CEVA Inc (CEVA) 2012 Q1 法說會逐字稿

Good morning, and welcome to the CEVA, Inc. first quarter 2012 earnings conference call. All participants will be in listen only mode. (Operator instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Richard Kingston. Please go ahead.

Thank you, and good morning, everyone. Welcome to CEVA's first quarter 2012 earnings conference call.

I am joined today by Gideon Wertheizer, Chief Executive Officer of CEVA, and Yaniv Arieli, Chief Financial Officer of CEVA. Gideon will cover the business aspects and the highlights from the quarter, and Yaniv will then cover the financial results for the first quarter of 2012, and will provide financial guidance for the second quarter and fiscal 2012.

I will begin 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 second quarter and full year of 2012, market data from Wireless Intelligence, Strategy Analytics, and Informa Telecom incorporated herein, optimism about our ability to expand our adjustable licensing market, strength of the 3G and LTE markets, recovery and stability of the 2G market, and our ability to capitalize on these trends, predictions about Nokia and the impact on our business, as well as our projection of the number of CEVA-powered devices in the future.

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 ability of intense industry competition and consolidation, global chip market trends, the possibility that our 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 related 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, and welcome, everyone. We are pleased with our solid start to the year, which was driven by strong licensing revenues.

Total revenue for the first quarter was $15.1 million, at the high end of our guidance range, and flat compared to the first quarter of 2011. While we experienced some expected softness in the royalty growth, which was discussed during the fourth quarter earnings call, this was partially offset by better than expected licensing revenues of $5.1 million, resulting from important agreements with key and existing -- key new and existing customers.

Royalty revenue was $9.1 million, which was in line with the first quarter of 2011. Yaniv will further elaborate on our financial achievement, including our recent share buyback activities, and will also provide you with our second quarter 2012 guidance, and revised annual 2012 guidance.

Based on a few trends, which I will elaborate on shortly, we are taking a cautious approach at this time, and revising downward our annual 2012 guidance.

During the first quarter, we concluded eight new license agreements. Six of the agreements were for our CEVA DSP cores, platforms and software, and two for our SATA/SAS technologies. Geographically, three of the license agreements were in the US, four were in Asia, and one was in Europe. The new DSP agreements are with both new and existing customers, addressing smartphone opportunities in all of these market key growth segments, from local (inaudible) market, 3G handsets, to the premium LTE phones.

The targeted use of our DSP within smartphone extends beyond basebands into advanced voice and audio processing, that has become distinctive and differentiating features recently. This clearly illustrates the strength of our diversified product portfolio, enabling us to generate solid licensing revenues and future royalty stream from incremental DSP sockets.

On this point, I would like to elaborate on the key dynamics for our diversified product strategy. Although the last few years, we have gradually extended our product offering and customer base, both with regard to our core cellular baseband product and new multimedia offering, a relatively untapped segment for us. Our broad product portfolio for cellular baseband include DSP cores suitable for every flavor of the market.

Our TeakLite-III DSP is now being deployed for baseband processing by all of our key customers, targeting mass market 3G smartphones, where cost and power consumption are the key metrics.

In this respect, two of the licensing agreements signed during the first quarter of 2012 were for the TeakLite-III DSP, including a multi-use agreement for high volume W-CDMA and [PDSDMA] handset for emerging economies.

On the other end of the spectrum, for cellular baseband, we offer the (inaudible) most advanced DSP architecture, the CEVA-XC. At the Mobile World conference event in February, we launched our latest DSP for baseband, the CEVA-XC4000. XC4000 targets LTE advanced and the next generation LTE standard capable of 10 times the data speed of LTE, and also can be utilized for the first time to support Wi-Fi 8211 AC on the same processor.

The XC4000 represents a significant step up from its predecessor, the XC323. It is offered in a series of 6 DSPs, with different performance capabilities level, that can serve a range of wireless applications from handset to small cell base station and up to a macro base station. The base station spread is a lucrative market for us, where we can take advantage of our technology edge in DSP architecture, versus incumbents such as TI and (inaudible), to expand our visible licensing market, as well as exploit future royalties opportunities.

On the multimedia front, we offer audio and voice platforms integrating our low power DSP engines with a large portfolio of DSP software, offered by us or by our ecosystem partner. These audio and voice platform products are strategically aimed to address the transition to our high quality wide band voice calls, combined with sophisticated noise fluctuation technologies necessary to enable a grant LTE services such as Voice over IP and voice [recombinations].

In this respect, three of the licensing agreements signed during the first quarter of 2012 were for these exact applications, including a strategic agreement with a US-based company with an already strong presence in the mobile space.

Early last month, we launched a new DSP architecture, TeakLite-IV. This is the fourth generation of our successful TeakLite DSP architecture, and targets audio and voice application for smartphone, home, and automotive markets. TeakLite-IV is also in the series of four DSPs with various performance and [guidance] measures, and with a unique power management technology, allowing up to 40% power reduction versus its predecessor, the TeakLite-III DSP.

Now, let me make a few comments about trends in handsets, based on our DSP technologies. I'll start with Nokia.

After announcing its first quarter 2012 results, it is apparent that Nokia faces challenges in its business. As you may know, Nokia has two product categories -- smartphone, which is approximately 20% of Nokia's volume shipments, and mobile phone, which is approximately 80% of its volume shipment.

The issues Nokia is experiencing with its smartphones are widely discussed in the market, but it's important to note that CEVA DSP technology currently are not focused to the news in this product category. In the mobile phone category, Nokia Q1 2012 results and Q2 2012 guidance reflect a noticeable volume reduction, primarily due to competitions from China-based OEM with broader portfolio of featurephones with smartphone (inaudible), such as touch devices.

Nokia is a large user of CEVA-based chips. We are widely used in the Nokia 2G phones. However, 3G phones, we have noted in previous calls, that we are expecting to grow our market share within Nokia significantly, replacing the incumbent supplier, Texas Instruments. Our prior guidance for the year 2012 did take into consideration both continuing 2G growth and 3G volume ramp up for the second half of the year.

We believe that the underlying fundamentals behind the recent announcement by Nokia shed some uncertainty on the recovery in the 2G space, and the timing for the 3G ramp up. Per last night Broadcom earnings call, Scott McGregor stated that Broadcom no longer expects material revenue from Nokia 3G baseband this year.

We have decided, therefore, to take a prudent approach, and reduce the revenue contribution from Nokia, both in the 2G, and to a larger extent, in the 3G space for this year. We will continue monitoring Nokia progress, and will modify our guidance accordingly. We will provide more details on this later in a few minutes.

Other than the Nokia-related shortfall, our royalty growth trajectory remains on track. Let me provide you with more details on this trend. I'll start with the 3G space.

On what volume perspective, the 3G market is the sweet spot of the handset market. Both the transition from 2G to 3G in emerging economy, and the opportunity to capture market share from incumbents such as Qualcomm and TI drive our customer growth. But Wireless Intelligence, there are currently 1.4 billion 3G subscribers worldwide, which are expected to grow to 3.2 billion subscribers in 2015.

The dominant theme is bringing smartphone functionality to a lower cost phone factor that will extend smartphone franchise beyond (inaudible) devices such as [Alpha 4S] and Samsung Galaxy S2. According to research from Informa Telecom, 81% of the smartphone chips in 2011 were sold at a wholesale price above $200. This proportion is expected to decline to below 50% in 2016.

In China, operators are aggressively offering smartphone at as low as $150. This is exactly the price point that Samsung set for its low-end Android-based Galaxy Y that is enabled by our DSP.

We are encouraged by the progress our customers have in the 3G space. Although we cannot be specific at this stage on the magnitude of the 3G ramp up, we can say that in the first quarter, excluding iPhone shipments, we experienced more than 2X sequential volume increase for some of our key customers in the 3G space. We offer here an example of high volume products.

Broadcom continued to expand at Samsung, with phone models such as Galaxy Mini 2 and Galaxy Ace 2, in addition to the Galaxy Y that I mentioned above. This is in addition to Broadcom's new wins with China domestic handset suppliers, such as ZTE, G5 and PCL, and the pending volume ramp up at Nokia.

Intel came out with the Medfield platform, and the announced wins airphones with Motorola, [VTE], and (inaudible). It also gave a high profile 3G win at HTC with one of its smartphones, for its baseband chip set.

(inaudible) announced that it is equipped in the PDSDMA version of the Samsung Galaxy Note for China Mobile. It is the second Samsung smartphone powered by (inaudible), following the Galaxy SII, which started to ship at the end of last year.

Our customers are also taking a lion's share at Huawei new [phone mobiles]. Five out of the nine new Huawei phones announced in China for 2012 are enabled by our DSP, including two of its [Flexit] smartphones, the Ascend D1 and the P1.

As for the 2G space, the royalty revenue reported for this quarter, which represents the fourth quarter of 2011 shipments, reflects softness in the 2G phone shipments by China based OEM. From the royalty reports we collected from our customers in the 2G space on their first quarter 2012 shipments, it appears that, excluding Nokia, the fourth quarter of 2011 was the bottom of the trend, and there is already a step up in shipments and orders.

However, given its market maturity and the commoditization, competition is fierce, which puts pressure on ASP. Mediatek's CFO commented recently that it expects 25% to 30% year over year decline in the 2G ASP. As a result, we expect some decline in the royalty ASP, with specific to low tier featurephone.

In then general, the 2G market, which is shipping in excess of 1.3 billion units annually, is forecast to stay at this level through 2016, according to Strategy Analytics' forecast. This market has its own dynamic, and revenue growth drivers. In terms of local (inaudible) smartphone user experience upgrade for GSM to EDGE, the untapped market in Africa, and the promising machine-to-machine application. Our customers in this space are well positioned to address the market opportunities, and determined to capture share from the largest incumbent, Mediatek.

[OLT], according to market research firm Strategy Analytics, LTE phone shipments are expected to grow tenfold, to 67 million units in 2012. Yet, this is still very small market share, out of the more than 2.5 billion units annual baseband shipment.

High volume prospect is what attracts our customers who can also offer value in terms of low power and cost efficiencies. Examples include Samsung Galaxy Note for Verizon, which include a new version of Samsung LTE baseband chip, and enabled by our DSP, with an estimated half of the cost of their prior chip.

(inaudible) announced at the beginning of 2012 the availability of its first LTE chip, the LC-9610, designed at (inaudible) silicon, its integrated multiple federal standards onto a single chip, including PDMP, PDSDMA, and EDGE GSM.

Broadcom demonstrated its CEVA powered LTE chip at the recent Mobile World Congress event, and made general comments about field test (inaudible). We are currently expecting other customers, among which is a Tier 1 OEM, to roll out in the market LTE chips this year and early next year.

So to summarize our prospects and the trends in the baseband market, the 2G space carries the majority of the baseband volume globally. After one quarter of softness, volumes are getting back to normal levels, and we expect to maintain our strong foothold there.

The 3G segment possesses big opportunities for us to gain market share, as evidenced by numerous new handsets enabled by our DSP such as Samsung HTC and Huawei. In addition, we continue to believe that the Nokia transition to our 3G baseband customers will materialize.

As for LTE, although the market is still small compared to other segments, our customers would traditionally take a [follow up stance], have started to realize design wins (inaudible) testing and start initial production.

All in all, we believe that we are capable of powering 1.7 billion CEVA-based devices in three years' timeframe, (inaudible) 1 billion in 2011.

With that said, I now turn the call over to Yaniv, who will outline our financials and guidance.

Thank you, Gideon. I'll start by reviewing the results of our operations for the first quarter of 2012. Revenue for the first quarter was $15.1 million, close to the high end of our guidance range, reflecting a flat year over year comparison.

The revenue breakdown was as follows. Licensing revenues were $5.1 million, reflecting 34% of the total revenue, and similar to the first quarter of last year. Royalty revenue was $9.1 million, reflecting 60% of our total revenue, and comparable to the first quarter of last year.

Service revenue was $0.9 million, reflecting 6% of total revenue, 29% higher than the first quarter of last year.

Gross margins were 94% to 95% on US GAAP and non-GAAP basis, respectively. Again, very similar to the same period a year ago on a non-GAAP basis, excluding approximately $50,000 of equity-based compensation expense.

Our total operating expenses for the quarter were $9.6 million, which included $1.2 million of 123(R) related expenses, and our total operating expenses, excluding 123(R), were $8.4 million, reflecting the mid-range of our guidance, and are only 2% higher than the operating levels a year ago.

US GAAP operating margins for the first quarter this year decreased slightly, to 30% of sales, from 32% last year. And non-GAAP operating margins for both the first quarters of 2012 and 2011 were at 39%.

US GAAP net income for the first quarter increased by 4%, to $4.9 million, and fully diluted net income per share increased 5%, to $0.20. This compares to $4.7 million and $0.19 respectively for the first quarter of 2011.

On a non-GAAP net income basis, it increased 6% to $5.9 million, as compared to the same period last year, and our non-GAAP fully diluted net income per share increased 4%, to $0.24, as compared to the same period last year.

Other related data. Shipped units by CEVA licensees during the first quarter of 2012 were 278 million units, down 6% from the fourth quarter of 2011, and 18% higher than the first quarter of last year. Of the 278 million units shipped, 254 million, or approximately 91%, are for baseband chips, and reflect 5% lower volume as compared to the prior year, in which 266 million units of baseband were shipped.

As for March 31, 2012, 27 licensees were shipping and incorporating our technologies, one less than the prior quarter, and we had 36 shipping customers under licensing arrangements, again, one lower than the prior quarter.

As for the balance sheet, as of the end of March, CEVA's cash and cash equivalent balances, marketable securities and long-term bank deposits were approximately $163 million, compared to approximately $165 million as of the end of 2011.

During the first quarter, we generated positive cash flow from operations of approximately $6 million, offset by $9.5 million for our buyback program.

Our DSOs for the first quarter of 2012 were 33 days, as compared to 30 days for the fourth quarter of last year.

As we previously disclosed, in 2010, our Board authorized a share repurchase program of up to 2 million shares. In the first quarter of 2012, we purchased approximately 400,000 shares of our common stock, at an average price of $23.80 per share, for a total consideration of approximately $9.5 million. And we have additional 1.6 million shares available for repurchase under the existing 10b-18 plan.

Now for the guidance for the second quarter. We see a healthy licensing environment and good pipeline. And royalties, our guidance reflects the seasonal low shipment quarter, including Nokia's weakness in the mobile phone segment.

As for the full year guidance, we are adjusting downwards our full year guidance due to the following reasons. Unanticipated royalty softness for the second quarter, as I just explained, prolonged challenges facing Nokia on its 2G and 3G phones, which are currently planned to incorporate CEVA's DSPs, and the ASP erosion in the competitive 2G featurephone Chinese market.

I will revise guidance for the full year of 2012. Total revenue is expected to be in the range of $57.2 million to $61.2 million. Gross margin is expected to be approximately 93% to 94%. Operating expenses, including equity-based compensation expenses, are forecasted to be in the range of $37.4 million to $39.4 million, including equity-based compensation expenses of approximately $5.3 million, and approximately $0.2 million recorded in the cost of goods.

Annual operating expenses, excluding equity-based compensation expenses, are expected to be in the range of $32.1 million to $34.1 million. Interest income, net, is expected to be around $3.4 million. Our tax rate for the year is expected to be approximately 15% on a GAAP basis, and 14% on a non-GAAP basis.

Share count for 2012 is expected to be in the range of 23.6 million to 24.4 million shares. US GAAP EPS is expected to be in the range of $0.66 to $0.78 per share. And our non-GAAP EPS, forecasted to -- excluding aggregated $5.5 million of equity-based compensation expenses, net of tax, is expected to be in the range of $0.87 to $0.99 per share.

As for the guidance for the second quarter of this year, revenue is expected to be in the range of $13 million to $14 million. Gross margin is expected to be approximately 93%. Operating expenses, including equity-based compensation, are expected to be in the range of $9.6 million to $10.6 million. Of our anticipated total operating expenses for the second quarter, $1.2 million is attributed to equity-based compensation expense. Excluding that, our operating expenses would be $8.4 million to $9.4 million.

Interest income, net, is expected to be approximately $840,000. Tax rate for the second quarter is expected to be approximately 16% for GAAP and 14% for non-GAAP. Our share count for the second quarter is anticipated to be around 24 million shares.

US GAAP EPS is expected to be in the range of $0.10 to $0.12 per share, and non-GAAP EPS, excluding an aggregate $1.3 million of equity-based compensation expenses, net of taxes, is expected to be in the range of $0.15 to $0.17 per share.

Operator, you could now open the floor for questions.

Thank you. We will now begin the question and answer session. (Operator instructions) Our first question comes from Gary Mobley of Benchmark. Please go ahead.

Hi, guys. Regarding your market share for cellular basebands, what is your estimate for the just-reported quarter, and when might we start to see that market share inflect upward? I'm assuming you're going to be trending below 40% throughout the year, but just -- you know, is it all contingent -- the market share gains, is it all contingent on Nokia's transition to CEVA-based 3G basebands, looking out into fiscal year '13?

Hi, Gary. Let me start -- no, the market share for the last quarter is a record high. It's 46% of the worldwide basebands sold, based on the Strategy Analytics data that we have been given over the last couple of years. So it is quite high, and we do still believe that it could continue to be in the -- above 40%, for sure, over the next -- throughout this year. No reason for it to lose and to go down. And I'll get Gideon to give a little bit more flavor about the Nokia related inflection of the question.

You know, first of all, you know, the shortfall, the problem that Nokia has in the smartphone, actually, we are taking benefit. As I said in the call, we are not planned to be at the Nokia smartphone, but when they lose smartphone share, say, for Samsung, and they are losing share in the smartphones for Samsung, we are directly benefit from there.

So the 3G is growing. I mean, we see it. I mentioned in the call that in the key customers, we see 2X sequential growth in the 3G. The Nokia 2G, that's something that we need to take time anyway. First of all, you don't have every day a situation where a gorilla like Nokia is losing share dramatically.

Now, there could be two scenarios. One scenario is that they will get their act together and fix the problem that they have, that they mentioned -- they mentioned the lack of touch device. And then, you know, things will be fixed immediately. And then from -- going back to the market share will grow, because we are going with the 3G.

The other scenario, that they will start losing their momentum there, and the share will somehow -- or the leftover (inaudible) somehow will be split between whoever (inaudible), Huawei, (inaudible) OEM. Then it's up to us to -- we will benefit, but we don't know exactly who will buy, because Mediatek can take some, (inaudible) can take some, (inaudible) our customers.

So this is something that we don't know.

Okay. And getting a point of clarification, I know you generated royalties from about 1 billion units in 2011, and you mentioned a 1.7 billion forecast. I just didn't get the timeframe for that.

We said three years. Within three years, we believe that we're going to be at the 1.7 billion.

Okay. And last question from me. Regarding audio and voice processing, I'm assuming your main competition there is Audience. And is there a royalty component for these types of licensing arrangements, similar to cellular basebands?

It's a bit higher, because this goes to -- into a smartphone. Audience is -- it's not really a competitor, because Audience is a chip company, and we are an IT company. And they are not -- eventually, they are not working with us, but the customer -- I mean, the customer that I mentioned in the call, eventually will compete with Audience, and there was another customer a quarter ago that also, we competed with Audience.

By the way, Gary, this is a new customer that Gideon mentioned in the US. It's a new customer that has never used our technology before.

All right. Thanks, guys.

Thank you.

Our next question comes from Suji DeSilva of ThinkEquity. Please go ahead.

Thanks. Hi, Gideon. Hi, Yaniv. So, with the share at a record level, can you talk about the trends, just aggregate those between 3G share and 2G share, what the trends there are for you guys?

Well, you know, the 3G share is something that we have just started. And we are encouraged with what Broadcom said yesterday, that they are basically some parts, the 3G revenue (inaudible), the 2G revenue. So that's a -- we have a few customers, keys customers that now taking significant share at Samsung.

Now, in 2G, basically, for us, 2G is kind of a baseline, meaning, we don't anticipate too much movement in terms of volume or share loss. We still have the opportunity to come up with things for our customers to capture more share from Mediatek, while some opportunities to go to -- there are some growth engines like moving to smartphone (inaudible).

The challenge in the 2G, and I mentioned this in the call, is the price erosion. Now, this could change -- this will change, because the market it serves is changing from a featurephone to smartphone, and all of the -- our customers are moving to a smartphone, and this carries a higher ASP, and eventually, higher royalties [for us].

Okay. And as we look ahead to Nokia's 3G, low end 3G ramping up in 2013, how competitive is their platform, do you think, when it comes out, versus the (inaudible) China offering?

Well, it all comes to whether -- how Nokia will deal with the mobile phone segment. They are competitive in terms of supply chain and the capabilities to do phones. You know, when you go to the mobile phone segment, people -- I wouldn't make that distinction, this is a featurephone and this is a smartphone. What Nokia is doing in the 3G is, literally, a smartphone. They make a touch device. Once they have the touch device, they relax it to the (inaudible), they have everything, and they have a powerful -- you know, a powerful platform to go to the market, the Series 40, the Series 30, and the (inaudible) new coming -- these are very powerful products.

It looks to me that they are busy with the smartphone now, and I just don't agree for (inaudible). But -- I mean, this is our perception. But you can ask this -- Broadcom. We are relying on what they are saying.

Okay, thank you.

Thank you.

The next question comes from Jay Srivatsa of Chardan Capital Markets. Please go ahead.

Yes, thanks for taking my question. Gideon, you've talked about some of the newer markets, the auto market, the TV market, set top box. Can you give us some sense on what your cycle is in terms of getting some meaningful penetration there, and what are some of the challenges in terms of displacing some of the incumbent solutions that are present in those products?

Well, you know, you -- when it comes to the whole market, the platform that we are holding there is audio, and the visual imaging platform, the multimedia. We are -- these are early days, still. We are a much more advanced stage when it comes to the mobile state. In the home, and specifically the smart TV, we are a -- we have the right market, we have the right product. But these are early days to be specific.

Okay. You mentioned the ISP erosion in the 2G market, which has prompted you to lower guidance for the full year, in China, specifically. There seems to be a sense that a similar type of erosion could occur in the 3G space as well in China.

So what -- as you look forward to your prospects, in terms of gaining more traction from some of the handsets in China, how do you see the landscape laying out in terms of your own royalty revenues from there?

Hi. Let me try to help you -- it's Yaniv. When we look at what Mediatek's CFO said about the low end 2G market, he said that, a week or so ago, that he now anticipates 25% to 30% erosion, versus only two months ago, which he mentioned somewhere around the 15% to 20%, so --

2G.

For 2G. We're specifically talking about 2G. So this is something that was not anticipated by us, more by bigger players like Mediatek even a month or two ago. And this is something that we will see, and this is the main aspect that we have been cautious about, and explained that this is one of the reasons of low end, especially the second half royalties associated with our big market share and success in the 2G space worldwide.

So, this is just input that we have received from some of the big players in the space. I'm not sure this includes -- is true for all the players, but most likely, it has a significant -- can have a significant effect.

When you talk about the low end 3G and EDGE, still, the pricing could be twice as more expensive, including the royalty contribution to us. Still, although you're absolutely right, but over time, when this market evolves, and the volume evolves, and like now, in China, you have maybe 10% to 14% smartphones, and the rest, the bulk of it is not, when that continues to increase, then the pricing as well will go down. But still, our starting point there is 2X more than where we are at 2G.

So, it's more of a transition period for us. It's specifically in the Chinese market, true worldwide for 3G, and this is the way we see it. And Gideon explained, the more EDGE based and the more featurephone touchscreen, feature rich phones in China, then our contribution is still the same, 1.3 billion devices will be higher.

Thanks, Yaniv. Thank you.

All right, thank you.

The next question comes from Anil Doradla of William Blair. Please go ahead.

Hey, guys. The guidance that you've provided for the fiscal year, can you walk us through the degree of conservativeness that you've baked in? It's about, what, 7.5% on the revenue, and about 10% on the EPS. Do you feel that you've baked in enough conservativeness, based on trends and based on your visibility? Any color on the licensing front and the royalty side would be helpful. Thank you.

So, let me start with the licensing. Our constant comfort zone for licensing, which we have been quite successful to execute for a pretty long period of time, is somewhere between $4 million to $5 million. And when we say that we have a strong licensing -- either execution or pipeline, we are referring more to the high end of that guidance.

So at least for the near future for Q2, we did say that we believe that our licensing pipeline is strong, and based on the product introduction that Gideon explained, I think we have one of the best and more advanced product portfolios for every segment of the market. Not necessarily baseband anymore, but a totally different market, and we talked about that. So also to take us to a strong play in the second half.

So I would say somewhere between -- in our comfort zone plus, it would be what we have in mind for the rest of the year, to try to execute on the licensing.

And --

Now -- sorry. Sorry, go ahead.

Okay. That's the picture on the licensing. The royalties, it's a little bit easier in the shorter run, and a little bit more tougher on the -- going forward. I mean, if you look at the five biggest OEMs that we've put just recently, last week, or two reported their shipments, overall shipments, looking at Samsung, the biggest in volume is minus 13% sequential shipments from Q4 to Q1. And remember, we -- our royalties for Q2 represent Q1 shipments.

So, Samsung was down 13%, Nokia was down with the problems that we explained, 27%. Apple was down 5%, LG was down 23%, and RIM was down 21%. If I add -- do an average, we're talking about 17% sequential shipment decline in Q1.

Our forecast for Q2 is slightly better than that even now, even it's more or less very close to it. So Q2, it's a little bit easier to explain, and that is mainly because of very strong negative seasonality effect in Q1 shipments, among which, Nokia was probably the dominant aspect of it.

Now --

The second half -- I mean, for the second half of the year, I think we mentioned, it's pricing (inaudible) and the lack of ramp up, or smaller ramp up for Nokia, offset by very strong ramp up by Samsung, HTC and some new players.

Great. Now, Yaniv, would licensing revenues grow year over year in 2012?

We're not there yet. We're not there yet. I would keep them probably at very similar levels as last year for a model perspective, and if we do better, then we'll be happy to announce. But for a model, I think you could take a -- flat to slightly lower.

Thank you very much.

Sure. Thank you, Anil.

The next question comes from Joseph Wolf of Barclays. Please go ahead.

Thanks. Just with regard to the stock buyback that was done in the quarter, the price that you did it at was higher than the current stock price. And I'm wondering, you know, the inclination of the Board or management to continue on the 1.6 million shares, or whether you've still been buying back stock in April, would be my first question.

Yes, thank you, Joseph. So we are on a 10b-18 plan, meaning as soon as the window opens, we could be active. And as we mentioned, because the average price was higher for what we have executed in Q1, we have the full concession of the Board to continue to be active on the existing plan.

Okay. And then, I guess, with all the licensing activity and the -- I guess there was a comment Gideon made on the base stations. Are any of these expected to produce any sort of revenue beyond licensing, or -- I guess, what's the timing of anything in terms of the base station, or a real opportunity with some of these multi-DSP kind of opportunities?

And then, I guess, just taking a step back, a lot of circling around on the future of the smartphone, if you look at that as the -- is the royalty and licensing 2G/3G story the same for all of them? Or, I assume most of the licensing right now has completely moved -- well, it's obviously not 2G. But what's the percentage that's -- of the licensing, that's moving beyond -- or do you see moving beyond handsets?

Okay, let's take one step at a time. The base station market, it's a licensing, although I believe we have one customer that our -- who already have chips, and (inaudible), and will be in production in -- pretty soon. I don't -- I cannot give you exactly the volumes, but it's ready for production.

Usually it takes, as you may know, it takes more time, the design cycle with telecom type of equipment is larger. But usually license fees, our royalty is higher, there is some (inaudible) market.

Now, the second question, on the big -- now --

Percentage of 2G versus 3G, 4G.

2G, I agree with you -- licensing.

Licensing, yes. I don't think they have almost any --

No, I don't -- people are not -- 2G is not like, now a cash cow. People are taking their design, upgrade them to cost reduction, upgrade them to smartphone design. They use the same engine as they use. Most of the design are for 3G and LTE -- I mean, licensing.

Okay, but is there a difference between -- or, I mean, I guess you mentioned it with Nokia, but is there any difference between featurephone versus smartphone, or is that sort of coming together at the customer base with very little distinction for you -- for CEVA, at this point?

License -- on licensing front?

Well, yes, on the license -- just that -- can you tell, anymore, what the difference is, or is it all coming together?

I just -- no, no, there are the differences. People that are getting into this space is really taking multi-use, and they create out of it multiple version of the chips -- featurephone, smartphone, etc.

I think, Joseph, maybe what could help you, I mean, even if at the end of the day, you see a nice touchscreen phone, what feature -- you don't know exactly to call it a featurephone, a smartphone. The price will determine, you know, to get $0.05 or $0.02. And I think the pricing has been the -- the way the OEM positions it, if it's a featurephone or a smartphone, it will be a much higher rate at the end of the day, and that will be a much more expensive chip, baseband chip, or [absent] baseband chip, compared to a simple 2G phone. That's the way, probably, to differentiate it, and as long as they're selling and (inaudible) the more featurephones today than the chip prices and the content, then our royalty contribution would be higher.

Okay, good. Thanks.

Regarding how the market -- yes, regardless how the market actually calls it, a featurephone or a smartphone.

Okay, thanks. That's helpful. Thank you.

Thank you.

The next question comes from Daniel Meron of RBC Capital Markets. Please go ahead.

Thank you. Hi, Yaniv and Gideon. Couple of questions. First of all, I understand the reasons driving the lowered outlook for the year. What gives you the confidence that you guys will be able to integrate -- to get integrated into 1.7 billion units three years out? Was it based on -- and if it's a repetitive question, please excuse me, because I might have missed some of the commentary earlier. Thank you.

Well, the revised guidance that we did has nothing to do with market share loss or change in the landscape. We are growing in the 3G space -- that's a fact. The Nokia 3G which was supposed to take place this year should move to next year, but Nokia is a company that eventually will do something. I don't know exactly what will be their sales, but (inaudible). But our (inaudible) of other design wins in the 3G space.

You know, just give you an example, because I don't recall all those examples of featurephones, I've (inaudible) confident. But I recall (inaudible) in the late (inaudible) is, they are speaking about 200 design wins for their 3G -- you know, the chips or whatever, there. And these are the things.

So that's the 3G. The 2G, as I mentioned, the market is stable. It's a 1.3 billion, 1.4 billion units a year in the next four years. So I don't see us losing share. I don't see newcomers that can take a major share. This is a market that they specialize (inaudible) there. They know the job well. So, it's 3G, and indeed, that will take us beyond the level that we are in the 2G.

A little bit more color on how we got to 1.7 billion units, the Strategy Analytics forecast for the next couple of years. This is the same data point that we compare every quarter, our market share in baseband. Look to the current players that are in the industry today. Our customers, and some of the different segments, as Gideon explained the market, and pretty much built it from bottoms up with the existing players in the market, and this is how we got to the 1.7 billion devices.

Okay, understood. So, now to the cash use. So you've got the buyback going on. And I'm -- again, I might have missed it earlier. But do you still plan on trying to extend to additional areas, or adjacent areas in (inaudible) and through M&A? Is that something that you also look for?

Yes. We are exploring also those ideas. We have a person now that we hired recently dealing with it. You know that we made the investment in gesture technologies. We are exploring other -- our [handsets], (inaudible), all those ideas that we have. And we'll keep doing it. But try to find the right things for us to do here.

I mean, we are not a large (inaudible), the revised guidance is not something that accelerate this.

Right. Okay, understood. Thank you. Good luck.

Thank you.

Our next question comes from Matt Robison of Wunderlich Securities. Please go ahead.

Yes, thanks for taking my question. So, should the working assumption be that we wait for Meltemi, or whatever it is Nokia calls it, [Power Climate, Falls], Asha, before we can expect to see the transition to 3G there?

What -- I don't know, Matt, because what we are following here is the things that Broadcom is saying. Because right now, they are the ones that are, you know, open in saying they are going to go into the 3G mobile phone segment. I don't know exactly the pattern, but the only thing that we know is that they are pushing it to -- for 2013.

I know that there are other customers that are working with Nokia on 3G, but again, we are taking -- we are making assumptions that there is no difference here. We'll push it for next year.

In 2G, as I said before, you know, it all comes how they get their act together. They -- (multiple speakers) --

They -- and so, the thing is, the Asha stuff is TI-based, I think, and it seems to be selling pretty well. And the question is, if they're content with that, it could be quite a delay. And the feedback -- the impression I get is that they've bombed the price on the 2G, and their volumes are starting to pick up there, but we'll see if that's sustainable for more than a couple of weeks --

By the way, Matt, I want to just emphasize there, you know, we are focusing on Nokia, because that was one of the opportunities for Broadcom, the Intels, and probably other vendors, because Nokia has moved -- as you we all know, to multi-sourcing the next couple -- a few years ago.

So it would be probably -- it would have been helpful for other of our clients, a customer that in the baseband world, but they didn't mention the 3G (inaudible), only come from Nokia, to the big driver. But if Nokia doesn't succeed in the lower end 3G, there are quite a few (inaudible) design wins, whether it's a brand-new HTC opportunity, Samsung, of course, in the way of mention Huawei (inaudible). And there are many other 3G vendors that if Nokia will not make it, either this year or next year, then most likely, they'll just do the market share to others, because I don't think there's any doubt that 3G, low end 3G markets are going to grow significantly over the next couple of years.

As I mentioned earlier, whether you call it smartphones or featurephones or 3G phones, the concept is, it's much more constant and [fun of use] in cell phones, and that's not the $20 phones anymore.

Yes, yes. Yaniv, you're jumping to my next question, but you're missing a point here about my first question, and that is, if Nokia is content with the success of the Asha, which is Texas-based -- Texan-based, then there is a bit of an issue there, where they actually do -- go into low end 3G and have some success, but they don't switch to your licensees. I'm just putting that out there. I don't think we can answer that question now.

But the point that you're starting to address is, where do we expect -- you're still looking for pretty good back half of the year, here, of -- given your second quarter guidance. So where do you see the bulk of that growth coming from? Is it just a diversified mix of new brands, or is it just dominated by Samsung? What -- how do we -- how should we look at that?

On the 3G, right?

Well, just general, yes, overall. But let's break it down 2G, 3G if you can.

Yes, you know, when it comes to 3G, there is -- Samsung is -- you know, they are going very well. We have a significant overview, a nice share there, and the sequential is growing very fast. It comes from multiple directions. One of them is entering the smartphone, where Samsung takes share from Nokia smartphone.

And that's 3G. Now, I mentioned in the prepared remarks, tons of new design, Huawei, (inaudible), these are big names in the 3G. They are volume (inaudible). And Matt, take also into consideration, you have the normal positive seasonality in the second half of the year.

So it's a regular business model for us. We just -- a lower starting point (inaudible) Q2, and the rest, we (inaudible), and trying to (multiple speakers) --

Your HTC design is -- appears to be somewhat of a breakthrough with Intel. Is that something that you think is significant for you this year?

Matt, we'll take it one step at a time. Every design is important. We need to quantify it up front with the -- would not be right. And I think just, we're running out of time on the call, and --

No -- well, you know, I'm sorry we're running out of time. I've just got a couple more questions. So on the licensing, is it principally the new scope in the application processors that gives you confidence for the licensing for the rest of the year?

You know, there -- we spoke about -- I mean, the licensing agreement that we signed in the audio side, this is behind us. We were speaking about new opportunities that we have for licensing, for Q2, definite -- for Q2 to feel okay, that's a good pipeline. We are on track. These are still opportunities, so we cannot speak about the use of that.

But it's still audio, it's still LTE. These are the things that we are stronger.

Okay. Yaniv, can you just give me the CapEx and depreciation?

Yes, no change. About $100,000 a quarter, that's what it has been in the past.

Okay, thanks a lot.

Thank you, Matt.

Our last question comes from Daniel Gelbtuch of Cantor Fitzgerald. Please go ahead.

Hey, guys. Just wanted to know if you could give us some update on where you see the competitive environment, and I guess relative to the XC4000, and if you see your competitors turning into customers over the next year or two.

The XC4000 is a step up with the competitors. Now, when it comes to competitor in our space, it was just recent (inaudible) reported the market share, we have 90% market share. So it's not that (inaudible) competitors that there is competition. It's more a matter of how we expand our licensing on those that use all sorts of in-house deals, space, and one of them is definitely Qualcomm. This is the -- we are working on that, trying to convince them they don't have -- Qualcomm, for example, does not have XC4000 light processor. And they are exposed to it.

Okay, thank you very much.

Thank you.

This concludes our question and answer session. I would like to turn the conference back over to Richard Kingston for any closing remarks.

Thank you. Thanks again for joining us today, and for your continued interest in the cores of CEVA. We will be attending the following upcoming conferences and events, and invite you to join us there. The JPMorgan Global Technology, Media and Telecom conference on May 15 in Boston, Barclays Capital Global Technology, Media and Telecommunications conference on May 23 in New York, the Sterne Agee Technology conference on May 24 in New York, and RBC Capital Markets Communications, Technology and Semiconductors Investors Day on June 5 in Boston.

Thank you very much, and goodbye.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.