CEVA Inc (CEVA) 2012 Q3 法說會逐字稿

Good morning, and welcome to the CEVA, Inc. third 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, sir.

Thank you very much, and good morning, everyone. Welcome to CEVA's third 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 third quarter of 2012, and will provide financial guidance for the fourth quarter of 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 fourth quarter and year of 2012, market data from ABI Research, and Strategy Analytics incorporated herein, optimism about our royalty revenue growth and long-term growth opportunities generally, growth in the 3G space for emerging markets, particularly in China, growth in the 2.5G space, the design wins of our customers, the market acceptance of smartphones incorporating CEVA technology, the gesture technology market, and our advances in the LTE Advanced space.

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 will start by reviewing the results of the third quarter.

We reported third quarter revenue of $12 million. Licensing revenue was $4.2 million. Royalty revenue was $7 million, and the remainder was derived from support and maintenance revenue.

We executed seven new license agreement in the third quarter. Five agreements were for CEVA DSP cores, platforms and software. One agreement was for CEVA SATA/SAS product lines, and one agreement was for CEVA Bluetooth technology.

Target markets for customers' deployments are 3G and 4G baseband processors, digital cameras, next generation vision related products, connectivity, and SATA interface chips for enterprise applications.

Geographically, one of the agreements signed was in Europe, and six were in Asia/Pacific, including Japan.

Of the licensing agreements executed, three are particularly noteworthy. The first is a new strategic licensee for CEVA-XC4000 based on CEVA DSP, targeting next generation LTE Advanced platforms. The second was a new licensee for CEVA MM3101 imaging and vision technology, targeting gesture recognition. And the third is an audio DSP license for a Tier 1 OEM in the DSLR camera space.

In general, third quarter license revenue reflects a level of caution attributable to general macroeconomic concern by certain customer prospects. We are, however, continuing to see a robust demand for our best in breed DSP technologies targeting next generation products, and in this respect, our customer prospects remain solid. We expect this licensing [advantage] to extend into the fourth quarter.

Moving on to royalty revenue, third quarter royalty revenue, which relates to the second quarter shipments, can now be anticipated. As we explained in last quarter call, during the first half of 2012, it was widely understood that consumers were withholding purchases of new handsets in anticipation of new, more advanced smartphones in developed markets, and the availability of low-cost smartphones to replace featurephones in emerging markets.

Despite this general market weakness, 3G shipments based on CEVA DSP are consistently growing, showing 7% growth on a quarter over quarter basis, and 11% growth on a year over year basis.

Further royalty growth is anticipated in the coming quarters as new CEVA based smartphones are rolling out from HTC, Huawei, Lenovo, LG, Samsung, ZTE and others, in particular, to address the transition from 2G featurephone to low-cost 3G smartphones in China.

Now, let me share with you some key points on our market and customer traction during the quarter.

One of the key agreements signed during the quarter was for the CEVA-XC4000 DSP, targeting LTE Advanced. LTE Advanced is the next evolution of LTE technology, with up to 10 times higher performance versus the existing LTE technology. Our new licensee is a first-time customer of CEVA that already have LTE baseband chip available. It elected to switch to CEVA-XC DSP framework due to the increased performance requirements for LTE Advanced, and because of the software defined architecture of the CEVA-XC, which allows it to seamless support multiple videos.

A way to demonstrate the customer benefit of using the CEVA-XC platform is to compare it with an equivalent (inaudible) incumbent such as Qualcomm. For LTE, Qualcomm offers two different SKUs, [MVM] 8960 for the US, and [MVM] 8930 for China, as these two geographies adopted two different variants of LTE and had different (inaudible).

However, a customer adopting a CEVA-XC based solution is agnostic to those different requirements, meaning that a single CEVA-XC based chip can support both LTE variants and (inaudible). In addition, the new CEVA-XC4000 already supports LTE Advanced, and thus, saves the customer a costly redesign of a new baseband chip to add this Advanced standard.

Recent data from market research teams at Strategy Analytics shows the CEVA DSP-based LTE chips are now shipping second to Qualcomm in volumes. As we have previously discussed, Samsung's in-house LTE chips and (inaudible) are based on our DSP, in addition to more than 20 other LTE design wins.

While LTE shipments are progressing in developed countries, and CEVA-based phones are rolled out to the market, 3G expansion is increasing in emerging markets, of particular interest with the China Mobile TD-SCDMA market. China Mobile announced a plan to expand its TD-SCDMA base station deployment from 57,000 to 400,000 in 2014. It also increased its subsidies for TD smartphones for this year, from $3.3 billion to $4.1 billion.

End of September, China mobile has more than 698 million subscribers, but still, only 75 million of these subscribers are using 3G services. (inaudible) CEVA customer is performing very well in the TD-SCDMA space, with a range of new smartphones from multiple brands like (inaudible), (inaudible), Huawei, (inaudible), Lenovo, (inaudible) and ZTE. The [positive] pricing point for these smartphones are $80 to $110, which makes them very affordable for mass market consumers.

Addressing the HSPA 3G space, which is the largest standard by volume for 3G worldwide, Broadcom uses our DSPs across all of its baseband products. It continues to expand into Samsung Glow, a mid-tier smartphone. The single chip total (inaudible) baseband chips is now in production, and Samsung growing smartphones such as Galaxy [Chat] and its VCN-21553 chip is following Galaxy Pocket Duos, the most affordable dual-SIM Android-based smartphone.

ZTE has also chosen Broadcom VCN-21553 to power new low-cost smartphones for T-Mobile [Euro], known as T-Mobile Concord. T-Mobile announced that this is the most affordable low annual contract Android smartphone available from it at less than $100. For Broadcom, this is the latest design for a low-cost smartphone, following other low-cost design wins at [PCN] and (inaudible) branded devices.

Intel, who also uses our DSP for all their baseband products, is progressing nicely in the HSPA 3G space, with a number of new customer and design wins of note. ZTE and Motorola both recently announced their first Internet (inaudible) based 3G smartphone, of which the baseband processor is based on CEVA DSP. The ZTE 1X [IM] and the Motorola RAZR i both went on sale during the third quarter.

Intel's [three model] chips and continues to show some traction. Its HSPA Plus chipset, our many new smartphone, side by side with leading application processors such as NVDIA Tegra 3, Samsung [XLS], and more. Recent notable design wins include Samsung Galaxy Note, 2972100, HTC One X Plus for Europe, the LG Optimus 4X HD, and the widely acclaimed [D1XL].

For less developed areas, where 3G coverage is limited, 2.5G phones are gaining traction. Many of these phones have all the features and enhancements of a regular smartphone, but without the 3G connectivity. We have had the advantage of cost (inaudible).

The majority of Nokia shipments targeted this 2.5G space in emerging markets. In the second quarter, Nokia shipped 74 million units, and its market share in the low cost phone space rose to 35%, the highest in the last two years. The main catalyst for these products has been feature enrichment, such as better Web experience, online games, and [texting]. The new low-cost smartphones, Asha 305, 306, 308 and 309 models, are all based on CEVA DSPs.

Spreadtrum also has a sizable volume shipment in the 2.5G smartphone space. Spreadtrum introduced last quarter its total nanometer SC6530 baseband chip, and its 1 gigahertz 6828 smartphone chip, targeting this market.

Turning back to licensing agreements signed during the third quarter, as I mentioned, one of the agreements was for our MM3101 platform, targeted at gesture market. Gesture recogition is another dimension to action with smartphones, PCs and tablets. Accordingly to a study by ABI Research, 600 million smartphones will be shipped with vision-based gesture by 2017.

Gesture-based technology enabled by the MM3101 shows 10 times higher performance versus (inaudible) solution. Also, as we previously announced, CEVA has an active stake, an equity stake in startup eyeSight, which specializes in gesture technology, and whose technology is already deployed in various TVs, PCs and smartphones.

Finally, I would like to acknowledge a significant milestone for the company that we announced recently. Shipments of CEVA-powered chips have now surpassed 4 billion units. This is an outstanding achievement that was brought about by a combination of the quality of our DSP and our strong customer base that relies on our technology to power the industry-leading products.

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

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

Revenue for the third quarter was $12 million, within the range, the guidance range that we provided, and a 19% decrease compared to last year. The revenue breakdown is as follows.

Licensing revenue was $4.2 million, reflecting 35% of our total revenue, down 19% from third quarter of last year. Our royalty revenue was $7 million, reflecting 59% of our total revenue, and down 20% from the third quarter of last year. Service revenue was $0.7 million, reflecting 6% of our total revenue, and down 13% from the third quarter of last year.

Our quarterly gross margin was 91% on a US GAAP basis, and 92% on a non-GAAP basis, as forecasted. Non-GAAP quarterly gross margin excludes approximately $70,000 of equity-based compensation.

Total operating expenses for the third quarter were $8.8 million, in the mid range of our guidance, which included an aggregated equity-based compensation expense of approximately $1.3 million. Our total operating expenses for the third quarter, excluding equity-based compensation expense, were $7.5 million, reflecting again the mid range of our guidance, and at the lower level than the operating expense levels for the first and second quarters of 2012.

US GAAP net income for the third quarter decreased 47%, to $2.6 million, and fully diluted net income per share decreased 45%, to $0.11. This compares to $4.9 million and $0.20 respectively for the third quarter of 2011.

Non-GAAP net income decreased by 40%, to $3.8 million, as compared to the same period last year. Our non-GAAP fully diluted net income per share decreased 38%, to $0.16 per share, as compared to the same period a year ago. These figures exclude approximately [$1.2 and $1.3 billion] (sic -- see financial statements) of equity-based compensation expense, net of taxes.

Other related data. Shipped units by CEVA licensees during the second quarter of 2012 were 254 million, up 2% and 3% from the second quarter and the first quarter -- second quarter of 2011, and the first quarter of 2012. Of the 254 million units shipped, 226 million units, or approximately 89%, are for baseband chips, and reflect 1% as compared to the prior quarter, in which 228 million units of baseband chips were shipped.

As of September 30th this year, 29 licensees were shipping products incorporating our technologies, one more than the prior quarter. And we had 37 shipping customers under licensing agreements -- again, one higher than the prior quarter.

As for the balance sheet items, as of September 30th, 2012, CEVA's cash, cash equivalent balances, marketable securities and long-term bank deposits were approximately $156 million, similar to the level at the end of June. In the current environment, we are focused on maintaining a strong balance sheet, which will allow us to address near-term challenges, and capture new opportunities in the future.

During the third quarter of 2012, we generated positive cash flow of approximately $2.7 million, offset by $2.9 million used for our buyback program. Our DSOs for the third quarter was 46 days, as compared to 31 days in the prior quarter.

As previously disclosed, we have a share repurchase program, up to 2 million shares. We continue to actively exercise this plan. During the second quarter, we purchased -- during the third quarter, we purchased approximately 170,000 shares of our common stock, an average price of $16.60 per share, for a total consideration of approximately $2.9 million. And we have additional 730,000 shares available for repurchase under the existing 10b-18 plan.

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

Now for the guidance. A key component of our quarterly revenue guidance is the royalty revenue derived from customer shipments one quarter in arrears. We do not get all the royalty reports from our shipping customers. However, initial indications suggest a return to growth in royalty revenue, derived from accelerated growth in 3G shipments, and higher shipments of 2.5G smartphones in China, and higher ASPs from featurephones which are undergoing pricing pressure.

This positive momentum is partially offset by the wind-down of the 2G phones at Nokia by one of our key customers, and the end of life of older iPhones, 3GS and 4 models, that are based on our DSPs. Overall, we expect to record sequential low double digit royalty growth for the first quarter of this year.

And the licensing, we believe the environment Gideon described earlier [will prolong] in the fourth quarter.

As for the numbers, revenue for the fourth quarter is expected to be in the range of $12.4 million to $13.4 million. Gross margin is expected to be approximately 93%. Operating expenses, including equity-based compensation expense, are expected to be in the range of $8.9 million to $9.9 million. Of the anticipated total operating expenses for the fourth quarter, $1.3 million is expected to be attributed to equity-based compensation expense, so our non-GAAP operating expense is forecasted to be between $7.6 million to $8.6 million.

Net interest income is expected to be around $750,000. Tax rate for the fourth quarter, same rate as last quarter, 16% GAAP and 14% non-GAAP. And the non-GAAP tax rate excludes the tax effect of equity-based compensation expenses.

Share count for the fourth quarter is expected to be in the range of 22.6 million to 23 million shares.

US GAAP EPS is expected to be in the range of $0.10 to $0.14 per share, and non-GAAP EPS, excluding $1.2 million of equity-based compensation expenses net of taxes, is expected to be in the range of $0.16 to $0.20 per share.

Our annual guidance. Total 2012 revenue is expected to be in the range of $53.1 million to $54.1 million. Gross margins for the year are expected to be approximately 93%.

Operating expenses are forecasted to be in the range of $36.7 million to $37.7 million, including equity-based compensation expenses of approximately $4.8 million. And approximately $0.2 million recorded in our cost of goods.

Our annual operating expenses, excluding equity-based compensation expenses, are expected to be in the range of $31.9 million to $32.9 million.

Net interest income is expected to be around $3.5 million for the year. Tax rate is expected to be around 14%. (technical difficulty)

Share counts for 2012 is expected to be in the range of 23.1 million to 23.5 million shares.

As for the EPS, on a GAAP basis, we're expecting EPS to be in the range of $0.57 to $0.61 per share, and on a non-GAAP fully diluted basis, excluding $4.4 million of equity-based compensation expenses net of taxes, is expected to be in the range of $0.76 to $0.80 per share.

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

Thank you. We will now begin the question and answer session. (Operator instructions) The first question is Gary Mobley from Benchmark. Please go ahead, sir.

Hi, guys. Good morning -- or, good afternoon, I should say. So I wanted to explore some of the variables involved in the licensing revenue. If I'm not mistaken, your -- the number of license deals signed in each quarter is somewhere in the range of 6 to 8, and 7 this quarter. I'm wondering what the puts and takes are there, driving down the average deal size on the licensing front. And then, if you can, as well, describe what the licensing pipeline looks, I know you're certainly dealing with the broadest product portfolio in the Company's history, but I'm just wondering, if you've seen a marked slowdown in chip design activity.

Gary, it's Gideon. In general, in every quarter, we have different types of deals. Some of them could be single deals, some of them could be multiple deals. Our customers are buying fewer [of our] products. The quarter, in looking at the quarter, I don't see any change in the mix, and it's product, it could be in one quarter, (inaudible) more in this type of deals, or in other type of deals. So the ASP for deals does not -- the ASP per deal does not -- it's not indicative to the overall pipeline macro-situation.

In general, as I said in my prepared remarks, we feel some cautious in specific customers. Those customers that are more close to their OEM customers, looking more in general to single deals third quarter, but one step at a time.

However, when it comes to a strategic customer, customers that are building (inaudible) product, as I mentioned, XC4000 deals that we signed, MM3101 customers, these guys are building the next generation products. The pipeline and the execution in the quarter will show it.

Okay. Just one last follow up. Of the 226 million royalty units derived from the baseband market, what was that mix between 2G, 3G and 4G basebands?

Hi, Gary, I'll try to help out. [Using an old data not that much detail], but 4G is still relatively small. A lot of the Samsung sockets are using that, and potentially a few other customers are in line to start production in the next quarter or two. So it's, I would say, a very small, handful, 1 million there or less. And the bulk of the volume is still probably 75% to 80% of the 2G-related. And that's what we have, somewhere between 55% to 60% worldwide market share. And 3G, which is starting to pick up, we started last quarter with 7% sequential increase this quarter, probably represents a world market share somewhere between 25% to 30%.

So from volume, the bulk of 75% to 80% is 2G, very small 4G, and the rest is the 3G ramping up.

Gary, I just want to add, and it had an effect on the third quarter shipments. We see a few encouraging things. First of all, when it comes to 2.5G, and I mentioned a few things, we see growth in a smartphone, 2.5G smartphone. I mentioned in my prepared remarks that there are regions in the world that you don't have 3G coverage, and 2.5G smartphone is the key (inaudible) there.

And when it comes to 3G, it is clear, we will continue to grow there. We are growing in all the segments -- the TV, the HSPA space, we continue to grow there.

Thanks, guys.

Thank you.

The next question is Anil Doradla, William Blair. Please go ahead.

Hey, guys, a couple of questions. When you -- when I look at the non-baseband during the quarter, I mean, from Q2 to Q3, clearly it looks like you've had some strong growth there. Can you give some sense of what it was? And as we look in 2013, how do you expect the composition to look like? And I have a follow up question.

Anil, it's Gideon. You mean in the -- you're looking on the units, or (multiple speakers) --

Yes, just the units. Just the units, on a sequential basis. I think you said the non-baseband units seem to have grown sequentially, right?

No, (inaudible), no. We've talked about 3G growing sequentially 7%. I don't think we talked about the non-handset. I think from the licensing point of view, we had very few -- very interesting deals the last quarter around gesture, that Gideon mentioned about earlier. And audio, for a DSLR camera. So I think from the licensing, we are seeing some very nice traction.

The [royalties are small], but not necessarily -- it takes time. It takes at least a year, year and a half, before we see this getting into production.

Okay. And then when I switch gears to the royalty rate, if my calculation is right, it's down about, what, 10% sequentially? The mix is moving towards 3G. Can you help us understand how we should be looking at the trends on the mix? Would the 2G aspect continue weighing on the overall mix over the next two, three quarters? Or do you think 3G would really start moving the middle?

Anil, I think you answered the question that yourself asked. 2G is still the bulk of our business. We are seeing the price erosion, and the 2G continues throughout 2012, which is not something new. We have been talking about it, and we have seen a lot of the companies in the space deal with it, with the price erosion.

With that said, we are seeing volume, healthy volume. We're not seeing the volume fall off the cliff, it's a healthy volume, even growing for our third quarter shipments, meaning that we report next quarter the significant growth in the 2G volume.

And the name of the game for growth, for us and for our customers over the next couple of quarters, is going to be the pace of adoption of these 3G devices. You could see on our website, from the Twitter and a bunch of different articles that we publish, a lot, a lot of new phones, by numerous players in the market. We mentioned some of them in our prepared remarks. As soon as these guys reach mass production -- not millions, but tens of millions, and in the future, hundreds of millions, those will be the bulk of the revenues. Of course, that will enhance not just the growth of our royalties from the value perspective, but also the ASP.

In the near future, it's very difficult to predict from one or two quarters. And longer term, I think it could vary -- it's a -- the fundamentals, and specifically for LTE and 3G, are quite easy to understand the pace of something that we all need to monitor on a quarterly basis.

(inaudible) (multiple speakers), Anil?

Yes.

Just an information that we saw from Strategy Analytics. 3G shipments based on CEVA were, quarter over quarter, 7%. Qualcomm went down, (inaudible) 10%.

Right.

So it's a market share type of gain now.

But what would please you, as we exit 2013? I know it's a little too far, but you talked about the mix as we exited 2012. But by 2013, where do you think, from a units point of view, you expect the 3G and the non-3G to break out?

Well, it's too early to speak about it, from our own view. We have to see how the last quarter is evolving. But in terms of trends, it will continue. It will not stop, meaning we, in the 3G, we will keep expanding, because we see all these models coming. This will go in production, and go to -- from a ramp-up to mass production in 3G.

We expect LTE coming -- other than Samsung, but now increasingly growing the LTE shipments based on ours. Other than Samsung, we have a bunch of other customers that are now in all sort of (inaudible), testing (inaudible), producing their product.

This [will be] material. This is about to materialize into next year.

Thanks a lot, guys.

Thank you.

The next question is Joseph Wolf, Barclays. Please go ahead.

Thanks, I had two questions. One is, I know it's a little bit early, but last year, the phenomena was that the third quarter, which is your fourth quarter, I guess, was seasonally very strong, but the fourth quarter was a little bit disappointing. I'm wondering whether you think there will be that kind of -- whether what you're seeing right now is a pull-in that's a repeat of last year. That's my first question.

And the second question I have is, with regard to just MStar. They seem to have written down some inventory with their baseband ICs as part of the Mediatek combination. And I'm wondering if you could just give us some thoughts on that transaction, and those two companies getting together, with regard to your ongoing business.

I'll start with the first one, Gideon could tackle the second one. I think we're pretty clear with our guidance for the fourth quarter. So you're right that last year was an anomaly, inventory and ramp-up, but we believe that our royalty revenue from the $7 million that we recorded now in Q3 will grow at least the low two digits, meaning 10% and above, sequentially.

So for now, we are seeing a pretty -- a nice tick in the royalties for Q4. How Q4 will play along, we need to see how the market, the economy, the ramp-ups that we talked about will do. And a lot of the players -- I mean, (inaudible), a lot of new phones that are introduced and they're ramping up now. So not necessarily we'll see the same cycles we had last year, I think it's a whole different market scheme this year. On the contrary, the first two quarters are very slow, because of the anticipation of the introduction of these new phones. So customers that waited and did not buy phones, which was exactly the opposite than one happened a quarter ago, a year ago.

So hopefully, Q4 (inaudible) royalties will continue to grow. But that all depends on actual shipments in the market.

With regard to MStar, the writedown, I'm not [submitting] was due to (inaudible) we can see from the report. They are progressing. (multiple speakers) --

So you don't feel a change to the --

No, no, no, no. No. They are specializing in the very low tier of 2G space. I would not say it's big volumes there. They are -- well, they're big enough, but they are progressing there.

Okay, great. Thank you.

Thank you.

The next question is from Matt Robison, Wunderlich. Please go ahead.

Hey, gents. Can you comment on how many XC4000 license deals you've gotten to date, and if this gesture recognition deal with the 3101 is the first in that space? And if the [M core] relationship has begun to bear any fruit, if any of these XC4000 licensees are starting to work the 802.11ac into their program? And I have a couple follow on.

Okay, so Matt, it's Gideon. And I'll answer -- I'll take first -- the first and the third question, which I believe are related. We have right now two XC4000 deals, we signed one last quarter (technical difficulty). This quarter is for also baseband processor. The M core is also in that related revenue investment in a company that will develop a Wi-Fi software that will run on the XC4000.

So, we are in the process of developing it, and reaching customers. The (inaudible) going to say, there are new customer build with LTE the Wi-Fi (inaudible), so the M core software is basically on top of the LTE.

So we will continue developing it, and hopefully we'll get some traction. It's a very attractive value proposition, because a lot of people that think that they can build LTE, they still need the Wi-Fi. And (inaudible) the next one is a pretty complicated one.

When it comes to the MM3101, it's a -- this is the second license agreement that we have, first in the gesture area. We see many -- gesture is, by the way, is part of a whole lot of other technologies related to vision. It's gesture, and eye tracking, and it goes to a lot of -- so a lot of traction. It's the same underlying technology.

And the customer that we address is going to, a little bit for gesture, but take it to -- further, because it's a platform.

When you talk about the 2.5G, is there -- are you able to -- I know you need a transition towards, sort of, variable pricing this year. Is that -- when you talk about 2.5G and more features wrapped in that are adjacent to our baseband, traditional baseband, are you able to pick up any ASP from that, such as Wi-Fi and that sort of thing? How does 2.5G affect you there?

Well, the 2.5G is overall a better performance and rich -- feature-rich type of phones. So these are touchscreen, Wi-Fi connected, with the music capabilities, audio. All this, at the end of the day, has a higher selling price versus a simple $20 phone. These are probably priced somewhere between $70 to $110. But that said, this is fully comparable to the iPhones and Galaxys and the very high end phones. But to the emerging economies.

So from our point of view, if we had a 2G product in a $20 phone, of course, the dollar content in these phones are lower than a 2.5G sophisticated phone, which runs somewhere between $70 to $100. So that's where we see that, and we don't get any additional, incremental royalties from the Wi-Fi, the touchscreen. We get from the DSP, but the chipset itself and the whole solution is a higher priced device.

Yaniv, while I've got you, why was R&D down, yet sales and marketing up, when the top line comparison was done?

The R&D, it's mainly timing of grants that we got in this quarter, and which caused R&D to be lower. Marketing, we had a few personnel, and then also the marketing teams across the world (inaudible) -- and it happened, a very interesting event recently, and the conferences in China, and Taiwan were very nice (inaudible), and a lot of the nicer reception to the technology. So these are pure marketing [expenses], and increase in headcount, (inaudible).

Now, some of the semiconductor companies talked about normal, or maybe a little bit better than normal seasonality in the fourth quarter. This goes to one of the earlier questions. And maybe a slight sequential decline for their shipments in the fourth quarter.

Sounds like you're thinking mix might be offsetting a little bit, to keep the uptrend going into the first quarter? Is that the right takeaway?

These kind of things, I would prefer to take (inaudible) as we go through the quarter. I don't know. I mean, I heard things, but from our standpoint, it could be the same, it could be different, because we are in a market share, market capture mode. So how much more are we going to get in 3G, what will be the pace of 2.5G, which also keeps momentum on the 2G? These are the type of questions that we need postmortem to understand.

Right. Now, one more for you, Yaniv, and I'll get off. Just depreciation, CapEx and headcount change.

Headcount overall increased by 1, from 194 to 195. We still have a few open [racks] of hiring, due to some changes. And CapEx and depreciation, those are $130,000 to $140,000 in the quarter.

Thanks.

Thank you.

The next question is Daniel Meron, RBC Capital Markets. Please go ahead.

Thank you. A few question, my end. First of all, you guys made an interesting move with gesture recognition. What kind of other technologies do you think may be ones to look for going forward? If you can just give us a sense on, what's on your planning board?

Well, first of all, when it comes to the baseband activities, we mentioned last quarter our target market. And in a way, traction in the base station market. Base station is the macro base station, and also in the small (inaudible). That's another one that we are, with XC4000, addressing.

And also, the investment we made in M core will help us to increase the value offering by adding the Wi-Fi on top of it. And also, and just the connectivity space and the handset space.

When it comes to the vision and imagining platform, Daniel, the 3101, it's a family of technologies that we [developed] starting from gesture recognition, and in my answer to Matt, other -- or I think it was somebody else, it's not just gesture, it's different technologies and markets. Like eye tracking, and if you go to automotive, it's lane detection, and other things that relate to safety.

That's one element in the offering. The other element is things that relates to the camera enhancement. If you go to iPhone 5, and you see all these new features that they added, these are -- we are working on the next level of camera enhancement. And again, it takes us to a different category of customer. It's not the baseband customer (inaudible), it's the people that (inaudible) application processor, people that are targeting the automotive market, people that are targeting the (inaudible) market. We are strictly development.

Okay, understood. And I may have missed it earlier, but on the license business, I under that this was light this quarter and next quarter. Is there something a little bit more fundamental going on that we should think about as far as innovation, or is it just, so you think -- be kind of like a macro-related issue, or some hesitancy, and that's about it?

Daniel, let me try to address that. The way we see this, and I think as long as I know Gideon and he knows me, this is how we convey the licensing business, is that our comfort zone is $4 million to $5 million. And we are not in the comfort zone. Some quarters could be slightly better, on the high end of it, slight -- some quarters, like this quarter, could be on the low end of the guidance or comfort zone.

We talked about this (inaudible) from a quality perspective with an excellent quarter, three different major type of technologies, audio or gesture, and our highest in LTE Advanced. I don't recall a quarter like this from a qualitative point of view ever, almost, or for a very long time.

So from that aspect, [over], oh, okay. With that said, if you look outside, it is a bit more difficult, and the companies are taking sometimes a more prudent approach. I think that's what we mentioned, and this is why few deals are -- one or two extra deals at $300,000 or $400,000 for smaller video [reuse] fee, there's some software patches, and we could have been in the mid range of the higher end of the licensing number.

So we don't see that -- other than the fact that it's lower than what previously we have come up with in the last couple of quarters or year or two, overall, we don't see that as a big hurdle, and continue to ramp up the business and offer technologies to different markets and to new customers.

Okay, thanks. That's a useful insight, Yaniv. Is there a way, when you're looking at the quality of the license deals that you're providing or getting, to look at the long-term prospects of translating those licenses into royalties, so we can at least be assured that maybe a couple of weaker quarters don't necessarily mean that the royalty stream down the line, two, three, four years, necessarily gets impacted one way or the other?

You know, that's an excellent point. That's very true, and sometimes when you count the deals and one nice startup, which is a good, nice deal for the quarter, doesn't necessarily mean that they could generate millions of dollars of royalties three or four years down the road. So that's an excellent point.

And it's true, I mean, it's hard to quantify it. And in the press release, and this is why I think in the prepared remarks, Gideon was trying to highlight every quarter, one of the more interesting and more strategic deals that could generate these numbers and these royalties, as you mentioned down the road.

Okay. Thank you, good luck.

Thank you.

Our next question is Vijay Rakesh, Sterne Agee. Please go ahead.

Hi, guys. I was just wondering, when you look at your (inaudible) and yes, obviously, starting to show a little bit of a pickup here, when -- you know, all the tablets and handset wins you have with the 3G licenses in China, etc., are ramping. When do you see getting back to that -- kind of [9 million] range? And I think you guys [picked up] [9, 10 million] last year, or late last year. And do you see getting those levels -- actually, going to 2013 (inaudible) almost (inaudible) levels here now. [8 million, quarter (inaudible).]

Yes, you know, it's a good question. I think we were asked that earlier, maybe a little bit differently, and then Gideon, then answer the -- it's (inaudible) have a crystal ball. I think we have global markets, and the trends in the market that we will try to explain (inaudible), said that correctly, but 3G, but 4G offsetting some of the 2G price erosion that -- you know, in order to come up with a number, you really need to see the royalty part and to see the execution, maybe now semiconductor players and OEMs in the field.

We could help you out by saying, how would we get there? But I don't think we have an exact timeframe. If it's a quarter from now, two quarters from now, it all depends on the market and execution of the Nokias, ZTEs, Huaweis, Samsungs of the world. You know, the OEMs start in the front with the power bar technologies.

So, I'm not sure exactly how we could help with a specific date, but overall, explain the segment and the growth prospects for us going forward.

Got it. And I know somebody asked this question before, but when you look at your 3G mix here, exiting 2012, where do you see it? And as you look at 2013, doing all the ramps, how do you see your unit growth on the 3G side year on year, so 2013, if you had a crystal ball there?

You know, we don't have -- you know, this is not a crystal ball. I don't have any crystal ball for 3G. I think -- Vijay, I think the way to deal with it is to see the consistency of the growth in 11% year over year until the last quarter, 7% sequential growth in mainly 3G. And let me add something there.

One of the things that muted our growth in the last few quarters is the headwinds with the 2G rampdown of -- at Nokia, by Broadcom (inaudible), or about it happening. Maybe a rampdown gone, so we see this going down. All these old iPhones, that would -- if they had the -- with the levels, the iPhone very substantial volume now, it's almost [gone]. So these headwinds now becomes less and less significant.

So what we are going to see from now on is just growth, hopefully without losing any -- without any more headwinds that are related to [legacy]. You know, what we have now is what we gain and we are not losing anymore.

Got it. On the licensing side, obviously, it tends to be lumpy. How do you feel about the licensing pipeline as you look at next year? And quarter to quarter, obviously, it's a little bit tougher to kind of guide, but when you look at next year, year on year, how do you think about your licensing pipeline and prospects there?

It's difficult to say, to think about next year pipeline in licensing. You know, we have -- and I think, [from the dimension], we have a lot of more products to offer, than we did before. In the beginning of the year, we didn't have the XC4000. At the beginning of the year, we didn't have the TeakLite-4. At the beginning of the year, we didn't have -- we had the -- all the previous generation of the MM3000.

So obviously, we think we'll now be -- are being offered to the market. You know, -- we see all these strategic customers interested in these kind of products, not the legacy type of things. They are interested in these kind of products, and that encourages us. I mean, the last quarter, even though it was, on revenue terms, a bit short, we still had these three strategic builds.

Yes, yes --

And I could also add that if you look at the longer prospects of CEVA, over the last couple of years, our annual licensing revenues were always in the $18 million to $20 million'ish. We don't see that changing, as Gideon said, just because of this bit shy Q3 licensing numbers.

I think that overall, the business and licensing is making sure we keep that $18 million to $20 million, and if we are successful with that over time, then those -- at least the strategic deals could generate very positive (inaudible) and we've seen it before.

Agreed. That's why I asked about the full year, not the quarterly numbers, on the licensing side. Last question here, on the XC4000, is that a 3G, 4G, 3G/LTE board on a single chip kind of IP? Or I know you guys gave some color. Can you -- and that's the last question, maybe some more elaboration on that.

Oh, you mean from a technology standpoint? Or from marketing?

Yes, yes, from a technology standpoint, does the IP enable you to make a backward comparable LTE and 3G all on one chip, or --

As far as I can see, there is no any XC equivalent in the market today that can run all those different standards, starting from LTE Advanced down to 2G. We are the only one that are able to offer this kind of thing.

Got it. Great. Thanks a lot. Appreciate it.

Thank you.

Richard, you want to wrap up?

Sure. Sorry, it's one second there. Operator?

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 very much. Thanks again for joining us today, and for your continued interest and support of CEVA. Please check in on the Investor Relations section of our website to see the schedule of upcoming conferences and roadshow days, where you'll be able to meet with CEVA management. Thanks very much, and goodbye.

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