CEVA Inc (CEVA) 2010 Q3 法說會逐字稿

Good morning. My name is Dorothy, and I will be your conference operator today. At this time, I would like to welcome everyone to the CEVA Q3 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 conference over to Richard Kingston, Director of Marketing and Investor Relations. Mr. Kingston, you may begin.

Thank you, and good morning everyone. Welcome to CEVA's third 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 on the quarter, followed by Yaniv, who will cover the financial results for the third quarter, provide financial guidance for the fourth 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 fourth quarter and fiscal 2010, general outlook for the remainder of 2010 and 2011, optimism about our customers' product pipelines and market penetration, and such impact on our future revenues, including our customers in the Chinese local OEM market, the positive impact of two existing customers fully utilizing their prepaid arrangements in the fourth quarter, optimism about the growth in handset markets, including LTE and 2G spaces, our networking and machine to machine products and our ability to generate revenues from these new products and technologies, and the positive impact of Intel's acquisition of the wireless division of Infineon, and Broadcom's acquisition of Beceem Communications.

The risks, uncertainties and assumptions include the ability of the CEVA DSP cores and other technologies to continue to be strong growth drivers for us, our success in penetrating new markets and maintaining our market position in existing markets, the ability of products incorporating our technologies to achieve market acceptance, the effect of intense industry competition and consolidation, 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, 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 like to now 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 2010.

Our revenue for the quarter was $10.7 million, representing an 11% increase compared to the third quarter of 2009. Royalty revenue for the third quarter of 2010 was $5.2 million, representing a noteworthy 42% increase over the third quarter of last year, and an 11% sequential increase after excluding approximately $444,000 associated with the royalty catch-up amount recorded in the second quarter of 2010.

Our third quarter operating margin reached 21% and 26% on a US GAAP and non-GAAP basis respectively, which represent all time record highs. Our non-GAAP EPS increased 17% on a year over year basis for the third quarter, and reached a record high of $0.14.

During the first quarter, we concluded six new license agreements. Five of the agreements were for our CEVA DSP core platform and software, and one agreement was for our Bluetooth technology. Geographically, two of the license agreements were in the US, three in Asia, and one was in Europe. Target application for the licenses concluded during the quarter are primarily 3G and 4G baseband processors for mobile handset and broadband, Android-based application processors for smartphones, tablets, eReaders, and smart meters.

The third quarter was a good quarter, with two important agreements which I will elaborate on in a few minutes. We also signed a software [sales] agreement with a tier one OEM during the quarter, supplementing a core license agreement with the same OEM that concluded at the end of last year. This OEM made substantial progress with its in-house developed LTE products, based on our DSP, and (inaudible) out our software offering to expedite its development efforts.

On the royalty front, our growth is driven by market share expansion in the baseband space, including growing contribution from Nokia.

Our pipeline continued to strengthen. We are seeing considerable interest in our products, in particular, next generation wireless product for handset, networking, and machine to machine.

Let me take a few moments to elaborate on the two key agreements that we signed in the quarter. A CEVA-XC license agreement was signed with a major semiconductor company, which is going to use its substantial efforts and economies of scale to become a major supplier to the growing smartphone and tablet space. The CEVA-XC technology was selected due to its capabilities for software defined radio, SDR architecture. The (inaudible) seamless and faster, powerful, supporting the most advanced profile for wireless communications such as LTE and LTE-Advanced.

The CEVA-XC base design allows the device manufacturer to use the same chip and form design on multiple networks such as LTE, HSPA, WCDMA/CDMA, thereby gaining an advantage in terms of economies of scale and expedited time to market.

The second key agreement that we signed this quarter was an impressive China based company, Rockchip, a fabless semiconductor company and a leader in the high volume personal multimedia player market in China. The company is the first local company in China offering an Android based application processor, targeted for a range of low cost smartphone and tablets.

These products are all based on CEVA multimedia platforms supporting leading edge features, such as HD and 3D video. With our latest multimedia platform, Rockchip plans to take leadership position in the fast growing local smartphone, tablet and [imager] segments.

I would like now to update you all about our main market, the cellular market share. (inaudible) supplied the market for handset in Q2 2010 grew 6% sequentially, and 16% year-over-year. CEVA market share in the baseband space grew to 33% versus 29% last quarter, and 23% a year ago. Within the mix of product shipped in the second quarter, 2G based product grew substantially, reflecting initial mass production by Nokia of GSM based phones targeting emerging markets.

The 2G GSM phone market is high volume, cost driven market segment. (inaudible) IDC in Q2 2010, 40% of the total number of phones shipped were priced at less than $50. 49% of the phones shipped were priced between $50 to $100. Nokia (inaudible) as well as many local brands, are targeting this segment with a range of product features such as dual and even three (inaudible) phones, local smartphones, and range of (inaudible), customized to the customer mix.

Recent public statements made by our key customers are very encouraging. I would like to share with you a few of these observations.

Infineon recently announced that its revenue for the fourth quarter, which ended on September 30, would be better than previously expected. Infineon emphasized that margins improved performance is attributable to the wireless business unit. We believe Infineon's positive results will contribute positive to our fourth quarter royalty revenue.

Also, Intel announced that it plans to acquire the wireless business of Infineon. As you know, Infineon is a long time strategic customer of CEVA, using various CEVA DSP cores across all its baseband products. We believe the combined assets and strengths of Intel and Infineon create a new dominant player in the mobile computing space, whereby putting CEVA in a very strong position to leverage opportunities in smartphone, tablets, and related products.

(inaudible) expect to [clear] its revenue due to (inaudible) [charging] the local China market in 3G, in 2G and 3G (inaudible). Total results upward its previously stated guidance. We expect this trend will also have a positive impact on our royalty revenue in the fourth quarter.

Broadcom announced that it plans to acquire Beceem Communication to expedite its time to market to 4G. Beceem licensed our flagship CEVA-XC DSP, (inaudible) for its newest multimode LTE and WiMAX chip. With the consolidation of Broadcom and Beceem assets, CEVA technologies will be deployed in all Broadcom range of baseband processors, from 2G, 3G to 4G.

Samsung recently increased its smartphone sales targets for the year. The company now expects to ship 25 million smartphones this year, up from 18 million previously targeted. Though Samsung, it will rely on its successful launch of the Galaxy S Android-based smartphone to achieve these outstanding goals. The Galaxy S platform is enabled by our DSPs.

The (inaudible) 4G phone, a $299 [central] device named (inaudible), is now available with the MetroPCS, Metro, using CEVA DSP (inaudible). The development of LTE network continue with plans to deploy products next year by the largest operators such as Verizon, AT&T, T-Mobile, and China Mobile. The recent forecasts by Juniper Research project more than 300 million LTE subscribers in 2015. As you know, given our attractive offering, strong traction, and already invaluable product in the LTE domain, we are well positioned to leverage this anticipated growth.

Additionally, during the third quarter, our customer STL (inaudible) launched the world's first [full chip] HSPA Plus [mobile]. It consumes half of the power of existing HSPA Plus solution, and has the smallest phone (inaudible) today in the 21 megabit per second category. They announced M5730 Plus (inaudible) based on our DSP.

HSPA Plus is an evolutionary upgrade to the HSPA network, providing three times higher bit rate with (inaudible), [42] megabit per second and 84 megabit per second. Operators such as AT&T are currently migrating to HSPA Plus before the LTE deployment, which we believe will come at a later stage.

The above data points, as well as royalty [reports] for the first quarter shipment we collected from our customers today, indicate a significant increase in shipments, in particular, in the high volume 2G market. Within the 2G space, in addition to Nokia and Samsung, which we discussed in the past, we see substantial volume contributions driven by Chinese OEMs, which we believe are switching from MediaTek to our customers' products.

The Chinese local OEM market is considered a significant, sophisticated, dynamic and cost driven market. Strategy analysts forecast the market size to be around 300 million units in annual shipments for 2010. This market was largely untapped by CEVA because MediaTek was previously the dominant player, with 85% market share, and utilized its in-house designed DSP.

We believe the landscape may be changing in our favor, with the market penetration by our customers in this market, thereby potentially having sizeable volumes and royalty revenue (inaudible) for us. For the fourth quarter, we are expecting significantly royalty growth of approximately 40% sequentially, resulting from this new trend.

Accordingly, we are revising upward our fourth quarter and annual revenue and profitability numbers. In addition, we expect two customers that are already shipping in high volumes products incorporating our technology to fully utilize their prepaid royalty arrangement. We believe this will contribute (inaudible) positively to our royalty revenue stream in 2011.

With that said, I will now turn the call to Yaniv for financials and guidance.

Thank you, Gideon. Good morning. I would like now to review the results of operations for the third quarter of 2010.

Revenue for the third quarter was $10.7 million, slightly below the midrange of our guidance, and 11% higher than the third quarter of last year. Revenue breakdown is as follows.

Licensing revenue was $4.5 million, reflecting 42% of total revenue, 15% lower than the third quarter of 2009. Royalty revenue was $5.2 million, the fourth sequential record high, reflecting 49% of our total revenue, and 42% higher than the third quarter of last year. Royalty revenue for the third quarter increased 11% sequentially after excluding approximately $440,000 of catch-up royalty on past shipments on Q2 2010.

Service revenue was $1 million, which accounted for 9% of our total revenue, up 35% compared to the third quarter of '09. Quarterly gross margin was 91% on both US GAAP and non-GAAP basis, similar to the third quarter last year.

(inaudible) operating quarterly expenses. Research -- R&D costs was $4.1 million for the quarter, including approximately $180,000 of equity-based compensation expenses. Our sales and marketing costs were $1.7 million, excluding approximately $100,000 of equity-based compensation expense, and our G&A costs were $1.6 million, including approximately $240,000 of equity-based compensation expenses.

Our total operating expenses for the quarter was $7.4 million, which included an aggregate equity-based compensation expense of approximately $520,000, approximately 2% higher than the operating expense levels for the third quarter of last year.

Our total operating expenses for the third quarter, excluding equity-based compensation expenses, were $6.9 million, reflecting the lower range of our guidance, and approximately 5% higher than the operating expense levels for the third quarter of last year.

A lower than expected OpEx is associated mainly with timing of certain R&D grant payments, and particularly due to higher allocation of R&D expenses to cost of goods, related to certain activities for our customers.

US GAAP operating margins for the third quarter increased to 21% of sales, from only 17% the same quarter last year. Our non-GAAP operating margins for the third quarter of 2010, excluding equity-based compensation expenses, increased to 26% from 24% a year ago.

Interest and other income for the quarter was $493,000, reflecting lower investment yields compared to prior quarters.

On the tax front, we recorded a quarterly tax income of about $200,000 on US GAAP basis, and a tax expense of approximately $292,000, or 9%, on non-GAAP pretax income. The reason for the tax benefit and for the lower tax rate for this quarter is associated with adjustments we made to the international cost allocation, as well as tax planning strategy, to utilize certain tax assets.

US GAAP net income for the third quarter was $3 million, and fully diluted net income per share was $0.13. This compares to $1.8 million and $0.09 respectively for the third quarter of last year.

Our non-GAAP net income increased by 24% to $3 million, compared to the same period for the prior year, an all-time record high. Our non-GAAP fully diluted EPS increased 17% to $0.14 compared to the same period last year. These figures exclude approximately $0.5 million and $700,000 of equity-based compensation expenses for the third quarter of 2010 and 2009 respectively.

Other related data. Shipped units by CEVA licensees during the third quarter was a record 141 million units, up 59% and 17% from the third quarter of last year and the second quarter of this year, respectively, excluding the catch-up royalties we had in the second quarter.

Of the 141 million units shipped, 101 million units, or approximately 72%, are for handset baseband chips, and reflect a significant higher volume as composed to the prior quarter, in which 83 million units were reported shipped. This [jump up] was driven by large volume, ultra low cost phones specially targeted at the emerging markets, which also bears slightly lower royalty ASPs.

Also, the 141 million units shipped in the third quarter, 123 million units were attributed to licensees currently paying per unit royalties, and 18 million units were shipped by licensees who were under a prepaid arrangement. This compares to 121 million units shipped during the second quarter of 2010, excluding the catch-up quantities, from which 100 million were attributed to per unit royalties and 21 million were attributed to a prepayment arrangement.

As of [December 30, 2010], 27 licensees were shipping products incorporating our technologies, two higher compared to the previous quarter, and it's attributed to a new customer that started to ship products replacing an existing customer that sold its business, and one customer that finalized its prepaid status, but with limited volume and magnitude.

As of the end of September this year, we had 34 licensing arrangements, of which 31 of them are under prepaid unit arrangements, and three -- sorry, 31 are under pay per unit arrangement, and three are under prepaid arrangements.

As for the balance sheet items, as of September 30, CEVA cash and cash equivalent balances, marketable securities and long-term debt deposits reached an all-time record high of $117.2 million, compared to $108.6 million as of June 30.

During the third quarter, we generated positive cash flow of approximately $8.6 million, after taking into consideration $0.4 million used for our buyback program in the quarter in which we purchased approximately 43,000 shares for an average price of $11.30 per share.

Our DSO for the third quarter of 2010 continued to improve to 43 days, compared to 48 days for the prior quarter.

Now for the guidance. As Gideon mentioned, we suspect a significant, about 40% sequential increase in our royalty revenue for the fourth quarter. This trend does not take into consideration two customers that are anticipated to exhaust their prepaid status, which we reflect and anticipate to contribute positively to our royalty revenue for early next year. We are therefore raising and revising upwards again our fourth quarter and annual guidance, which will reflect the higher royalty increase and improve our profitability.

Our guidance for the fourth quarter of 2010 is as follows. Revenue is expected to be in the range of $12 million to $13 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 at similar levels as our first and second quarters of the year, and slightly higher than the third quarter, and in the range of $7.5 million to $8.5 million.

Of the anticipated total operating expenses for the fourth quarter, about $0.5 million is expected to be attributed to equity-based compensation expense, and therefore, non-GAAP guidance for Q4 is between $7 million to $8 million.

Interest income, net, is expected to be approximately $450,000. Our tax rate for the fourth quarter is expected to be 12% to 14%. And our share count for the fourth quarter is expected to be in the range of 22.9 million to 23.1 million shares.

US GAAP EPS is expected to be in the range of $0.14 to $0.16, and our non-GAAP EPS, excluding $0.5 million of equity-based compensation expenses, is forecasted to be at the range of $0.16 to $0.18 per share.

Now for the full year 2010 guidance. Based on the first three quarters and the guidance I just provided for the fourth quarter, I'll summarize the 2010 annual guidance for you.

Total 2010 revenue is expected to be higher than what we previously guided, and be in the range of $43.4 million to $45.4 million. Our gross margin is expected to be in the range of 91% to 93%. Operating expenses, including equity-based compensation, are expected to be slightly lower, are in the range of $30.2 million to $32.2 million. Our annual equity-based compensation expense is forecasted to be approximately $2.2 million. Therefore, our annual operating expenses, excluding equity-based compensation, is expected to be in the range of $28 million to $30 million.

Net interest income, net, is expected to be around $2 million. Tax rate for the year is expected to be 9% for US GAAP, and approximately 12% on non-GAAP basis. Our share count for this year is expected to be around 22.4 million shares, and for the EPS, our US GAAP EPS is expected to be higher, and in the range of $0.45 to $0.49 per share, and our non-GAAP EPS, excluding the $2.2 million of equity-based compensation expenses, is forecasted to be raised and in the range of $0.53 to $0.57 per share.

Operator, you could now open the floor for the Q&A session, please.

(Operator instructions) We will pause for just a moment to compile the Q&A roster.

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

Hey, guys, thanks a lot. Congratulations, and great job on the guidance. A couple of questions. This deal with Rockchip -- can you help us understand the impact on the overall royalties from an ASP point of view as we get into 2011? And I have some follow-ups.

Sure, Vijay. I mean, Anil, sorry. You know, we cannot be specific with any customer of ours as these deals are -- they are confidential. I think what we have explained and talked about in the past, the overall [considerable] electronic related devices and the market bear higher royalty ASPs than some of the high volume type of 2G (inaudible). That's from the ASP perspective. I'll let Gideon reply more from the business perspective, which I think has a much greater magnitude and can affect us going forward.

Okay. The Rockchip product line or strategy is aimed at the low cost (inaudible) chip. I would say the emerging market smartphone technology, smartphone tablets, if you will. In this case, you're going to have this (inaudible) provision where you have a very low cost baseband, like MediaTek's (inaudible) and there are a bunch of other companies. Most of them, by the way, work in (inaudible), and they -- then there is the application processor.

And I suggest the investors not to underestimate the technology that this application process -- this is an (inaudible) based platform. It supports high definition video, it supports 3D video, and this will be in a smartphone or tablet that -- together with the baseband processor.

So that's, for us, it's a really, I would say, substantial foothold in the application processor, into this specific market. The volume of these markets are very good.

It's [fabless], it looks like iPad. It's not an iPad, it's not a clone of iPad, but it's a product that will be sold into this emerging market, mainly in China.

Great. And you -- stepping back, you know, if I look at the next couple of years from a team point of view, clearly, you guys have done very well on the baseband front. Can you walk us through your success and ability to succeed on the application processor? I know that you guys have seen some success. But how should we be looking at that side of the business, maybe a couple of years from now? How do you guys anticipate your success out there?

Well, you know, we -- unfortunately, we cannot too much comment with the public about customers, but our major customers are going to use us. Keep in mind -- you know, the success that we have today with the multimedia is more power the emerging markets.

And this market is going to develop, or (inaudible) process of developing to become a big market. And this is already a foothold in this (inaudible).

The end (inaudible) consumer products that use our multimedia platform that we talk about (inaudible) [comes from], and this is how I think that we will see more and more impact on our royalties in the next -- I would say, in the next year, and the year after.

Okay, very good. And finally, on the Nokia front, can you give us a sense -- you know, how much is Nokia contributing in the third quarter and maybe fourth quarter? How much came from Nokia?

(inaudible).

Yes, I think we saw for the first time a significant ramp-up coming from Nokia. That is something that we did not have, or similar numbers and quantities in the past. I think hearing what TI had to say on their earnings call, I think it's still the tip of the iceberg, to the extent that they still have north of $450 million dollars of revenue coming from this business line, and (inaudible) follow a straight line plus, minus, and down to zero, until the end of 2012. That, I believe happened yesterday.

So I think we're on track to gain market share, additional market share there, and Samsung, the more -- the OEM that you already know, I think the exciting opportunity to us is that we were -- we recognize that it may happen, but we did not know when, and the magnitude, is really going to start with our next core shipments, our Q3 shipments, and that's the local Chinese market, not necessarily Nokia, but the local OEMs. And that's where we get our strong confidence to come up with close to approximately 40% growth in sequential revenues, growth revenues next quarter.

Okay, thank you very much, and good job on the execution.

Thanks, Anil.

Your next question comes from the line of Gary Mobley with Benchmark.

Hi, guys. Your -- the midpoint of your revenue guidance for the fourth quarter is about $12.5 million, and you can really quantify the licensing revenue, but I guess implied in that overall revenue guidance, you're expecting a dip in licensing revenue. Are you guys just trying to keep the bar low there, or have you seen any deterioration in your licensing pipeline?

Well, Gary, we don't see deterioration in licensing. On the contrary, we have a very good and solid pipeline. The (inaudible), the growth that we are focusing or guiding for is what is driven by royalties. This is something that we would like to see going forward. This is something that you can predict. This is something that shows sustainability in our business.

Licensing is pipeline related, it's timing related. So we keep the [range] -- we keep it -- it's not the method of being conservative (inaudible), but we keep it at the level that we feel comfortable.

But again, the growth is worth it. This is -- we are -- as I said in my prepared remarks, we are expecting approximately 40% sequential growth in royalties. This is something that this company never showed in the past. Never.

Gary, let me add that, again, if you back up the numbers like you have, you do get similar licensing revenues. I don't think there's any deterioration whatsoever. You get similar levels that we had in the last three quarters, and this is what Gideon stated is our comfort zone. It could better, time will tell. But this is really the comfort zone and taking the business in a much more serious manner, and then there will be (inaudible).

Okay. And regarding the expiration of two prepaid agreements during the fourth quarter, just to try to quantify the impact of that, that would translate into what, approximately a $500,000 step up in quarterly royalty revenue? Is that how we should think about it?

I think that's a reasonable number, at least $500,000 a quarter. We'll see that -- we talked about Q4 shipments of this year. We'll see that starting next year. And I think that will be pretty much the end of the prepaid (inaudible) or (inaudible), from the (inaudible), they'll just start reporting, a continuous report, actually, the number of units shipped to our customers on a quarterly basis.

All right. Thank you, guys.

Thank you.

Your next question comes from the line of Vijay Rakesh from Sterne Agee.

Yes, hi, guys, good quarter here, and good guide, I guess. Just looking, if you will give me some more color on the 4G side, how do you see that side developing over the next year? And royalty license rates there, LTE rates?

Yes, okay. First of all, thanks for the question, Vijay, because you know, a lot of good news in this conference call, but I mentioned a significant (inaudible) significant semiconductor company. I was (inaudible). I was speculating that you'll start grilling me on the whole big significant semiconductor company, which I will not, of course, comment. So that comes to your question of LTE.

We -- our pipeline is, I would say, very encouraging on LTE. Companies are taking us not just by the way -- not just for handset, or what we call connected devices, but also in the networking side. This is the market that we [learned]. And now with (inaudible), we have the CEVA-XC, we are ahead of competition on the technology front, (inaudible) come back maybe full scale and Texas Instruments. So LTE is looking (inaudible), pipeline looking very good. Going back to the question about royalties, of course, royalties for LTE is higher than other standards.

And when you look at [software] licenses like Samsung on the 4G side, do you see more handsets coming out as you look at first half next year also, on that?

I wouldn't say -- I think (inaudible), I did -- I gave, I think, strategy analysis to somebody. The LTE (inaudible) regard, you're seeing that 2011 (inaudible) on what -- it won't be that significant in volume. It's still less than 1% of the overall market, but in Q3, we're going to get a sizeable (inaudible) of [200, 400 million].

Got it. And lastly, when you look at the China market, you mentioned the low end handsets, and that you are seeing some more things turn in your favor. Can you give a little bit more color? It looks like you have a good presence there with Spectrum and Infineon through Nokia that -- what are you seeing as you look out in the next year in the China market?

Let me give you kind of an overview how we see this -- this is not China market. It's basically the combination of emerging markets, China, India, Indonesia, Bangladesh. It's huge market volume there.

Now, in general, a lot of the development OEMs' work is done in China. In general, for the emerging market, there are two types of suppliers, OEMs. One, what we call international, (inaudible). This the largest one. Nokia and Samsung both are working with us.

And then there is -- you know, the domestic OEM. These (inaudible) guys, they do development of forms, not just for (inaudible), just for China, but (inaudible) the emerging market. Also, local (inaudible), and (inaudible), everything else, and the largest one is (inaudible), also working with us. And then there is range of companies, (inaudible) market volume, that are developing 2G and voice phone and smartphone, mainly in 2G. Most of the world is 2G, not 3G. And that's the volume that we are doing.

This (inaudible) -- the China OEM, not the international one, was dominated by MediaTek for many years. But how MediaTek becomes the dominant player. And now, and there has been 85% to 90% market share.

Now this (inaudible) changing, (inaudible) struggle, and there are a few other companies that are getting into this market, specializing in market, and (inaudible).

Okay.

So overall, by the way, it's -- we are expecting -- we are focusing on -- not us, but a company, (inaudible), companies like (inaudible) supply, thinking about $1.2 billion. This is not -- if you add up all this market, you ended up with more, and this is just phone, not just connected device, you would end up more. It's not something that is tracked accurately like the other international [brand], but the market is bigger. And we are now getting there. It's not a surprise for us, because we were working with this customer for a while. The timing is something that we (inaudible). But now it's eventually (inaudible).

Got it. And one last question here. The Intel acquisition on Infineon, have you seen any progress? Have you seen -- are you seeing -- are you getting more traction now that Intel is kind of a player in this space too?

We believe this will be the case, but right now, they are still have to conclude the deal. It's not -- they are not done with (inaudible). I think they believe in January, they will start working with the one [company].

Got it. Thanks a lot.

Thank you.

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

Hey, good morning, and congratulations. Nice to see this stuff we've been looking for coming in. A couple boring questions, first, for Yaniv. Yaniv, what was the backdrop for prepaid going up so much in the quarter?

Going up? I'm not sure I understand the question. It went down for --

Prepaid expenses went from $3.9 million to $5.5 million sequentially. Maybe you want to come back to me on that one.

(multiple speakers), no, no. Prepaid covered royalties. No, just on the [EDA] related payments, and (inaudible) tax return payment that we get from the tax authorities.

Okay. And how long are you hedged, and when do you think you'll have to be back in the market to hedge for next year's OpEx?

For this year, we're fully hedged. Next year, we'll have to -- the beginning of the year, first quarter, come up the next guidance, and we'll know exactly. We are set to guide an FX rate for the budget and for our operations next year. So it will happen early next year, I believe.

How much of that cash flow was from options exercise?

In the last quarter, $2.8 million were for option exercises. $4.6 million was from operating activities.

What was CapEx?

I don't have it here handy, but I believe a few hundred thousand dollars. Nothing material.

Similar to last quarter?

Yes. Yes.

Headcount?

300,000.

Okay. Anything go on with headcount?

The headcount is similar to what was last quarter, 184 people.

Okay. Now, the -- Gideon, was your only X or XC license to the semiconductor company that you mentioned, the big deal, the big semi company?

It's a semiconductor company, yes. The big one.

Did you only have the one for the XC?

That's the only one this quarter (inaudible), yes.

How's -- how should we view the pipeline for the XC323? Is -- you had a pretty impressive announcement about that product last week. Have you already recognized your first -- or already talked about your first licensees for that? And when should we expect to see additional ones?

We didn't -- we don't have yet a customer for that. By the way, the three -- the three was, we did it, you know, that to get into the networking, the base station market. Base station is not just the macro base station. It's going to pico (inaudible) in front of that.

And when we got all these different segments together, sizeable market, we have a very good pipeline into this one. I wouldn't rule out one of the (inaudible) in this quarter.

Okay, so those will be the first ones (inaudible)?

Yes.

And now, this media -- this market share with the indigenous manufacturer in China, clearly that's exciting news. But you also have MediaTek fighting back with new products. What is your view of the sustainability of the success from [EmStar] and Spectrum?

Well, it's a good question. The only thing -- you know, first of all, we are coming basically from zero into this market. The segment MediaTek is in is a new product coming, it does not (inaudible) the other (inaudible) good answers. It's a dynamic. It's a -- there is a lot of pressure on prices there. But the companies that you have mentioned, they have a very good product, a competitive product versus MediaTek. No doubt about it. They -- that's (inaudible) that they got, this kind of foothold there.

Okay. Appreciate the input. I'll catch up with you later.

Thanks, Matt. I think with regard to this specific market, and because we all know it's a significant market and it's pretty dramatic and dynamic, I think that we will rely a lot of what we know, what we get, from our (inaudible) from future guidances. I wouldn't take the whole market and then plug in some type of analysis or something, what is the market share we could gain over time, that (inaudible) from one quarter to the other, taking into account that now we have at least two customers that are shipping into this new segment. I think that would be the right way to tackle it and see how incremental that could be over the next couple of years.

Yes, what do -- you've got probably the two biggest ones that were previously the 15% that MediaTek didn't serve, and so that's changing pretty rapidly, it sounds like. You just -- should we think in terms of maybe splitting that market three or four ways? Instead of one company having such a vast majority?

Time will tell. That's very -- you know, that's the first quarter that we are getting sustainable revenues, sustainable royalties coming for this market. No doubt, (inaudible) the momentum goes (inaudible), and (inaudible), and by the way, don't (inaudible) is going there, (inaudible) strong relationship with (inaudible) and (inaudible) is the largest one.

So there are a lot of ways they are still of course doing very well, if you (inaudible), contracts (inaudible), they say that 2G is there now, their (inaudible).

And all of them are, I think, very good products, and let's wait for a couple of more quarters and see how it is indeed (inaudible). Keep in mind one thing. Without going to names, but into this market and players, we are the multimedia and application processor side. So we end up -- or, we may end up (inaudible) with two [cores] in the [chips, or] one core doing application processor [on that basis].

Well, since you brought it up, are you now licensing the Multimedia 3000?

No, we are not licensing the Multimedia 3000 for this market. It's only the Multimedia 2000 you can get HD and the 3D video right now, Rockchip. That's what Rockchip is doing, and other people are doing into the US. And that's good enough. The MM3000 will take you to the (inaudible) things that appear now in TV and not in mobile.

Oh, yes, I understand. But I was just asking, is that now licensable, or is that a next year event still?

No. MM3000 is the next -- second half of next year licensing.

Oh, that far out? Okay. All right, thanks a lot.

Thanks, Matt.

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

Hey, Gideon and Yaniv. Congrats on the good outlook here. A few questions. First of all, on the usage of cash, the cash pile always keeps growing. That's a very good work on that front. But anything that you guys are looking to do with this? I mean, are there any missing technologies or elements that you think you may need to acquire down the -- in the foreseeable future, or you feel pretty set as far as the (inaudible) competency that you have within the company?

In terms of technology and (inaudible), we don't [need] technology, because we had [need] something, I'm telling you, we would acquire it. What we are looking, in terms of use of cash (inaudible), is technologies that either take us to a market that we are not there yet, or provide some useful (inaudible) feature sets that I would say people don't -- becomes the next big thing in whatever market that we are.

We are evaluating a lot of technology. We are checking a lot of things, (inaudible) ideas. We didn't find here the right (inaudible).

But the growth in the next couple of quarters, years, the market that we've talked about, I really do not request, require us to do any M&A type of transactions, but manage the cash --

(multiple speakers)?

Daniel, did you get the answer?

Yes, I did. And then my next question, if you can refer to the -- you know, so right now, we should think about cash as something that you're intending for M&A, right?

Sorry, that's what?

Towards M&A, right? The cash? That's what -- how we should think about it. You're not going to distribute it to shareholders at this point in time.

We just answered. We are not going -- we don't need anything for M&A, so the cash is there because it's a profitable company with good cash flow. We have ideas what we could do with that, what other new applications or add-ons we could do. We announced a buyback program that has been active in the past and will be active in the -- under certain scenarios that the Board has decided, and that's the way to give money back to shareholders.

And I think I'm happy, for my role, at least, to be in this -- to have this problem on hand, of being profitable and generating cash. So I think pretty much, nothing has changed from the last few calls on that -- on this front.

Okay. And then, when you look at -- maybe I missed it during your discussion. On the consumer front, what do you think your market share is right now, and what do you see that's connected to prices and multimedia prices, say, two, three years from now? How do you see your pipeline evolving, and some of the products that you've been selling, as far as licenses, coming to production?

This is the same question we were asked, the first question on the call. So I don't want to repeat anything, what we have said, but there's no doubts we are making good and interesting progress mainly in the application processor over the next -- of the last couple of quarters. And we could take it offline, but I think that was the first question that was asked, and that's a very interesting market segment for us, going forward, the multimedia application processors, baseband, picocell, macrocell, there's a lot of these other markets that will.

Okay, great. Thank you. Good luck.

Your next question comes from the line of Doug Whitman with Whitman Capital.

Thank you for the outstanding quarter. I just have some quick -- because Matt's already asked all the super-smart questions. I just have some very quick questions.

Going to the cash, which as a shareholder, I'm very happy that you shepherd so carefully and continue to build, but could you comment, did you do any stock buyback last quarter? And I notice your cash is at $5.24 a share, so congratulations on the great cash growth.

Thanks, [Gary], good to hear from you. Yes, we said earlier that we have a $2 million share buyback program that we started off in June, and we were able to buy about 33,000 shares at an average of $11.30 per share before the stock started moving upwards and the buyback program was out of the range of the current guidelines that we have.

So we were active when we can, and will be active when we can in the markets, and take it from there.

And Gideon, I apologize, I know you -- but if you could just clarify on Broadcom, your comments, and I heard that you're going to be a supplier to 2G and 4G. Are you also talking about being the main supplier to Broadcom in 2G to 4G?

No, (inaudible). Broadcom, I believe. Because (inaudible), I was referring to (inaudible).

Okay, I apologize.

So Broadcom, the segment -- Broadcom [missed] in the cellular, the 4G. So in 2G and 3G, they used us. In the 4G, they acquired a company that also uses us, the CEVA-XC (inaudible). (inaudible) Broadcom in all their three generations.

Okay. And then, the last question, which is, if I'm picking up correctly, because of, in part, the major unnamed semiconductor company that's making an effort in wireless, is it reasonable to expect that licensing revenues, that you'll start to see some of that coming into your licensing revenues, not just royalties, in 2011 as well? New relations, new added agreements?

You know, at the end of the day, that's the goal, to increase every statement of their revenue that we can, because we really -- the more we license, at the end of the day, or in two years down the road, it will generate more royalties. So overall, the answer, that would be our goal, and for now, and in the past, we've been quite comfortable to be at the $4.5 million, $5 million'ish per quarter, and being able to maintain these types of licensing revenues if we can, because of this (inaudible) dynamics in the market, M&A activity in the market, new market segments for us, and we'll be able to increase it. That, of course, would be our goal and that's what we strive to do.

You know, Doug, let me tell you how I see the licensing activity, the licensing business. For me, it's more important to make sure that we license to the right company, the company we generate royalties. While (inaudible) companies that OEMs, that we -- that have this kind of capability.

I'm not running boldly on any startup or any companies that are based in the middle of nowhere to get -- to go for licensing. I am looking on the quality of the license and the capability of the company. And if you -- you know, every quarter, we have a major (inaudible), you know we have (inaudible), one or two semiconductor companies that license with CEVA-XC, other CEVA (inaudible), and the target market is where we want to be. And we continue our product. That's most important.

You know, if you end up one quarter, if we be $5 million and not $4.5 million, I will not make -- I will not be that excited about it. I will be more excited over the fact that this is a big company.

Thank you. It's great to see the dream become reality, so thanks for the great execution.

Thank you, Doug.

There are no further questions at this time.

Okay, well, thank you very much again for joining us today, and for your continued interest in CEVA. As usual, our IR department will be glad to further follow up and assist to understand the business opportunities and roadmaps for CEVA.

We will be attending the AeA Classic Financial Conference in San Diego on November 8, and invite you to join us there.

Thank you, and goodbye.

Thank you for participating in today's CEVA Q3 2010 earnings conference call. This call will be available for replay beginning at 11:30 am Eastern time today, through 11:59 pm Eastern time on Tuesday, November 2, 2010. The conference ID number for this replay is 15781514. Again, the conference ID number for the replay is 15781514. The number to dial for the replay is 1-800-642-1687, or 1-706-645-9291.

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