CEVA Inc (CEVA) 2013 Q3 法說會逐字稿

Good morning, and welcome to the CEVA, Inc., Q3 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. Good morning, everyone, and welcome to CEVA's third 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 third quarter and provide guidance for the fourth quarter 2013.

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.

Forward-looking statements include our prospects for the licensing deal that was not executed in the third quarter of 2013, financial guidance for the fourth quarter of 2013, optimism about our business outlook and the growth opportunities, including with respect to our strategy to expand our customer and revenue base, positive implications from Microsoft's acquisition of Nokia's mobile phone business, 3G expansion in China, and the LTE trends.

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

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

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

Thank you, everyone. Thank you, Richard, and welcome. As you know from our press release earlier this month, revenues for the third quarter was lower than originally projected, primarily due to significant license agreement that was not executed as planned.

Goes without saying that the licensing shortfall is very disappointing. Nonetheless, we continued to see momentum in our licensing business with the diversification of our customer portfolio and the increase of our market presence beyond the baseband market.

Our expanded product portfolio allow us to address the needs of larger customer base as evidenced by customer -- by the customer design wins that we closed during the quarter.

Total revenue for the third quarter was $10 million, down 17% compared to the third quarter of 2012.

Licensing and other revenue was approximately $4 million, and royalty revenue was approximately $6 million.

During the third quarter, we closed five new license agreement with customers targeting base stations, satellite communications, smart meters, automotive, and connectivity applications.

Geographically, two of the license agreements were in Europe and three in Asia.

In the third quarter, we continued to expand our customer base in addressable market. To this end, we signed five agreements in the quarter with four out of the five agreements signed with first-time CEVA customers. These important new customers are targeting interesting growth market, such as smart meters, automotive, connectivity, and satellite communication.

Overall, in the last two years, CEVA has signed more than 20 DSP-related licensing agreements with non-cellular baseband customers because of wide range of growing market.

In addition to the market that I mentioned about, we made strong strides into new applications, including embedded vision, digital photography for mobile, audio and voice for mobile, Wi-Fi connectivity, and wireless infrastructure.

These non-cellular baseband agreements offer three significant benefits for future growth. First, the potential royalty stream are incremental to our baseband business without destruction or channel conflict.

Second, the market and customer base that we are targeting are fragmented, which significantly reduces the inherent risk on depending on few large players competing in the single marketplace.

Third, the royalty ASP for these product are higher than the CEVA average royalty today, which serves to raise CEVA royalty revenue per unit as these customer bring CEVA power product to the market.

We view these as the major advantages that underscore our strategy and (inaudible) in diversifying our revenue streams into new non-cellular growth market that can play significant role in helping drive our future earning growth.

Now, I would like to highlight and comment on recent developments in our main market cellular. During the third quarter, Nokia announced that it will sell its mobile phone business to Microsoft. CEVA's DSPs enable the majority of Nokia mobile phone shipments.

We do not have currently presence in its smartphone category. We were recently asked about the possible implication of this acquisition, in particular if Microsoft eventually abandons the mobile phone segment.

Though we can't comment specifically on this transaction, Nokia and Microsoft executives have provided some visibility into their plans for this business through their public statement. According to Nokia Head of Marketing, Microsoft plans to enhance the Asia phone lineup, bringing key services to the platform.

Microsoft and its CEO Steve Ballmer has already stated that some of Microsoft services that were previously restricted to the higher-end smartphone may be adopted for the Asia lines of phone.

Additionally, Nokia has commented that bringing low-cost phone options to the next billion people and beyond that have yet to own camera phones is a priority. If Nokia is successful in this strategy under Microsoft ownership, CEVA is poised by virtue of our DSP powering their mobile phone portfolio.

On LTE, (inaudible) telecom and media research, the LTE penetration in the US is 18%, significantly higher than Asia specific with a penetration rate of only 1%. In all other regions, the penetration rate is less than 1%, including Western Europe.

Despite this very small penetration rate, which globally adds up to only 2% of overall mobile subscription, per ABA Research, LTE chipset shipments are expected to go to 850 million units by 2018.

As discussed in previous calls, CEVA baseband customers are slowly rolling out LTE product into the market. The latest entrant is Intel, who in late August stated that it is going into mass production with its first multimode LTE chip, the XML7160. This is in addition to Samsung, who is already in the market, and Spreadtrum and [Litco], who are targeting next year for expected launch of China Mobile TD-LTE network.

In China, 3G smartphone expansion continues to gain momentum. Per IDC China, second quarter shipments reached 110 million units, of which 86 million are smartphones. The main reason for the high penetration rate of smartphones is the availability of low-cost smartphones, which are priced as low as $60.

Leading the way is China Mobile, the world's largest operator. After the slow start with its homegrown 3G [standard] TD-SCDMA, China Mobile and its suppliers are gaining momentum. 40% of the smartphones sold in the second quarter in China were compliant with the China Mobile network. Our 3G market share at China Mobile is 50%.

With regard to 3G wideband CDMA smartphone, the potential for true low-cost smartphone on these networks has yet to be realized, both in China and other developed nations. Spreadtrum recent entry into this market with their wideband CDMA feature phone and smartphone offering are aimed at exploiting this opportunity and accelerating wideband CDMA deployment with low-cost solutions.

These data points I just highlighted reflect the general dynamic of the handset market. From review of the preliminary royalty report we received thus far, we are seeing a sizable quarter-over-quarter growth in 2G, mainly driven by low-cost Edge smartphone shipments by Nokia, Samsung, and white box manufacturer.

In 3G, we are seeing modest sequential growth in light of China Mobile expected inventory adjustment to its TD-SCDMA smartphone offering.

In LTE, all our shipments are associated with one OEM supplier, who uses us in selected SKUs of phones and tablet today. So, shipments here are subject to fluctuations based on model introduction and inventory levels.

All in all, we are expecting a sequential royalty revenue growth for the fourth quarter.

So, to summarize, the fundamental and prospect for royalty growth are intact and in line with the market dynamics. In licensing, our expansion to (inaudible) DSP market continues with five new deals in the quarter, bringing the number to more than 20 non-cellular handset DSP-related deals signed in the last two years.

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 third quarter of 2013.

Revenue for the third quarter was $10 million, 17% decline compared to the same period last year. The revenue breakdown is as follows. Licensing and related revenue was $3.9 million, reflecting 39% of total revenue, 36% and 20% lower sequentially and on a year-over-year basis, respectively.

Our royalty revenue was $6.1 million, reflecting 61% of total revenue, down 9% and 14% sequentially and on a year-over-year basis, respectively.

Quarterly gross margins was 89% on both US GAAP and non-GAAP basis. Non-GAAP quarterly gross margin excludes approximately $73,000 of equity-based compensation expenses.

Our total operating expenses for the quarter were $10 million, slightly above the high end of our guidance range, due to delay in receiving research and development grant payments from the Office of the Chief Scientist.

Total operating expenses, including aggregated equity-based compensation expense, was approximately $1.7 million. Our total operating expenses for the third quarter, excluding equity-based compensation expense, were $8.3 million, reflecting the mid to higher end of our guidance.

US GAAP net loss for the quarter was $0.3 million, and fully diluted net loss per shares was $0.01. This compares to net income of $2.6 million and fully diluted earnings per share of $0.11 for the third quarter of 2012.

Our non-GAAP net income decreased by 66% to $1.3 million as compared to the same period for the prior year. Non-GAAP fully diluted net income per share decreased 63% to $0.06 per share as compared to the same period last year.

These figures exclude approximately $1.6 million and $1.2 million of equity-based compensation expenses net of taxes for the third quarters of 2013 and 2012, respectively.

Other related data. Shipped units by CEVA licensees during the third -- the second quarter of 2013 were 200 million, down 29% sequentially and 21% from the second quarter shipments of 2012.

Of the 200 million units shipped, 174 million units or approximately 87% were for baseband chips, reflecting a sequential decrease from 259 million units of baseband shipped and down from 226 million shipped on a year-over-year basis.

As of September 30th, 29 licensees were shipping products incorporating our technologies, same as the prior quarter. And we had 36 shipping customers under licensing agreements, one higher than the prior quarter.

As for the balance sheet items, as of September 30th, CEVA's cash, cash equivalents, marketable securities, and long-term bank deposits were approximately $154 million.

Our DSOs for the third quarter of 2013 increased to 84 days as compared to 65 days in the second quarter. I stated in the prior earnings call that we forecast that this figure will diminish closer to the end of the year. And it is due to the timing of payments from new customers and project-related payment milestones.

I want to share with you that, during the month of October, we further collected from our customers approximately $2 million. And we believe that our accounts receivable and DSOs will return to more historical levels towards the end of next quarter.

With regards to our share repurchase program, during the third quarter and the first nine months of 2013, we repurchased approximately 138,000 and 443,000 shares of our common stock at an average price of $16.9 and $16.2 per share, respectively, for a total consideration of approximately $2.3 million and $7.2 million.

At the end of the quarter, we had additional 2 million shares available for repurchase under our 10b-18 plan.

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

Now for the guidance. Summarizing the insight Gideon provided and from the initial royalty reports and worldwide market trends, handset market trends, we forecast our fourth quarter royalty revenue to grow from the third quarter in high single-digit growth rates. For licensing and related revenue, we forecast it to be in the range of $5 million to $6 million.

Our guidance for the fourth quarter of this year. Revenue for the fourth quarter is expected to be in the range of $11.5 million to $12.5 million. Gross margin is expected to be similar to our normal levels, approximately 92% on GAAP and non-GAAP basis, excluding equity-based compensation expenses.

Operating expenses, including equity-based compensation expense, are expected to be in the range of $8.8 million to $9.8 million, lower than the last two quarters, due to higher R&D grants.

Of our anticipated total operating expense for the fourth quarter, $1.4 million is expected to be attributed to equity-based compensation expenses. So, our non-GAAP OpEx is also expected to be lower than the prior two quarters and in the range of $7.5 million to $8.5 million.

Net interest income is expected to be lower and approximately $600,000. Tax rate for the quarter is expected to be approximately 14% for GAAP and 13% for non-GAAP. Non-GAAP tax excludes tax effects of equity-based compensation expenses.

Our share count for the fourth quarter is expected to be lower and in the range of 21. -- sorry, 22.1 million to 22.5 million shares.

US GAAP is -- EPS is expected to be in the range of $0.08 to $0.09 per share. And our non-GAAP EPS, excluding aggregated $1.3 million for equity-based compensation expenses net of taxes, is expected to be in the range of $0.14 to $0.16 per share.

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

Thank you. At this time, we will open the floor for questions. (Operator Instructions). And the first question comes from Gary Mobley with Benchmark.

Good morning, guys.

Morning.

Can you explain why you saw a sharp increase in the royalty rate per unit in the third quarter? And based on your prepared comments, should we assume a large increase in royalty units on a sequential basis and then perhaps some reversion back down to that [$0.025] royalty rate per unit in the fourth quarter?

And so, first of all, the $0.03 average that we came up in -- for the third quarter was mainly due to inventory corrections by Nokia before their acquisition to Microsoft. Whether it's timing of new product launches or inventory, we don't exactly know. But, they were tens of millions of units lower. And you could see that in the difference in our baseband and all-around 2G. These are low-cost simple type of phones.

So, if you take out of the equation lower ASPs and high volume, our mix was more higher-end, more 3G, more smartphones. And that has helped to increase the ASPs by about 30% on a sequential basis.

Going forward, it's all about the question of mix. As we anticipated and as we've talked in the past, the more 3G launches and, of course, in the future, LTE and the higher ASPs and the higher average ASP that we could have.

I think the Q3 was a little bit of an anomaly because of that huge inventory correction. And our baseband went down from 259 million to 174 million. All of it is 2G related because our 3G business is continuing to grow.

So, when that gets back to higher volumes, and it does -- and it will in Q4 because we have seen that inventory correction. And there were some of those OEMs already discussing such corrections on their earnings calls in the last couple of days.

That will probably shift slightly the ASP lower, but maybe only single digit up to 10% or so, not back to [$0.025] as far as we could tell. And again, we don't have the full royalty reports. So, we don't have the exact math. But, the concept is that our 3G's continuing to grow, and that's a positive mix from the ASP perspective.

Gary, this is Gideon. I want to add some marketing color to what Yaniv explained.

First of all, with regard to 2G, as Yaniv pointed out, last quarter, meaning Q2 shipment, was significantly low in the 2G front. And it relates to inventory replenishment toward new category of phones. And these are the 2G Edge based.

If you are looking for examples, the Asha, Nokia Asha product is an example. But, we have Samsung phones. And we have lot of white box manufacturers going.

What we have seen in Q3 shipments that we will report the royalty or that we see the royalty implication in our guidance is that there is a significant quarter-over-quarter increase in the Edge category or the Edge class. These are smartphone per se that are not 3G based, but 2G based.

What Zuckerberg said at the beginning of the quarter about Internetology, this is in light of everything. The idea is to provide to people in the low-cost economy or the low-income economy Internet access at almost zero payments on the data plan. So, that is the 2G.

Other than this, in 3G, we have, as I said in my prepared remarks, it progresses as we expected. There is some muting in the TD-SCDMA. I think Spreadtrum commented on this. In 2G in the second quarter, there was a huge amount of -- a sharp increase in 2G, 3G smartphone in the TD space. Now, it's a bit slower, but not significant. And the expectation in the TD side to continue growth, same goes to all the other aspects, wideband CDMA, HSPA. These are all growing segment.

Okay. Just one follow-up question. Based on the midpoint of your license -- in your guidance at about $5.5 million, should we take that to mean the $2 million license deal, which slipped during the third quarter, did that -- has that since closed here in the early part of the fourth quarter?

And remind us again, with the other revenue now included in licensing revenue, what is the new quarterly long-term guidance range for licensing?

I don't think we're changing anything. $5 million to $6 million is something that we've been comfortable with for a long period of time. I don't think anything has changed other than an unfortunate miss of a deal in Q3. That deal right now is in our pipeline, like many other deals.

And as we all know in the licensing and IP business, as soon as a deal gets closed, we recognize it, and we talk about it. And then it's recognized as revenues. And as long as it's not closed yet, then it's sitting in our pipeline with the potential to close. So, that's I think what we are continuing on the longer term as well. And no changes from our business model or prospects thus far.

In regard to the -- Gary, to the second part of your question, whether in the long term we're going to see higher license revenue per quarter, it's premature to say. We are now in this quarter and in the last few quarter more elaborated about our non-baseband design wins. Our intention is not just higher license. We are looking here for higher ASP and a broader customer base in order not to be dependent on one market or a few key anchor customers.

So, that's the intention. And with the new product line that we have, we can address the needs of this market. And when we look in our pipeline today, it's full of non-baseband customers. And that's encouraging.

All right. Thanks.

Thank you.

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

Hi, good morning. Gideon, you talked about LTE. And you gave some statistics for 3G plus LTE. Do we expect LTE to be essentially immaterial until 2015 at this point, or how do you -- what's your sense of that?

It's a good question. My frank answer is it's hard to know. But, Samsung is definitely -- if you look from where they are in baseband in LTE product portfolio and their design activity, they are well advanced. And they can surely be a key contributor in 2014.

Intel definitely has a good product and could be in 2014. I mentioned also Spreadtrum and Litco. These are China players. And it all depends whether they -- this Spreadtrum tender that's supposed to be concluded by the end of the year will be indeed concluded and they can start shipping LTE. So, there are still some unknown, but I think important from our standpoint is -- are the product are in place.

Is the inventory overhang related to China 3G? Is it all TD, or is it a combination with W?

No, no, what -- W-CDMA, it's -- we are -- at least if you refer to Spreadtrum, they are just entering to this market. I think yesterday they post another press release for another smartphone wideband CDMA that are now in production. So, I don't -- there's no inventory issue in the wideband CDMA.

TD-SCDMA, honestly speaking, we didn't have -- we do not have full -- we didn't review fully the report. But, it looks like -- and I think Spreadtrum said that there is some inventory. It's not something problematic I should say.

So, at this point, you think that there is a potential for a flat or maybe up shipment period for TD of -- for your licensees in their fourth quarter.

Fourth quarter, I don't know. Fourth quarter shipments, I don't know. But, take what Spreadtrum said. They said that, definitely, the market is not slowing down. Just see out of the whole smartphones shipped in China, 40% in China Mobile, they are very aggressive in terms of pricing. They are very aggressive in terms of vendors and different phones that they do. I don't see slowdown in TD.

You guys mentioned new customers, for good reason it seems, not a metric you often do. I'm sure it varies widely from quarter to quarter. It would be interesting to hear what you -- what the trend has been for -- in terms of new customers on an annual basis. So, I'd just throw that out there for something you might want to think about giving us in the future.

And with that, I'll -- Yaniv, I'd just like to get the actual numbers for cash flow from operations, CapEx, and depreciation, as always.

Sure. So, $1.3 million is the cash flow from operations, $150,000 is the depreciation and the fixed assets, and 199 employees at the end of the quarter.

And CapEx the same as depreciation?

Same number, around $150,000.

Thanks.

Thank you, Matt.

Thank you. And the next question comes from Tavy Rosner with Barclays.

Hi, just a follow-up question on the licensing side. You've mentioned the expansion into new growth markets. I was just wondering if you could talk about the breadth of the new licensing deals. What kind of size are we talking about here?

Well, it's -- semiconductor companies, those companies that are same baseband, not in the same volumes. We are speaking here of a very fragmented market. The volume per customer, the annual volume per customer, it's between 10 million to 15 million, maybe 10 million to 20 million units a year. But, the application is all over the place. And the royalty [experience], that's something, the drivers is higher than we are used in the cell phone.

Okay. Thank you.

Thank you.

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

Good morning, Gideon. Good morning, Yaniv. Quick question on the cell phone market. The 2G versus 3G, can you talk about the mix there and the share in those segments for you guys?

Sure. So, our market share in Q3, which is based on Q3 -- second quarter shipments, is a bit awkward because of this huge inventory replenishment cycle that we talked about, where 34% worldwide market share in Q3, but it should go back to the normally 40-ish percent levels next quarter we believe.

With regards to the 2G/3G breakdown, first of all, 87% of the overall volume, out of 200 million, 87%, which is 174 million, were baseband. So, 26 million were non-baseband.

If I add a little bit more color to the prior question and answer that Gideon gave about the non-baseband, on an annual basis, if you look at this number and annualize it, we are about 100 million units of non-baseband deals. So, we -- if we had every quarter a few of these 10 million to 20 million units of different markets that Gideon mentioned, our goal is to multiply and maybe much more than that in the next couple of years our non-baseband business.

So, if we grow it from 100 million to 200 million or 300-ish million and at the two to 10X ASP in some of these deals compared to the $0.03 average, that is exactly the targeted opportunity that we are looking for.

And the last piece of your question, I believe that, out of the 174 million, 75 million were 3G, and the rest, close to 100 million are 2G. So, from a volume perspective, we are the run rate of -- if you analyze 75 million, we're about 300 million units for 3G, it's continuing to ramp up. But, the opportunities there are hundreds of millions if we substitute part of the lower-end 2G market.

Great. And then follow up on 2G market, do you think, Gideon or Yaniv, that 2G is a flattish unit environment into 2014? And have the ASP trends there stabilized that 2G's no longer a headwind for you guys? Thanks.

If you take 2G as some of the [GSL], which is the voice only and the Edge, so, there is I would say modest decline year over year. But, from our standpoint, the more Edge you have, the higher ASP we are collecting because Edge is -- let's put it very simple. Edge is smartphone. And you have the electronics and the contacts. And the ASP is higher.

Great. Thanks, guys.

Thank you.

Thank you. And the next question comes from Anil Doradla from William Blair.

Hey, guys. Broadcom on its earnings call, Scott McGregor highlighted that the 3G baseband mid-tier market is under ferocious pricing. So, can you help us understand how would that -- whether it would impact CEVA or not, and how could it play out?

And stepping back, when I look at the handset market, clearly, there's inventory buildup that you are referring to due to Nokia dynamics. But, beyond that, there was an inventory buildup for some of the higher-end handsets, too.

So, from your perspective, when you look at the inventory buildups, whether it's Nokia or non-Nokia related, can you shed some light and color on that? Thanks a lot.

Yes, let's start with the second one because I think it's [easier]. The Nokia was a one-time event in Q2, a very strange event in Q2. We talked about those tens of millions of units that disappeared from their shipments and our royalty report. That has -- a big portion of that, not all, but a big portion of that has returned, as we said earlier, to the fourth quarter. So, we expect to see significant unit volume increase back to 2G and to the normal levels. So -- .

-- I wouldn't say -- I would call it an inventory whatever issue. They decided and, in parallel to that, we see that Samsung is [falling to central]. And the white box guys are going to central. They want to do now an Edge smartphone. The new phones, the new chipset, they need that certain point to stop producing old stuff and go to the next one. That happened in the second quarter shipments. Third quarter, we start seeing things because we understand then that, hopefully, that's the 2G, 3G at the moment.

Yes, 3G, we don't want to comment specifically whatever what's -- on any specific company that made a sentence or a snapshot of the market or its issues that they're encountering.

From CEVA's perspective, we do not see an ASP [rosen] in 3G. Now, I think the dynamics are completely different. And we have discussed that in the past. That has not changed that the dynamics for CEVA is different than from a semiconductor company.

And every new smartphone, whether it's 3G or, as Gideon mentioned earlier, Edge, which is -- can called -- can be called a 3G as well. We're talking about smartphones. The content for CEVA is 2 to 3X the content that we historically had in the 2G market.

So, from that point of view, we don't see price erosion. From that point of view, we don't see ASP pressures. It's different to be an OEM and to need to sell a $600 phone. Four years later, it's $50 or $40 a smartphone. That's a significant price erosion in the industry. But, that's on the OEM level. It's different from a chip vendor or chip player.

And it's different from CEVA and from our suspected -- our numbers that we see and add up, we are happy, of course. And the numbers would be better as long as we get more 3G and more Edge-related products.

Great. And, Yaniv, one quick follow up, which is, do I understand rightly that the license deal that got pushed out in the current quarter is not going to materialize in next quarter? It might take a couple quarters, or that license revenue is being -- will be recognized in the December quarter? Thanks.

No, we did mention specifically what was the situation. We have a pipeline of tens of different prospects across different markets with different customers. Each one, we have our own assumptions when it could be closed. And I think we said earlier that, in the licensing business, it ain't over until the fat lady sings.

So, until we get the signature and the deal is signed and over to -- and recorded and we transfer the technology and can recognize the revenue, we don't know exactly with any other of our 50 other prospects what can be signed and when. It's in the pipeline, and we hope to execute it, but we don't know exactly when.

Right. And on that licensing front, given the volatility in the licensing business, as you said, it's not done until it's done. Is there any sense from your point of view to try to see whether you could amortize it over a year or two years, kind of create some kind of smoothness to the licensing model? Is there -- as you go into more complex 4G non-mobile baseband licensing deals, is there any way to convert that into a one -- from a one-time payment to perhaps a more amortized (inaudible) approach? Thank you.

It's a good question. It's a different model. I think it's more suitable in many cases, either for [EDA] type of companies, software type of companies, or much, much larger type of companies that sign $20 million and $30 million deals. And then if you amortize it over two years, then it makes sense.

If we take a deal of $2 million, $3 million and start amortizing over three years, of course, it creates backlog, and it's much easier and smoother. But, the other hand, I think it's pretty difficult to keep it at $5 million to $6 million range with five to eight deals signed every quarter.

So, I think we're, like, somewhere in the middle that, for now, the upfront license model makes a bit more sense for this size of company. Of course, if we would be an EDA player or an ARM, then it would be much easier to amortize because of the sizes and scale.

And at least historically, we could see that we have been -- although you're right that it's a lumpy type of business, historically, we've been quite successful managing it. So, we had a [hang up] now in Q3. But, we hope that we will not be too -- to have such an event again in the -- anytime soon.

Anil, I would say, first of all, our ultimate goal out of the license agreement is not to sign an agreement and to record it. The ultimate goal is not to record the license deal and to show what is outstanding or, God forbid, a disappointing one.

Our ultimate goal, and that's what we see in every license deal that we are discussing, is the impact on our royalties. That's the royalties what we are looking in our business. Whether it will be -- whether it's lumpy or not, whether it is -- if it's moved from one quarter or another, I don't think this is something that is significant.

The idea is to have -- to get the customer in production and to collect royalties at the end of the day. So, EDA companies are not doing that way. They are looking for quarter-over-quarter licensing or EDA [tool]. And that's the reason their model is flat.

Okay. Very good. Thank you, guys.

Thank you.

Thank you. And the next question comes from Vijay Rakesh from Stern Agee.

Yes, hi, guys. Just looking -- I know you mentioned the China market that the 2G Edge was stronger. I'm just wondering what you're seeing in the China market in terms of the 2G/3G mix in 3Q and when you look at the shipments there. How do you see that mix in the China market in the fourth quarter?

So, 2G's not in China anymore. The 2G Edge that we are -- [what we're saying] goes beyond China to Africa, to India -- India is strong there -- and to some extent Latin America.

So, 3G is all China. As we pointed out, if you look -- and I'm telling you upfront it's just a brief look on what's going on in 3G. There is a momentum there, TD, some inventory success because it was the quarter before sharp, something very outstanding, sharp. And this is expected.

So, overall, it's a very competitive market, very dynamic, fast growing. And that's -- this kind of market we like because this is where our customers are -- this is where our technology starts to create value.

Got it. And the Nokia side, I know you mentioned there were some inventory adjustments post-acquisition of their mobile business that hurt you in the third quarter. But, do you see those coming back post those adjustments? Do you see their shipments picking back up? I know you mentioned it's picked up a little bit on the 2G Edge side. But, do you see those shipments picking back to the prior levels?

That's a good question. The only thing that we see that they are very active in this space, they have a technology edge in this respect because they can compress the information and, in this way, provide the user -- smartphone user experience over 2G networks. And they are coming with products quite often.

I think just recently, the two, three Asha products, new Asha product, they have division whether they will come. They are today I think 50 million units a quarter, 50 million, 50-something million a quarter to 100 million a quarter. The market is there, but it's competitive.

Got it. And last question here, when you look at the handset market in China, obviously, you mentioned Spreadtrum and Litco, some of your wins there. On the tablet market, Mediatech has been pretty aggressive. Just looking at those two markets, what are the new design wins in the China market from the OEM perspective? And also, from the -- on the tablet side, what's your share there? And how do you see it going forward?

Tablets, we don't breakdown all these different segment. But, in regard to your question about where the growth in 3G, the growth in 3G, TD-SCDMA is a growing market. Bear in mind that the lifecycle of a phone in China is very short. People are very demanding. They're replacing phone once in 1.5 years. They are now in the single core. They want dual core and quad core and all these things. People like all those bells and whistles.

And the other thing, which is in my opinion at this stage not realized in our standpoint, is the wideband CDMA. All these emerging markets, China and India and going forward to the other nation, will adopt wideband CDMA, not TD-SCDMA. Wideband CDMA is where we have plenty of customers. Broadcom is doing there nicely and in the HSPA. And Spreadtrum, as we mentioned, is there. And Intel is there and a bunch of others.

Got it. Thanks.

Thank you. And the next question comes from Brad Erickson with Pacific Crest Securities.

Hi, thanks for taking my questions. Just a follow up on the royalty revenue guidance. I think you indicated that it would be -- sounds like kind of seasonal range, but probably no better than that.

Just still want to understand -- you talked about the snapback, mentioned Nokia and Samsung and others in China. Be curious to know kind of the reason that the -- it would seem the guidance should be kind of better than seasonal based on those indicators.

Can you kind of walk us through again what might be going on there? Is that just strictly pricing headwinds associated with mix shift back to 2G, or are there other headwinds going on there?

Okay. So, when it comes to -- I wouldn't treat the guidance of revenue increase that we say today as just seasonal.

Certainly, Q3, Christmas season is seasonal, but bear in mind that we have -- our main market is Asia, and Christmas is not their high season. So, it's more structural changes in the market that slowly but surely materialize.

So, we mentioned TD. TD, by the way, it's overall -- I think they have 30% penetration rate. Someday, whether it will go to 100% or maybe 90%, so TD-SCDMA Edge smartphone, this is a structural change.

Wideband CDMA that I mentioned is something that just starting. So, I don't see headwinds. Of course, you have from time to time seasonality. From time to time, people are doing inventory. Samsung in every -- in the fourth quarter do inventory adjustments. So, these are things that happen. But, overall, we are, in my opinion, in the course of the structural changes. Whatever changes that we are there.

Brad, let me put it in a different way. I think we are looking at completely different. In the last two years, we all saw in the wireless different -- in the markets that there is -- as Gideon mentioned, there is no seasonality whatsoever. Every company has its own issues, different time to introduce products, whether it's Apple, Samsung, the Chinese markets, or the Blackberries or Nokias of the world. Everybody has different seasonality, and there's no rules anymore.

From CEVA, after quite a few quarters of down guidance in the royalties, we're taking it higher for the first time. We see positive prospects ahead of us and in every segment of the market, whether it's what Gideon mentioned, 2G, 3G, Edge, and even in the US with -- this is the first time that Samsung is coming up with their own internal modem for their S4 Zoom, which is an LTE phone in -- selling now in T-Mobile from October.

So, even in LTE, this is the first time that we make it into the Chinese market and replacing most likely a Qualcomm design. So, no headwinds, no real seasonality. I don't think that exists that much anymore. And it's higher guidance, which we haven't had for quite a long time.

Great. That's really helpful. And then just one other follow up. You mentioned kind of the higher ASPs for some of these non-cellular products that -- where you're -- you guys have been signing some good deals, and the pipeline looks pretty strong for next year.

Can you kind of talk about how those could contribute in 2014, particularly on the royalty revenue line? And obviously, the guidance this year looks like it has the royalty revenues down kind of mid to high teens, somewhere in there. Is it plausible that some of these contributors could offset and get the revenue, royalty revenue, growth back to growing next year? Is that a reasonable expectation?

We're in October. I'm sure, when we get to January, we'll have some more insight and some better analysis for 2014. I think, for today's call, we prepared ourselves for Q4 much further. And we gave the highlights and the growth engines for us in the next couple of years. So, specifically 2014, I think we'll discuss it on the next call most likely.

Great. Thanks very much.

Thank you.

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

Yes, thanks for taking my question. Gideon, you mentioned strength in the Edge market. It also appears that a lot of the emerging markets have been suffering because of currency devaluation and currency weakness, which has affected a lot of the sales of 2G handsets. How does that contrast with your comment about the strength in the Edge side?

The macroeconomic is on and off. I don't see it -- I didn't see it at least for what we so far managed to investigate from the royalty report. But, the Edge phones, in these regions, what's important for the customer is not the price of the phone. The price level of Edge phone has reached to the level that people can afford.

They are looking for Edge phones because they cannot -- that's the only way for them to access the Internet without being obliged to pay a data plan or to pay close to zero for data plan. And that's the reason the Edge works there.

Of course, global (inaudible), they have this money to buy these $30, $20, $30 phones, can affect the timing of purchasing. But, the important thing is that that's what -- that's the way for them to access the Internet. It's important for them.

Okay. In terms of some of the new licensing agreements in areas that you highlighted, the smart meters, the autos, and the satellite areas, when do you start to see revenues from that to become material to the point where your dependence on the handset business kind of goes away?

I think I said it. I did say it in the -- in conference. But, we are doing the effort in expanding our market share and product portfolio not because we gave up the baseband handset market. On the contrary, we have our prospects. But, as a company, we want to expand our business further. So, it's not either or. It's not either, either baseband or non-baseband.

Now, specifically, to your question, usually, it takes between two to three years from the time a customer gets -- makes or concludes a licensing agreement until you see a sizable volume. (inaudible) a bit earlier, but sizable volume is between two to three years.

Thank you very much.

Thank you, Jay.

Thank you. And as there are no more questions, I'd like to turn the call back over to management for any closing remarks.

Thank you very much. Thanks, everyone, for joining us today and your continued interest and support in CEVA.

We will be attending the Barclays Select Growth Conference on November 18th in New York. And we invite you to join us there.

Thank you very much, and bye, bye.

Thank you. That concludes today's teleconference. Thank you for participating. You may now disconnect your phone lines. Have a nice day.