CEVA Inc (CEVA) 2012 Q2 法說會逐字稿

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

Now, I'd turn the conference over to Richard Kingston. Please go ahead.

Thank you, and good morning, everyone. Welcome to CEVA's second 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 of the quarter. Yaniv will then cover the financial results for the second quarter of 2012, and will provide financial guidance for the third quarter and fiscal 2012.

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 full year of 2012, market data from ABI Research, Gartner Research, Strategy Analytics, and Wireless Intelligence incorporated herein, optimism about our royalty revenues generally, growth in the 3G space, particularly with smartphones for emerging markets, and/or advance in small cells LTE advance and 4G LTE spaces, and our ability to capitalize on these trends.

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, global chip market trends, 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, and welcome, everyone. I am pleased to be able to share with you the results from another well-executed quarter.

CEVA total revenue for the second quarter was $13.6 million, slightly higher than the midpoint of our guidance range. License revenue was particularly strong, at $5.4 million, which represents the best quarter for our licensing business in more than three and a half years. We secured eight license agreements for a range of (inaudible) applications, including the first lead customer for our newest, best in breed communication DSP, with CEVA-XC4000. Three of the license agreements were in the US, and the rest in the Asia/Pacific region.

As anticipated, royalty revenue was $7.6 million. This reflects the handset industry first quarter shipments, which were affected considerably more by seasonality than has historically been the case. According to Gartner, this was the first time since 2009 that the handset market experienced a decline on a year over year basis.

Our royalty revenue also reflects pricing pressure in the competitive 2G market, and the weakness of Nokia mobile phone segment, which we discussed in detail during the first quarter earnings call.

Despite the softness in royalties from mobile devices, we were able to offset it by securing licensing agreements with key customers for new design of next-generation mobile products.

In addition to (inaudible) to our top line revenue for the quarter, licensing agreements fueled our future royalty stream, and open up further opportunities to extend our foothold in our customer's new designs. The fundamentals that stimulate growth in the mobile market remain strong, with numerous opportunities to expand and differentiate. As a result, incumbents and newcomers must develop and implement initiatives for the -- designing highly integrated chips with the DSP playing a central role in communication and multimedia processing.

Our DSP technology provides the capability to reuse the same chip design from multiple products and multiple generation of products via software programming. It is an advanced technology that enables a flexible and more affordable R&D expenditure profile compared to the conventional hardware base design. This is of particular importance in light of the significant rise in silicon manufacturing costs, and the recent capacity shortage in 28 nanometer.

Now, let me make a few comments about the key highlights of the quarter and a few observations about the mobile market.

OEM concentration in smartphone space is apparent. The need to differentiate and be at the forefront of mobile technology have driven leading OEMs to vertically integrate and develop their own chips. This is evident with OEM including Samsung, Apple and Huawei integrating their own chips into their smartphone designs.

Moreover, these key OEMs can have significant influence on their [merchant] chip supplier to license our technology and allow consolidation of the same DSP architecture and software investment.

CEVA's strategy, to engage with these dominant OEM, centers on offering a partnership rooted in technology excellence, and aligning our product plans and future development to the customers' needs. An example of this strategy coming to fruition is the strategic agreement we concluded during the second quarter with a Tier 1 OEM, who plans to use our DSP cores across a range of LTE products ranging from mainstream LTE smartphone to next-generation LTE-Advanced design. For confidentiality reasons, we cannot elaborate more on this important deal at this time.

As I mentioned earlier, we signed a lead customer for our newest and most advanced DSP architecture, the CEVA-XC4000 during the quarter. This is a milestone for our technology that targets the next generation wireless technology, LTE release 10, also referred as LTE-Advanced, and for 8 to 11 AC, also known as 5G Wi-Fi. Our lead customer is a major player in the growing market of small cells, a key enabler for the growth of LTE, and yet untapped market for CEVA.

The mobile networks are exploding with users streaming video, social networks and other data-related applications. A solution that will allow operators to support this data demand is to increase the [total] G base station density through a mass deployment of small cells, to augment the large base station.

According to ABI Research, by 2016, the vast majority of base station deployments are expected to be small cells, which project the shipment of 55 million small cells per year.

On 4G LTE, we continued to make progress in terms of customer traction and design wins in this lucrative market. With the additional agreements we signed during the second quarter, we now have more than 20 LTE design wins [throughout this space].

Samsung recently launched its latest CEVA-powered LTE chip, with its Galaxy S3 LTE smartphone for Korea, which broke the Korean smartphone sales record on its launch date. In addition, we have a number of customers who already have LTE silicon powered by our DSPs, and are currently in full trials with network operators with the expectation to enter the market in 2013.

Turning to the handset space. In the first quarter of 2012, sales of mobile phones to end customers declined 2%, versus the first quarter of 2011. According to Gartner Research, this was the first time since the second quarter of 2009 that the market has contracted. This market downturn, which comes after 10 straight quarters of growth, is mainly due to the economy weakness in mature markets, and slowing demand in the Asia/Pacific region as consumers wait for new smartphone launches.

As for CEVA shipment data, we managed to buck this global handset market decline, and expanded our shipment volume by 2% versus last year.

Within these three main segments of the market, the 3G segment is expected to grow significantly, driven by upgrade to a more advanced mobile phone in developed countries, and to a larger extent, migration from 2G to 3G in emerging markets.

According to Wireless Intelligence at the end of June 2012, of the 1.8 billion 3G connections globally, there were [better] than 900 million 3G connections in emerging regions, representing a 40% -- 42% growth year over year.

We discussed 3G is trending (inaudible) and stated that we believe we will be a major beneficiary of this 3G growth, both from a new design and from replacing the incumbent market participants, such as Qualcomm. This is evident from CEVA 3G shipment volume, which recorded a 16% sequential growth in the first quarter of 2012, as compared to a 2% decline for the overall 3G market. This is according to Strategic Analytics.

Demand for CEVA enabled smartphones that we were recently introduced by Samsung, introduced [our] Samsung Galaxy S3, targeted for Europe and China, and HTC One and HTC Desire, targeted for China Mobile 3G network.

In order to maximize 3G penetration in China and other emerging markets in the coming year, it is widely believed that the handset vendors will need to continue to focus on reducing handset costs. Today, the price point is in the range of $300 to $500 per smartphone. However, this will need to be reduced to the $75 to $150 range to attract an even larger pool of customers transitioning from 2G to 3G in emerging markets. We believe this trend powers market penetration and commoditization benefits CEVA, and is already evident in development with some of our leading customers.

Last month, (inaudible) five out of the six Chinese 3G (inaudible) low cost smartphone [socket], that went out for bid at China Mobile. This is in addition to more than 200 other design wins for a low cost smartphone that (inaudible) has secured today, including handsets from Samsung, ZTE and (inaudible), and the recently announced high profile smartphone design wins at Lenovo and Huawei for their new 1 gigahertz smartphone platform.

Broadcom is consistently growing its 3G market share at Samsung, expanding from low-end segments into mid-range models. Examples include the Samsung Galaxy Y, Y Pro and Y Duos. Also announced during the quarter were the (inaudible) chipset powered the new low-cost (inaudible) produced (inaudible) Android-based phone that is shipping globally. The (inaudible) Super (inaudible) edition of (inaudible), from Vodacom, which used a Qualcomm chipset.

Broadcom also disclosed that it has received first production of the (inaudible) CEVA-powered 40 nanometer single core and dual core baseband chips, to be shipped in the second half of this year.

(inaudible), our outlook. Comments on quarterly reports by chip players in the wireless industry indicate that handset sales were weaker than expected in the second quarter of 2012. The main reason cited for this trend was current economic environment, 3G inventory decline ahead of new smartphone releases in the fourth quarter, and smartphone displacement of featurephone in the Chinese market.

From CEVA's standpoint, (inaudible) review of the second quarter shipment report, we can highlight the following.

3G, continued sequential increase in shipments, based on our DSPs. This is particularly noteworthy, as this expansion mainly relates to market share captures by CEVA in the (inaudible) market environment. We achieved [exaborated] by the reduction in the legacy (inaudible) shipment.

2G, production ramped up with higher value 2G smartphone by Tier 1 OEMs, only partially offset the ramp down of Broadcom 2G chips at Nokia, and the continued intense pricing competition in the low-end featurephones.

Looking forward into the third quarter shipments, which will be reflected in our fourth quarter royalty revenue, we believe that 3G growth product based on our technology will amplify, with new products entering the mass production in China and throughout the world. 3G represents our major growth driver, going forward. In 2G, we expect the transition to new, low-cost smartphones to offset further decline in featurephone royalty revenue.

So, in conclusion, we forecast that these product transitions and ramp-ups will trigger a return to royalty revenue growth in our fourth quarter earnings, and firmly believe that our royalty growth trajectory and the impact in the medium and long-term.

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

Thank you, Gideon. I'll start by reviewing the results of our operations for the second quarter of 2012.

Revenue for the second quarter was $13.6 million, at the midpoint of our revenue guidance, reflecting a 6% year over year decline. The revenue breakdown is as follows. Licensing revenue with $5.4 million, reflecting 39% of our total revenue, 5% sequentially higher, and the highest figure we have recorded in the last three and a half years. Royalty revenue of $7.6 million, reflecting 56% of total revenue, and down 17% sequentially, as Gideon just explained. Service revenue was $0.6 million, reflecting 5% of total revenue, compared to $0.9 million, which were recorded in the second quarter of 2011.

Quarterly gross margin was 93% on both US GAAP and non-GAAP basis, as forecasted. Our non-GAAP quarterly gross margin excludes approximately $50,000 of equity-based compensation expense.

Our total operating expenses for the quarter were $9.4 million, in the lower end of our guidance, which included an aggregated equity-based compensation expense of approximately $1 million. Our total operating expenses for the second quarter, excluding the equity-based compensation expenses, were $4.5 -- sorry, it was $8.4 million, reflecting also the low end of our guidance range, and a similar level to the operating expenses for the first quarter of this year.

US GAAP operating margins for the second quarter declined to 24% of sales from 28% to the same quarter of 2011. Our non-GAAP operating margin for the second quarter was 31%, compared to 36% for the second quarter last year.

Non-GAAP operating margin excludes approximately $1 million and $1.1 million of equity-based compensation expenses, net of tax, for the second quarters of 2012 and 2011 respectively.

US GAAP net income for the quarter decreased by 16% to $3.5 million, and fully diluted net income per share decreased by 12% to $0.15. This compares to $4.1 million and $0.17 respectively for the second quarter of last year.

Non-GAAP net income decreased by 17% to $4.4 million, as compared to the same period a year ago, and our non-GAAP fully diluted net income per share decreased 14% to $0.19 per share, as compared to the same period for the prior year. These figures exclude approximately $1 million and $1.3 million of equity-based compensation expense, net of taxes, for the second quarter of 2012 and 2011, respectively.

Other related data. Shipped units by CEVA licensees during the first quarter of 2012 were 247 million, down 11% for the fourth quarter of 2011, and it's a similar level for the first quarter of 2011 shipments. Of the 247 million units shipped, 228 million are approximately 92% for baseband chips, and reflect 10% lower volume as compared to the prior quarter in which 254 million units of baseband chips were shipped.

As of June 30th this year, 28 licensees were shipping products incorporating our technologies, 1 higher than the prior quarter. And this reflects 36 shipping customers under licensing agreement, the same as the prior quarter.

As for the balance sheet items, as of the end of June, CEVA's cash, cash equivalent balances, marketable securities and non-maturing bank deposits were approximately $156 million, compared to approximately $163 million at the end of the first quarter. During the second quarter, we generated positive cash flow of approximately $4.4 million, offset by $11.3 million of our buyback program. Our DSOs for the second quarter were at 31 days, as compared to 33 days for the first quarter of the year.

As previously disclosed, in 2010, our Board authorized a share repurchase program of up to 2 million shares. We continue to be actively exercising this plan, and in the second quarter of 2012, we repurchased approximately 670,000 shares of common stock, at an average price of $16.90 per share, for a total consideration of approximately $11.3 million. And we have an additional 900,000 shares available for repurchase under our existing 10b-18 plan.

We believe the continued execution of the buyback program illustrates our confidence in the long-term growth opportunities for CEVA, with strong fundamentals and earnings leverage.

As for the guidance, as Gideon just discussed, our third quarter and analyst guidance reflects softness in royalty revenue, derived from a weak global handset market and product transition. We do, however, forecast a return to royalty revenue growth in the fourth quarter.

Revenue for the third quarter is expected to be in the range of $11.8 million to $12.8 million. Gross margin is expected to be approximately 91% to 92%.

Operating expenses, including equity-based compensation expense, are expected to be in the range of $8.3 million to $9.3 million. Of our anticipated total operating expenses for the third quarter, $1.3 million is expected to be attributed to equity-based compensation expenses, so our non-GAAP guidance would be $7 million to $8 million of operating expenses.

Net interest income is expected to be approximately $800,000 for the quarter, and our tax rate for the third quarter, similar to the previous guidance, 16% for GAAP and 14% for non-GAAP figures.

Share count for the third quarter is expected to be in the range of 23 million to 23.6 million shares. Our US GAAP EPS is expected to be in the range of $0.11 to $0.13 per share, and our non-GAAP EPS, excluding the aggregate $1.3 million of equity-based compensation expenses, net of taxes, is expected to be in the range of $0.16 to $0.18 per share.

Our revised guidance for the full year of 2012. Total annual revenue is expected to be in the range of $51.9 million to $55.9 million. Gross margin is expected to be approximately 93%. Operating expenses are forecasted to be in the range of $35.9 million to $37.9 million, excluding equity-based compensation expenses of approximately $5 million, and approximately $0.2 million recorded in the cost of goods sold.

Annual operating expenses, excluding equity-based compensation expenses, are expected to be in the range of $31 million to $33 million. Net interest income is expected to be around $3.5 million. Tax rate for the year is approximately 15% on GAAP and 14% on non-GAAP basis. And finally, share count for 2012 is expected to be in the range of 23.2 million to 23.6 million shares.

As for the EPS, our US GAAP EPS is expected to be in the range of $0.68 to $0.62 per share. And excluding equity-based compensation expenses of $5.2 million, our non-GAAP EPS is expected to be $0.78 to $0.82 per share.

Operator, we will now open the floor for questions.

We will now begin the question and answer session. (Operating instructions) And our first question will come from Suji DeSilva of ThinkEquity. Please go ahead.

Hi, guys. Good morning. Can you talk first about the ASP delta between the 2G and the low-end 3G smartphone markets, and what kind of declines you're seeing in the 2G market versus typical trends?

Well, in the 3G, the ASP -- you know, ASPs, the royalties that we are getting are pretty much stable. In the 2G, and I'm referring specifically to the featurephone space, this space is now being displaced to the smartphones. So here the prices are going down significantly. There is there only price competitions between a few vendors, and the volume is pretty much stable, but it's all pricing.

On the other hand, the smartphone space -- and this is where the market is going, the prices are stable, the clarity is much more complicated, the landscape there is -- not everybody -- let's say, the local OEMs cannot go that far. And I want to emphasize what I said in my prepared remarks. The growth that we are expecting in the 2G smartphone relates to Tier 1 OEMs.

Overall, 2G, when you add that the (inaudible), without going into the details and specific agreements or names, which of course, we could not reveal, there is a 2x type of change, and high rate of speed, when we refer to higher end phones versus the low-end phone. So I think you could see that in the chip price that Gideon talked about, and the market still segments around that, and that also implies to our growth rate, which could be twice as high in the higher end phones.

Okay, good, and --

And this is 2G. 2G.

Great. (inaudible). And the other question is on Nokia. Could you talk about, maybe, what percent of your royalties are exposed to Nokia, still, and if you expect a further year on year decline in the next 12 months, or how that's going to trend versus the last 12 months?

Well, we cannot speak specifically about Nokia. First of all, what we said in the prepared remarks relate to a specific customer. This is Broadcom -- they made it public, that they're ramping down 2G, focusing on 3G, and that's -- (inaudible) more significant volume than two quarters ago, they had a reduction last quarter, and they will see in Q2 a further reduction.

But that said, this will be superior, and eventually -- and Broadcom will not supply to Nokia. Although Nokia is still a big customer, and if you had a chance to listen to their conference call, they -- their mobile space, where we are (technical difficulty) they (inaudible) volumes, they reiterated their commitment and their support for the [CS30, CS40] smartphone, which are basically smartphone in the definition, in their definition, which is all very (inaudible).

Suji, when you also add to that, that if you recall, last quarter, we took down our forecast for 3G growth with Nokia, because of the same reason Gideon just mentioned. With that said, we still were able, as we just said in the call, to record a 16% growth in our 3G business and market capture, without that piece of Nokia being in. So -- and this is also with the headwinds of the iPhone also going down for us.

So, 16%, they exclude Nokia, exclude the iPhone, the volume that went down, and even further, and Gideon explained, Nokia, for now, is key in the 2G space. If they do continue to be successful in the S30 and S40 ramp ups, which are their smartphone segment, that would give us the first and low-cost type of smartphone that we'll be powering to Nokia. So that's a little bit more of the picture about them.

Good. Thanks, guys.

Thank you.

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

Yes, good morning, guys. A couple of questions. When I look at the midpoint of both the September and December quarter guidance, obviously, you're assuming a certain sequential increase in the fourth quarter. I think, a couple of things. What gives you the confidence that the fourth quarter will witness sequential growth? If you could walk us through some puts and takes, that will be wonderful.

And perhaps, from the last quarter until now, what surprised you, from your end, over the course of three months? You know, that would be helpful. Thank you.

So -- good morning, Anil. Let me take the question, maybe Yaniv will add.

First of all, what surprised us is there is a price reduction in the 2G space, and that's the reason that we are now guiding a [working] down quarter in Q3, which relates to the Q2 shipments. So that's the key point there.

But we see a trend change in the 2G, and that's mainly to the second -- the first part of your question. In the 2G, we see movement into the smartphones, and the -- that's to give you an indication, and specific customers, there were a few -- tens of thousands units in Q1, and went up in Q2 to a few million of units, just in one quarter. And that's a ramp up. This is not, you know, stabilization, and this is in a quarter that is pre-Christmastime proposals. So that's the 2G.

We believe that the growth in the smartphone, and as Yaniv stated, the (inaudible) is significantly higher there, they are still significantly higher. With that said, the decline, the further decline in ASP in the featurephone -- the featurephone basically is, if you're going to see something, there is further decline, so we cannot focus how far they will -- it can go next quarter.

3G, things are pretty focused, Anil. You know, we see all those products that are coming into the market. As everybody is saying, this is all Q3, Q4 shipments, people are holding their buy -- holding until they see all those new smartphones coming, different smartphone. And we are going -- Broadcom say that they're going in there. Of course, Samsung, which is the largest player, all those (inaudible) from (inaudible), that need phones, and (inaudible) tons of phones. So we are very optimistic about the 3G trend. It's [solid].

Anil, maybe let me add you some numbers. (inaudible) also surprised us, and not just CEVA, but pretty much the whole industry, in the weakness in the second quarter. And I'm not sure if you have a chance to see the ABI research that came out just last night. They're saying for the first time, that (inaudible) they believe that this could be now second quarter, second sequential down quarter in the wireless industry. And of course, they correlate a bunch of -- these OEMs, where the -- Apple went down, and (inaudible) and Nokia, and they mentioned that there is Samsung. We believe 16% growth in smartphones, but a 13% down in featurephones, and the list goes on.

So, from having only one (inaudible), they are saying that this will be the first time, essentially, that this second quarter where it's down, a second sequential down quarter, which would be very difficult for us to forecast the three months ago, or even a month ago. And I think that's key to understand a bit the market dynamics.

If you take what Gideon just said, and you implement it to our model, you will see that we are taking royalties down for Q3 to a single digit figure. That's not significant, but a single digit. Of course, we'll have different flavors, we will have more 3G kicking in, and we still have some of the effects of the pricing of the low-end 2G, and the better pricing, and the initial ramp up was getting explained of the higher end 2G, which is the smartphone.

And I don't know, we guided anywhere above the amount that is on the licensing based on our traditional guidance, which is somewhere between $4 million to $5 million. So that brings us to the guidance that we gave for Q3, a higher number, and continued back to growth in royalties for the fourth quarter, which of course, could be much stronger momentum in the first quarter of next year as well.

Right. So -- and finally, you talked about a strategic LTE-Advanced licensee. When do you think this will bear volume shipments?

This could be a very fast -- I cannot guarantee you, but this could be a 2014 production.

Thanks a lot, guys.

Thank you, Anil.

Our next question comes from Gary Mobley of Benchmark. Please go ahead.

Hi, guys. Am I correct in assuming that you're expecting about a 15% sequential decrease in the royalty rate per unit, based on the comments just made? And given all the stars that need to align with respect to 3G mix versus 2G mix in the royalties, when would you expect some royalty rate per unit stabilization, or perhaps, increase?

Hi, Gary. I'll try to answer that. But you know, I'm not sure if we're expecting, if you look at the overall assumption, or summary of the model -- again, without going to a specific customer, overall, the number has been quite stable. Around (inaudible) average for our business, and not slightly higher or lower, but that has been the case for a while now, nor do we that changing soon.

So, we talked about earlier, higher price designs and volumes, lower price. But I don't see an overall model base any such decline as you just stated. I think it would be overall quite stable, with -- we -- just slightly up, or maybe up and down, based on volume ramp ups.

Okay. So, if we're assuming a mid-single digit sequential increase in your mobile royalty units, I'm assuming that your non-cellular is going to continue to decline, as it has for several quarters in a row. And/or, you're expecting license revenue to be down around $4.5 million, toward the lower end of your typical range, while at the same time, for 5 of the past 6 quarters, you've exceeded your long-term license revenue forecast.

I know there's a lot of questions embedded in there, but I guess, first, to start out, is there any indication in your license pipeline that you would expect license revenue to be down towards the $4.5 million mark, and then, could you also answer the question regarding your non-cellular related royalty outlook?

Hi, Gary. This is Gideon. So, you basically ask two questions. First of all, with regard to the [other] royalty contributor, the consumer market, it's not that the consumer market is not declining. It's -- it has its own seasonal pattern. What we see this year, and it's -- I believe it relates to the economy, that they are not ramping up inventory, not building up inventory in the second quarter as they usually do in a typical year. Probably, it will be pushed out to the third quarter. At the end of the day, it will be Christmas season, and they will have to build inventory.

So that's the consumer. I don't see any outstanding, I don't see any market share loss where (inaudible) that, and shipping in the typical pattern that we have.

Now, the second part, about the licensing. I believe you are -- you know how we operate. Licensing, as you know, is something that is hard to foresee. It depends on time (inaudible), and the -- we did eventually two good quarters, and we are happy about it, but going forward, you know, we -- our recommendation for you guys is to stay in our range of $4 million or $5 million, which will be higher, will be happy, will not be -- will not make -- cannot make a party out of it. That's the (inaudible). And the idea is, it's not the quantity of the license deal, it's the quality of the license deal. And this quarter, we had two key deals, the OEMs and the XC4000. These are, in my opinion, quality type of license, and not just quantity.

Okay. In your earnings press release, you talked about an engagement with a Tier 1 handset OEM. Is this your first such license agreement with this specific Tier 1 OEM? And could you talk about how many Tier 1 direct license agreements you have with these different handset OEMs?

You know, I don't want to elaborate further, more. It's something that -- let me say, it's new to us, this specific. I think for selling (inaudible), we have four or five OEMs.

All right. Thank you, guys.

Thank you.

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

Thanks, guys. Just maybe as a follow-on to that question, is there anything that you can tell us terms of geography of that vendor, or -- you know, if you're selling the ASP technology (inaudible) directly, are you working with the chipset vendor, or are they doing that internally as well? That would be my first question.

And I'll probably repeat it, Gideon has said that (inaudible) geography, at this time, we were asked not to give too much data about this. So we'll keep it as (inaudible) and when they get closer to production or to some other type of mutual understanding, we'll be happy to talk about it.

Okay, so then maybe, I just -- in terms of the 2G, 3G mix, where you're seeing acceleration in market share gain, is it too early to talk about an actual mix of revenues within the royalty stream as we move to the fourth quarter, in terms of what you expect 3G to contribute?

So that's the key point. Although we're making excellent progress with an 16% growth when the market has gone down 2% in volume, it's -- the overall 3G story for CEVA is relatively new. Our growth in the last five years was mainly around 2G and EDGE. That's how we got into the business, and we got -- we had the significant market share that we have.

3G, where the market players which Qualcomm and TI dominated 100% of, and over the last two years, maybe two and a half or so years, we have started to gain market share, and we believe, some of -- we have today, somewhere around 25% market share. But the volumes are not yet big. If you talk about [228 million] baseband that we sold, the majority is still the 2G, with its different flavors.

So as soon as that becomes a more significant play, of course, you'll see a (inaudible) ramp up in revenues and ASPs, and all of it will follow in terms of that could have for -- in the 2G market space. So we believe it's going to -- we have the same opportunity to copy that success, and as well, we explained it in the prepared remarks and in the Q&A for now, that there is a big transition, even to low-cost smartphone, and that is our stronger presence for us. You will see the first time in the Q3 shipments, which we report in Q4, but that was not the case yet in the Q2 quarter.

Okay, and just one last question. With the MediaTek/MStar combination, is there any color that you guys have heard from customers or out in the field with how this is progressing?

No, we didn't have the chance yet to speak with them. We'll have to see. Nobody really knows how this is going to evolve.

All right. Thanks, guys.

Thank you, Joseph.

Our next question comes from Vijay Rakesh of Stern Agee. Please go ahead.

Yes, hi, guys. Just wondering, when we look at your quarter and the guide, what's your current 2G, 3G, (inaudible) mix, and how do you see that by Q4? And also, do you see the units going back to the 250 million to 270 million units quarterly shipments by Q3, Q4 -- by Q4, Q1?

Yes, you know --

(inaudible) too low.

What?

Quarterly shipment, 170 is too low?

No, 270 (multiple speakers). You know, we never try to guess up front of the volume. I don't think that has been our practice, nor does it make sense for us to start and try it now. Overall, we could say that this last quarter, in Q1, we [power] 228 million, rounded up, 230'ish million baseband. The mix was different, how more 3G than ever for us, and we hope that that trend will continue. To what numbers, exactly, it will reach, it also depends on the market.

But if you refer to some of the conference calls that we're -- and the comments that we made on the call, Broadcom spectrum, Intel's design wins, all of them mainly talk about 3G these days. And those will get into production mainly in the second half, as they all said even last -- a quarter ago.

So that is our base to start. Their second half starts in Q3. That means our Q4 royalties should already take that into account.

So have you seen a 3G (inaudible) like 40%, 50% by Q4, given all the ramps?

(inaudible) like market share, you mean, or (multiple speakers)?

Yes, your mix.

Eventually, we'll get there. I don't think it could get there in one quarter. That's not -- those numbers are lower. I don't think we could double that overnight, but eventually, there is no reason for us not to get there, because the forecasts for 3G are quite robust.

Got it. And last question, how many Tier 1 OEMs do you have now licensed with LTE?

(inaudible). I don't know, maybe -- I don't -- two or three, Richard?

Yes. We haven't fully disclosed the number publicly, but that's in the range, yes.

Yes, great. Thanks.

Thank you.

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

Yes, thanks for taking my question. Gideon, as you look ahead, every quarter, there seems to be some issues, some pricing pressure, some product transitions. How do you -- I mean, what are some of the initiatives you're taking as you look to 2013 to circumvent some of these quarterly fluctuations, and be able to run a more streamlined business?

Hi, good morning. First of all, Jay, there aren't any issues in this quarter. We said last quarter that there are price (inaudible) in 2G, and these are -- probably the same issue in this quarter. So, the steps that we are doing in terms of working much closer with the customer and transitioning to 3G and 2G smartphones, these are the new products that require our support and accelerations. This is ongoing, and we see the fruits of this work.

The 2G featurephone, this is a market that we stayed there to a lesser extent, and it would be superior somehow, I mean, in one way or another. And definitely, total, the trend is going either to smartphone, 2G smartphone, or to go to 3G.

Okay. Looking ahead to the ramp up in 3G, what gives you the confidence that some of the pricing issues that face the 2G business won't transfer over to the 3G business, meaning, the ASPs that you currently believe are now twice the 2G ASPs, that could pretty dramatically fall when the ramp up happens. Is it not?

You know, but that could take maybe two years. Eventually, every high volume market, you have price erosion, which is common practice. It's true for consumer, true for baseband, true for many other markets. So I don't think we're inventing the wheel, here. The idea is that you will always have something new like LTE, which has a much higher price, and potentially, we'll get some of the multimedia stuff, which are higher priced, the application processor, just your hardware, which we have talked about in the last couple of quarters, and we are getting the [values] from time to time, and those will also kick in.

So, when you look at an average, you'll have higher (inaudible), lower volumes, and you'll have the mass market, which will always have pricing. And this is how most of the semiconductors manage their business, and so do we, or at least try to.

I think what we do, and what's happening now in the last two quarters, and we are quite transparent about it as much as we can a quarter ago, is that we are -- the market is going under a transition between 2G and 3G. If you look at our growth in 2G in the last couple of years, LTE, you could find the numbers there. And if you look at the growth in 3G, and one of it, we just demonstrated today, for the last quarter, it's by far a much more robust -- and Qualcomm 3G business, or any other player in the 3G business today.

So the numbers are still small for us, but if it all happens the way we believe the market could move to, I hope it will benefit our earnings, our capitalized earnings, and of course, the rest of the business.

All right. One last question, then. Can you talk to us on some of the work that's being done on the non-baseband side, i.e., the application processor and/or the recognition and stuff. Where are things at in terms of revenue growth there for you, and when do you expect some of that to become material, as you look forward?

Well, we have two different product lines beyond baseband and are relating to smart TV and, so of course, smartphones. One is the audio. We mentioned, I think, this last quarter, that we have the (inaudible) licensing mode, and the -- it's more, in my opinion, a 2014 contributor. Of course, it's in addition of the baseband.

Now, the other activity is the (inaudible). This is a platform that open up for us a significant more (inaudible) models, including automotive. So I would say that we are in an introductory mode, meaning, coming to customers, let them evaluate, then them know -- have their opinion, and -- we will see licensing, no doubt, licensing in this respect, no doubt, 2013.

Okay. Thank you. Good luck.

Thank you, Jay.

Our next question, from Blake Harper of Wunderlich, please go ahead.

Yes, thanks. Most of my questions have been answered, but I just wanted to ask you, you had gone over where the royalties and licensing revenues, where you expected them to be over the next quarter or two, and can you just talk about what the design service is, and how much of that, and growth from there you've put into your guidance for Q3 and for the full year?

Yes, thanks, we haven't covered that. Indeed, we have a baseline for that revenue, so we have the service end and the support that we give to our customers, and that's pretty flattish across the year and the quarter. And the piece that fluctuated, this (inaudible) sometimes (inaudible) with their design tools that we give our customers to -- from time to time, to help production.

And this could vary between $100,000 and $200,000, sometimes higher, and that's the variance that we have, we're burning down from, in the first quarter, the $900,000 level, to a $600,000 level. That's the main reason.

I'm not sure -- we took that down a bit, from the $900,000 level to the $700,000 (inaudible). I hope that this is something that we could achieve.

Okay, thanks. And then I -- just a couple housekeeping items. Could you give us the CapEx and depreciation numbers?

Yes, both of them above $130,000, $150,000 in the last quarter.

Okay. And then, what was your headcount at the end of the quarter?

194, versus 191 a quarter ago.

Okay, thanks. That's all I've got.

Thank you.

This is time. Our next question will be our final question, from James Faucette of Pacific Crest. Please go ahead.

Thank you very much. Just a -- most of my questions have also been answered. I just wanted to ask you about how you're thinking about the growth in the underlying handset market, particularly as you look out to 2013 and beyond, as you develop your development, or you build your development plans. If we've seen two quarters of contraction, are you -- I guess I'm just wondering what kind of view you have into a return to growth, if any, and how you're thinking about that, as you try to plan for the future? Thanks.

So, I think the contraction in the market, or, if you (inaudible) the market to us, we're more or less following the contraction in the market.

There is -- it looks like there is a change in the profile of the way people are buying phones, or making their decision on phones. It's not like toward the end of the year, where the smartphone market is a very competitive, lots of (inaudible), it's -- for a consumer, it's tough to make a decision.

So, as I said -- I think I said it in the prepared remarks. What we have seen (inaudible) discussed in the fundamentals out there (inaudible), people eventually need 3G, 4G smartphones, and you see the growth, and we are in this highway here, and getting to it.

So, there are consolidation in the market. People now don't -- do not want any low featurephone, they want smartphone. You take Europe for example. Only 42% of the people in Europe has a smartphone. So this, eventually, they need. There is lots of possibilities on going into the 2013 and onward.

Okay. Thank you very much.

Thank you.

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

Thank you, and thanks, everyone, again, 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 first of these is the Oppenheimer 15th Annual Technology International and Communications Conference, August 14 in Boston. Then we'll be at the Deutsche Bank DB Access 2012 Technology Conference from September 11th to 13th in Las Vegas. And finally, ThinkEquity's 9th Annual Growth Conference September 12th and 13th in New York.

Thank you, and goodbye.

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