CEVA Inc (CEVA) 2013 Q2 法說會逐字稿

Good morning, and welcome to the CEVA, Inc. Q2 2013 earnings conference call. All participants will be in listen-only mode. (Operator Instructions). After today's presentation, there will be an opportunity to ask questions. (Operator Instructions). Please note that this event is being recorded.

Now, I would like to turn the conference over to Richard Kingston. Mr. Kingston, please go ahead.

Thank you very much. And good morning, everyone. And welcome to CEVA's second quarter 2013 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 second quarter of 2013 and provide guidance for the third quarter.

I will start with the forward-looking statements. Today's conference call will contain 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.

These forward-looking statements include financial guidance for the third quarter of 2013 on prospects relating to a specific feature phone customer, third-party market data incorporated herein, optimism about our business outlook and the growth opportunities, including with respect to our strategy to expand our customer and revenue base, internal chip development by customers, the displacement of 2G to 3G, higher royalties from LTE, and the migration to low-cost smartphones.

The risks, uncertainties, and assumptions include the ability of the CEVA DSP cores and other technologies to continue to be strong growth drivers for us; our success in penetrating new markets and maintaining our market position in existing markets; the ability of products incorporating our technologies to achieve market acceptance; the effect of intense industry competition and consolidation; global chip market trends; the possibility that markets for our technologies may not develop as expected or that products incorporating our technologies do not achieve market acceptance; our ability to timely and successfully develop and introduce new technologies; and general market conditions and other risks relating to our business, including but not limited to those that are described from time to time in our SEC filings.

CEVA assumes no obligation to update any forward-looking statements or information, which speak as of their respective dates.

With that said, I would now like to turn the call over to Gideon.

Thank you, Richard, and welcome, everyone. I am pleased to report a second quarter 2013 financial result with revenue and earnings that exceeded our guidance range.

Total revenue for the second quarter was $12.8 million, up 6% sequentially and down 6% compared to the second quarter of 2012.

Our strong results were driven by our licensing business, where we completed several pivotal agreements with our multimedia and baseband products.

During the second quarter, we concluded six new license agreements. Four of the agreements were for our CEVA DSP cores, platform, and software. One was for our SATA/SAS technologies. And another was for our Bluetooth technology.

Geographically, one of the license agreements was in the US, and the other five were in Asia, including Japan.

Key DSP agreements signed during the quarter were for 3G and LTE, cellular baseband, imaging vision, and audio for mobile devices.

Looking at our quarterly licensing achievements, the key takeaway is the successful execution of our strategy to expand our customer and revenue base beyond our strong foothold in the baseband space.

Our competency to create vertically integrated product offering comprising of our DSPs and software enable us to address a substantially larger customer base and further diversify our revenue streams.

I believe the agreement executed during the second quarter reflects the (inaudible) of this strategy, which will underpin our future royalty growth and allow us to capitalize on multiple vertical end market and trends.

Let me now elaborate on the key deals completed during the quarter. During our previous conference call, we discussed the recent trends of OEMs moving to internalize developments of multimedia processing chips.

This is especially evident in the smartphone space, where companies such as Apple, Samsung, and Huawei are gradually relying more and more on usage of their internally designed proprietary chips to achieve product differentiation.

As we have previously discussed, we believe that this is a positive development for our business, as it will work to extend our licensing base beyond the merchant chips vendor and connect us directly into the OEM space.

In particular, we continue to see strong interest in our digital photography and embedded vision platform, the MM3101. Our comprehensive offering enable OEM to differentiate the product by combining their proprietary technologies with the advantages of our MM3101 platform.

During the quarter, we continued to see traction with this offering successfully, signing up two new OEMs, both first-time CEVA customers targeting mobile multimedia application.

At this point, due to confidentiality clauses, we are unable to disclose their identity. I will just say that both are major player in their respective mobile markets.

In the same context of diversification, we also managed to sign a new first-time customer in China for our audio DSP offering during the quarter. This customer is one of the larger vendor in audio space in terms of product volume.

For this agreement, we wanted to specifically highlight our customer decision to switch from audio processing on a CPU to our DSP.

Advanced audio technologies aim to enriched user experience in the form of audio rendering and voice control require significantly more DSP performance at much lower power levels than what can be achieved on a CPU.

CEVA's expertise with this capability played a major role in winning us this business. And we are seeing the movement offloading audio processing to a dedicated DSP gaining momentum.

We continue to make positive inroads into new markets and technology while also developing and investing in our strongest market, the cellular baseband space. It is a very demanding space, where players like CEVA have to consistently be at the forefront of technology and adapt to emerging trends.

CEVA has been able to take a lead in the DSP front as we demonstrated with successive generation from CEVA XC architecture that already supports the performance requirement of next-generation cellular, both for handsets and base stations.

We are fortunate to work exclusively with three out of the five largest players. We have been strategic relationship with these key customers, which involve ongoing discussions, coordination, and planning.

As a result of our solution expertise and customer-oriented business model, we are extremely happy to announce that one of these key customers has decided to extend the use of our product for 3G and LTE development.

We believe that this adoption sets the stage for continued long-term and successful relationship with one of our most important customers.

Now, for the remainder of my prepared remarks, I would like to provide you with updates on our markets and customers.

Overall, the handset market for the first quarter of 2013, which translates to our second quarter royalty revenue, was slightly weaker than we expected.

According to Strategy Analytics, global handset shipments dipped 1% annually during the first quarter of 2013.

While the low-cost smartphone segment in emerging markets continued to grow, [low-field] 2G feature phone continued to decline and are being displaced by low-cost smartphones.

A recent report from ABA Research Project that shipment of sub-$250 smartphones will grow from 259 million units this year to 788 million units in 2018 and will make up 46% of the global smartphone market. In contrast to this, mid-range and high-end smartphones will grow at a much slower pace.

We see that there is a clear market shift underway as value-driven mass-market low-cost smartphones are beginning to dominate, where price takes precedence over technical superiority.

This landscape bodes well for CEVA customers as they strategically target the large installment base of OEMs and ODM in China and Asia, where cost-effective turnkey smartphone solution enable them to capitalize on this trend.

Following a few data points about our customers, Spreadtrum baseband shipments grew 36% year over year per Strategy Analytics' latest report. They are ranked number one in the 3G TD-SCDMA baseband market with over 50% market share.

The TD space continues to offer huge migration opportunities for low-cost smartphone vendors. In Q1 2013, only 114 million out of China Mobile 726 million subscribers have switched to TD.

The transition from 2G to TD is expected to accelerate, as already seen by recent encouraging financial preannouncement of Spreadtrum.

Spreadtrum also recently extended its 3G product offering to the ubiquitous wideband CDMA market, which focused to reach 1 billion units in 2015.

The FC7701 is Spreadtrum's first wideband CDMA integrated baseband chip. And it's said to further reduce prices in the wideband CDMA market.

Spreadtrum announced yesterday that this platform has now successfully reached mass production. And Samsung is one of the customers that is deploying it.

Broadcom has a comprehensive technology offering for the low-end and middle segment of the smartphone, including recent introduction of quad core processors. Samsung is its largest customer with numerous Samsung models launched recently, among which are various Galaxy brands, such as Mega, Grand, Grand Duo, Fame, and more.

Broadcom is also looking to diversify its customer base and recently remarked that it continues to have design wins with handset brands like TCL, K-Touch, and Compal, totaling more than 40 design wins.

These trends where 3G-based phone displaced 2G phones strongly benefit CEVA as the royalty per chip we collect is notably higher compared to 2G royalty level.

This quarter result represents the first time that royalty revenue contribution from 3G shipment exceeded the royalty contribution from 2G.

Looking ahead, we expect this trend to continue and expedite. Next year, we anticipate to record incremental contribution to our royalty stream from LTE chips, which carry higher royalty per unit than 3G.

Last, before handing over the call for Yaniv for financial, I would like to comment on the second quarter shipment as implied by our customers' quarterly earnings statement and from our preliminary review of the royalty reports we received thus far from our customers.

The general theme is that, outside China, the handset market is soft. It is causing tier-one OEMs to reduce order and to adjust inventory. In the high-end smartphone, the trend is toward LTE smartphone that replace 3G smartphone.

As our key customer are not yet in mass production for LTE, our market share and royalty revenue derived from LTE smartphone to date is minor.

In the low-cost high-volume 3G smartphone, we are progressing very well with a noticeable unit shipment increase, in particular on the TD-SCDMA front and at China Mobile.

This is being driven by consumer preference to migrate to a more enriched user experience offered by smartphone or their feature phone.

While we expect a continuous decline of shipments of feature phone as a result of this trend, there appears to be a substantial and extraordinary decline in the shipment of feature phone related to one key customer in the second quarter.

We believe that this low shipment level of feature phones does not represent a normal trend and that it is a result of inventory adjustment and a push-out of order to the second half of the year.

With that said, I will hand over the call to Yaniv for financial results and guidance.

Thank you, Gideon. I'll start by reviewing the results of our operations for the second quarter of 2013.

Revenue for the second quarter was $12.8 million, above the high end of our guidance and a 6% decline compared to last year. The revenue breakdown is as follows. Licensing and related revenue was $6.1 million, reflecting 48% of total revenue, 22% and 2% higher sequentially and on a yearly basis, respectively.

Royalty revenue was $6.7 million, reflecting 62% of our total revenue, down 6% and 12% sequentially and on a year-over-year basis, respectively.

Quarterly gross margin was 91% on US GAAP basis, 92% on non-GAAP basis, excluding approximately $81,000 of equity-based compensation expenses.

Our total operating expenses for the quarter were $9.1 million, at the mid to high end of our guidance range, which includes an aggregated equity-based compensation expense of approximately $1.3 million.

Our total operating expenses for the second quarter, excluding the equity-based compensation expense, were $8.6 million, reflecting again the mid to higher range of our guidance.

US GAAP net income for the quarter decreased by 37% to $2.2 million, and fully diluted net income per share decreased 33% to $0.10. This compares to $3.5 million and $0.15, respectively, for the second quarter of 2012.

Non-GAAP net income decreased by 24% to $3.4 million as compared to the same period for the prior year. Our non-GAAP fully diluted EPS decreased 21% to $0.15 per share as compared to the same period last year.

These figures exclude approximately $1.2 million and $1 million of equity-based compensation net of taxes for the second quarters of 2013 and 2012, respectively.

Other related data -- shipped units by CEVA licensees during the first quarter of 2013 were 281 million, down 1% sequentially and up 14% from the first quarter shipments of 2012.

Of the 281 million units shipped, 259 million units or approximately 92% are for baseband chips, reflecting a sequential decrease from 264 million units of baseband shipped and 14% year-over-year growth in volume shipments.

As of June 30th this year, 29 licensees were shipping products incorporating our technologies, two more than the prior quarter. And we had 35 shipping customers under licensing agreements, same as the prior quarter.

As for the balance sheet items, at the end of June, CEVA's cash, cash equivalent balances, and marketable securities reached approximately $154 million.

Our DSO for the second quarter of 2013 increased to 65 days as compared to 55 days in the prior quarter. We forecast that this figure will reduce closer to the end of the year due to timing of payments from new customers and project-related payment milestones.

With regards to our share buyback program, during the second quarter and first half of the year, we purchased approximately 176,000 and 305,000 shares of our common stock at an average price of $16.2 and $15.9 per share for a total consideration of approximately $2.8 million and $4.9 million, respectively.

At the end of the quarter, we had additional 179,000 shares available for repurchase under our existing plan. Yesterday, our Board of Directors decided to increase the share buyback pool by an additional 2 million shares.

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

Now for the guidance, as Gideon commented earlier, from our preliminary view of the royalty reports that we received thus far, we continue to experience a noticeable growth in the 3G low-cost smartphone segment that is replacing feature phones.

However, the decline in feature phone shipments in the second quarter were substantial and extraordinary, reflecting inventory reduction and order push-out by a key customer.

In the consumer part of our business, after a few successive quarters of decline, we are seeing indications that our markets for our products in this segment are stabilizing and expect shipment volumes to increase as we get closer to the Christmas season.

Our guidance for the third quarter of this year -- revenue for the third quarter is expected to be in the range of $11.5 million to $12.5 million. Gross margin is expected to be similar to the second quarter and approximately 91% on GAAP basis and 92% on non-GAAP basis, including 123R-related expenses.

Operating expenses, including equity-based compensation expense, are expected to be in the range of $8.8 million to $9.8 million, higher equity-based compensation expenses offset by higher R&D grants.

Of the anticipated total operating expense for the third quarter, $1.1 million is expected to be attributed to equity-based compensation expense. And our non-GAAP OpEx is expected to be lower than the prior quarter and in the range of $7.2 million to $8.2 million.

Net interest income is expected to be approximately $700,000. Tax rate for the third quarter is expected to be the same rate as in the second quarter and approximately 14% for GAAP and 12% for non-GAAP.

Share count for the third quarter is expected to be in the range of 22.7 million to 22.9 million shares.

Our US GAAP EPS is expected to be in the range of $0.08 to $0.10 per share. And our non-GAAP EPS, excluding aggregate $1.5 million of equity-based compensation expenses net of taxes, is expected to be in the range of $0.15 to $0.17 per share.

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

Thank you. We will now begin the question-and-answer session. (Operator Instructions). And the first question comes from Gary Mobley from Benchmark.

Hi, guys. Thanks for taking my question. So, a couple of trends would seem to drive your average royalty rate up on a per-unit basis for quarter. You had a higher mix of non-cellular royalty units. And as you mentioned, you had a greater mix of 3G royalty revenue versus 2G. So, I'm hoping you can reconcile why we actually saw an overall decrease in the blended royalty rate per unit given those two factors.

Yes, good morning, Gary. If we look at the handset space, this is the first quarter that we actually saw the first change of the needle into a higher blended ASP overall on the wireless segment.

So, what you just noted is exactly what happened in this second quarter. And that should continue and go into the third quarter.

What offset it as an overall average, in the non-baseband business, we had one new customer shipping a pretty high volume of Bluetooth chip, which is the first time he is in production with our technology. And of course, a Bluetooth chip is a new market for us in the sense that it's a very much smaller and low-cost chip. And the ASP there is lower than the regular mix.

So, it's a new add on, a new customer that did get into very high volumes as we go along. That unfortunately offsets the overall ASP of the non-baseband business and has some slight effect on the overall ASP as well because of that new customer.

Overall, if I want to -- if you want to add and look at Q3, we believe that, in ASP overall blended mix, we could see for the same reasons as you mentioned up to 20% sequential increase in EPS next quarter.

Okay. All right. Congrats on the strong licensing quarter. And based on your commentary, it looks like you're doing a good job of diversifying your future royalty stream. So, I was hoping you could share with us your best estimate as to the timing of when we'll see significant royalty contribution from these MM3K-type licensing arrangements and then as well some of the others in audio subsystems, etc.

Yes, Gary, that's a good question. This is Gideon. Two things, first of all, when it comes to the MM and the audio, these are kind of a consumer type of product. The difference between consumer type of multimedia product and baseband is that, in the multimedia, you don't need to go through certifications in the operator case.

Once it works in the lab, in the customer lab, you can go out into production. So, usually, a cycle of multimedia, it's about 12 months. And the deals that -- the licensing deals you -- I mean, the type-out date and the production timeline that they outline in front of us are much faster than in baseband.

Okay. Last question from me has to do with sort of how the licensing revenue shaped up for the quarter. It -- I'm just curious if there was a lot of customization work involved. And was that the factor for the higher-than-expected R&D? I know you don't break that out specifically, but it appears as though that was a pretty high number.

And then as well, was there -- was the licensing activity skewed toward late in the quarter, and that's why we saw an increase in AR? That's it for me.

So, no, that's not necessarily the case. There was no customization work at all this quarter. All the deals are straightforward, immediately recognized upon the execution and delivered the technology. And the fact that R&D was higher was due to the timing of some of the R&D grants that we received.

There were no grants yet this quarter, which we hope will go into Q3. And that's where we guided lower OpEx overall.

And what was the other part of the question?

The timing of license deals.

Usually at the end of the quarter.

Yes, usually, we have a nice last two weeks of the quarter when Gideon cancels all the vacations. So, that's when we get the deals done.

All right. Thanks, guys.

Thank you.

Thank you. And the next question comes from Suji De Silva from Topeka.

Morning, guys. So, perhaps a question there on the license revenue as well. The two large deals, did that -- was that a significant part of the overall license revenue you reported this quarter?

Not necessarily. We don't break it out. We have two licensing arrangements. One is a multi-use, which can use our technology across multiple product lines and multiple generations of chips. And one is a single use, which is for one product line or one type of first product. And then if they want to go to a new design, new feature, low-cost type of next generation, they come and pay another license fee for that.

Usually, what we see, it's for new technologies. We still -- we have more of the single-use flavor and for either larger companies or more advanced companies that use it across multiple product lines, we see the multi-license deals.

So, sometimes it's a mix, not necessarily the newer markets are the bigger deals and so on. I think it's an overall mix this quarter like any other quarter.

Suji, this is Gideon. One thing that I want to add to what Yaniv was saying, the noteworthy topic or the point with regard to the OEM -- the deals, the multimedia deal is the fact that we signed with an OEM.

When you sign with OEM, basically, you have in front of you a large significant more customer base or licensing opportunity base. As you know, the handset space when it comes to merchant chip is a very consolidated market.

And it's how to get there with a differentiated product. The fact that the OEMs figure out that they need to differentiate, and the way to do for them is to make a chip, that's good news for us because we can go speak with them directly and extend the licensing opportunity.

That is a very exciting trend, Gideon. Thanks for the color there. And so, Yaniv, you've talked in the past about license being in sort of a -- I guess $4 million to $5 million range. And with the MM ramping, that might see an uptick. Should we think of a new range for licensing with MM? Is that going to be a steady contributor here to help licenses going forward?

No, I don't think we're changing overall metrics of where we are comfortable with our licensing business. Of course, if you see this licensing business, I believe it's the -- I think the highest we had in the last four years. So, as Gideon mentioned, it's very nice to be able to diversify. But, I wouldn't change anything thus far.

On the other hand, we all know that there is consolidation in the wireless space, fewer companies overall in our core business, much larger, much more successful companies. But, I think it's a blend of new markets, new opportunities with some older markets and its own merits and opportunities and newer generations and things like that and new product lines.

So, for now, we're good. And we're happy that we're able to differentiate a bit more than just baseband.

And the last question, on 2G, can you just talk about the longer-term trends in terms of pricing as it stabilized from what you've seen in the past? And should we expect it to be flattish units or declining units going forward? Thanks.

That's a good question. Overall, when you look on the low-mid range of the market, 3G's growing, and 2G declines. And this will continue I think for awhile. We don't know exactly how to do it.

In the 2G, when it comes to ASP, it's pretty stabilized. It's not something that we were facing years ago. There is some dynamics in the 2G. There are a few big customers, like Nokia and even Samsung, that's still committed to 2G and find opportunities there.

But, in generally, it's declining and have been replaced with 3G. And that's what we are looking because, when we move to 3G, ASP's higher, and we are progressing.

Fair enough. Thank you, Gideon.

Thank you.

Thank you.

Thank you. And the next question comes from Joseph Wolf from Barclays.

Thanks. I have two questions. The first is -- and I think you touched on this, but I was hoping for a little bit more clarity. On China Mobile, if you look through, they've had some pretty steady increase on the 3G side.

And I'm wondering if you could at least give us some sort of ballpark in terms of what you think your market share in 3G in China is with those new customers as they -- I think they report them monthly.

And then my second question is, given the commentary on the 2G that you made on the call and now on the last question, when do you think your units of 3G will be greater than your units of 2G now that revenue's already gone in the direction of 3G?

Yes, Joseph, this is Gideon. Let me take one by one. First of all, when it comes to China Mobile, this is right now at least just from Spreadtrum's purpose, it's -- we have between 50% and 60% market share.

Spreadtrum is I think doing the right thing in the TD-SCDMA space. They are focusing on the low-mid range part of the space. Qualcomm, for example, in their conference call said clearly that they are not addressing this price range and segments. So, we have like 14% or 13% penetration rate right now. And Spreadtrum by themselves are very bullish about going forward.

Another thing about Spreadtrum is their announcement that they made yesterday that they have -- they are now in mass production in the wideband CDMA market. Wideband CDMA market is much more ubiquitous.

In my prepared remarks, I spoke about 1 billion units in 2015 because this is the 3G that goes to India and Africa and Latin America and Eastern Europe, those guys that are still in 2G. So, they will take down the prices and bring up the volumes.

So, this brings me to the second question. It's hard to say for now when exactly we'll cross the point. But, at least one thing that we can tell you, it's consistent. The ASPs in 3G are stable. And they are significantly higher than 2G. And that's a trend.

And there are still few bigger customers, as I said to Suji, that are still committed to 2G. Nokia is still -- has planned to 2G. Samsung has plans to 2G. The edge-based smartphones, there are all sorts of ideas how to provide value proposition in the 2G.

And to add to Gideon, what Gideon said, we did cross this last quarter our first junction with regards to the [dollar] revenue. So, now, we're -- the overall 3G contribution was higher for the first time ever for us from 2G.

Your question is a very good one. Our next target should be also crossing over the volumes. And then you have a nice thing to talk about.

Thanks, Guys.

Thank you.

The next question comes from Anil Doradla from William Blair.

Couple of questions, now, you talk about this inventory build-out from one particular customer, 2G centric. I just want to understand whether this is related to weaker-than-expected sell-through. Is it due to some structural shifts away from 2G? Any -- and basically, are people not buying the models that you were designing, or this is just a temporary hiccup? And I have a follow-up question.

Anil, this is Gideon. I think it's little bit of everything. This specific customer said that after a slow start at the beginning of the year, they start seeing in June pickup in demand or whatever forms that he referred. That's one data point.

The other data point is that we see, looking on the customer royalty breakdown, that there is movement from 2G feature phone to 3G feature phone. So, it means that this specific customer, not doing all the way to smartphone, but still going to 3G.

Whether it's a sell-through issue, we don't know. We don't know. But, definitely, that's what the customer told us, that the decline is extraordinary, and there is also a push-out.

So, you do not rule out the possibility that these revenues which you've seen this strong decline does not even come back.

No, I believe that, if it will come back, not -- they don't necessarily will come to the full extent the feature phone. They may -- some of it will come back in the low-cost 3G phones, which is good for us. It's even better for us. If there is a lag of the quarter before that clears off or partially clears off, that's the point that we don't exactly know because it's an OEM level.

Understood.

At the end of the day, 2G goes down. 3G is going up. And it's not one to one. It's not the same pace. And along the way, there will be -- and the first thing, the easiest thing is to do -- is to clean the inventory and the overall. But, what we were told by the customer that this is a low point in the 2G volume for sure.

Okay. Great. And a couple of follow up is, can you just give a sense of how you expect the licensing royalties breakdown to look? I know you don't break it down. But, give us some qualitative commentary around that.

And the other question I had was, one of the key things we're seeing is that -- whether it's a mix or it's an ASP pressure, we're noticing that 20% plus year-over-year decline ASPs.

Now, that is eating up into some of the unit volume growth for you guys, resulting in an equivalent growth rate on the top line.

When do you think the ASPs will start moving upwards? When will we start see year-over-year ASP increases? Is it 2014, or is it sometime in 2013? Thanks a lot.

Yes, a lot of good questions. On year-over-year base, I'm not sure. I think we need to go and do a lot of math and a lot of guessing. And I would look at it differently a little bit from one quarter to the other and on a sequential basis. I think that will show you the progress or not from this.

Right, even sequential is fine.

Okay, because on year-on-year, basically, there are two issues. One of them was, of course, the experience that we all know about. There's significant price erosion in the 2G phones a year ago. And that's 30% to 40%. That's one of the factors.

In the last couple of quarters, we also had an issue with our older generation of consumer products, which were down over time and also had a different volume and mix.

And we said two things on this call, and we said it earlier. One, from the consumer side, at least when we look at Q2 that we reported today and we look at the partial royalty reports that we've received so far, from the dollar perspective, we do not see any further decline, at least for Q3.

So, for us, it's good news because it's stable. And if Christmas is around the corner, hopefully -- and again, we don't guide Q4 on this conference call. But, hopefully, if the volumes pick up, then we should enjoy higher ASPs and higher volume on the non-baseband stuff.

So, basically, you're saying, Yaniv, that the June quarter sees a trough on the ASPs. That's what -- is that the right way to look at it?

Sorry. Say that again.

The June quarter will mark the bottom in your ASPs. And starting from the September quarter onwards, we can start seeing a positive sequential growth in the ASPs.

Yes, and the positive sequential growth is -- could reach even 20% next quarter. Again, I don't know how -- if you ask me how Q4 or Q1 2014 would look like, but at least in the short term that we do have the data and the visibility, that's a very fair assumption.

And the color around the licensing and royalties qualitatively as we go into the September quarter?

I think that, from this feature phone issue that we talked about, there is going to be a decrease in volume in overall 2G, not just because of the normal trends Gideon mentioned and the market flavoring smartphone, but really from that single customer issue to lower volume.

That lower volume, although the ASP is higher, will take our royalty down from this level today, and I would say somewhere up to 10% or so.

And with that said, if you look at the guidance, and that also ties to a prior question about year over year, I think the guidance also indicates that, if you compare Q3 of this year, at least the guidance part of it, versus the actual non-GAAP of last year, we're very, very close or the same type of level that could hopefully or potentially show the first time of a positive comparison on a year-over-year basis after quite a few quarters of not being there.

So, I think we're getting there. At least the guidance does support a flat year-over-year comparison with all the issues we talked about.

Very good. Thank you very much.

Thanks, Anil.

Thank you. And the next question comes from Matt Robison with Wunderlich.

Thanks for taking my question. First, have you received reports from all your major royalty players -- payers at this point?

Yes, I would say that the majority of them, yes, not 100%, but the bigger players, we did.

Okay. How significant to licensing was the infrastructure deal that you announced on the last call?

Infrastructure, no, the infrastructure deals we then taken into this quarter?

Yes, I know it was a -- .

-- Prior quarter -- .

-- Quarter kind of a situation. You announced it in the prior -- in the -- .

-- Yes. We said I think in the last quarter as well, it's very few hundreds of thousands of dollars that will be recognized in Q2, 3, and 4. We believe that we'll be finishing the project.

Okay. And the strength in -- I know you're not breaking out design services anymore. Should we take it that the strength was from new licenses as opposed to a big uptick in design services?

Yes, correct. The design services was a normal level of $700,000. So, if you exclude that, it's the highest licensing number we came up in the last four years.

And relates to Nokia and their commentary about the destocking process during the first couple months of Q2 and then improvement they started to see in the third month, we expect to see some 3G contribution from the growth of [Asha], or is it purely 2G with those guys?

No, it's also 3G, and we already start seeing it.

Okay. And so, that's really what we should look for I guess in the fourth quarter for you guys as a -- .

-- That's the key. That's I think the key for the -- and all the work that they did with inventory probably to setting up things for more advanced phone.

Right. Okay. And, Yaniv, just the -- these will have -- .

-- 300,000 CapEx, 200,000 depreciation, 193 employees.

And the cash flow from operations, give us that. And I presume it was the mix shift towards licensing, most of it coming late in the quarter with the 10-day stretch in DSO. Is that the culprit there?

That's true, but still positive. It was about $800,000 if I recall, so still positive.

Okay. Thanks.

Thank you.

Thank you. And the next question comes from Jay Srivatsa from Chardan Capital Markets.

Yes, thanks for taking my question. Gideon, at a higher level, over the past few quarters, you've had some disruptions, either in the consumer electronics business or, in this case, the feature phone business. As you look ahead, I mean, how do you manage this kind of volatility and give the confidence to investors that you have a sustainable business model that'll continue to grow in terms of revenues and earnings as you look at 2014?

Yes, you speak about the royalties and not licensing. Royalties is not under our full control.

I wouldn't -- when it comes to the consumer activities that we have to date, it's not something that I would consider it a destruction of business or controlling. We -- our play is in the baseband in unit terms, more than 90% [fall in the] baseband.

Now, the baseband market is -- overall is in transition. And we are as part of this transition. The fact that feature phones goes down and the certain quarter, it goes down beyond the regular trajectory that happened, it's not something that concerned me because, at the end of the day, the trend is moving to 3G. And I want to be more and more 3G. And there was a question, when would we have more volume in 3G than 2G? That's the point that I want to be there. And any 3G point, we have any 3G going up. We have higher royalties.

We will be also next year as part of the LTE. And this will be incremental.

So, I don't think that, from CEVA's standpoint, we are surprising people. We are going with the market, and we are doing well where we should be when this is the high-volume market.

Jay, I would also add to Gideon, if you look at the players today in the wireless space, in the baseband, all the big players -- and we're talking about north of a 2 billion unit market opportunity, other than the Qualcomm and the media techs of the world, all the large other players work with CEVA.

So, at the end of the day, whether they have issues or the market has issues one quarter or the other, at the end of the day, if we are and we continue to work from one generation to the other with them, we should enjoy the wave of higher ASPs as we go from 2G to 3G and 3G to 4G.

And of course, if we look aside from just the cell phone market and look at the other incremental baseband business, like machine to machine or macro or pico cell, that is all incremental and new customer base that could help us in baseband overall.

All right. Spreadtrum, as you know, is now going to be acquired by a state-owned enterprise in China. What does that do to your relationship? Do you see any change, or do you see it continuing as you've had in the past?

I think it's -- I don't see something dramatic change in terms of the relationship with Spreadtrum. Spreadtrum, we have a very good relationship with Spreadtrum. They use us exclusively. I think it will continue. But, we have to wait and see.

Thank you.

Thank you.

Thank you.

Thank you. And the last question comes from Vijay Rakesh from Sterne Agee.

Hi, guys. Thanks. You mentioned weakness at this 2G feature phone customer. Do you see them coming back in the second half with 3G? And should that -- how do you see that trending?

Yes, I think somebody asked me this question before. I believe that it's a mix. Definitely, part of the 2G feature phone going forward will be transferred to a 3G feature phone.

But, still, there is a relatively big market for 2G feature phone. And by saying 2G, I'm referring to [LG] base, where you can do Internet surfing, and you can add Wi-Fi, and you can add things and do a -- and give you, I would say, minor or subset of -- with the experience at about $30 phone.

So, there is a market for this. We don't know how big is it. We don't know how these big customers that we were saying, how committed to this one. We'll have to see. But, definitely, when it comes to migration for these specific customer to 3G, we see.

Got it. You mentioned the ASPs bottoming and might be with this 2G fallout. When do you see the units crossing over on the 3G side?

Yes, I think we answered that as well a bit earlier. This quarter was the first quarter or second quarter that the revenue crossed over and was higher in 3G. On the volume, we don't have any crystal ball for that. But, there's no doubt from whatever report and the market data that we see. But, the trend is for 3G volume to continue to grow much faster than the overall pace of the market.

So, eventually, down the road, it should happen. We don't know an exact date yet for it to happen. But, that's our target to reach that point. Of course, it should increase our ASP. It should increase our overall dollar revenues for royalties. That's our trend. And the more we'll get 3G, and the more we'll get LTE design in the next production, that all is good inputs and good progress.

Got it. And last question, I know you mentioned something about -- was end of the -- sorry, ASPs growing 20% into the third quarter. And the 3G LTE OEM who [got] the license, is that a global tier-one OEM or a Chinese OEM?

Can you repeat the 3G -- can you repeat the last part of your question?

In the prepared remarks, you mentioned one OEM has upped the license to the 3G and LTE and expecting ramp from them. I'm wondering who that -- is that a global tier one, or -- ?

-- No, there was two OEMs that licensed our MM3101 platforms. These are a global -- I would say global OEMs. That's answer your question. And the other one on the 3G going into LTE, that's also tier-one global OEM, semiconductor company, an existing customer for us.

All right. And what was the -- what was growing 20% sequentially? I missed that.

That's the ASP increase or potential increase from the average second quarter to the third quarter.

Okay. Great. Thanks a lot. Really appreciate it.

Thank you.

Thank you.

Thank you. This concludes our question-and-answer session. I'd like to turn the conference back over to Richard Kingston for any closing remarks.

Thanks very much. So, thank you, everyone, for joining us today and your continued interest and support of CEVA.

We will be attending the Oppenheimer's 16th Annual Technology Internet and Communications Conference on August 13th and 14th in Boston and invite you to join us there.

Thanks very much, and bye, bye.

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