CEVA Inc (CEVA) 2009 Q3 法說會逐字稿

Good morning. My name is Christy, and I will be your conference operator today. At this time, I would like to welcome everyone to the CEVA Q3 2009 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

(Operator Instructions)

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

Thank you. Good morning, everyone. And welcome to CEVA's third 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 fourth quarter and fiscal 2009 general outlook of the market and economy and our licensing pipeline, market statistics gathered from analysts, projected increase in our market share, design wins with our customers, new product introduction by our customers, their production schedules, and our availability to generate revenues from new products, our ability to capitalize on trends for greater usage of ultra-low-cost phones, data cards, e-readers, netbooks, MIDs, and machine-to-machine products.

The risks, uncertainties, and assumptions include the ability of 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 in our industry; the effect of the challenging period of growth experienced by industries in which we license our technologies to; the possibility that the markets for our technologies may not develop as expected or that products incorporating our technologies do not achieve market acceptance; our ability to timely and successfully develop and introduce new technologies; our ability to continue and improve our royalty revenue in future periods; 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 of their representative dates.

This conference call will be conducted by Gideon Wertheizer, Chief Executive Officer of CEVA, and I, Yaniv Arieli, Chief Financial Officer of the Company. Gideon will cover the business aspects and highlights for the quarter. But I will cover the financial results for the third quarter of 2009 as well as the financial guidance for the fourth quarter of and fiscal '09. With that said, I would now like to turn the call over to Gideon.

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

During the quarter, we achieved revenues of $9.7 million, a 6% sequential increase over the second quarter of 2009 and 5% decrease compared to the third quarter of 2008. This revenue figure exceeded our expectation and was above our previously stated guidance.

Royalty revenue for the third quarter of 2009 was $3.7 million, representing a 19% sequential increase over the second quarter of 2009, excluding approximately $0.9 million of catch-up royalties and 12% higher than the $3.3 million reported for the third quarter of 2008.

During the third quarter, we completed six new license agreements. Five of the agreements were for CEVA DSP cores, platforms, and software. And one agreement was for our Bluetooth technology. Geographically, three of the license agreements were in Europe and three in Asia. Target applications for the licenses concluded during the quarter are primarily 2G ultra-low-cost phones, 3G handsets, smart phone data cards, mobile TVs, portable and home multimedia, and passive optical networks.

Our third quarter results indicate an improving pattern of licensing and royalties from our customers. We believe our licensing business has started to recover. And customers are more receptive to upgrades for a new generation of our best-of-breed DSP cores and other technologies, rather to reusing existing platforms.

Visibility is starting to improve as well. And our licensing pipeline has strengthened. Specifically regarding advanced technology, such as LTE terminals, data card 10%, high-definition multimedia, solid-state drive, and voice over IP.

Turning to royalties, our results reflect a return to seasonality as well as continued market share gains for CEVA base product, particularly in the baseband market. The royalty contribution from the consumer front has shown some improvement but still constrained by overall weakness of the economy.

We continue to show robust and systematic progress with our profitability. And our debt-free balance sheet is stronger than ever. Both our GAAP and non-GAAP operating margins reached record high of 17% and 24% respectively. Our gross margin for the quarter also reached a record high of 91%. Our non-GAAP net income and EPS also reached all-time highs of $2.4 million and $0.12, respectively.

Now a few observations about the cellular handset market -- the global cellular handset shipments for the second quarter of 2009 per supply were 265 million. Our third quarter royalties, which represent second quarter shipments, included approximately 61 million handset units shipped. These strong results, driven by higher handset sales of low-cost phones in China and India in the market and improved demand for 3G smart phones for the rest of the world.

These trends increase CEVA worldwide market share for baseband products to a record high of 23% versus 18% for the prior quarter. Based on Nokia public announcement, it's expected that the 2009 worldwide shipments to be nearly 1.1 billion, down 7% from 2008 but an improved focus from its prior expectation of 10% annual decline.

A substantial portion of our customer shipments were for low-cost phones for emerging markets. Per Juniper Research, by 2014, 50% of the global shipments will be for low-cost phones. In India, just in the amounts of August 2009, 15 million new subscribers were added. In China, per [Saliban] report, there are 618 million subscribers, which equates to only 51% penetration rate. Our key customers focus on these significant market opportunities. And our low-cost, low-power DSP provides tremendous value proposition that fits well with their needs.

Mobile broadband data cards, which provides direct internet connectivity for laptops, is becoming an increasingly important market segment for CEVA, as we are able to leverage our strength in handsets to drive innovation and reduce costs for these products. Per Alain Dutheil, the CEO of ST-Ericsson, next year, mobile broadband subscribers will overtake fixed-line broadband users. And by 2014, two-thirds of the broadband subscribers will be mobile users.

Our advanced DSPs are now being designed into the products of the largest vendors in the data card space. Per an ABL recent report, this market is expected to grow to 230 million units in 2013 versus 45 million in 2009.

At the October 2009 Intel Developer Forum in San Francisco, Ericsson unveiled the C3607w HSPA module that is enabled by our DSPs. Ericsson is working closely with Intel on modules for Intel Atom Moorestown processor mainly for MIDs and netbooks. Given Intel's power in the PC and the netbook ecosystem, Ericsson partnership with the chip giant is increasingly important.

The C3607w is one-third of the size of the previous Ericsson module, consuming only 40% of the power, and will be commercially available in the first quarter of 2010. In addition to MID-based on the Intel Moorestown platform, the C3607w is targeted at broader range of e-readers, personal navigation devices, picture frames, gaming consoles, and other portable consumer electronics.

With regard to the e-reader that I just mentioned, Sony unveiled its first wireless e-reader, the Daily Edition with a seven-inch touchscreen. Its wireless connectivity is based on our CEVA-X DSP. According to [Instart], e-reader shipments for 2009 will total around 1 million units but is expected to grow to 30 million units by 2013.

Before handing the call over to Yaniv for financials, I'd like to summarize that we are encouraged by the progress made in our business. Our pipeline is strong, driven by strong interest in our new CEVA-XC DSP, which is being currently evaluated by many of the key players in the space. We continue to expand in the handset market and are well positioned to capture market shares for netbook, MID, data cards, e-readers, machine-to-machine, and consumer products. With that said, I will now turn the call over to Yaniv to review the third quarter 2009 financials and provide you to guidance.

Thank you, Gideon. I'll now review the results of operations for the third quarter of '09. Revenue for the third quarter was $9.7 million, which was above the higher end of our guidance, compared to $10.2 million for the third quarter of 2008. The revenue breakdown is as follows -- licensing revenue was $5.2 million, reflecting 54% of revenues, 12% lower than the $6 million reported for Q3 '08 but 23% higher than the second quarter '09 licensing revenue.

Royalty revenue was $3.7 million, reflecting 38% of total revenue and 12% higher than the third quarter of '08 royalty revenue of $3.3 million and 19% sequentially higher than the second quarter of '09, excluding approximately $900,000 relating to the catch-up royalties.

Service revenue was $0.7 million, which accounts for 7% of total revenue and down 23% compared to $0.9 million for the third quarter of '08. The decrease is associated with fewer annual service renewal agreements compared to prior years due to expense reductions taken by few of our customers. Gross margins was 91% on both US GAAP and non-GAAP basis, an all-time record high compared to 89% for the third quarter of last year.

As for the operating expenses, research and development expenses were $4.1 million for the quarter, including $200,000 of equity-based compensation expenses. Sales and marketing costs were $1.6 million, including $200,000 equity-based compensation expense. And our G&A costs were $1.5 million, including about $300,000 of equity-based compensation expenses. Our total operating expenses for the quarter were $7.2 million, which included aggregated equity-based compensation expense of approximately $700,000, which was slightly below the midrange of our guidance.

Total operating expenses for the third quarter, excluding the equity-based compensation expenses, were $6.6 million, also slightly lower than the midrange of our guidance and approximately 13% lower than the operating levels for the third quarter of 2008.

US GAAP operating margins for the third quarter were 17% of sales, more than double the 8% for the third quarter of '08. Non-GAAP operating margins for the third quarter of '09, excluding the equity-based compensation expenses, reached an all-time record high of 24% compared to 15% for the third quarter of last year.

Interest and other income for the quarter was $550,000. And on the tax front, we recorded a quarterly tax expense of $394,000. US GAAP net income for the quarter grew 25% to $1.8 million, and fully diluted net income per share grew 29% to $0.09 compared to $1.4 million and $0.07, respectively for the third quarter of last year.

Our non-GAAP net income and fully diluted net income per share, excluding approximately $700,000 of equity-based compensation, also reached an all-time record high of $2.4 million, or $0.12 per share, an increase of 34% and 33%, respectively, compared to the same period last year.

Other related data -- shipped units by CEVA licensees during the third quarter of '09 were a record high of 89 million units, up 34% and 24% from the second quarter of '09 and the third quarter of '08, respectively. Of the 89 million units shipped, 61 million units, or approximately 68%, are for baseband ships and reflect a significant increase from 46 million units reported in the prior quarter.

Also, of the 89 million units shipped in Q3, 75 million were attributed to licensees currently paying per-unit royalties. And 14 million were shipped by licensees or under a prepaid arrangement. This compares to 65 million units shipped during the second quarter of '09, of which 57 million units were attributed to per-unit royalties and about 8 million attributed to prepaid arrangements.

As of September 30, we have 21 licensees shipping products incorporating our technology pursuant to 29 licensing agreements, one higher than the prior quarter. Of the 29 licensing agreements, 25 are under paying royalties and four are under prepaid arrangements.

As for the balance sheet, as of September 30, '09, CEVA's cash and cash equivalent balances and marketable securities reached a record high of $91.8 million compared to $87.7 million at June 30, 2009. During the third quarter, we generated positive cash flow of approximately $4 million, including proceeds of about $2.3 million from option and ESBP exercises. Our DSOs for the third quarter of '09 were 61 days compared to 55 days for the prior quarter.

Now for our guidance for the fourth quarter of 2009 -- as Gideon noted, business conditions have improved steadily over the quarter. And our overall visibility has increased. We see new products being evaluated by many leading players in the industry for next generation platforms.

As for royalties, we expect seasonal increase as we approach the holiday season and continued market share expansion, particularly in the low-cost phones and smart phones. In light of these trends, our revenue guidance for the fourth quarter will be the highest we have given thus far for any other quarter in 2009.

As for the actual guidance, revenue is anticipated to be in the range of $9.4 million to $10.4 million. Gross margin is expected to be 89% to 91%. Operating expenses, including equity-based compensation expense is expected to be in the range of $7.1 million to $8.1 million. Of that, our operating expenses will include about $700,000 attributed to equity-based compensation. Our non-GAAP operating expenses are forecasted to be $6.4 million to $7.4 million. We have slightly increased our R&D investments, particularly due to projects postponed from the third quarter, which were not reflected yet in our Q3 numbers and will in Q4.

Interest income is expected to be approximately $450,000. And our tax rate is expected to be approximately 12% to 14% due to a different mix of geographies and full utilization of our US NOLs. Share cost for the fourth quarter is expected to be in the range of 21 million to 21.6 million shares. Our US GAAP EPS is expected to be in the range of $0.05 to $0.07 per share. And our non-GAAP EPS, excluding the $700,000 of equity-based compensation expenses, are forecasted to be in the range of $0.08 to $0.11 per share.

For the full-year guidance, our total 2009 annual revenue guiding is expected to be in the range of $37.7 million to $38.7 million. Annual gross margin is expected to be in the range of 88% to 90%. Operating expenses, including equity-based compensation, are expected to be in the range of $28.7 million to $29.7 million. And interest income is expected to be around $1.9 million.

Annual equity-based expenses are forecasted to be approximately $2.7 million. And our annual operating expenses, excluding equity-based compensation, are expected to be in the range of $26 million to $27 million. Tax rate for the year is expected to be in the range of 12% to 13%. And share count for the year is expected to be approximately 21 million shares.

Based on our forecast for the fourth quarter as well as the strong Q3 results, we are increasing our EPS estimates from the current street analyst forecast. US GAAP EPS is expected to be in the range of $0.31 to $0.33 per share. And our non-GAAP EPS, excluding the equity-based compensation expenses and the $1.9 million of pretax gains in Q2 '09, associated with our equity investment of GloNav, is expected to be in the range of $0.38 to $0.40 per share, a 19% to 25% increase compared to $0.32 reported for 2008. I will now open the floor for questions.

Thank you.

(Operator Instructions)

And your first question comes from Anil Doradla with William Blair.

Good morning. It's Brian for Anil.

Good morning, Brian.

Good morning. Can you just elaborate a little bit on the overall design pipeline? Are you guys seeing customers opening up R&D broadly? And also, do you feel like there's some pent-up demand there still?

Well, Brian, there is I would say openness to explore seriously new projects. It started in this quarter. This was not the case in the second quarter. And as a result, we have a very decent pipeline for technologies that will serve next-generation projects. And I mentioned in my prepared remarks this is an DHD data card. These are the projects that people are looking now to do.

All right, and can you just elaborate on the higher rate per contract this quarter? Did you guys have any CEVA-XC licenses? And broadly on the applications, are there any application processors that you feel like you're winning licenses there, too?

Hi, Brian. It's Yaniv. I'll start with the quarter. In Q3, we did not have yet any CEVA-XC licenses. Although, as we mentioned earlier in the prepared remarks, we see and are very active with numerous customers that are evaluating this technology. So we are quite bullish that this is going to be leading-edge technology and one of the strong licensing revenue contributors for 2010. We will see if we could also accommodate such a deal in the first quarter. But until a deal is signed, it's not signed yet. But we have a healthy pipeline around this new core. The other part of your question if you could repeat, please?

Well, I'm just trying to figure out why the rate per contract was so much higher this quarter and how sustainable that is.

I see. No, no, the simple math of taking the overall licensing revenues and dividing it by the number of deals has always been a bit misleading. It's a simple math that one does every quarter. But it doesn't have that much to do with reality. I think our business model has been intact, meaning some companies, usually large-name employers, like to have a multi-use license to our technology for that. But they have few millions of dollars. And then they have the right to use a specific DSP core or platform across all their industry or product lines and ships.

Some other deals are smaller deals, either single use -- and these are hundreds of thousands of dollars. And as you know, we have a bunch of different applications that we license these days, Bluetooth, SATA, audio voice over IP, video codecs, and software that run on these DSP processors. And these, of course, are lower than millions of dollars. These are, again, in the hundreds of thousands.

So in every single quarter, you always have a mix of some new licensees using us across multiple product lines. And these are the bigger licenses and then smaller ones with more different offerings. But they're not million dollar deals. So it's a combination. We have both this quarter. And we're quite pleased with the names and the players that license our technology.

Okay. Great. And then sorry if I missed this on the prepared comments. But on the Ericsson device that you were mentioning, is that the LTE device that they're testing?

No, that's a data card. It's HSPA. It's --

Okay.

-- technology.

Okay. And then -- but looking forward longer term, I mean, it's going to take a long time for 4G to get ramping up and particularly hitting the P&L. But just looking longer term at an upgrade cycle like that, do you see that as an overall positive or negative? It seems like you're having a lot more success in the low end. I don't know if that's the right way to look at it in terms of your baseband market share. But longer term, when we look at LTE, do you see that as positive or negative, both in terms of your market share and your royalty rate per unit?

This is Gideon. The 2G is a royalty contribution. Eventually, people are not now buying licenses to develop the 2G platforms. Going for the 4G, it's licensing activities. And going forward in 2013, '14, when LTE's supposed to be mainstream, we're going to see contributions in royalties for LTE. And well, we'll see -- the low-cost market or what is called 2G, it's a huge market. I mentioned in my part in the prepared remarks 51% in China using it. So we have another 50% that you can go. And this market by itself is evolving. So now it's a 2G. In two years from now, those people will replace it with 2.5G. And these are all products that we have in place that will be translated to royalties.

That's great. That's helpful. But just to clarify, I mean, you wouldn't see the outsourcing trend be more or less as we transition to 4G, which it would be kind of what you're seeing in 2G now, five years from now. That's what I'm just trying to clarify.

Well, yes, that's the idea. These types of design cycles, as Gideon explained just now, you have the licensing kicking in first with multiple customers in order to start their design activities. And usually, two, three years down the road, then you have the royalties kicking in, same exact cycle that we have in 2G and we have with the video technology.

And we don't see a fade out and phase in. We see all this one mix. And every core, we can analyze together what are the different trends. Right now, as you know, the trends are very strong on the royalties on the 2G solutions and platform. And we're starting to get new design wins into the higher end data. The licensing side and in between, we have lots of other offerings, like video, voice over IP, Bluetooth, and subsystems.

All right, thanks a lot, guys.

Your next question comes from the line of Tom Ehrlich with RBC Capital Markets.

Thank you. Hi, Gideon and Yaniv. It's actually Daniel Meron here. Just a question on the outlook in the licensing business into 2010, do you see this increased momentum in this business. How should we think about this business on longer-term basis? Do you think that it's going to stay sitting around the $5 million, $6 million level or increase from here going forward? And what will be the drivers for that?

Sure, Daniel. It's Yaniv here. I'll start with the numbers. Unfortunately at this point in time, we usually don't give guidance for 2010. We will do so and give much more detailed outlook like we usually do in the January conference call. So I'll refrain from giving any specific numbers. The business environment hasn't changed. The licensing business is the most very important part of our growth because that generates the royalty streams two or three years down the road. So this is something we're putting a lot of effort to.

We're introducing and will introduce in 2010 very -- two interesting technologies. One is the CEVA-X, which will be all finished and off-the-shelf product by then. And then later in that year, we'll also have an HD video solution. So the licensing front, we're very active promoting these activities. But again, I don't think there is a big change in overall business. And number wise we'll be happy to get into when we guide for the rest of 2010. Gideon, you --

Okay.

-- want to add anything?

Daniel, the only thing that I would like to add is drivers for revenues in 2010, the way I see it now is definitely CEVA-XC. We are encouraged by the pipeline. We see companies that in the past weren't in our list as a potential licensee now evaluating the technology. And as Yaniv mentioned, later the second half of next year, we'll see new multimedia platforms that will go to the connected DTV and connected set-top boxes. These are things that we see a lot of interest coming from customers.

Okay. Thanks, Yaniv and Gideon. So maybe on another front, as you look into the prospects in the business, in what areas can you expand your portfolio? I mean, as far as M&A, do you have a rising cash pile here? And it seems like your business times working pretty well on both front of licenses and the royalties. How should we think about CEVA next three years, are you just staying the course? Or are you looking into expanding this business through M&A down the road? And if you can just broadly outline for us how -- what areas you may be considering here?

This is Gideon. I would say this. When it comes to M&A, the general thinking that we have and the practices that we do and the things that we are checking here is to -- for technologies that will grow our business in our main market. We are active, as you know, in the handset space. And in the handset space, you have evolution in the baseband going to 4G. And you have evolution in what people are familiar with smart phone and a whole lot of technologies involved there. And that's one segment.

The other segment is the consumer electronics. And we are now active in the multimedia audio-video activities and other technologies that are of interest for us to complement and to provide to the customer a higher level portfolio of products. Customers definitely today are expecting to get a more integrated higher valued platforms and not just cores, as there used to be three or four years ago.

By the way, we started this trend few years ago with adding the video and the voiceover IP platforms. And they were our first steps into that space that our DSPs could be multi-used for different application and a much more consolidated and one-stop shop type of approach. So we already started that. And I think we will -- our plan, as Gideon said, to continue on the same route. And with that said, just to remind us all that even without any active M&A, we still find ourselves in a very strong position organically to continue to add value to our shareholders and continue to grow the business and its profitability. That's our main course.

Okay. Thank you, Yaniv and Gideon. Good luck.

Thank you.

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

Hi. Nice results, gentlemen. First, before I forget, headcount?

182 versus 178 in the prior quarter.

Gideon, do you have your baseband market share from a year ago? I'll circle back with you on that if you want.

A year ago --

I know it was 12% for the second -- you quoted for the June quarter.

Yes, I think we were at the end of Q3 '08 at the same, at 12% or 13%. Q3 and Q4 stayed at the same level. We ended of 2008 with 12% market share. So I think that's the same there. That's the same number.

Okay. Your average -- your royalty ASP declined a lot again. Is it -- do we -- can you give us a flavor of the percentage of royalties that came from consumer and how that changed versus the number you reported last quarter?

Sure. I'm not sure, though, that your math is 100% accurate. Let's do it together.

Please correct me. I may have the wrong denominator here.

Yes, I think it's pretty much flat. If you take the $3.7 million that we just reported and divide it by about $75 million paying royalties and then do the same for the previous quarter with $3.1 million of royalties divided by $57 million, you'll find that the average is about $0.05 for the Company. So I don't --

Yes, $0.07 in the prior quarter but --

Prior year maybe. Yes, prior year, we had more consumers. The last two quarters, even this quarter, the consumer did not contribute as it was in the past. It's still slow. It had some positive contribution compared to Q2 but a very low contribution. So the main growth came from volume in the lower end of the phone. Those are the 2G phones, very strong momentum there. And by the way, we do see that trend continue into Q4.

Based on few of the royalty reports that we have already seen, we see at least a 20% growth sequentially, at least for the next quarter. So that trend is continuing. And what we have recently seen, again, reports for the next quarter is some pick up in consumer. Now bear in mind that these are Q3 shipments. So these are the pre-Christmas and stronger quarter, much better than the numbers. Again, we don't have the full picture. But at least from the initial report, the consumer seems to have picked up in Q3 compared to Q2 shipments.

So even though the semiconductor industry benefited from a restocking activity in the June quarter, which showed up in the royalties you're reporting today, do you think you'll still see a 20% unit pickup in the royalties you report in January, which will be reflecting the third quarter.

One correction -- 20% at least in royalties, dollars. I don't know about the quantities. I was talking dollars.

Okay.

On $3.7 million -- do the math. But this is the --

Yes.

-- trend we're seeing on the royalty front.

So yes, so the sell-through, obviously, your customers continues to be pretty good, at least in the applications that you serve.

Absolutely.

What is -- what are you -- with the forex volatility, what should we be thinking in terms of your incremental hedging expenses for next year on your largely Israeli R&D OpEx?

Again, very similar to the prior question, we'll give more detail as we go along in the next quarter. Overall, we haven't changed our FX strategy over the last two or three years. So it's the same answer. We usually hedge somewhere between six to nine months in advance. So part of 2010 is already hedged and not all of it. Of course, the average hedge rate is slower than it is today due to the dollar valuation, which is quite low these days. And the expenses might have an uptick. But I don't have the magnitude nor the numbers yet to back up that.

Do you do it on a rolling basis? Or do you just do a 12-month every year?

No, no, rolling basis.

And you go out six to nine months.

Yes.

Okay. And I guess that's it for me. I'll circle back if I have more. Thanks.

Thank you, Matt.

Your next question comes from the line of [Alan Mission] with Brigantine Advisors.

Hey, guys. Can you please just review who the top baseband royalty payers were for you in the quarter?

Hi, Alan. It's Yaniv. We don't give specific names. And we don't list them by importance or dollar contributors. But if you look at just the portfolio of customers that we have, let's start with OEMs. Of course, the bigger OEMs that are using our technology are the Sony Ericsson, Samsung, LG, iPhone, a lot of the Chinese blackbox type of players. Gideon, did I miss anything there? These are the big names on the OEM side I believe.

On -- if you look at who are the chip providers or suppliers to these tier I OEMs, you'll find a bunch of names. These are the ST-Ericsson. These are the Infiniums that are working with us. These are the Broadcoms of the world. These are the --

(inaudible).

-- and maybe a few others that we didn't highlight as much yet. And this may mean Asia and some other parts of the world.

Okay.

Pretty much all the big ones. The ones that are left that are not using our technology these days are obviously TI, Qualcomm, and Mediatech. These are the only big players that do not work essentially with CEVA.

Okay. Fair enough. And then I don't need exact numbers. But if you look at the sort of blended royalty rate you get for baseband and the blended royalty rate you get for everything else, which of those two is higher?

Consumer -- the everything else.

Okay. So baseband would actually drag down maybe only in a minor way. But it would drag down the overall rate for you.

In principal, yes. It's a much bigger market. So there's -- the idea in our business and the ASP for the royalties are built in, in every license agreement. We don't have to redefine it. So the larger the quantities, you have an automatic step down in the percent that the customer needs to pay us. So of course, if the markets are larger and you're already shipping to existing customers, they may be in the lower bracket than a new customer now shipping into the consumer side, whether it's in the e-reader that we talked about, which is a brand new opportunity for us, or some of these other data cards or video type of application.

Okay. Great. And then last one from me -- in the non-baseband category, which I guess was about 28 million units this quarter, what are the top couple of applications? And I don't mean in terms of licensing. I mean in terms of what's actually paying today. And if you could segment it out, things like whether it's game consoles or DVD, just so I can understand the top couple of applications driving that.

Alan, this is Gideon. It's set-top boxes. It's game consoles and DTVs.

Okay. That's very helpful. Thank you very much.

Your next question comes from the line of Stephen Glass with STG Capital.

I wonder if you could touch base a little bit more on the SSD opportunity. What's the magnitude of the opportunity? Can you talk about, if you're comfortable talking about it, whether that's enterprise focused or whether it's a client-based application that you're focusing on? Should we be focused on that in terms of near-term material revenue opportunities? Or is it a longer-term build we're looking at? Thank you.

All right, Gideon. It's still in I would say infancy. We are working with big names. It's not for -- it's enterprise. This is the activity. It's -- with some customers, we have product. And the shipment is still -- the quantities are small. In some other customers, we are in I would say 50% through with the design phase.

I would add maybe we have already two customers that have started to ship products. We've seen their initial royalty reports. Still, as Gideon said, small numbers, but two have just recently started to ship out.

Okay. Thank you.

Sure. Thanks.

Your next question comes from Robert Morrison, a private investor.

Hi. My recollection is that you were -- and correct me if I've got this wrong -- that you were anticipating a license of the CEVA-XC in the third quarter and that that didn't happen. And if that's correct, it would be particularly impressive that you beat on revenues. I'm wondering if you can comment on that and if you could say anything about why you might expect with the CEVA-XC just around the corner that you'd see weakness in your licensing with people holding off for the XC. And yet that doesn't seem to be happening. So is there any general comments you can make? Are there people licensing the CEVA-X in anticipation of the XC, any coloration you can give to that?

Sure. No, I don't recall us saying that we'll have the deal or we are looking for a deal in Q3.

Okay.

We did say that we'll be very happy. And it's going to be a very important milestone for us to achieve such a deal in 2009. Or we said maybe back then at the later part of 2009. So if that happens again in Q4 and we have a line of customers that are evaluating the technology as we speak, that will be a very nice and strong achievement. If that was not mature, then I'm sure we'll see that numerous deal in 2010. So the timing is still on track. And we have the opportunity to do it. And I hope that we'll be able to update you all next quarter. If not, this is going to be a 2010 event.

With regards to the type of product cycle or replacement cycle that you were referring to, I don't think that's the case at all with CEVA. The CEVA-X has a totally different market, customer base, and target base than other DSP cores which are for other applications, whether it's gaming consoles or e-book type of applications or voice over IP applications. I think we'll see or continue to see a parallel mix between newer technologies to a very high-end 4G type of application. And in Asia, we could see more cost reduction activities with all new cores just because the end application is different.

So we don't forecast or anticipate a product cycle replacement or replacement cycle. On the contrary, we expect that the new core will be just an add on to the existing portfolio of products that we have today.

Okay. Thanks very much. And sorry if I was mistaken on that then. One last question -- I may have not heard that correctly. But did you mention that Rim has adopted your technology through one of your licensees? And if so, is that new?

No, we did not comment about them.

Okay.

Not aware of that happening yet.

Okay. I have to go back and listen again. I just didn't hear correctly. Thanks very much.

Okay. Not a problem.

Thank you.

(Operator Instructions)

And at this time, there are no further questions. Are there any closing remarks?

Yes. We would like to thank you again for joining us and your continued interest in CEVA. We will be attending and presenting at the AeA Classic Investor Conference next week on Tuesday, November 3rd, in San Diego, California, and invite you to join us there. Thank you. And goodbye.

Thank you. This concludes today's conference call. You may now disconnect.