CEVA Inc (CEVA) 2010 Q2 法說會逐字稿

Good morning. My name is Derika and I will be your conference operator today. At this time, I would like to welcome everyone to the CEVA Second Quarter 2010 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 call over to Mr. Richard Kingston, Director of Marketing and Investor Relations. Please go ahead, sir.

Thank you and good morning, everyone, and welcome to CEVA's Second Quarter 2010 Earnings Conference Call. This conference call will be conducted by Gideon Wertheizer, Chief Executive Officer of CEVA, Yaniv Arieli, Chief Financial Officer of CEVA, and I, Richard Kingston, Director of Marketing and Investor Relations. Gideon will cover the business aspects and the highlights from the quarter, followed by Yaniv, who will cover the financial results for the second quarter and provide financial guidance for the third quarter and fiscal 2010.

I will start with the forward-looking statements. 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 and fiscal 2010, general outlook for 2010, optimism about our licensing pipeline, royalty revenue, and increased design activities in 2010, optimism about our customers displays in TI and Qualcomm, optimism about market growth in LTE, home entertainment, base stations, set-top boxes, digital TVs, HD video, the Chinese TD-SCDMA market, and alternative Wi-Fi connectivity devices and our position within them and our customer production schedules and our ability to generate revenues from new products and technologies.

The risks, uncertainties, and assumptions include the ability of the CEVA DSP cores and other technology to continue to be strong growth drivers for us, our success in penetrating new markets and maintaining our market position in existing markets, the effect of intense industry competition, the possibility that 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 to improve our licensing and 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 as of their respective dates.

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

Thank you, Richard. 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 second quarter of 2010.

Our revenue for the quarter was $10.6 million, which represents a 16% increase when compared to the second quarter of 2009. Revenue for the quarter was at the high end of our guidance and slightly higher than the previous record achieved in the first quarter. Royalty revenue for the second quarter of 2010 was $5.2 million, which results of a record high representing a 30% increase over the second quarter of 2009. This is the third consecutive quarter in which we have achieved record high royalty in our revenues.

During the second quarter, we concluded nine new license agreements. All of the agreements were for our CEVA DSP core platforms and software. Geographically, four of the license agreement were in the US, four were in Asia, and one was in Europe. Valid application for the licenses concluded during the quarter are primarily based on the process of our 3G and 4G handsets, mobile broadband, base stations, voiceover IP gateways, digital TV and Blu-ray DVDs.

We are extremely happy with our achievements for the second quarter in relation to our licensing activity and our growing traction in baseband markets, including both market share and high profile products. The licensing agreements concluded in this quarter reflect growing demand for our advanced DSP technologies, particularly in the mobile broadband markets with devices such as smartphone, tablets, laptops, and other multimedia devices. Every device targeted at providing mobile broadband connectivity will require the inclusion of DSP technology.

I would like to highlight a few important achievements on the licensing front. Three of the new licensing agreements executed during the quarter were for our leading edge DSP, the CEVA-XC, which marked an outstanding achievement for technology that is revolutionary and new. We have discussed in the past that the value proposition of the CEVA-XC is the ability to enable software modem or what is referred of software defined radio, SDR, capability versus the common practice today of hard wired modems.

A CEVA-XC base modem can support, by means of software, all the different varieties of wireless standards such as HSPA plus, LT, WiMAX, CDMA, GSM, Wi-Fi, and mobile TV. We have also mentioned in previous calls, that the pipeline for the CEVA-XC is strong, which eventually led to three agreements signed during the quarter. One of the agreements is with the first tier OEM that adopted the CEVA-XC for the next generation version of the LTE, the LTE Advanced. As a reminder, we have now two first tier OEMs that recently licensed our technology directly from us and are planning to design chips for their future smartphone and mobile broadband products.

In the past, we explained that the OEMS are stepping forward to develop LTE technologies by themselves rather than wait for merchant market chips which are available once the market takes off for mass volume. By licensing directly to the OEMs, CEVA gets the recognition for its technology, which may eventually lead to licensing of our technology directly to the semiconductor companies in the future.

Another noteworthy agreement is the licensing of the CEVA-XC to a key player in the base station market to be used for a softer defined chip capable of supporting the LP and the 3G broadband all in one platform. The base station market represents incremental and lucrative market for CEVA where we can leverage our technologies and traction in handsets. Moreover, with the addition of smaller phone factor base station products such as Picocells and Femtocells, the overall market is sizable.

Another aspect of the second quarter licensing agreement is that four out of the nine DSP agreements were signed in China with company aggressively targeting 3G and 4G mass deployment in the Chinese market. We are seeing a lot of design start by established companies as well as startups financed by venture capital sales and the Chinese government. Also, China Mobile, the largest cellular operator in the world in terms of number of subscribers is aggressively pushing 3G and 4G deployment of the China home-grown cellular standard, the TVS CDMA and the TDLT. In a few minutes, I will provide further data points about the Chinese market.

In other aspects of our licensing activity during the quarter relates to the home entertainment space. As we have discussed in the past, we see the home entertainment space with products such as connected digital TVs, set-top boxes and Blu-ray DVD as an incremental growth engine. We also stated that we see our DSP taking the role in high definition audio processing, such as DPS and Dolby and starting next year also HD video processing.

During the quarter, we sign an important strategic agreement with one of the largest players in this space. These customers used, until recently, its homegrown DSP engine and software and now decided to switch to our DSP firmware, which provides software and hardware technology related to audio that leads to a more efficient use of customer-owned R&D resources.

I would like now to share with you some important developments in the handset space, which is our primary market. Our market share in the baseband space increased by 12% sequentially to 29%, which represents a 61% increase over the second quarter of 2009, in which our baseband market share was 18%. We are encouraged by this level of growth which comes in light of 14% sequential market decline due to the seasonality according to our supply analysis.

We should mention here that our royalty reporting is one quarter in the wheel, so the Q2 2010 reporting will play -- reflect Q1 2010 shipments, a past Christmas quarter that is seasonally weak. iSuppli also mentioned that the suppliers focusing on the 2.5G space were the best performance in the baseband market. Two of the three best performance mentioned in iSuppli report [brackam] is spreading due to DSP and crossover product.

Furthermore, Nokia recently announced new model of high volume, low cost smartphone. The C and the X series are experience-focused phones which support our media players, social networking, web browsing, camera, Wi-Fi, and other features. And mind its compelling feature is a battery time of six weeks per charge versus one week that is commonly available.

Based on the study published by Jefferies & Company, Nokia Model C1, C2, C3, and X2 are all based on our customer DSP design. Also, we discussed in the past that Samsung is expanding the use of our technology in their phones, including its high-profile smartphone, the Galaxy S.

During Infineon recent analyst day, the Company provided interesting observation about the cellular landscape. It appears that Infineon has doubled its market share in the wideband CDMA, HSP 3G space from 7% in 2008 to 14% in 2009, whereas TI and Qualcomm both lost market share, 5% and 2% respectively. In the GSM 2G space, both Infineon and Broadcom market share went up 1% and 3% respectively in 2009 versus 2008.

TI still owns 34% of the GSM market, however, based on TI recent announcement, its market share will decline whereas the market share for its main competitor, Broadcom and Infineon will increase during the next 18 months, which will positively impact our royalty income. One last data point is with regard to the cellular activity in China. We [strouse] of forward concept expect 11% unit growth in 2010 globally, but China is expected to have 23% unit growth.

Per iSuppli, the domestic 3G arena is forecasted to reach 110 million units by the end of 2014, which is 35% of the total handset market in China. China Mobile said it would expand about $6.6 billion to expand its 3G network and introduce new phones. It expects the number of TD-SCDMA phones will grow 7 times in 2010 versus 2009. These activities and forecasts are substantiated by the significant design activated by large and local startup we are witnessing in our design wins backlog and pipeline.

Before handing the call to Yaniv for financial guidance, I would like to make a few statements with regard to CEVA achievements in the first half of 2010. In general, business exceeded our expectation, leading to a better-than-expected financial results. The licensing environment is healthy and our strategic objective to target our CEVA-XC platform to the growing base of NT and mobile broadband customers is progressing very well. Also, our strategy to expand into the home entertainment space has recently materialized with two Tier 1 customers adopting us during 2010.

On the royalty front, our market share in the handset space continues to expand while we are consistently taking market share from TI, Qualcomm, and media. Royalty revenue for the first half of 2010 increased 31% compared to the same period of 2009. And now, our non-GAAP net income increased 38% for the same period. In light of this positive prospect, we are revising upward our annual guidance. In addition, our Board of Directors has recently authorized a new share buyback program of up to 2 million shares. This authorization is in addition to the previous buyback program of 1 million shares that we completed during the second quarter.

At this time, let me hand over the call to Yaniv for financials and guidance.

Thank you, Gideon. I will now review the results of operations for the second quarter of 2010. Revenues for the second quarter was $10.6 million at the high end of our guidance and 16% higher than the second quarter of 2009. The revenue breakdown is as follows. Licensing revenue was $4.6 million, reflecting 43% of total revenues, 7% higher than the second quarter of last year. Royalty revenue was $5.2 million, a third sequential record high, reflecting 49% of total revenue and 30% higher than the second quarter of 2009.

Royalty revenues for the second quarter of 2010 also include approximately $0.4 million of catch-up royalty on past shipments, resulting from two existing customer in the consumer space. In the second quarter of 2009, we also recorded a catch-up royalty of $0.9 million on past shipments resulting from a single customer. Excluding these two events, our royalty increased net on year-over-year basis by 53%. Service revenues were $0.9 million, which accounted for 8% of total revenues, down 3% compared to the second quarter of last year.

Quarterly gross margin was 92% on both US GAAP and non-GAAP basis, approximately 5% higher compared to the second quarter of 2009 for which we recorded 87% and 88% on GAAP and non-GAAP basis respectively. As for the operating expenses, research and development expenses were $4.5 million for the quarter, including approximately $140,000 of equity-based compensation expense. Our sales and marketing costs were $1.8 million, including approximately $100,000 of equity-based compensation expenses and our G&A costs were $1.6 million, including approximately $300,000 of equity-based compensation.

Total operating expenses for the quarter were $7.9 million, which included an aggregate equity-based compensation expense of approximately $525,000, approximately 9% higher than the operating leverage for the second quarter of 2009. Our total operating expenses for the second quarter, excluding equity-based compensation expense were $7.3 million, reflecting approximately the mid-range of our guidance and approximately 12% higher than the operating levels for the second quarter of last year.

The expense increased in overall OpEx is associated partially with headcount increase in R&D, which should allow us to further leverage opportunities in the LTE and HD video markets as well as some timing of certain R&D grant repayments. US GAAP operating margins for the second quarter of 2008 was 18% of sales, a 151% increase from only 8% of sales for the same quarter last year.

Our non-GAAP operating margins for the second quarter of 2010, excluding equity-based compensation, increased significantly by 66% to 23% of sales compared to 16% for the second quarter of '09. Interest and other income for the second quarter of this year was $541, 000. On the tax front, we recorded a tax expense of $313,000 or 11% of non-GAAP pretax income.

US GAAP net income for the quarter was $2.1 million and fully diluted net income per share was $0.10. This compares to $2.3 million and $0.12 respectively for the second quarter of last year, which included a pretax capital gain of $1.4 million from our equity investment of GloNav to NXP Semiconductor.

Non-GAAP net income increased by 59% to $2.7 million compared to the same period from the prior year, an all-time record high. Non-GAAP fully diluted net income per share increased 50% to $0.12 per share compared to the same period in the prior year. Remember, those figures exclude approximately $0.5 million and $700,000 of equity-based compensation expenses for the second quarter of 2009 -- 2010 and '09 respectively.

Other related data. Shipped units by CEVA licensees during the second quarter of this year was a record 126 million units, up 93% and 3% from the second quarter of 2009 and the first quarter of 2010 respectively. Of the 126 million units shipped, 83 million units or approximately 66% of our handset baseband ships and reflects slightly higher volume as compared to the prior quarter in which 81 million units were shipped.

Also, of the 126 million units shipped in the first quarter, 105 million units were attributed to licensees currently paying per unit royalties and 21 million units were shipped by licensees who are under a prepaid arrangement. This compares to 122 million units shipped for the fourth quarter of 2009, of which 101 million were attributed to per unit royalty payers and 21 million were attributed to prepaid arrangements. This is the same number, by the way, as the existing quarter.

As for the June 30, 2010, we had 25 licensees shipping products, incorporating our technologies, one higher than the compared -- compared to the previous quarter, which is attributed to a customer that started to ship products in the consumer space, pursuant to 34 licensing agreements, which is also one higher compared to the previous quarter.

Of the 34 licensing arrangements, 30 are under per-unit royalty arrangements and four are under prepaid arrangements. As for the balance sheet items, as of June 30th, 2010, CEVA's cash and cash equivalent balances, marketable securities, and long-term bank deposits reached a record high of $108.6 million compared to $106.7 million for the March 31, 2010.

During the second quarter, we generated positive cash flow of approximately $3.1 million before taking into consideration $1.2 million associated and used for our share buyback activities during the quarter, in which we purchase approximately 108,000 shares and an average price of $11.20 per share. Our DSO for the second quarter of 2010 improved to 48 days compared to 57 days for the prior quarter.

Now for the guidance. Our guidance for the third quarter 2010 is as follows. Revenue is expected to be in the range of $10.3 million to $11.3 million. Gross margin is expected to be in the range of 91% to 93%. Operating expenses, including equity-based compensation expense, is expected to be slightly lower than the second quarter and in the range of $7.2 million to $8.2 million.

Of our anticipated total operating expenses for the third quarter, about $0.5 million is expected to be attributable to equity-based compensation expenses. So, our non-GAAP operating expenses is targeted to be in the range of $6.6 million to $7.6 million. Interest income net is expected to be approximately $450,000. Tax rate for the third quarter is expected to be approximately 12% to 14%, similar to the past few quarters.

Share count for the third quarter of 2010 is expected to be in the range of 22.2 million to 22.4 million shares. Our US GAAP EPS is expected to be in the range of $0.09 to $0.11 per share and our non-GAAP EPS, excluding the $0.5 million of equity-based compensation expenses is expected to be the highest we ever guided or achieved in the range of $0.12 to $0.14 per share.

Now for the full year 2010 guidance. As Gideon mentioned earlier, the first half of 2010 results exceeded our expectations in terms of revenue growth and profitability. Our pipeline and royalty prospects are solid. We are therefore slightly adjusting upwards our annual guidance to reflect these prospects. Notwithstanding the very promising growth indicators for the second half of this year, we are still maintaining prudent practices with regards to the magnitude and timing of future royalty growth.

Our revised annual guidance for this year is as follows. Total 2010 revenue is expected to be slightly higher in the range of $41.7 million to $44.7 million. Gross margin is expected to be in the range of 91% to 93%. Operating expenses, excluding equity-based compensation expenses are expected to be -- sorry, including equity based, are expected to be in the range of $30.3 million to $32.3 million. Our annual equity-based compensation expense is forecast to be approximately $2.2 million. In our annual operating margins, expenses, excluding equity-based compensation expense are expected to be slightly lower and in the range of $28.1 million to $30.1 million.

Net income -- interest income net is expected to be around $2 million. Our annual tax rate is expected to be about 13% and our share count is approximately 22.2 million shares. That brings us to US GAAP EPS in the range of $0.38 to $0.42 per share and in a non-GAAP EPS, excluding the $2.2 million of equity-based compensation expenses, forecast is raised and currently expected to be in the range of $0.48 to $0.52 per share compared to the $0.43 to $0.49 per share in our previous guidance.

Operator, you could now open the discussion to Q&A.

Thank you. (Operator Instructions).

Your first question comes from Gary Mobley with Benchmark Company.

Hi, guys. Congratulations on the good results. You guys mentioned in your prepared comments that you have now landed or signed two Tier 1 -- sort of baseband licensees. Based on that -- based on what your potential penetration could be at those Tier 1 licensees, what do you think your cellular based end share could rise to in three to four years' time?

Well, Gary -- let me -- it's Gideon. Let me, first of all, elaborate on these firstly. These are, firstly, OEMs. They're not semiconductor companies. We see a phenomena that OEMs are basically taking the lead in developing future technology or next generation technology as they rather to wait to wait for a merchant chip to be available supporting these standards. This is an interesting trend.

I am not -- it's hard to say, at this point, what would be the volume coming out of this adoption of the OEMs. There is a significant benefit in terms of qualifying our new designs onto the LTE and LTE Advanced, which I believe can further lead to semiconductor adoption of the technology for the merchant market chip. Now, in terms of adoption of our technology in general of the overall market, I can -- I mean, we can reiterate what we said in the past, that we -- and we have, I think, good indication as for the -- that this 45% to 50% within the next two, three years is achievable.

Okay. Let me dig a little bit deeper into that. What is your definition of a Tier 1 cell phone OEM? Is it a top five OEM or is a top eight or 10?

Top five.

Okay. And I was hoping that you could shed some light on what your licensing pipeline looks like, relative to recent past and as well what is mostly in the queue of potential license deals looking out over the next couple quarters?

That's a good question. First of all, the pipeline is now composed of a lot of cellular baseband adoptions or interests. And it relates to the handset or the user equipment. It's not just handset. It's mobile broadband in general. It includes data cards and tablets and netbooks and all the very different variants where you're going to see mobile broadband.

We have in our pipeline a nice queue of infrastructure, companies that aim to go to the macro base stations, Picocells and Femtocells. In the consumer electronics, the HD audio is -- we have a nice pipeline. Here we are, more selective in terms of focusing on Tier 1 OEMs to go and we signed two [others] that we signed during these two Tier 1 OEMs to use our DSP in future consumer electronic products. So this, in a nutshell, what the pipeline looks like. User equipment, cellular infrastructure, and consumer electronic audio.

All right. Thank you, guys.

Thank you, Gary, and welcome on board.

Your next question comes from Anil Doradla with William Blair & Company.

Hi, Anil. Good morning.

Anil, your line is open.

Hi. It's Brian in for Anil. You mentioned LTE user equipment. Can you just expand on that and it sounds like, in LTE, this is kind of broadening your opportunity behind -- beyond handsets. Is that the right way to think about that and why is that?

Yes, this is Gideon. That's the right way to do it -- to look into this one. LTE, basically, is, I would say preconditioned for mobile broadband. LTE can provide you up to 150 megabit, by the way. One of the agreement takes us to the next generation SB. It's called LT Advanced that is capable to provide up to 1 gigabit per second. So, the LTE basically opened up categories of product and I think I spoke in the past or we spoke in the past of the -- that the overall market size is not anymore the 1.4, 1.5 -- let's say I'm talking about three years from now handset, but it's more like 2.2 billion units that include all those mobile connected devices.

Okay. And then in the home entertainment market, you talked about adding another Tier 1. Can you just talk about how many Tier 1 vendors you're working with and then to what extent are those vendors outsourcing now? Is it just a couple of applications or do you see that broadening more significantly?

Well, that's an interesting question. First of all, when it comes to the agreement that we signed this quarter, this is indeed the Tier 1 semiconductor company that used in the past it's homegrown DSP for doing audio. And they decided to switch and not use any more of the homegrown PSP and go to our framework or infrastructure of software and hardware and that's going forward. So far we, as I said, we are in [further], we are trying to work with first tier companies. So far, we have three companies that work with us and actively design, based on our DSP in audio.

I would add to that, Brian, that -- this is Yaniv -- that we also have, as you recall, design wins -- at least two important ones, in the application processor. So, other than the audio side of consumer electronics, we're also now empowering cell phones and the application processor as well as tablets, netbooks, and handheld devices for the video/audio type of functionality.

This is something that we did not have as we focused more in baseband in the past, but we did have the design switch our shipping products in our production. So, this is another factor to look at if you would exclude that from the baseband business, but call it consumer, which is application processor, as well as consumer-related products.

Great. And can you just talk about -- I mean, we're talking about handset share being what it is and increasing. Do you have a -- can you kind of help us gauge what your market share might be outside of handsets and where that could go?

Yes, we were asked about that in the past, as well. I think it's a premature. I mean, if you would have asked us three or four years ago when we had 3% market share in baseband, it would be almost a non-relevant type of question because we were such a small player then. A year ago at 18%, we already had a pretty firm outlook and plan of where we want to reach and you see that a year after we are at 29% market share. Our goal in baseband is still far higher what we want to achieve for -- in the next two years or so, it could be in the 50% range, more or less.

If you look at all the other segments of the market, these are much, much newer players and markets for us. So, it's the same as we compare us three years ago and the baseband, when 3% didn't mean too much. I believe that two or three -- two years down the road -- 18 months down the road and we have more significant shipments and numbers that we could evaluate a bit better, we'll be happy to give out some more color on the non-baseband type of modem -- numbers.

Gideon gives a lot of color on new segments for us and new opportunities for us -- base station, consumer devices, application processors. I don't think we have yet the data -- sufficient data to come up with well-defined numbers. I hope that we could do it in the near future.

Sure. That's helpful. Thanks a lot, guys.

Thank you.

The next question comes from Matt Robison with Wunderlich Securities.

Congratulations. I wanted to talk a little bit about this transition to CEVA-XC and the move towards the -- move kind of up the food chain to the OEMs. You guys, for years, have been -- for lack of a better word, sort of stuck in the Teak and TeakLite realm for most of your volume. And we haven't seen a lot of movement from the merchant semiconductor companies to adopt the new architectures and then the software for -- presumably the software associated with that. You see, with the OEMs starting to use -- to license more -- it seems like it's more of a clean slate and maybe a little less inertia to overcome in adopting a new architecture.

Is -- do you -- at some point, do you expect these OEMs to then push these -- the newer architecture down the food chain to the merchant level so they can have multiple sourcing or do you -- at the merchant level, or do you expect the OEMs' business models to simply be going into more of a full custom sort of foundry-oriented business model? Also -- I also have a couple follow-up questions regarding the near term.

Well, Matt -- this is Gideon. First of all, we are asking ourselves why indeed OEMs are adopting technology or stepping ahead and developing the modem. One reason I mentioned because they need to be ahead -- they need to push the next generation standard. Another thing is relates to the technology in serve. The CEVA-XC is, for OEM, is a perfect fit because it's software oriented. The OEMs are not capable or not specializing in developing all those hardware blocks that semiconductor companies can develop.

They cannot carry the cost of -- take-out costs, which has now become significant -- close to $1 million. They prefer to stay in the software level. And this is what CEVA-XC also then to do. To your specific question, going forward, I believe we'll see a mix, meaning product may be premium product, the chip itself done by the OEMs or manufactured by the OEM to some of the semiconductor partners and merchant markets that follows the guidelines of the OEMs.

Matt, let me add another aspect to your question. And if we count the number of CEVA-X, which is the higher end, the newer type of DSP that are out there today, we have about 26 active customers with -- have licensed the CEVA-X. So, you're right that for many, many years, the older generations, Teak and then TeakLite were the main source for revenues, but that has shifted when we look at the scope and the -- of the CEVA-X. And going further, of course, the CEVA-XC, which was the highest end and best of breed for higher end applications.

Thanks, Yaniv. On the -- I guess while I've got you, maybe you could give us a headcount -- that cash flow number you quoted, that's from operations. Can you confirm that and also give us CapEx and depreciation? And then, Gideon, we heard over -- yesterday afternoon and overnight from Broadcom and Infineon. And Infineon seemed to have real strong results and outlook commentary. Broadcom not so strong on the basebands for the June quarter, but a real strong outlook commentary.

How does -- and clearly, the June quarter is what we're looking for as an indication of what -- to see from you on royalties for the September quarter. How should we look at that and -- in light of your royalty expectations or should we just -- or is -- are there other customers that we should think would be driving things more in the September quarter royalty number?

Yaniv, do you want to start?

No, go ahead.

Well, here's the thing. I think you are right. I mean, we see Infineon is doing well in the baseband space. Maybe it relates to the Nokia ramp up that is expecting. Going forward with royalties, I believe -- here is what -- how I see things. First of all, I think, in the next few quarters, we're going to see continued growth in the quarter. I would say about $5 million.

Now, there is a step. It's totally true, we were the 2009 -- 2008, at the range of $3 million in 2009, we went to three to four -- four in -- starting from Q4 2009 -- yes. Starting Q4 '09, we are reaching to the $5 million. I believe that more power in our reporting in Q1 '11, we'll see another step in royalties.

Step up, of course.

Of course, step up in royalties. I think we have good indication that this is going to happen. This will be both in, of course, market share and dollars terms.

Matt, by the way, you could also tie all these facts to the introduction of the new products we talked about, whether it's Samsung, whether it's Nokia. All these products are out now or later in the second half of this year. So, all this together with the relatively good results in the wireless space for the customers and companies you mentioned, should help us get to that new kick or higher royalty standard early 2011. In the meantime, we'll, of course, increase the levels that we are at and have been for the last three quarters.

Okay.

On the housekeeping questions, we're 184 employees at the end of this quarter versus 183 in the last quarter. Operating cash positive cash flow of $2.7 million and both CapEx and depreciation at around $250,000.

Thanks, gentlemen.

Thank you, Matt.

The next question comes from Allan Mishan with Brigantine.

Hi, guys. Just a couple quick ones. First, what would the royalty units have been, if not for the $0.4 million catch up?

Overall, instead of 126 million units, which of them we said that 105 million are paying royalties, I would look at 95 million units of paying royalties for this quarter, excluding the catch up. So all in all, it's about $4.8 million and about 95 million units for paying royalties. On top of that -- yes, versus 101 million paying units for the prior quarter, which generated about $5 million.

So, if you do that analysis and you take the overall numbers that we mentioned earlier, we do have an increase in baseband business from 81 million to 83 million units, which is positive and this is how we got the increased market share because the market went down 14%. On the other hand, we have the typical seasonality -- 18% decline in units and more or less in dollars from the non-baseband business, which represents the post-Christmas Q1 lower shipments in the environment. So, that's -- those are the numbers if that helps out, excluding that catch up.

No, that's perfect. And then, do you have a market share figure for CEVA just for 3G baseband?

No, I don't think we have that type of analysis. Yes, we're looking at the whole baseband market. It's a bit tricky today because 2G, if you look at Nokia, the new phone introduction, which we discussed -- the C series, X series, are all type of smartphones. They're low end or low cost, but smartphones. So, it's even difficult to compare a 3G to a 2G if you look at the phone functionalities these days. So, we don't have a specific breakdown. We do have, for the overall baseband business, which includes the two.

Okay. I mean, I was just -- my own estimate would be, let's say, in the 10% range and I don't know if you have a feeling whether it's higher or lower than that.

Well, just if you take what did [Samsung] said -- that by the end of 2009 in 3G, there has 14%.

Okay. So it has to be higher than that.

Not including the Samsung, not including Broadcom ...

Right, right.

Yes, it should be higher, but --

Okay.

It's a bit difficult to assess those quantified. And Allan, keep in mind that today -- and 70% of the volume is 2G. I mean, up to edge.

Of course.

It's only 30 switches.

Okay. Thanks very much, guys.

Okay. Thank you.

(Operator Instructions).

Your next question comes from[Warren Darley] with Morgan Keegan & Company.

Hello, gentlemen. Great quarter. A question on what would be the catalyst and/or timing of someone like a Qualcomm to use DSPs outside of their own investment there and what would be the economics for that catalyst of doing that?

That's a kind of $1 million question. When Qualcomm will -- right now, Qualcomm is using homegrown DSP. The homegrown DSP, when it comes to FD is not sufficient to run everything in software. That's the pitch that we are using for this [event]. So, there is a bunch of hardware to do. Will this be sufficient for them to switch, to adopt outsourcing and go to the CEVA-XC? It's hard to say at this stage.

Okay, thanks. And also, is there any update on the first major android product using CEVA cores? Is there anything that could be said there?

Well, Galaxy S -- it's the Samsung high profile android base is in CEVA and there are a bunch phones that we do. I don't recall exactly the brand, the market names of all these things. But Galaxy S is something that we heard a lot.

Thank you.

Sure. Thank you.

Your next question comes from Daniel Meron with RBC Capital Markets.

Hey, guys. Congrats on the ongoing execution here. Nice work.

Thank you, Daniel.

Sure. Just a quick question. I might have missed it earlier. Were there any FX impact, either on the top line or on the bottom line?

FX effect?

Yes.

No, no, none. No, we said in the past that we hedged -- we're fully hedged for the rest of the year and well, we don't have any effects there.

Okay. And continuing the ongoing execution you've got here, I mean, are you factoring any macro impact one way or the other or you're basically basing it on what you're seeing right now in the market?

No, I think we're basing it at two elements -- on the licensing front we talked about earlier, a pretty strong pipeline of companies evaluating the technology. We see a lot of new designs. We mentioned that in Asia we had four Chinese companies sign up in their technologies. It's a lot of money spent in R&D. We don't see the macroeconomics yet. The holding companies from putting resources for new R&D project in our space -- both the baseband and the newer markets that we discussed. That's on the licensing front.

On the royalty front, I think we are getting pretty strong indications from -- and we've been asked about that in the prior question or two. We're getting pretty good indications about big semiconductor companies that our customers, Broadcom, Infineon, [Spectrum, SD Eriksen], to some extent, that are doing quite well.

And I think that the sooner the market picks up, both in Q2 that's just a typical seasonality post a 14% decline they had in Q1, that should be the case both in Q2 and continuing in Q3, we should benefit from the royalty front. So, from that type of aspect, we are pretty optimistic. But as usual, and you know us for many years, still conservative until we see these reports and until we see the dollars flow in, we take a more conservative approach.

Understood, great. And then, just again, since I joined you late, I missed the third quarter and 2010 guidance. Can you just give me the top line and the bottom line headline figures? We don't need to go through the costs and all that. Just the top and bottom line.

Sure, on an annual basis?

For third quarter and for 2010.

Okay. For the third quarter, it was $10.3 million to $11.3 million, with bottom line non-GAAP at $0.12 to $0.14, the highest ever guidance we gave. And on an annual basis, we tweaked our top line to -- between $41.7 million to $44.7 million. But generally, the much higher bottom line of $0.48 to $0.52 per share non-GAAP.

Great. This is pretty good numbers of those. Good luck. Thanks Yaniv and Gideon.

Thank you.

Thank you.

There are no further questions. I will now turn the call back to management for any closing remarks.

Okay. Thank you again for joining us today and for your continued interest in CEVA. We will be attending the following events in the coming months and invite you to join us there -- the Oppenheimer Annual Technology, Media, and Telecommunications Conference, August 10th, in Boston and the Bank of America-Merrill Lynch European Tech Conference, September the 1st, in San Francisco. Thank you and good-bye.

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