CEVA Inc (CEVA) 2011 Q2 法說會逐字稿

Good morning. My name is Chris, and I will be your conference operator today. At this time I would like to welcome everyone to the CEVA, Inc. second quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. (Operator instructions)

I will now turn the call over to Richard Kingston, Director of Marketing and Investor Relations. Please go ahead, sir.

Thank you, and good morning everyone. Welcome to CEVA's second quarter 2011 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 will provide guidance for the third quarter and fiscal 2011.

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 2011, market data from Strategy Analytics, [IDC], China's MIIT, and of certain customers incorporated herein, optimism about our customers' product pipelines and market penetration, optimism about our products, including the CEVA-XC and CEVA-M3000 product lines, projections relating to LTE and smartphone expansion, as well as the 3G expansion in China, and trends relating to Internet-enabled HDTV, 3D TV, and machine to machine devices, optimism about our ability to penetrate new markets beyond the cellular baseband market, as well as the positive impact on our business of these various factors.

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, 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 2011.

We are very pleased with our second quarter results, as we delivered a revenue of $14.4 million, which was at the high end of our guidance, and represents a 36% increase over the second quarter of 2010. Royalty revenue for the second quarter of 2011 was $8.3 million, a 60% increase over the second quarter of last year. Earnings per share on a non-GAAP basis were $0.22, 83% higher compared to the second quarter of last year.

During the quarter, we concluded eight license agreements. Seven of the agreements were for our DSP cores, platforms and software, and one agreement was for our SATA/SAS product line. Geographically, four of the license agreements were in the US, and four were in Asia. Target application for customer deployment are 4G and 3G baseband processors for handsets, infrastructure and smart grid, portable game consoles, and SSD drives.

The second quarter was an outstanding period for CEVA. Our results reaffirmed the key trends that have accelerated our growth in recent years, and our testament to our box product portfolio, and noteworthy customer relationships. Our strong licensing revenue has built a growing adoption of our CEVA-XC DSP cores, including three new agreements for products targeting 4G equipment.

Also, our other DSP products were selected for new design of mass market 3G phones and portable game consoles.

On the royalty revenue, we saw a strong increase of 60% compared to the second quarter of last year. Shipment volume increased approximately 5% sequentially, mainly due to increase in the [low cost] 3G smartphones and (inaudible) market segments, which helps to offset the other traditional off-Christmas seasonality effect in the 2G space.

Let me take a few moments to provide some additional details on our licensing revenues. As I mentioned, we concluded three new CEVA-XC agreements in the second quarter. The new CEVA-XC agreement with tier one OEM and semiconductor company, who plan to use the technology for 4G smartphones and smart grid equipment.

The common theme with this design win is the capability of the CEVA-XC to enable unit priced software based architecture, which represents multiple revenue protocols such as [MP, HSPA Plus, (inaudible)] with one DSP.

We have explained in the past that the CEVA-XC appeals to those new designs where cost and power consumption are key factors for large market adoption. For example, the available (inaudible) today such as the HTC Thunderbolt, Samsung Droid Charge, and the recent LG Revolution, are all using multiple chips to (inaudible) MPE and other standards.

This can be collapsed into one CEVA-XC baseband chip that will support all these radio protocols in a structure based architecture, thereby leading to lower power, smaller and cheaper products.

Our CEVA-XC market reach extends beyond handsets to a range of products collectively called machine to machine, or M2M. One of the new CEVA-XC agreement is with a customer that is focused on one of the largest segments of M2M, (inaudible). Ericsson expect that all types of machines, such as DVD players, refrigerator and traffic systems will soon be linked to a mobile network. In fact, Ericsson expect that there will be 50 billion wireless connections by 2020.

CEVA is well positioned to capitalize on this trend, and has already achieved numerous design wins with multiple tier one players for the CEVA-XC. This is an impressive achievement for a new product that's only been commercially available for one year.

Before handing the call over to Yaniv for financial and guidance, I would like to go through the main highlights of our markets and key customers.

First, the LTE space. According to Strategy Analytics, 2.2 million LTE baseband chips were shipped in Q1 2011, compared to 1.4 million for the entire 2010. Meanwhile, the adoption of LTE technology by operators represents the fastest growth scale for any mobile technology. The Global Mobile Suppliers Association, GSA, predicts that 208 operators in 80 countries are either operating LTE networks committed to an NP rollout in (inaudible), or otherwise actively pursuing the LTE technologies.

In recent quarters, we have consistently realized significant design wins in a number of different market segments (inaudible), including smartphone data cards, base stations, and smart grids. There are (inaudible) smartphones in service, such as the Samsung Droid Charge, (inaudible) i5510 in the Samsung (inaudible), SPH [Power] 900, that are enabled by our DSPs. We believe we are well (inaudible) to benefit from growth in LTE as it further evolves.

Smartphones. According to IDC, vendors are expected to ship total of 472 million smartphone in 2011, compared to roughly 305 million units in 2010. This figure will approach 1 billion units by the end of 2015. There are already numerous smartphone enabled by our DSP technology, among which is the latest Samsung Galaxy S2, a 4G phone that Samsung -- it is the company's fastest selling phone ever, with (inaudible) 3 million units within 55 days of its launch. Its predecessor, Galaxy S smartphone, was sold mobile 10 million units (inaudible) since its launch.

The [track] conditions for the smartphone market to further expands its volume is the availability of lower price smartphones that can reach emerging markets such as China and India. We see this trend as an opportunity to capitalize on our strength in local slower power DSP, to expand our market reach and revenue base. For this purpose, we have recently started to introduce an (inaudible) index technical evaluation by a potential customer for newer MM3000 multimedia technologies.

This product target application process for portable devices such as smartphone and tablets, in addition to digital home devices such as set top boxes and small digital TVs. MM3000 is the only IP platform that can support both HD video, including 3D video, and vision on one DSP. Initial feedback by key customers is promising.

China. According to China Ministry of Industry and Information Technology, MIIT, the number of mobile phone users in the country reached close to 900 million users during the second quarter of 2011. To put this in perspective, the US currently has about 300 million users.

China presents a market growth opportunity for 3G technology. Where MIIT data, the current (inaudible) penetration rate is only 80 million users, or 9.5%.

The 3G migration in China and India is one of the key strategic growth in Turkey for our customers. We are well positioned to execute on this opportunity as our customers can leverage their experience and cost-driven design to further expand these technologies.

As you may know, a 3G baseband design is significantly more complicate than 2G designs. MediaTek is (inaudible) delayed in the 3G product ramp for more than a year, to continue -- due to continued technology [missteps], while our partners, Intel, Broadcom and [STL] (inaudible) gained design wins with local brands with high volume potential, which (inaudible) enhances CEVA positioning in this very attractive market.

Broadcom. In its first quarter results, Broadcom said that it expects a decline in its revenue from baseband in the second quarter. (inaudible), this is not a market share related issue, but more than a timing issue regarding (inaudible) largest customers. However, since yesterday, second quarter conference call, the company stated that its mobile and wireless business will rebound sharply, up double digit driven by strength across all lines of business.

The company said to have recently achieving (inaudible) 3G design wins with three more key customers, VP, (inaudible), and BCN. Also, it believes business of its 3G products at Nokia will start in 2012.

All but (inaudible), including the two new recent single chip baseband and application processor for low cost Android-based smartphone, the BCN 21654 and the BCN 28150.

(inaudible) continued its strong progress in its two main markets, the 2G featurephone for emerging markets, and the (inaudible) DMA, the 3G version for China Mobile. Industry forecasts expects the market of stripped down handsets to grow to 750 million units this year, up from 620 million a year ago.

Addressing the 2G market, (inaudible) we continued to introduce two new chips, the [XC-6610 and the XC-6620], a low cost single chip that combines baseband and advanced multimedia for a low cost featurephone.

On the 3G front, industry (inaudible) predict that (inaudible) should have approximately 40% to 45% market share of the [TV SEVMA] chipset market in 2012. All (inaudible) chipset for (inaudible) incorporate CEVA DSPs.

(inaudible) front. So Strategy Analytics, although 50% of Samsung 2G phones, including its dual SIM operating are all -- they are all CEVA based. Also, Samsung Galaxy S4G and(inaudible) 4G, two HSPA class smartphones, are enabled by (inaudible) chipset, and are also based on CEVA DSP.

Last but definitely not least Intel showed 98% year over year growth in Q1 2011, versus the prior year's Strategy Analytics report. It is mainly due to a strength in smartphones, and 2G and 3G featurephones.

Also, Intel takes the HSPA Plus platform, (inaudible) 6260, is featured in the Samsung Galaxy S2 smartphone. All Intel baseband chips are CEVA based.

So to summarize, we believe factors driving our business remain strong. Semiconductor companies and OEM are realizing the contribution and the value of our technology and IP mobile as enablers to effectively leverage the (inaudible) high value markets. We are particular encouraged by strong licensing activity and pipeline with CEVA (inaudible).

Also, the (inaudible), for our new MM3000 market (inaudible) product line indicate that our potential customers believe the technology offers a compelling value proposition, thereby enabling promising licensing opportunities going forward.

Finally, we continue to show consistent success in our financials. In particular, when comparing the first half of 2011, and the first half of 2010, our total revenue increased 39%. Royalty revenue increased by 72%, which resulted in a significant 123% increase in non-GAAP operating income, and 105% and 88% increase in a non-GAAP net income and EPS respectively.

With that said, I turn the call to (inaudible) Yaniv for financials and guidance.

Thank you, Gideon. I'll now review the results of our operations for the second quarter of 2011. Revenue for the second quarter of $14.4 million, at the high end of our guidance range, reflecting a significant 36% year over year increase. The revenue breakdown is as follows.

Licensing revenue was $5.2 million, reflecting 36% of total revenues, 13% higher than the second quarter of last year, during which we recorded $4.6 million.

Royalty revenue of $8.3 million, reflecting 58% of total revenue, and 60% higher than the second quarter last year, during which we recorded $5.2 million.

(inaudible) revenues for the second quarter of 2011 and 2010 were $0.9 million, which accounted for 6% and 8% respectively from total revenues.

Our growth margin was 94%, a record high on both GAAP and non-GAAP basis, compared to 92% for both for the second quarter of last year.

Next, to the quarterly operating expenses. Research and development expenses of $5.4 million for the quarter, including approximately $484,000 in equity-based compensation expenses. Now, the marketing costs were $2.3 million, including approximately $255,000 of equity-based compensation expenses. And our G&A costs were $1.7 million, including approximately $371,000 of equity-based compensation expenses.

Our total operating expenses for the quarter were $9.5 million, which included an aggregated equity-based compensation expense of approximately $1.1 million, approximately 21% higher than the operating expense level for the second quarter of 2010.

Our total operating expenses for the second quarter, excluding equity-based compensation expense, were $8.4 million, reflecting the mid to upper range of our guidance, approximately 14% higher than the operating expense levels for the second quarter of last year, and similar to the level we recorded in the first quarter of this year.

US GAAP operating margins for the second quarter increased 57%, to 28% of sales, from only 18% for the same quarter last year. On a non-GAAP basis, operating margins for the second quarter, excluding equity-based compensation expense, increased 58%, to 36% of sales, from only 23% for the second quarter of last year.

US GAAP operating income more than doubled in the second quarter of this year, compared to 2010, from $1.9 million to $4 million. Non-GAAP operating income increased 114% from $2.4 million in the second quarter of 2010, to $5.2 million in the second quarter of 2011.

Interest and other income for the second quarter was $717,000 higher than our estimates, due to some FX effects, and higher cash balances.

On the tax front, we recorded a quarterly tax expense of $0.6 million on a US GAAP basis, and a tax expense of $0.5 million on a non-GAAP pretax income basis. This accounted for 13% and 9% of pretax income, respectively. The changes from one quarter to the other in our tax expense are due to the geographical nature of the deals closed and recognized within the quarter.

US GAAP to net income for the quarter increased significantly by 94%, to $4.1 million, and fully diluted net income per share increased by 70%, to $0.17, which compares to $2.1 million and $0.10 respectively for the second quarter of 2010.

Non-GAAP net income doubled by 102%, to $5.4 million, compared to the same period last year. Non-GAAP fully diluted net income per share increased 83%, to $0.22 per share compared to the same period last year. This figure excludes approximately $1.2 million, and $500,000 of equity-based compensation expenses, net of taxes, for the second quarter of 2011 and 2010, respectively.

In other related data, shipped units by CEVA licensees during the second quarter of 2011 were a record 247 million units, up 93% and 5% from the second quarter of last year, and first quarter of 2011.

Of the 247 million units shipped, 222 million units, or approximately 90% of, were baseband chips, and reflect 4% higher volume as compared to the prior quarter, in which 213 million units of baseband chips were shipped.

As of June 30, 2011, 29 licensees were shipping products incorporating our technology, the same as the previous quarter, which reflected 38 shipping customers under licensing agreements.

As for the balance sheet items, as of the end of June, CEVA's cash and cash equivalent balances, marketable securities, and long-term bank deposits reached a record high of approximately $153 million, compared to $143 million as of March 31 this year.

During the second quarter of 2011, we generated positive cash flow of approximately $9 million. Our DSOs for the second quarter of 2011 was 23 days, compared to a record low DSO of 7 days in the first quarter, and approximately 40 to 55 days in January for the prior quarters.

Now for the guidance. As discussed earlier, we are experiencing a healthy licenses pipeline and backlog for DSP technologies. On the royalty front, we did not get all the royalty reports yet for the second quarter shipments, and we are still missing a few important reports.

In general, we can state that we will [trend] to record slightly higher sequential royalty revenue for the third quarter, powered mainly from the growth in the 3G smartphone, which will somehow offset (inaudible) in the specific, but rather large customer in the 2G space.

With regards to our full year guidance, we are adjusting it upward again, based on actual first half results, and guidance for the third quarter, which I'll elaborate in a moment.

Our guidance for the first -- for the full year. Total 2011 revenue is expected to be between $57 million to $59 million. Gross margin is expected to be in the range of 93% to 94%, slightly higher than in our prior guidance.

Operating expenses, including equity-based compensation, are expected to be higher than 2010 levels, as we explained on prior calls. Our overall operating expenses are forecasted to be in the range of $36.9 million to $38.9 million.

Annual equity-based compensation is forecasted to be approximately $4.8 million, with approximately $0.2 million in cost of goods.

Our annual operating expenses, excluding equity-based compensation, are expected to be in the range of $32.3 million to $34.3 million, and has not changed from our prior guidance.

Interest income is expected to be around $2.3 million. Tax rate for the year is expected to be approximately 13% on a GAAP basis, and 12% on non-GAAP basis.

Share count for the year, in the range of 24.3 million to 24.5 million shares. And to summarize, our US GAAP EPS is expected to be in the range of $0.64 to $0.68 per share. In our non-GAAP EPS, excluding the aggregate $4.8 million of equity-based compensation expenses, we expect it to be in a new high range of $0.82 to $0.88 per share.

As for the guidance of the third quarter of this year, revenue is expected to be in the range of $13.8 million to $14.8 million. Gross margin is expected to be between 93% to 94%.

Our operating expenses, including equity-based compensation expense, are expected to be slightly higher than the second quarter of this year, on a GAAP basis, due to (inaudible) related expenses, and in the range of $9 million to $10 million.

Of our anticipated operating expense for the third quarter, $1.3 million are expected to be attributed to equity-based compensation expense, so our non-GAAP operating expenses are expected to be slightly lower than the second quarter, and in the range of $7.7 million to $8.7 million.

Interest income, net, is expected to be approximately $600,000. Tax rate for the third quarter, approximately 13% on GAAP and non-GAAP basis. Share count in the third quarter, 24.3 million to 24.5 million shares. And to summarize, our US GAAP EPS is expected to be in the range of $0.14 to $0.18 per share. In our non-GAAP EPS, excluding the aggregated $1.3 million of (inaudible) related expenses, is expected to be in the range of $0.19 to $0.23 per share.

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

(Operator instructions) Your first question comes from the line of Joseph Wolf with Barclays.

Thanks. Two questions. One is that some of the CapEx for the next generation LTE network seems to be fast tracked with some large carriers, at least in in the United States. And I'm wondering if that's showing up in your design wins, order patterns, and if things are moving faster than you expect.

Second question would be, it's global trends in the iPad -- or a tablet -- you're calling it the iPad, but the tablet market seems to be only the iPad right now, and I'm wondering what CEVA is seeing with some of the non-handset in the tablet world right now.

Okay, Joseph, it's Gideon. Let me take these two questions. First of all, regarding LTE, we do see (inaudible) designs starting for LTE. As I mentioned in my prepared remarks, we had three deals for this quarter, we have a pipeline on LTE. By the way, both on the handset side and the infrastructure, the infrastructure is a bit more advanced, because for LTE, we make the infrastructure first. So that's when it comes to the LTE question.

Now, regarding the tablet versus handset, we don't know exactly what -- as you know, LTE tablets, some of them or part of them remains the modem, 3G or LTE going forward. We don't know exactly the share of how many tablets are with LTE or 3G. But I believe some of them are there, but I don't have a definite answer for this.

But Joseph, maybe yes, if you look at our customer base, each and every one that has the baseband, especially the LTE solution, and we could look at Intel, Broadcom, STE, (inaudible), are all targeting the same market that you just mentioned. So -- and they will benefit from this growing market, other than the base, the traditional handset, of course, that will automatically be reflected in our royalty numbers and business, because we will enjoy that growth of the exponential market on top of the traditional (inaudible) phones.

One more -- maybe indicative to the extent of the design wins that we have for tablets in general for a data driven product, it's (inaudible), you know, make this conference call. They spoke about (inaudible) their customers are doing the modem or the data cards for tablets. That's 100 design wins so far.

Great. Thank you.

Thank you, Joseph.

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

Hey, good morning. A couple housekeeping items to start with. Could you give headcount, and then differentiate your cash flow from operations versus OpEx, and then -- and provide CapEx, to start with?

Yes, headcount, there were 192 people. And for the end of June, there were a few more mainly in R&D, and some technical support people across the globe.

Our CapEx was about $150,000, and (multiple speakers) -- our cash flow, $3.8 million from operating activities.

Okay, so the other [5 and change] is from options exercise?

About -- yes, about -- there is about just shy of 5 from option, and some tax related -- any cash flows.

What was the linearity of the licensing like in the quarter?

Well, we closed [ABO]. I think that this time around, it is (inaudible) [linear] compared to the traditional business in the IT space, which is usually, or has been in the past, more back end loaded. I think the reason is the same reason Gideon just explained about, the prior question about the LTE adoption, the (inaudible) and Q1, we see (inaudible) likes bigger than Q2. I think that we are seeing a pretty strong and healthy licensing environment, and that's determined a little bit, maybe, the rules that we have been used to in the past on the licensing front.

What do you -- do you see licensing up or down as a percentage of revenue in the third quarter?

It was 46%, versus 34% last quarter. So, you know, slightly higher, but still about $5 million. And this -- I think that's a good benchmark for us, we hope to continue with. So (inaudible) to keep (inaudible), we plan to continue.

Okay. Were there any catch-up royalties?

No. No, no, no.

Now, what portion of the -- I know you mentioned some CEVA-XC licenses. What portion of your DSP licenses were for HD audio versus baseband?

90% of our baseband, including the quantity. We said that in the prepared remarks, (multiple speakers) --

No, I was talking about licenses. I was talking about licenses.

Oh, sorry. I think most of them were (inaudible). Out of -- (inaudible), most of them are baked in. Yes. We have (inaudible) revenue, (inaudible), the majority was based on (inaudible). Based -- but in every segment of it -- let me say, six out of the [seven], we have (inaudible). Six out of them was based on (inaudible) deals.

Okay. And then, you mentioned multimedia 3000. Sounds like you're on schedule with that one for license of -- to license in the first quarter of next year. Is that the right takeaway?

I believe, or we plan, at least, or target to do it earlier than that, than in 2011.

Okay, so, fourth quarter, right?

Somewhere in the second half.

Okay, sounds good. I congratulate you for pushing the retained earnings into the positive for the first time.

Yes, thank you. (inaudible) later on, we figure.

All right. That's it from me.

Thank you, Matt.

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

Hey, guys, a couple of questions. You talked about some weakness, or softness with a large customer. Can you give a little color? And does your guidance account for that weakness, or you're accounting for some revenues from that customer?

Well, you know, it's a bit confusing here. We are guiding for our next revenue, which reflects Q2 level shipment. And as you know, in the quarter, there was a tier one customer that has issues with inventory in China, with the (inaudible) technology. So that's the (inaudible), and yes, we account it in our guidance.

So --

Yes, and Anil, maybe to give a little bit more color, just to explain, (inaudible) direct customer of ours, but an end customer. (inaudible), an OEM, using our baseband (inaudible) different (inaudible), our (inaudible) customers.

So this issue was a China-specific inventory issue?

Yes, yes, yes. And based on yesterday, conference call of Broadcom, this looks like behind us. (inaudible), next quarter.

Right. Now, when I look at the balance sheet, deferred revenues went up, I think, first time I've seen the move in the deferred revenues. Can you explain what happened there?

Yes, sure. We closed the deal with a tier one strategic player, for one of our technologies, and had additional services that we had to work on as part of that licensing deal. So we are not able to recognize that in Q2, and we'll be able to recognize that later on, most likely in Q3, when we finish the additional services around the DSP core.

We got paid for that deal, this is why you see it in deferred, but it was not recognized yet, and will probably most of it or all of it in Q3.

So that was tied to the licensing business?

Correct.

And finally, can you comment about how should we be looking at your ASPs? I mean, clearly, you've had some good volumes, but you know, the ASP, is it a mix driven, or is it pricing pressure driven? Going forward, how should we be looking at that?

No, I don't think anything has changed in our model, pricing, or any of the deals. And essentially, we know that there are different (inaudible) functions and different agreements what we have, if our customer reached a certain level, we just had a lower step function with regards to a single customer in the 2G space. So when we reach that lower level, from now on, any incremental volume should increase the overall royalty revenue for us, and from time to time, I think the mix is with new customers that start kicking in (inaudible) will pay higher royalties because of this mechanism. And when you get to certain levels, there could be a step function downwards from time to time.

So I think this is exactly the same model we had before. This time around, we just experienced this step function, lower step function. And interesting to mention, and I think -- I'm not sure if you highlight this enough, our 3G smartphone (inaudible) market share increased. So we are still more and more, and we believe the mix going forward will be toward 3G and we progress, and our customers progress, and of course, that's (inaudible) also higher ASPs, and higher [content] for us.

And finally, Gideon, would love to hear your -- kind of macro thoughts. There's obviously been some concern about slowdown weakness, macro related issues. You've referred to some inventory issues in China. But what are you seeing out there, and how do you look at the second half of the year, from a macro point of view?

Yes. From our perspective, when it comes to the handset space, I -- the way we see it is, 3G is growing. We don't see, at this stage, softening. There are softening, another QUALCOMM may claim about softness. On the other end, Broadcom see it strengthen. It's more or less company related.

The inventory issue is, again, a specific customer issue. It's not the industry light of things.

So it all relates to customers, specific issues, competitive landscape. So at the end of the day, it's a zero sum game, so if Nokia (inaudible) gains, and you have to be on -- you know, you have to be on the right track. We are now something becoming the -- go IT -- I believe it's going to be the largest handset maker, and we are all about the (inaudible).

All right. That's all for me. Thank you very much, guys.

Thank you, Anil.

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

Thank you. Hi, Gideon and Yaniv. Congrats on the ongoing execution. A couple of questions. Yaniv, can you provide us just a little bit more details on the 10% customers that you had in the quarter? Or (multiple speakers) --

Well, we had two 10% customers only in Q2 versus four in Q1. So that means that -- you do the math. (inaudible) you will find, it's a little bit of a different (inaudible) in the first quarter. None of that 10% exceeds 15%, so that's a little bit more color on this quarter.

Okay. Can you mention who they are?

No, we never do. They are large customers, large players, of course, because usually a 10% customer, they're either large, multi-use type of licensing deals, or large royalty payers, or both. So it's (inaudible). So this is usually the combination when we do have a 10% customer, it usually comes from a large one-time licensing deal or ongoing large (inaudible).

Great. And I think, maybe it was on your fourth quarter earnings call, you guys pointed to very strong royalty business that did come in as expected. And then, on that call, you kind of lowered the bar a little bit, or tamed some expectations on the licensing side. And it seems like so far, in the first half of the year, the licensing business was pretty strong.

You did refer to that a little bit on the call, but has anything specifically changed within the market, or within your execution that is driving the ramp-up in the licensing business? Are there any specific metrics or drivers that we should be noting going forward, and on this front? And how should we think about it into 2012? I have to base it -- (inaudible) a little bit higher than what we expected in the licensing segment.

Yes, Daniel, let me try and take it. I wouldn't go to 2012. You know our approach about licensing. We are taking it one step at a time, we see. The (inaudible) you see update in the licensing, which needs to do in the last two quarters of the year, is the need in the market for a (inaudible), and an engine that we are providing (inaudible) that allows you to basically to support multiple [standouts], which I elaborated in my prepared remarks. This will drive the movement.

Three agreements for CEVA in Q1, another three in Q2, this is an outstanding achievement, and mainly -- and it shows that there is a market for this kind of product.

I wouldn't think it (inaudible), we have in the second half of this year -- well, we are now in the second half of the year. We have another new product which take us to another market. Then in (inaudible), the trend is positive. But we have to see how things are progress.

Okay, and then just last question from me. Maybe I missed it. The DSP market share that you have right now overall in the handset market? And also, cash (inaudible), if you guys are amassing that cash power, which is great. Any update on that front?

Nothing in particular, pretty much the same count that we had in prior quarters. What you are trying to look now, and how to grow the business into these new markets that we mentioned and talked about earlier, we already made good progress in moving out of the traditional baseband for handsets. We moved to infrastructure, we're moving to the same CEVA-Ericsson, especially the MM3000 solution, to continue to set the box to a brand new market, and from there, this types of market we would like, and look for an add-on software pieces, or capabilities to enhance our offering.

So I think you can do -- put the cash to work in the next twelve months. It would be for small type of features, technology that we are missing, that will enable us to get and penetrate the new market, with very interesting opportunities and royalties, and of course, the first (inaudible) licensing. And so, now this is the way we are targeting to put the cash to work.

Great, and just, market share in the handset space that I might have missed earlier?

Ah, sorry. 41%, same number as last quarter.

Okay. Did anything change in the stats or something like that, or the definition, or is it just because you had -- it reflects of the issues with one of your key customers?

No, I think it ought to do with what we talk about, large flare in the (inaudible) that changed a bit the mix. The overall revenue within our baseband increased by about 4% from Q1 to Q2, so we have gained more, but a little bit of a different mix from the market point of view. But we believe that this number should continue to grow as we go along.

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

Thanks, Daniel.

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

Hi, guys. I was hoping to dig down a little bit deeper into the one license deal which has a large service element to it. Just looking at your deferred revenue, it looks like it's probably $3 million above the norm, and you mentioned most of that will be recognized in the third quarter. So it looks like you've got 60% of your license revenue coverage just coming from that one service deal. So I'm just curious why you're thinking, perhaps, you know, the other six to eight license deals you might close during the quarter, as usual, might only [worth] $2 million.

Well, I think your calculator works pretty good in these very early morning hours. And the same goes with our model, the traditional guidance, the prospects. I think they call this together. I think we are taking our licensing revenues much higher, maybe not at the same magnitude as our deferred, but we still have to finish the services there, and they will -- that said, we will continue to work on other deals, and work hard in other deals and in other markets.

So I think you have the full picture, and we will take it step by step and see where we get.

Okay. You mentioned this particular license arrangement with a service element is with a tier one customer. Is this an indication of, perhaps, a slight change in CEVA's licensing approach, and might there be other tier ones customers identical to this one wishing to engage with CEVA, perhaps as a result of the transition to 4G?

No, there is no change in the [cruxes]. They are -- our approach is to do a (inaudible) share in IP, the customer taking and giving (inaudible).

But from time to time, we are getting feedback from customer. It's not a -- it could be applicable for other customers as well. And we are -- we will do this work. But in general, I would say that the multiplication slightly (inaudible) of the (inaudible) as well.

Okay. How many first time licensees did you have during the quarter, and what is the (inaudible)? And that's it for me, thanks.

(inaudible). Well, one -- I think it's one. One or two. Two. Yes. Gary, one or two.

That's it for me. Thanks, guys.

Ah, okay, thank you.

Your next question comes from the line of Jay Srivatsa with Chardan.

Hello. Thank you for taking my question. Looks like ARM yesterday, looking beyond Q3, were a little cautious about Christmas sales, and I think Broadcom also talked about some weakening in consumer spending. Could you address what you're seeing out there? Is that of concern to you as you look ahead to the second half?

Yes, you know, our -- the only way I would call it in the handset space, or in the cellular space, not too much in the consumer. You know, the consumer overall contribution in the business is about 10%. 90% is baseband and cellular.

So there is a consumer issue, where the consumer, in the form of things that people are buying for home, we don't see it from (inaudible).

When it comes to cellular, our business is very much spread. We have emerging market 2G, we have 3G going into emerging market, 3G going to smartphone. So it's spread all over the place, and there is, in specific niche or segment, an issue, we'll find out. But right now, we don't think.

All right. Looking beyond fiscal '11, as you look at your cash position, are there any specific areas where you are making capital expenditures that could come to bear for you in the next year or so?

Capital expenditures, no. I think -- (inaudible) remember in the regular CapEx in the (inaudible) base sales, it's mainly for our engineers, the computers, the different software, (inaudible) tools. This is the main CapEx and expenses for us on an annual basis.

I think when we talked about incremental add-ons, it was around -- potentially, I mean, small M&A transactions of add-on technologies. Not necessarily from the CapEx, what do you call it, (inaudible) for that to be CapEx.

Thanks for answering my question.

(inaudible), thank you.

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

Hi, guys. Just mentioned -- just on the licensing side, you mentioned, (inaudible), you mentioned that one of the licensees that (inaudible), do you see to update your core numbers, the -- when you finally get those numbers, do you think you'll update those, or --

We -- how to say? Right now, we're not planning on changing anything (inaudible). We gave higher guidance for Q3 for the whole year, they're in line that we increased our top line, but we did not increase our non-GAAP operating expenses for the year ---

I understand.

--- when you're seeing the leverage kick in. So for now, for now I think we are comfortable, and we'll see where we get to. But this has not been common practice. In the past, we always have, if you look even in prior years, every once in a while we did have some expenses, and if you recall, the expense of some of the R&D went to cost of goods because of (inaudible) completion, or some type of similar mechanism.

So, yes, I think it's a good position to be at, but for now, we were taking it business as usual, (inaudible) consuming to try to getting more traction.

Okay. And the single chip, there's the 3D that you mentioned. When do you see your customers sampling it, on the single chip?

The single chip, the application processor baseband?

Yes. No, no, the LTE and 3G combined, the 3,300.

Well, yes, I know. Well, in my opinion, you're going to see, since the beginning of next year.

Right. And lastly, you made some comments on MediaTek. Can you give some more color there?

You know, MediaTek is -- competes with our customers in the 2G space. In this case, it looks like our customers, and we have at least two significant -- one of -- two customers that really focus on the 2G. They are getting the market share and taking market share in the 3G. MediaTek is a newcomer. They don't have the design wins. They will have to meet their (inaudible) on Broadcom. Of course, Intel. Broadcom just announced that they have -- (inaudible), the (inaudible), (inaudible) and (inaudible). And that on top of Nokia and Samsung (inaudible).

So MediaTek will have to compete with all those guys.

Got it. Okay, great -- thanks.

Thank you.

Your next question comes from the line of Suji DeSilva with ThinkEquity.

Morning, guys. Nice job on the quarter. On the licensing deals, we've seen just a handful of layoff announcements. I know in the past, that's caused licensing, maybe, to slow down. Have you seen any hesitance in people in doing projects versus the past few months?

Well, working in the areas that we are, we are mustering the -- on the contrary, we see a lot of people doing LTE design, and a lot of them, by the way, are in China, mainly newcomers into the space, with all sorts of ideas of combining connectivity and baseband, and multimedia with baseband. So that's in the LTE space, and goes for the MM3000, the multimedia.

We see different types of players. All of them are looking for the integration of baseband and applications [also]. (inaudible) in 2014, 70% of the chips on the market in this space will be integrated. So we see application processor [guides] coming to us, and are interested in the (inaudible) and the fact that the [3 by 3] is the first platform, that's the easiest route for them. They just put the core, and then (inaudible) whatever. And this application (inaudible) that looks so modern, and we see modern guys that let strong multimedia, like 3D video, like imaging, where you need, for the [camera] functions still, they are coming to us for them (inaudible).

So to summarize, from this (inaudible) activity (inaudible), we don't see slowdown.

Very good. And then, are you guys -- how are you positioned for, I guess, the low end smartphone market, which is kind of on the come here in China, particularly?

Well, the lot -- you should note, around the low end smartphones, or at least from our standpoint, in two perspectives. One is more of the modems is EDGE. Just to give you an indication, you know, (inaudible) they saw just in a few days, last few days, in India, EDGE, they are confident over 3G.

Today, we get unlimited data capability with EDGE, even though it's slow, but it costs you about $4.00. If you wanted 3G in India, you pay $16.00 for 1.5 megabits. And so that, yes, we have the smartphone and other things. So what we see there in China, and MediaTek is an example, where the (inaudible) technology, by the way, for the multimedia side, we have small (inaudible) signal chip that the modem is EDGE, which is considered 2.75 or 2.5G. That's one thing.

The other thing is, the 3G smartphone, which is mainly under its base, and here, there are a bunch of companies that are integrating these in one chip, you know. Dell has one platform, Intel has one, (inaudible) has one. So this could be a very low cost modem, 3G, and not necessarily LTE in the (inaudible).

What did you say the cost was in India for EDGE versus 3G, it was $16.00, what was EDGE? I missed it.

I said that the operator fee for EDGE is $5.00 -- about $4.00 (inaudible). And if you compare it to 3G in India, it's $16.

Got it, great. And last question, on the emerging market, I think someone asked about your share in DSPs. Are you seeing a competitive dynamic change? Any new competitors coming in? Thanks.

In the (inaudible), no, (inaudible) in business.

Emerging DSP market, you know, the one you can see it in. I mean, are you seeing new competitors in your IP space?

Well, always there are competitors. Whenever we go for a licensing agreement, (inaudible) we get a competitor, or we find a competitor. I can say that we are the only company today that has the track record in the space, in DSP, the track record and the product portfolio. These are the two main strengths of us, versus compared to those.

Thanks. Nice job, guys.

Thank you.

That was our last question. And now, I'll now turn the call back over to Richard Kingston for closing remarks.

Thank you, everyone, for joining us today, and for your continued interest and support in CEVA. We will be attending the following upcoming conferences and events, and invite you to join us there. The 13th Annual Pacific Crest Global Technology Leadership Forum in Vail, Colorado on August 8th. Oppenheimer's 14th Annual Technology and Communications conference on August 9th in Boston. The Rodman and Renshaw Annual Global Investment Conference on September 12 in New York. G8, ThinkEquity's 8th Annual Growth Conference on September 13 in New York. And, the Deutsche Bank 2011 Technology Conference on September 14 in Las Vegas.

Thank you, everyone, and goodbye.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.