tendency was to try to do evolutionary project, (inaudible) type of project, cost reduction project.

Going forward, second half, we -- you know, still visibility is not as it used to be, but we see that companies are looking more positively on opening new projects. So the comment that Yaniv made was regarding licensing.

Okay. And as far as the royalties go, in the current quarter, most of the -- your peers in the semiconductor space have reported a pretty substantial increase, sequential increase in the chips they've sold. And so, that would normally be indicative of what you would recognize in the September quarter, correct?

Yes, that's absolutely correct. To give you a little bit of flavor, we are a little bit early, because usually we get most of the royalty reports like 30 days after the quarter end, and we haven't -- we don't have yet the full picture, but if you look at Q3 of last year, we had a growth ramp up of about 8% from Q2 to Q3.

I believe the Q3 ramp up this year could maybe be even twice as higher as the previous year. So I would -- that does take into account the same assumptions that you mentioned. Again, we don't have the full picture yet, but I believe it should be significantly higher than the ramp up we had in previous years.

Okay, so you're thinking in terms of royalties, maybe in the range of $3.6 million, or maybe a little higher than that?

More or less around that. Again, from our initial looking at the puzzle, which is not yet -- which I'm missing a few pieces.

Fair enough. What was the headcount in the quarter?

One hundred seventy eight.

Okay. And I'll let somebody else ask a question. Thanks a lot.

Thank you, Matt.

Your next question comes from Anil Doradla with William Blair.

Thanks a lot for taking my question. You know, Yaniv, a couple of questions. Can you talk a little bit about the revenues derived on a per license? Sounds like it's been kind of in a gradual decline, the dollars per license agreement. Can you talk about that a little bit?

Yes, sure. Let me give you a little bit of flavor there. We don't see it that way. We had a pretty solid quarter with regards to ten new deals that were signed throughout the quarter, one of them including the catch-up royalty. And out of those other nine technology deals, two are brand-new customers, using for the first time one of our technologies in a new space for them and for us, and this is quite exciting.

In this specific quarter, we -- the rest of the deals were existing customers that came back to us to either take new technologies or pieces of software or new uses, a specific use for a new project that they had on hand.

So, if you recall, we have two types of business models. One is on a per-use basis, and that we had a little bit more this quarter compared to others. And every once in a while, we also have a very significant deal of $1 million to $2 million, which is a more comprehensive deal to use our technology across the multiple product lines.

Another way to look at it, if you look at last quarter, we had -- Q1, we had four 10% customer -- 10% of revenue type of deals. In the second quarter, we only had two. That means that there are also more diversification with regard to the number of customers and the number of different technologies that we license.

So it varies. Sometimes you have big deals which are more across the board, and sometimes there are more specific deals of existing customers that come back and add more functionalities. And I think the combination is both throughout the last couple of years.

So, can we make a general statement saying that when customers come back to you, on the average, the licensing -- the per license revenue is maybe slightly lower than a new customer? Can we make that generalization, or that is not an accurate way to look at it?

No, not at all -- not an accurate way to look at it. Whoever comes back to a new use, the cost for that additional use is already predefined in the original agreement. So this could be a four year old agreement, but the price is -- already has been negotiated up front. So that will not change.

When any customer, whether it's an existing or a new customer, joins, then they pay per the technology. I think what matters here, price-wise, is really what technology the customer uses. If they want to use CEVA-XC, or Teaklite-III, these are -- or one of the CEVA-X technologies, these are much newer and more expensive technologies than an old Teaklite type. So I think the type of the technology is what counts with regard to the pricing.

Now, switching to the royalty side, if I got my calculations right, it looks like on a per unit basis, both sequential and year-over-year, there's been an increase. Given that you guys are doing well in emerging markets, and typically those handsets tend to be lower cost, can you walk me through the puts and takes, how we're seeing an increase per unit on the licensing -- on the royalty front?

Well, in the royalty front, eventually, when it comes to emerging market, so those (inaudible) the royalty is lower, but the consumer, which was weak in the second quarter, the royalties tend to be higher, as well as all the 3G femtocells, data cards. We mentioned Ericsson Corporation within this higher royalty.

All right. And finally -- now, you said you guys increased your market share from 12% to 18%. What is that based out of? Can you walk us through how you came up with that number?

Sure. This is something that we have been doing over the last two years, when we started to realize the story here at CEVA and the business model is starting to pick up and evolve from the 3% market share we had three, two years ago, to the record high 18% that we are reporting today.

It is based on all the chips on -- from the wireless side that we get on a quarterly basis, the reports that we get, divided by the number of the overall units sold, phones sold, taken by (inaudible) supply on a quarterly basis. That's the rationale of our market share in the handset space.

All right. Thank you very much.

Thank you, Anil.

Your next question comes from Tom Erlich with RBC Capital Markets.

Hey, guys, congratulations on the execution, and thanks for taking my questions. First question here regards the market share dynamics. You obviously gained some market share and reached 18%. How do you see yourself positioned by the end of 2009? Is it still -- do you still expect something around 20%, or are we heading even higher than that?

Well, it's hard to say at this point. Our different trends, with the -- going -- the stimulus plan in China helps very much to the 3G development there, and also the generation or production of 2G phones going to the emerging markets, and femtocell design.

So in general saying, the trend is -- I mean, we are expecting to see progress, but the extent of it, it's something that -- let's wait for a while.

Okay. Maybe I'll rephrase that. When you see your chips, your cores sent into chips in the marketplace, and I'm sure you find out once in a while regarding the ramp up in Broadcom, etc., has something been front end loaded, or come to realization earlier than expected? Or are the devices sent on plan right now, as far as you know?

The question is not that relevant, and let me try to explain why. We -- it doesn't really matter, the linearity of how they ship their phones throughout the quarter, because we only get once a quarter, a royalty report. So whether it's back end loaded, or a new model comes out two days before the end of the quarter, it doesn't matter as much. We get once a quarter report, which summarizes all the different -- the three months of shipments.

What I could say, that the news that we've been monitoring, and Gideon mentioned quite a few new design wins -- Broadcom, Infineon, STE. All these different new products -- a few of them, we mentioned even quantities. LG was very bullish about a new product that they have in the market, and thought that they'll have at least 10 million units sold in 2009.

All of these data trends are very positive, and continue to be positive. The linearity of when they're actually sold is not that of importance to us. And as Gideon mentioned, in the longer term, we don't see this trend of continuing to gain market share changing in any way or form. This will continue. The magnitude, we will monitor and share with you on a quarterly basis, but there is no doubt that this trend is continuing, especially in the ultra low cost market.

Thanks. And could you talk a little bit about the dynamics of signing license deals? Has that changed over the quarter or over the past six months? Or are we still seeing usual back end loaded, and that's about that?

Well, I cannot (inaudible) something that is the regular course of our business. Yes, the dynamics in terms of license (inaudible) are more careful about committing. You know, in licensing, you have to pay up front, and it's non-refundable. And companies (inaudible) especially because of budget. Licensing is like R&D expenses. People set a budget, and take it to the -- and try to comply with it or work with it (inaudible).

And the beginning of the year, people tend to -- you know, expected a downturn. As a result, didn't spend so -- didn't take into consideration to spend so much money in new projects.

So the business in general, the licensing business is soft. But we are not saying that there is no business -- there is business. And the -- our objective here is to find those customers, find those projects that they're investing in. Out of the ten agreements that were signed last quarter, three of them are for [OLP], which is the next generation wireless technology. And this is very encouraging for us, because there are companies that are looking to 2011, 2013, etc.

Great, thanks for the color here. Last question. I might have missed it, but will -- do you expect R&D, the uptick in R&D expenses to go into fourth quarter? And can you give us some color on where do you see operating expenses run rate going forward? Thanks.

Yes. If you recall, we guided a little bit higher R&D, our overall operating expenses for Q2, but at the end of the day, the number was slightly lower than our plans. And this was mainly due to even our still putting a very tight control over expenses.

But from what we see in the field today, based on the pipeline and based on the technologies and the features and time to market, we think that we are now in the actual process of increasing slightly our R&D investments, and that is planned to take place now in the third quarter with a few additional hirings.

So that means that the range that we gave now for the overall operating expenses is something non-GAAP $6.4 million to $7.4 million, this is something that we are comfortable with for the rest of the year as well.

Great. Thanks a lot, and again, congratulations.

Thank you, Tom.

(Operator Instructions) Your next question comes from Robert Morrison.

Hi. I wanted to ask you -- you said some of your licensing deals were for LTE. Were any of those actually the XC, or is that going to come later?

No, it's not yet XC. XC is a model -- you know, this is now the kind of third generation LTE project. People are trying to do something fast. They are not dealing now of what is called multi-standard. They are not dealing with what is called [software defined radio]. These are the things that XC provides an excellent solution.

Okay. One other thing I wanted to ask you about. There was -- this, I thought was quite interesting. There's a link on your home page to a number of articles, even in the news, and there was one that came out maybe a little over a month ago, called Analysis -- CEVA's Reversal of Fortune. And indeed, it's the first article I've seen on CEVA which is more on the whole company, as opposed to, say, an article on a new product.

And I was a bit surprised there was a link there, because the article is not entirely positive. There were two red flags that were raised that I can remember. One is that there are forces of convergence in the industry, and that raised the question of whether long-term, people are going to be doing separate licensing deals for DSP, or whether that will converge with microprocessor cores and perhaps other IP.

And then the other question, the other red flag that was raised, it was suggested that the carryover in terms of software from 3G to 4G is not really that large, so it won't necessarily be that important for customers to have backward compatibility in terms of software when they move to 4G.

Now, I guess the question is, particularly with the last one, do you agree with that? And if so, should it be a concern?

Well, basically, there are two things that I personally disagree. When you go to LTE, you go to WiMax II, you go to HD video, this is not a territory of CPU. Whatever you put there, (inaudible), (inaudible) A8, you cannot do it there. The power consumption goes through the roof. And it doesn't make sense to do it on the processor. You have to add all sorts of hardware. And once you do it, you add hardware, it's not a processor type of solution.

So this is where we are focusing. We are taking our new technology into those emerging applications where we can show a clear performance edge both in the feature set that you can get out of it, and the power consumption which is critical in the mobile state.

Now, the second comment about compatibility, this is, again, something that we don't see it from our customers. Compatibility -- people are investing hundreds of man-years to go into developing -- into wireless or radio. And if there is a supplier like CEVA that supplies both the leading edge technology and the compatibility, why would they go and do things in (inaudible) which they cannot do it efficiently anyway?

So I -- you know, I think I saw this out again, but in my opinion, it's too simplistic.

Okay. And just one other question. I know when you do a licensing deal, as part of that contract, you'll reserve the right to do an audit of royalty reports, or just to check on the royalty numbers later. Do you -- how often do you do those, how much do they cost, and have there been any times in, say, the last year you've had a problem in one of those audits, a disagreement?

I think in the last two years -- let me back up a bit. In every agreement, as you mentioned, we have those rights. We only took this action more seriously in the last two years, and we've put an annual plan into place of conducting an annual royalty report to all of our customers.

We haven't finished all of them yet. We are just doing it for the last two years, and we will go and do it, all of them, at the end of the day.

And cost, we usually use an external auditor in order to have a third party objective work. I would say the costs run somewhere around $20,000 to $25,000 apiece. It takes some time and efforts from our side, but we also found over the last two years, a few events -- sometimes in royalties, sometimes on the per-use basis, of not understanding the definition correctly, and reporting to us the number of uses used.

And this is, as I mentioned earlier, part of the ongoing licensing business that you want to make sure your customers comply the same way you understand and sign the licensing agreement with the actual contracts.

So from time to time, you find something like we have done now in this recent quarter, and we'll continue to monitor that actively as we go along.

Okay. Thanks, then.

Thank you.

There are no further questions at this time. Are there any further remarks?

Yes. I would like to wrap up, and thank you for joining us today, and your continued interest in CEVA. We will be presenting at next month, the Oppenheimer Annual Communication and Technology and Internet Conference, which takes place on August 11 in Boston, and invite you to join us there.

Thank you, and goodbye.

Thank you for participating in today's conference call. You may now disconnect.