CEVA Inc (CEVA) 2012 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the CEVA, Inc. fourth quarter and year-end 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 Mr. Richard Kingston, Director of Marketing and IR. Please go ahead, sir.

Thank you, and good morning, everyone. Welcome to CEVA's fourth quarter and year-end 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 also review our progress during 2012. Yaniv will then cover the financial results for the fourth quarter and full year 2012, and will provide guidance for the first quarter and fiscal 2013.

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 first quarter 2013, market data from ABI Research, Infonetics Research, and Strategy Analytics incorporated herein, optimism about our business outlook and growth opportunities generally, including trends in the 3G, LTE, smartphone and base station markets, as well as our market penetration, product releases and design wins by our customers that incorporate CEVA technologies.

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 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. As I am in the process of getting over a cold, Richard will lead and present the business prepared remarks, and I will join in the Q&A session. Richard?

Okay. Thanks, Gideon.

I am pleased to report a solid finish to the fiscal year 2012, with revenue at the midrange of our guidance, and 16% sequential royalty revenue growth. As you know, 2012 was much more difficult than initially anticipated, due to the challenging macroeconomic environment, and product transitioning in the handset space.

As a point of reference, the semiconductor industry was projected to have contracted by almost 5% in 2012 as compared to 2011, according to ABI Research. According to data from IHS, the handset market was projected to have grown only by 1% in 2012, as compared to 2011, which was significantly below what was expected at the beginning of the year. In fact, 2012 had the lowest annual growth rate in the handset market for the last three years.

Looking at our fourth quarter results, total revenue was $13 million, at the midrange of our guidance. Royalty revenue was $8.2 million, a 16% sequential increase, and down by 19% on a yearly basis.

Our fourth quarter royalty revenues saw sequential growth driven by unit growth in all three segments -- 2G, 3G, and 4G. In this respect, customer units shipped reached an all-time high record for CEVA, surpassing 300 million units. This impressive shipment milestone more than offset moderate price reduction in 2G featurephones, the ramp-down of old iPhones, and the ramp-down of 2G phones at Nokia by one of our customers.

In the fourth quarter, our licensing revenue was $3.6 million. We signed eight new license agreements. Five of the agreements were for our CEVA DSP cores and software, including two new CEVA-XC customers. Geographically, two of the license agreements were in the US, one in Europe, and five in Asia, including Japan. Target applications for the agreements closed during the quarter are primarily baseband processors, G-Fast modems that enable operators to offer fiber-to-the-home-like speeds of up to 1 gigabit per second, mobile audio, and solid state drives.

Other revenues were $1.2 million, higher than what we projected, and relates to licensing of development tools in conjunction with a fourth quarter licensing deal with a large customer.

In previous reporting periods, we broke down revenue from license agreements into two components -- licensing revenue, and other revenue. Other revenue includes primarily sales of development tools, tools licenses for our cores, and a fee for technical support. As this revenue component is directly associated with licensing revenue, starting with the first quarter of 2013, we plan to consolidate these two revenue items for the sake of simplicity.

On licensing, we are experiencing a longer decision-making process by our customers, as compared to the beginning of 2012. This prolonged decision-making process could be explained, to some extent, by the macroeconomic environment, and also by the complexity of next generation technologies for LTE advanced, audio processing, DSLR-like imaging performance, and computer vision, all of which are considered revolutionary technologies, rather than evolutionary.

In this regard, large companies with whom we have had no previous business relationship are discussing with us a framework for a long-term engagement, involving the use of our future products to replace their incumbent DSP-enabled products.

Our 2013 annual expense guidance includes the anticipated execution of a very strategic agreement, which would involve additional R&D investments for such an advanced product. Furthermore, notwithstanding the longer decision-making process by potential customers and strategic engagements, there continues to be strong interest in our DSPs and platforms across all of our wireless baseband, Wi-Fi, audio imaging, and vision product lines.

I will now take a few moments to provide some perspective on the business outlook in our main markets, and the progress CEVA has made during 2012.

At the beginning of the year, we outlined the key drivers for our continued growth in the handset space. The first of these was the evolution of cellular networks, specifically the growth of 3G networks in emerging countries, and the migration from 3G to LTE in developed countries. The second was the mass adoption and feature set enhancements in smartphones. These growth profiles remain intact, and the positive impact on our royalty revenue is already evident in our Q4 sequential royalty revenue growth.

The following are a few related data points that reflect our strategic and competitive positioning.

Annual 3G and LTE shipments grew 21% on the yearly basis, in line with market growth. This excludes shipments of old iPhone 3G and 4 models that use our DSPs, and have been displaced by newer, non-CEVA based models. Shipments of CEVA-based smartphones, excluding legacy iPhone models, grew 446% on a year over year basis, compared with 40% for the overall smartphone market.

In its recent analyst day, Broadcom disclosed that it has achieved 500% yearly growth in 3G baseband shipments on a quarterly basis. Broadcom continues to have strong traction at Samsung, deployed within many variants of the high profile Galaxy brand, such as the Galaxy S II Plus, Galaxy Grand, Galaxy Pocket Plus, Galaxy Chat, Galaxy Music, and the Galaxy Y. Its diversification strategy that includes a full turnkey design targeting the emerging markets has also started to bear fruit, with design wins at TCL, ZTE, G5, and operator-branded phones from T-Mobile and Vodafone.

Another encouraging sign is Spreadtrum's 3G traction within China Mobile's proprietary TD-SCDMA network. There is a strong incentive for Spreadtrum to focus on TD-SCDMA, as China Mobile is the world's largest operator, with more than 700 million subscribers, yet only 10% are TD users today.

Through successive price drops, market research firm BMI projects TD-SCDMA handset sales could surpass 500 million units in 2017. Spreadtrum has been at the forefront of TD technology from its inception, and recently redefined the space with highly integrated smartphone chipsets such as the SC8810, which provides exceptional user experience at phone prices as low as $80.

Spreadtrum serves 12 out of the top 15 OEMs targeting the China market, including Samsung with its flagship phones, the Galaxy S III and Galaxy Note II, Lenovo-Huawei, ZTE, HTC, TCL, High Sense, and more. With a strong momentum for new, first-time smartphone users in China, it is expected that Spreadtrum will ship between 80 million to 100 million smartphone chips in 2013.

As for LTE, recent data from Strategy Analytics predicts that the shipment of LTE devices would hit 275 million units in 2013, a three-fold rise from 91 million units that shipped in 2012.

Quite a lot has been discussed about Qualcomm's dominance in the LTE space, as it is the only merchant vendor so far that ships in volume. However, recent announcements by some of our customers indicates significant progress in availability, as well as superior performance. For example, at its recent analyst day, Broadcom showed its 4G LTE chip, manufactured at 28 nanometer, and incorporating our most advanced DSP. This chip is planned to be released to customers in 2013.

Broadcom demonstrated that if its LTE technology had been deployed in an iPhone 5, it would have yielded 37% smaller size versus Qualcomm. This attribute allows for both lower power consumption and lower cost for one of the most expensive chips in a phone. Moreover, as this chip uses our software-defined radio technology, it supports multiple wireless standards such as FDD LTE, which would be used by most of the world's networks, as well as TD LTE, TD-SCDMA, and the legacy WiMAX to cover the rest of the world's wireless standards, including China Mobile.

Furthermore, Spreadtrum has announced that its multi-mode TD LTE chip, the SC9610, which uses our CEVA-XC DSP, will be shipping in a data card from High Sense. That was awarded a portion of China Mobile's recent 4G [German] tender. It integrates multiple communication standards, including multi-band TD LTE, dual-band TD-SCDMA, and quad-band EDGE/GPRS/GSM on a single chip.

As a result of its incumbent position in TD-SCDMA, Spreadtrum is ahead of many other potential suppliers into China Mobile, including Qualcomm.

Another key customer of ours that is well advanced and currently ramping sizable volume in LTE is Samsung. In a strategic move to reduce dependency on merchant silicon vendors for LTE, Samsung continues to migrate to their in-house developed LTE solutions, which are based on our leading edge DSP.

In addition, our key customers such as Intel, Broadcom and Spreadtrum are consistently expanding within Samsung's high volume segments in 2G and 3G smartphones. Samsung recently predicted their shipments for 2013 will be over 500,000 handsets.

Another target market that we have recently started to address is the LTE base station market, including the emerging small cells which we elaborated on in prior calls. According to market research firm Infonetics Research, the number of small cell units sold is forecasted to grow nearly 40-fold from 2011 to 2016.

Our publicly announced anchor customers addressing this space are Broadcom and Mindspeed. Broadcom has recently announced that Huawei has incorporated its CEVA-based chip into picocell products, and Mindspeed recently reported a rollout of its CEVA-based Transcede SoC within the SK Telecom network in Korea.

These major achievements, combined with the accelerating market trends, highlight and reinforce four key elements that underpin our growth strategy. CEVA is firmly established in the largest space in the semiconductor industry, baseband for mobile handsets, as well as other evolving cellular markets such as machine to machine.

Our competitive edge in software-defined radio technology for the next generations of LTE and Wi-Fi, and the inherent low cost and power performance balance of our technologies, puts us in a strong position to capitalize on the mass market adoption, and allows us to address all of the growth vectors of the space simultaneously.

Our proven track record in baseband technologies -- in particular, our pioneering position in software-defined radio -- allows us to expand into the base station market, including the high volume potential in small cells.

The spectral efficiency of LTE enables additional and very interesting new opportunities for DSP related products. One such use is voice over LTE, where higher bit rate speech codecs, combined with advanced noise and echo cancellation, allows substantially clearer phone calls, along with higher intelligibility that is required for services such as voice recognition. With our new CEVA-TeakLite-4 audio DSPs, we are in a superior position to address the high levels of processing, yet lower power usage, that is required for these products.

Finally, a new technology pillar that we have recently added to our product offering relates to image enhancement and vision analytics in cameras. Per ABI Research, 1 billion cameras were shipped in 2012, and this number is predicted to grow to 2.7 billion units in 2017. 80% of this volume is attributable to smartphones, where we already have a strong foothold through our other technologies.

Mobile OEMs are looking for new DSLR features, such as smarter autofocus, best picture using super resolution algorithms, and best image capture in low-light environments. Furthermore, with the addition of video analytics support, the camera will enable new services like augmented reality, gesture recognize, and advanced safety capabilities in cars.

We see this new revolution as an emerging opportunity for us to significantly expand our footprint in smartphones, and further, into tablets, PCs, automotives, and others. With our MM3101 platform, we are the only vendor that offers a unified vision and imaging platform that can support these future developments.

While we continue to make inroads in the handset market, the contribution from our non-handset business, which primarily composes of high profile portable game consoles and long-tail legacy consumer products, suffered continuous weakness throughout 2012. We expect this trend to continue while the economy is uncertain.

But to summarize, while 2012 proved to be a more difficult year than we had originally thought, despite this, we continued to make good overall progress during the year, and entered 2013 in a solid position. Our engineers and sales and marketing teams worked tirelessly to expedite the design cycles of new products, such as the CEVA-XC4000, the Teak-Lite-4, and the MM3101, and to sign up new key customers. Notwithstanding the ongoing macroeconomic uncertainty, we are optimistic about our prospects for 2013 and beyond.

I'd like to take this opportunity to thank our customers and investors for their continued support and loyalty, and to thank our employees worldwide for their dedication and commitment towards achieving our goals. We wish you all a happy and prosperous New Year.

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

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

Revenue for the fourth quarter was $13 million, at the midpoint range of our guidance as provided, a 19% decline compared to last year. The revenue breakdown is as follows.

Licensing revenue was $3.6 million, reflecting 28% of total revenue, down 25% for the fourth quarter of last year. Royalty revenue was $8.2 million, reflecting 63% of total revenue, down 19% from the fourth quarter of last year, but up 16% sequentially.

Other revenues was $1.2 million, reflecting 9% of our total revenue, up 12% from the fourth quarter of last year, and 62% sequentially higher.

Gross margin was 92% on US GAAP basis, and 93% on non-GAAP basis, as forecasted. Our non-GAAP quarterly gross margin exclude approximately $64,000 of equity-based compensation expenses.

Total operating expenses for the quarter were $9.5 million, at the midrange of our guidance, which included aggregated equity-based compensation expense of (technical difficulty) [$1.3 million], and $0.4 million of due diligence costs associated with the MIPS transaction.

Total operating expenses for the fourth quarter, excluding equity-based compensation and expenses associated with the MIPS transaction, were $7.8 million, reflecting the lower end of our guidance.

US GAAP net income for the quarter decreased by 43% to $2.8 million, and fully diluted net income per share decreased 40% to $0.12. This compares to $4.9 million and $0.20 respectively, for the fourth quarter of 2011.

On a non-GAAP basis, net income decreased by 33% to $4.3 million, as compared to the same period for the prior year. Our non-GAAP fully diluted net income per share decreased 27%, to $0.19 per share, as compared to the same quarter last year. These figures exclude approximately $1.2 million and $1.5 million of equity-based compensation expenses, net of taxes, for the fourth quarter of 2012 and 2011 respectively, and exclude $0.3 million of transaction costs associated with the MIPS transaction, net of taxes, recorded for the fourth quarter of 2012.

Other related data. Shipped units by CEVA licensees during the fourth quarter of 2012 was an all-time record high of 303 million, up 2% and 19% from the fourth quarter of 2011, and the second quarter of 2012, respective.

Of the 303 million units shipped, 275 million -- another record high -- or approximately 91%, are for baseband chips, and reflect an impressive 22% increase in volume as compared to the prior quarter, in which 226 million units of baseband chips were shipped.

As of December 31st, 27 licensees were shipping products incorporating our technologies, two lower than the prior quarter, due to end of life specific products. And we have 35 shipping customers under licensing agreements, two less than the prior quarter.

Despite the challenging year, our customers shipped a record of 1.1 billion CEVA-powered chipsets, compared to 1 billion units shipped in 2011. Baseband shipments also increased on a year over year basis by 6%, to 981 million, from 927 million chips. We concluded 2012 with 46% market share, based on third quarter baseband shipments, a strong customer base, and new, exciting products that were introduced throughout the year.

As for the balance sheet items, as of December 31st, CEVA's cash and cash equivalent balances, marketable securities and long-term bank deposits were approximately $158 million.

During the fourth quarter, we generated positive cash flow of approximately $5.6 million, offset by $3.5 million used for our buyback program. Our DSOs for the fourth quarter were 44 days, two days lower than the prior quarter.

As previously discussed, we have a share buyback program of up to 2 million shares. We continue to actively exercise this plan. During the fourth quarter, we repurchased approximately 243,000 shares, at an average price of $14.40 per share, and a total consideration of approximately $3.5 million. We have an additional 484,000 shares available to repurchase under the existing 10b-18 plan.

On an annual basis, we repurchased approximately 1.5 million shares of our stock, at an average price of $18.30 per share, and a total contribution of approximately $27 million.

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

Now for the guidance. As we have stated today, and in past conference calls, a key element of our forecast for the Company relates to growth in the low cost 3G smartphone, LTE and 2G based smartphones replacing featurephones. The trend of the transition of these products and standards remain intact.

However, given recent public reports from a number of our customers, and the uncertain timing of this transition, and actual penetration of 3G and 4G devices in our key markets, we have decided to continue to give quarterly guidance, but to refrain from giving annual guidance.

We generally believe that our growth primarily relates to market share capture via introduction of new and superior handsets enabled by our DSP, which usually ramp up starting from the second quarter. We believe the impact of this in terms of sequential royalty growth and annual royalty growth on a quarterly basis will take place from the second half of the year onwards.

Our guidance for the third -- for the first quarter of 2013. Revenue for the first quarter is expected to be in the range of $12 million to $13 million. Gross margin is expected to be 92% on GAAP basis, and approximately 93% on non-GAAP basis, excluding 123R-related expenses.

Operating expenses, including equity-based compensation expense, are expected to be in the range of $9.1 million to $10.1 million. Of our anticipated total operating expenses for the first quarter, $1.2 million is expected to be attributed to equity-based compensation expenses. So our non-GAAP OpEx is expected to be in the range of $7.9 million to $8.9 million.

Net interest income is expected to be about $700,000. Tax rate for the first quarter is expected to be approximately 17% on a GAAP basis, and 16% on a non-GAAP basis. The [non-tax basis] excludes the tax effect of equity-based compensation expenses.

Share counts for the first quarter is expected to be in the range of 22.6 million to 23 million shares. US GAAP EPS will be in the range of $0.08 to $0.10 per share, and our non-GAAP EPS is forecasted to be in the range of $0.13 to $0.15 per share, excluding [aggregate] based compensation expenses, net of tax, of $1.1 million.

With that, we'll open the session for our Q&A.

Thank you, sir. Ladies and gentlemen, we will now begin the question and answer session. (Operator instructions)

The first question will come from Joseph Wolf of Barclays. Please go ahead.

Hi. Just going into the guidance, can you talk a little bit about seasonality? Is the fourth quarter reflective of the end of 2012 being weak? Broadcom's comments last night reflected a pickup, or perhaps even a market share gain in its 3G business with a sequential uptick in the first quarter, which I guess impacts your second quarter. So if you could correlate or corroborate some of those data points, that would be great.

The second question I have is, if you just look at the -- this pace of this transition which you talked about in the guidance, of the 1.1 billion units shipped last year, what was -- could you give us -- I think you gave some of the numbers, but a 2G versus 3G, and what kind of expectation could we get in terms of mix for 2013, both in terms of end market exposure and perhaps even with regard to ASPs based on current pricing trends?

So, good morning, Joseph. Let me start with the number [that I gave], let Gideon add a bit more on the expectations.

And what we're seeing in Q1, how Q1 compared to Q4, and again, as you mentioned correctly, these are Q4 shipments of chips versus Q3 shipments of chips, we see about a 10% sequential decrease in royalties, which is very similar to last year as well.

I would divide it into two. On the handset side, we're only talking about a single digit decrease. Not 10%, but much lower than that. And this is due to the fact of the growth drivers that got us into Q -- a very nice 16% sequential increase into Q4. If you recall, we talked about 21% increasing volume shipments of 2G, and 23% sequential growth in [2], 3G and 4G.

So, on the one side, we don't see the typical seasonality that the market is seeing in handsets. But what is offsetting that number, in order -- for it to be a 10% decline in royalties is really the consumer-related devices. These are older devices that we have with customers shipping into a bunch of consumer device, DVD, hard disk drives, to some extent the portable gaming console, which we saw not a great Christmas season, and a Q4 number, then that is reflected in weakness in royalties for our Q1.

I think these are the major drivers for the royalties. Very similar to last year. If you look at overall rates and the seasonality, the typical pattern of seasonality, I would say, to summarize, consumer a bit weaker, and the on the handset side, we still see a very good result.

On an overall basis, I -- out of the 1.1 billion, close to 1 billion were a 2G overall baseband, and out of that 1 billion, around 800 million were a 2G base. So that's still the bulk of the business is 2G, and I'll ask Gideon to add about the transition, and how we see the year evolving.

Yes, Joseph, let me just highlight one point regarding the handsets in Q4. I don't know if you know, but there is one large OEM customer in the handset space that every Q4 makes an inventory adjustment. And that's a major source of the decline that we had in units in Q3 versus Q4, which, in a way, offset by any other, higher shipments in the China region.

So there shouldn't be any surprise. This OEM, this large OEM makes this inventory adjustment every Q4, and if you -- since you referred to Broadcom, they said that in Q1, they're going to regain more volume in 3G, and one (inaudible) this large area is going to restart ordering in the first quarter.

So that's, when it comes to the royalty revenue in Q1, reflecting Q4 shipments, when it comes to [affordable] market going forward. That's what we said in the prepared remarks. 3G smartphone, this is something -- low cost 3G smartphone, this is something that we are seeing. These new phones probably will get introduced in the market in Q1, and [people will] start shipping. And we'll start seeing the impact, starting from Q3, report out -- Q3 reporting.

LTE, it's hard to say when we're going to see this in volume production. Right now we have one big customer that ships, and we see volumes going up.

2G, in fact, in 2012, our market share in the 2G market went up, so we are still catching the market share. There is still smartphones that going into India and other emerging economies. And when you have smartphones, also there is (inaudible). So this is, in a nutshell, the landscape. It's all moving elements for us. It's the same thing that we shared with people in the past. The pace of these changes is something that the -- where we are in the food chain, it's hard to forecast.

Well -- so, but assuming a strong Q2, second half, would -- of that 800 million, would half of that transition in 2013, or is that too aggressive an assumption?

This is exactly the question that we -- when we're asking ourselves, and our customers. I don't see -- I don't think that you have these types of inputs from the Intels, the Broadcoms, the Spreadtrums, the ST-Ericssons of the world. I don't think they break it down [in orders forecasted]. But I'm sure we'll see an increase in 3G market for the 200 and something million that we ship this year.

To what extent, to how many millions or hundreds of millions or tens of millions, that's something that we'll continue to monitor, and we, unfortunately, for now, we don't want to guess and get it wrong.

Okay, great. Thank you.

Our next question --

Thank you.

I'm sorry. Our next question will come from Gary Mobley of Benchmark. Please go ahead.

Hi, guys. I wanted to delve a little bit deeper into your licensing revenue. In the application processor market, particularly on the mobile side, we've seen companies like TI get out of the market, frankly, because all of the different OEMs that have captive solutions. In the baseband market, we've seen Samsung with their own captive baseband. And I'm assuming that's hindering the ability for companies like ST-Ericsson to compete, and so on and so forth.

Is Samsung's decision to internally supply a captive baseband hurting your overall licensing activity with the rest of the merchant baseband community? And then, as well, was the attempt to buy MIPS a distraction for your overall salesforce during the fourth quarter?

So, when it comes to the Samsung in-house development, I don't think this reduces the amount of licensing, or the potential for other customers to keep sending merchant chips to Samsung. Samsung is a big company. They have -- they want to cover all the different variants of LTE. And yes, indeed, they want to rely more and more on in-house, but still, there is a sizable volume beyond that. That's one thing.

The other thing, LTE is a big market. We've seen many, many companies are targeting the China market, which has a different variant LTE. We see a lot of Chinese companies that are developing baseband for these purposes. We see companies taking the LTE for the machine to machine application. So, we have a lot of licensing opportunities.

Can you repeat the second question --

MIPS related.

MIPS again?

Yes. Gary, I think that the -- when you look at the overall, the other revenues, and I think we mentioned that in the prepared remarks, one of the deals that we signed, or one of the customers also took a large portion of different software, which we called more of the development kits and development software. At the end of the day, this was the same type of a licensing deal, and it's caused by a licensing agreement.

So probably somewhere between $400,000 to $500,000 of the other revenue, that jumped from the $700,000 range to $1.2 million, is actually looked upon, and should be looked upon, as regular licensing activity, which is all new, and based on new deals that we signed within the quarter.

This is one of the reasons why we are bundling it, and this will still be in the range of $4 million to $5 million in the pure licensing environment.

So I don't think that the sales guys actually were too disturbed from the MIPS transaction. It was very few people, and then not the sales team that are still focused on executing the business, and the DSP strategy, and not the risk processor strategy.

Okay. Okay, I just wanted to also follow up on your prepared comments -- commentary regarding increased R&D activity for a specific customer engagement. And I'm curious to know, how big of an R&D investment are you making there? What is the payback in terms of licensing revenue? And which specific end market is this customer engagement targeting?

Gary, I think it's premature to speak about it at this stage. The investment that we make there is -- the incremental investment that we make there is not something that takes [off chart] our expense level. But it's really premature. The deal is not signed there. If it's signed, we'll provide [notification].

And anyway, from a dollar perspective, we're not talking about anything major. It's very similar to prior years. Overall OpEx, probably $1 million, $2 million type of ranges. We're not talking of something unusual.

Okay. All right, very good. Thank you, guys.

And our next question will come from Daniel Meron of RBC Capital Markets. Please go ahead.

Hi, Yaniv, Gideon and Richard. As we look into the ASPs, do you see signs of stabilization there? I mean, based on my math, it sounds like it's roughly similar to where it was. Maybe slightly down from the prior quarter. If you can just give us a sense of how it's looking from here.

(inaudible), Daniel (inaudible), broken up. What?

I'm sorry. The ASPs on your royalties, what is the trend right now? It seems like it's stabilized. Maybe it dipped a little bit sequentially, but overall, stabilizing. How do you see it going forward?

Oh, I see. Yes, you're right that it stabilizes from Q3 to Q4, and even if you look at the annual, on an annual basis, you will see that overall, 2012 versus 2011 went from about [$0.035 to $0.03 on average] for the whole Company. So not a major decrease, and that is all due to the fact of the transition that we talked about. 2G did go down very, very significant in pricing, we all know that, and we have experienced that throughout the year. And with that said, the 3G and LTE has helped to offset that.

I think that will continue as we go along. The pace, [it's all determined] in the unit growth in each of these segments that I think we talked about earlier. We did not want to guess, but we see the trends from Q3 to Q4, and we hope that these types of trends will continue throughout 2013.

The pace, and what exact quarter it's going to happen, and to what magnitude, that, for now, we are putting aside, and we'll continue to monitor it as we go along. (multiple speakers)

Okay, great, and -- (multiple speakers). And another question relates to diversification of your business. You guys did a pretty -- I want to commend you for an opportunistic move to acquire MIPS, which didn't occur, at the end of the day, but I think it was a good move if it was to happen. What other means are you looking to expand your business, be it organically, maybe in the consumer arena, or in the connected devices elsewhere, and organically. And also, what is the timeframe for such initiatives to take hold? Thanks.

Okay, Dan. Dan -- Daniel, when it comes to organic investment that we are making, I am -- you know, we are having significant amount of development for things that are beyond the baseband. We are addressing the base station market. I mentioned in my prepared remarks the audio, which is a distinctive market for us, as well as imaging and vision, that is -- take us to beyond even to mobile, it takes us to automotive, it takes us to [DTV].

So when it comes to organic investment, the level of investment in the products and the software that we are developing, I am -- I'm comfortable, you see. When it comes to non-organic means, you mentioned MIPS, we are continuously looking for ways. The IP segment, if you put aside for a second [arm], it's composed of many threads and companies. And like in the case of MIPS, we'll take it -- we are very cautious here. We don't just rely on (inaudible) and future strategies, but also some traction in business, which we can leverage.

Okay, thank you. Good luck.

Thanks, Daniel.

And our next question will come from Anil Doradla of William Blair. Please go ahead.

Hi, guys. It's Brian, for Anil. I think you mentioned, the guidance kind of implies $5 million in licensing and other -- you know, the quarter is weak. But can you just talk about the pipeline relative to maybe a year ago? You commented on that in your prepared remarks. But are there more pent-up deals now waiting to happen, and is there anything you can say about activity thus far in 2013?

Yes, Brian, it's Gideon. The pipeline in (inaudible) is a little different than we had in the year ago. It's (inaudible) handset type of development. We mentioned in the prepared remarks the strategic deal that we are working -- by the way, we are more, strategic type of things than we had in the past. And the reason is, what we mentioned in the prepared remarks. People that are going into the next generation are facing a lot of challenges, because the new technologies are kind of a step, versus the existing ones. If you want to move from 3G to LTE, that's a big step. That's the reason that you see so many companies now struggling, and you see only Qualcomm and Samsung in the market today, and the production [with the] product.

So, we see new customers, companies that didn't work with us in the past, coming to us and saying, what can you offer us on the DSP side that we can do, that we can work together? So (inaudible) pipeline is good.

I wouldn't take this [3.6], and Yaniv mentioned also that there was an add-on in terms of two licenses that really take us to the range where we used to be. I wouldn't take it as a trend, but more like a singular point, where companies are taking their time, and we are trying to expedite it. But we couldn't do it indeed last quarter, but we keep going.

Yes, and on those strategic deals, I mean, could you just -- is that -- that sounds like it's more to firm up your position in the next generation technology, and to -- I guess, is it aimed at reducing time to market for your customers? Or -- I mean, are you really looking for incremental revenue opportunities there?

And then you also mentioned a little bit of an OpEx headwind, I guess. That's not -- I wanted to clarify, that's not factored into the first quarter guidance, but can you -- is there any way to sort of give a sense of the magnitude of how that could progress, the incremental expenses in 2013?

Yes, I think I said that, (technical difficulty) $1 million to $2 million overall. Not something that's out of the ordinary from prior years. I think that said, you're right that it doesn't have too much effect in Q1 as we see it for now, but as the year evolves, we'll keep a close monitor both on that, and on the model on the top line, of course.

All right. And then just real quick, small cells, you mentioned two customers. But are you working to expand into -- you know, a broader set of customers there that you're not announcing? And then, can you also talk about, sort of how we should think about content in those systems? You talked about the unit growth, but I imagine it's more of a flat royalty rate. And if you can talk anything about timing in 2013, how meaningful that could be. Thanks.

(inaudible), because we have a [long list] and ten minutes, [it would take you] -- well, the small cells, we are addressing many customers. We have an advantage, because the two customers that I mentioned are in production, and there are not that many companies in the production today in this space. And that makes our technology more mature.

The other question will (inaudible).

No, I think what we could offer them, in what type of market, I think we covered that, in the sense that the DSP is targeting the not just typical handset, but many other markets. And you could see that, even in this Q1, we signed the G-Fast modem for the fiber-to-the-home. So a lot of this in modems that at the end of the day, can enhance our licensing and future royalties. It's not just typical OEMs or [semis] in the handsets.

Thanks.

Thank you, Brian.

And our next question will come from Vijay Rakesh of Sterne, Agee. Please go ahead.

Yes, hi, guys. Just wondering if we can give a -- what the 2G, 3G mix is now?

Hasn't changed much. If we said about $800 million out of the $1 billion is 2G, it's about 80%, on an annual basis.

That's for the year. How about for the quarter?

It's slightly higher than that, because in the last quarter, we had more 3G. So, slightly higher in that.

Okay. And I know you had mentioned some uncertainty on the licensing side, and things were a little affected by macro. How does your licensing pipeline look for 2013?

I think we just answered that. Gideon just talked about it in the last question. So, I'm not sure we want to repeat it, but essentially saying that it's as good as a year ago, even more. We have new products that we talked about that we did not have in the beginning of last year, and a few markets that we did not have, like around the multimedia, vision, audio. So we just covered that in the prior answer, if that's okay.

Got it, okay. And obviously, you saw some weakness here on the consumer side. Any thoughts on when you see any pickup between the handset and the consumer side? Obviously, June will reflect March, which tends to be a little weak, but how do you see that worldwide (inaudible) picking up?

It's probably the consumer will really ramp up in the second half of the year, but you're right, it's all -- when it comes to consumer, it's economy.

Got it. Okay, great, thanks.

Thank you, Vijay.

And our next question will come from Matt Robison of Wunderlich. Please go ahead.

Hey, thanks for taking the question. You guys have had sequentially down licensing comparisons in '05, '06, '07 and '08, and now in '12. Is -- now, are we -- is part of this service and maintenance commitments that's affected the way you recognize this? And the other thing, maybe more profound, is it looks like you may be in kind of a structural shift here. Can you talk about the percentage of your licensing that was direct to brands in 2012, and how you expect that mix to shift in 2013?

So, I'll try to answer the question, and also show (inaudible). First of all, when it comes from historical, 2007 and 2008, the Company had a very large communication business. We had many more people there, and we had the license -- other products to license. When you have more products to license, you can -- I will say, theoretically, get a higher license. The Company is now --

Well, that was back when you were -- that was back when you were doing more, kind of job-shop the licensing, and --

(multiple speakers) (inaudible). If you are -- we are not -- right now, we have the DSP. We are not changing the model by doing more sales (inaudible) and things like that. We continue to do in the way we did so far. The shortfall in licensing in the quarter is, as I said, it's a point. Just one single point. I don't see this as a trend.

Okay, so let's talk about the shift in customer mix. You're talking about the strategic deals. You mentioned one customer -- one big leadership customer that's doing more captive work. How do you expect that percentage that comes from captive type brands change in '13, versus '12?

We have -- without going specific to the customer, and the type of the customer, I mean, let's make sure that we get the deal, and then we'll be happy to address questions about it.

But in general, we are dealing with a broader customer base, because we have technologies that are beyond the modem. We have this audio, and we are sticking with (inaudible) and application (inaudible), and we have the imaging and vision, and we meet automotive companies, and we meet [DPV] companies. And the addressable market that we have today is bigger, and that's why -- one of the reasons that the pipeline is bigger.

How much has the consolidation in the merchant semiconductor business -- how much negative impact has that had on your licensing business?

It generally has an impact, because when it comes to baseband, let's say, LTE [entry], you know, you don't have that many companies. If you leave aside for now Qualcomm, you know, real companies that can create all this, and this is what we are looking. We are looking for companies that generate the volumes. You have less than (inaudible).

However, we have -- we have now the Wi-Fi, and that open up another customer with the same DSP technology. We are addressing the base station, the small cells, and these are different customers.

So in terms of the amount of customers that we are -- have in front of us, we manage to basically extend it even beyond what we had in the past.

Yes, okay, so you've got some -- at least, qualitatively, you've got some addressable market expansion now --

Yes, it's not -- yes, it's not qualitatively, it's quantity-wise. We have much bigger customer -- potential customer base.

Right. Do we -- are we going to see any change in capital spending associated with some of the tools, resale tools --

No. No, last quarter, it was about [300 and something thousand dollars], $100,000 (inaudible), annual less than $1 million, and that should not change into 2013.

And is depreciation flat sequentially also?

Well, same numbers, more or less. $150,000 for the quarter, about $600,000 for the year. That's not going to change in 2013.

Okay, thanks.

Thank you, Matt.

And ladies and gentlemen, the final question for today will come from Jay Srivatsa of Chardan Capital Markets. Please go ahead.

Yes, thanks for taking my question. Gideon, in terms of the mix, clearly, you've been expecting the smartphone business to ramp up, and it looks like it started ramping up in some part. That should start to improve your ASPs, would it not? I mean, it looks like ASPs are relatively stable, but the offset in the units should be -- you know, should be counteracted by the increase in the ASPs at some point, don't you think?

Yes, I think so. There is -- one thing that I will -- you know, maybe you consider it not as a good news. But we are -- on a quarter on quarter, still we are expanding our market share in the 2G. So the volume in 2G are growing. You know, let me just give you an example -- Nokia. All the Asia products (technical difficulty), and they are shipping more.

So, yes, indeed, we see the trend, the 3G in more volume, but also, 2G is growing. And in fact, in the last, I would say, two quarters -- no, let's say this -- two quarters, 2G is growing faster than 3G.

Okay --

But that said -- but you know, I don't know how long will it take, the growth in unit-wise in 2G. And definitely, the 3G and LTE is more sustainable. In 2G, it's more like, I think we see and going to see more smartphones, 2G smartphones that also take the ASP higher.

Okay. In terms of the full year guidance, I know you refrain from giving full year guidance. I guess the question is, what's the rationale behind that decision? Are you concerned about just volatility in the market in general, or are you concerned about the mix, or what was the rationale behind not giving full year guidance anymore?

Well, I think it's quite simple. The fact is, none of our customers actually open up and give more color, or specific color about the handset business, and baseband in particular. If you don't have that to back up, you have -- it's our own analysis. We did not want to repeat 2012 by misinterpreting the market, the Nokia, the RIM business at the time. I think we have very interesting growth drivers ahead of us, that we've mentioned, but we don't want to take a calculated risk, versus just seeing all the announcements. Let's wait for next month specifically around Mobile World Congress. I think you will see a lot of new phones out there, a lot of introductions of the phone, that this is exactly what we are talking about. We are continuing to replace TI in the higher end phones, and Qualcomm, in a sense, in the lower end 3G phones.

The magnitude, and the product announcement, this is something that we want to first see out there, and then we'll be much more comfortable to guide and to build them all.

So our longer term model is intact. You still see growth in handsets. On the short term, meaning the next couple of quarters, we did not think that it's right to take a calculated guess versus sharing with you the growth drivers, the customer base, the market that we've talked in length about, new markets, not just the traditional baseband guys. And I'm sure we'll see a few new players that will start contributing royalties for us in 2012 from all of these different segments that we have just talked about.

All right. Last question from me. Gideon, at the end of the day, even though you've tried to penetrate several other adjacent markets, you're still depending heavily on the handset business. When do you foresee to have, to get to a point where you have some level of certainty in other areas that will potentially offset the seasonal fluctuation, or the uncertainty around the handset business?

You know, Jay, I wouldn't say the (inaudible). The answer (inaudible) is -- have a consistent trend in terms of migrating from 2G to 3G to 4G. And we better be focused -- having dealt, make sure that we have a foothold in all these three segments, and we have it.

Now, regarding other growth engines, and please think (inaudible) as a growth engine, and not something to cover any shortfall in mobile. I don't want to -- I don't see any shortfall in mobile. I want to be there. I want to grow there from 46% that we are now, to be 60% and 70%. I want to go from 2G to 3G, and get [RSP and LTE] to be there. This is the primary goal of this Company.

Regarding the other growth engine of the Company, we have find -- I mean, we find -- I don't recall exact now, I don't give something which I don't (inaudible), but in general, yes, we're going to see, starting for, let's say, end of this year, contribution from other -- royalties from other businesses. (inaudible).

Okay, thank you. Good luck --

And incremental, it's incremental. It's not offset.

Thank you.

Thank you.

And ladies and gentlemen, that will conclude our Q&A session today. I would like to turn the call back over to Mr. Kingston for his closing remarks.

Thanks, Denise. Thank you again for joining us today on the call, and for your interest and support in CEVA. We will be attending the Mobile World Congress, the world's largest mobile exhibition, on February 25th through February 28th in Barcelona. And you can find more information on upcoming events and conferences that CEVA will attend on the Investor Relations section of our website.

Thank you, and goodbye.

Ladies and gentlemen, the conference has now concluded. We thank you for attending today' presentations. You may now disconnect your lines.