CEVA Inc (CEVA) 2013 Q4 法說會逐字稿

Good morning, and welcome to the CEVA, Inc. Q4 and year-end 2013 earnings conference call. (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, and good morning, everyone. Welcome to CEVA's fourth quarter and annual 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 year. Yaniv will then cover the financial results for the fourth quarter and annual 2013 and provide guidance for the first quarter of 2014 and general qualitative data for 2014.

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.

These forward-looking statements include our financial guidance for the first quarter of 2014 and qualitative data for 201;, optimism about growth opportunities beyond the cellular baseband market, including in imaging and vision, audio and voice and other next-generation products; positive outlook for the cellular handset market; forecasts about CEVA's customers and the expected resulting growth in royalty revenues; and CEVA's buyback program, illustrating the Company's long-term growth opportunities and earnings leverage.

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 technology to achieve market acceptance, the expansion of 3G and LTE networks, 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'd like to now hand the call over to Gideon.

Thank you, Richard, and welcome, everyone. I am pleased to report a strong fourth-quarter result, which exceeded our internal expectations. This strong performance was driven by strong licensing growth across our product line, which I will elaborate on shortly.

Total revenue for the fourth quarter was $14m, up 40% sequentially and up 8% on a year-over-year basis. Licensing and other revenue was $7.3m, an all-time record high for CEVA, up 84% sequentially and 52% on a year-over-year basis.

Royalty revenue was $6.7m, a sequential increase of 11% and a year-over-year decrease of 18%. It reflects a continued transition from feature phones to low-cost smartphones for emerging markets, and from pre-holiday production ramp of mobile game consoles.

During the quarter, we signed 11 new license agreements, the highest numbers of deals signed in a single quarter in the last seven years. Nine of the agreements were for our CEVA DSP cores platform and software, and two for our Bluetooth connectivity technology. Geographically, 10 of the license agreements were in Asia, including Japan, and one in Europe.

Our record licensing performance during the quarter is outstanding for a number of reasons. In addition to being the highest licensing quarter in our history, it reflects the continued strong adoption of our technology for a whole new range of applications beyond our traditional cellular baseband market.

From customer application standpoint, three of the agreements are in baseband, three in imaging, two in audio, two in connectivity, and one is a foundry customer. The diversification both in terms of customer and markets demonstrates the strength of our current technology portfolio and our ability to serve broader customer base.

Secondly, the profile and caliber of customers that are adopting our technologies for these new markets are exceptional, with five of the 11 licensing agreements signed with customers classified as tier one. Also noteworthy is that of the 11 deals, six of them are with first-time customers of CEVA.

I'd like now to highlight key takeaways from the deals we signed. The first area I would like to touch on specifically is imaging and vision. As we have elaborated on our prior calls, the market potential, combined with our strong competency in this new and exciting space presents a very attractive opportunity for us.

During the quarter, we continued to expand our licensee base with three new licensees, all of which are first-time customers of CEVA. Two of the agreements are with customers in the smartphone space, and both are tier-one players. The first is a smartphone OEM who plans to embed our MM3101 DSP in its own application processor that he is currently designing.

The second customer is one of the leading suppliers to a major smartphone handset OEM for imaging and vision technologies and is migrating to our platform for its next-generation design.

The third agreement is with a customer targeting the advanced driver assistance safety, ADAS, application for automotive market. ADAS is an emerging usage model where camera sensor nDSPs are used for safety-related measures such as lane departure, traffic sign recognition, adaptive cruise control and more. This is our first win in this space and opens up another new end market where our technology is now background to penetrate and we have the opportunity to establish a foothold in the early stages of growth in the market.

The second area is order invoice. During the fourth quarter, we signed two new high-profile customers that are regarded as tier-one players in this space. Both of these customers have licensed our latest CEVA-TeakLite-4 DSP, specifically targeting high-volume products. One of the customers is a major supplier of a smart codec chips for smartphones and other mobile products.

The increased importance of audio and voice, along with the stringent requirements for low power in mobile devices is driving suppliers in the space to incorporate high-performance DSP in analog-based chips such as audio codec, power amplifiers and a technology that was widely showcased at the Consumer Electronics Show in Las Vegas recently, the Sensor Hub.

The potential volume and product diversity stemming from such devices is enormous and includes smartphone, tablet, PC, wearable devices, wireless speakers, audio players and much more. We believe that this agreement with a high-profile player in the space will further encourage peers in this space to follow this trend.

The deals we signed in the fourth quarter, in addition to those signed throughout 2014, underpin our strategy for growth beyond the cellular baseband market. This strategy is composed of three core components -- first, the diversification and expansion of our customer base via our imaging, vision, audio and voice platform. This diversification substantially expands our addressable market, which is now forecast to be in excess of 7b units in 2016 and span across a range of end markets.

Although we are still in very early stages of adoption for such advanced use cases, as evidenced at the CES, these technologies have already been identified as highly important for next-generation product development across the mobile, consumer and automotive industries. The performance Edge we offer ideally positions us to capitalize on the vast and underpenetrated opportunities emerging for the future.

Second, we aim to capture more value, and as a result higher royalty ASP, in our customers' SOC through our vertically-integrated product platform offering composed of our DSP engine, DSP software and ecosystem. We are investing heavily in DSP algorithm innovation and software products with the objective of providing our customers with flexible and feature-rich technologies that enable them to get to market quicker, with differentiated products.

Third, our ability to leverage our vast expertise and success in handsets will allow us to grow our business by expanding into new verticals in networking, including base stations, small cell, backhaul, Wi-Fi access points and wired modems. We have already signed up key customers in this area, among which are two tier-one players in the base station space.

I will now take a few moments to share with you our prospective and outlook for our cellular handset market. The recent study by [Delisle] Group, smartphone update will continue rapidly and is expected to grow to 1.8b units in 2017. Most of this growth will come from low-cost segment, where the compound annual growth rate is expected to be 45% from 2013 to 2017.

Low-cost smartphones are aimed primarily at our emerging market, where there are still billions of feature phone subscribers that are expected to convert to smartphone. And byproduct of smartphone is the migration from 2G networks to 3G and LTE networks. Informa Research segment 3G and LTE penetration by region. According to Informa, the current global LTE penetration is 1.8%, whereas the global 3G penetration is 25%, with the largest emerging economies, such as China and India, at 24% and 7% penetration, respectively.

The relatively low penetration rate for 3G and to a greater extent LTE, combined with the trend for low-cost smartphone in emerging economies, are the fundamentals that drive our royalty growth in business. Our baseband customers are heavily investing in SOC development and full turnkey solutions which are translating into continuous progress in design wins and production ramps in handsets, as well as into adjacent markets such as mobile broadband and Internet of things.

Let me highlight recent developments of our key customers. Intel has started to ship its XMM 7160 LTE chipset for Samsung Galaxy Tab 3 10.1 inch. Intel also targeting this chip for M2M market, where it will be integrated into Intel embedded modules with GMSS location chips, also powered by our DSPs. These embedded models will soon be available in products from Huawei, Sierra Wireless, Telit, and later in 2014, in tablets and ultrabooks from leading manufacturers.

In the second half of 2014 and into 2015, Intel plans to introduce its second-generation XMM 7260 slim modem chip that will add support for LTE Advanced and TD-SCDMA. Intel also will roll out new single-chip smartphone platform, SoFIA, which will be Intel's first single-chip offering and would be powered by CEVA DSP and Intel Atom core.

Spreadtrum continued to experience substantial growth in all of its primary market segments, TD-SCDMA, wideband CDMA, as 2G Edge. Spreadtrum focuses on affordable phones in emerging markets. Retail prices for these phones have now reached to $40 and below. Spreadtrum has already established a strong position in the TD-SCDMA space affordable market, driven by China Mobile and has recently started commercial shipments into more ubiquitous wideband CDMA space with some major customers that include Samsung.

Regarding LTE, after last month's issuance of LTE spectrum licenses to China operators, the stage is now set for a healthy rollout in China. China Mobile is currently deploying the world's largest 4G network and plans to complete the rollout of more than 500,000 base stations by the end of 2014, which will cover more than 340 cities with 4G service.

In its recent earnings call, Spreadtrum management commented that, in the upcoming quarter, it will begin customer engagement in LTE and expects the second half of the year to produce meaningful commercial handset launches.

Broadcom also focused on (technical difficulty) midrange phone segment in emerging markets. Broadcom already has three tier-one customers shipping its 3G base smartphone, namely Samsung, ZTE and, more recently, HTC. Beyond the tier-one customer, Broadcom has been able to expand its customer base within China and India white-box manufacturers. There are now more than 100 handset designs using Broadcom chipsets from companies like K Touch, G5, Micromax and more.

Samsung, our third customer to ship LTE modems that leverage our DSP, recently announced additional progress toward reducing its dependence on Qualcomm. On their recent Analyst Day, Samsung revealed that they have successfully commercialized their in-house single-chip applications process and LTE modem powered by our DSP. This new single-chip offering is being used in the Samsung Galaxy Light, which is now shipping with T-Mobile USA and Samsung Galaxy [Wind], which is slated to ship globally in 2014.

All in all, we are encouraged by our customers' progress and plans. In 2013, we experienced 80% unit growth in Edge and 3G smartphones based on our DSPs. We are optimistic that 2014 will be a revenue growth year for CEVA in royalties, following two successive years when we experienced a decline in royalty revenue.

Before handing over the call to Yaniv, I'd like to make a few remarks regarding CEVA's 2013 key milestones and their positive implications going forward. As I outlined a few minutes ago, 2013 was a year in which we reinforced our strategy to expand our business reach beyond cellular baseband.

In that respect, it was a very successful year. In licensing, we significantly broadened our customer base and market reach. We signed 30 licensing agreements in 2013, including 17 first-time customers who will take our best-in-breed technologies into a broad range of new addressable markets. Our technologies are now designed in by leading semis and OEMs in base station, smartphones, imaging chips, audio chips, automotive, smart grid, Wi-Fi, satellite communication, connectivity, GPS and more.

This is set to drive our growth in overall royalty revenue and average royalty per unit in the coming years. On the financial front, while we continue to invest in new DSP products and complementary software, we remain highly profitable and continue to have a strong balance sheet. During the year, we returned to our stockholders approximately $20m via our active, ongoing stock buyback program.

We plan to continue to make investment in our new growth engines as we are extremely optimistic about our current prospects and market traction to date.

Last but not least, I'd like to take this opportunity to thank our loyal investors, customers and suppliers for supporting CEVA, as well as our dear and loyal employees for their hard work and determination. We wish you all a happy and prosperous year.

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

Thank you, Gideon. I'll start by reviewing the results of our operations for the fourth quarter of 2013. Revenue for the fourth quarter was $14m, a 40% sequential increase and an 8% increase compared to the same period last year.

The revenue breakdown is as follows. Licensing and related revenue was an all-time record high of $7.3m, reflecting 52% of our total revenue and 94% and 52% higher sequentially and on an annual basis, respectively.

Royalty revenue was $6.7m, reflecting 48% of our total revenues, up 11% sequentially and down 18% on an annual basis. Our quarterly gross margin was 90% on a US GAAP basis and 91% on a non-GAAP basis. The non-GAAP basis excludes approximately $89,000 of equity-based compensation expenses.

Our total operating expenses for the quarter were $9.8m, including higher R&D grants contribution, partially offset by higher employee benefit provision. Our total OpEx included an aggregated equity-based compensation expense of approximately $1.4m.

Our total operating expenses for the fourth quarter, excluding equity-based compensation expense were $8.4m, reflecting the mid to higher end of our guidance. US GAAP net income for the fourth quarter was $3.1m, and then the fully diluted net income per share was $0.14, an increase of 14% and 17%, respectively, compared to the fourth quarter of 2012.

Non-GAAP net income increased by 4% to $4.5m as compared to the same period on the prior year, and our non-GAAP fully diluted net income per share increased 5% to $0.20 per share, as compared to the same period for the prior year. These figures exclude approximately $1.3m and $1.5m of equity-based compensation expenses, net of taxes, for the fourth quarter of 2013 and 2012, respectively.

Other related data -- shipped units by CEVA licensees during the fourth quarter were 245m, up 23% sequentially and down 19% from the fourth-quarter shipments of 2012. Of the 245m units shipped, 215m units, or approximately 88%, were for baseband chips, reflecting a sequential increase of 23% from 174m units baseband shipped, and down 22% from 275m shipped a year ago.

As of December 31st, we had 29 licensees shipping products incorporating our technology, the same as the prior quarter, and we had 36 shipping customers under licensing agreement.

As for the balance sheet, as of December 31, 2013, CEVA's cash, cash equivalents balance, marketable securities and bank deposits were approximately $152m.

Our DSO for the fourth quarter decreased significantly and back to the normal levels of 37 days from 84 days in the prior quarter. This is the lowest figure in the last six quarters and as I explained and forecasted in the prior earnings call.

With regards to the share repurchase program, during the fourth quarter and the entire year, we purchased approximately 800,000 and 1.3m shares of our common stock at an average price between $15.50 to $16 per share, for a total contribution of approximately $13m for the fourth quarter and $20m for the full year.

As of the end of the year, we had an additional 1.2m shares available to repurchase under our 10b-18 plan. 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 just described, we are experiencing good demand and interest for our extended product lines on the licensing front. On the royalties, while we do not have at this stage a complete assessment of our customer shipments for the fourth quarter of 2013, we expect seasonal decline in the range of 10% to 15%, similar to the first quarter of 2013.

The decline primarily relates to Samsung, as it tends to take down its inventories during the December quarter. We're also expecting continued contraction in legacy feature phones in the emerging markets that will gradually be replaced with low-cost smartphones.

Our guidance for the first quarter of 2014 -- revenue for the first quarter is expected to be in the range of $11.6m to $12.6m. Gross margin is expected to be in our normal level, at approximately 91% on both GAAP and non-GAAP basis. Operating expenses, including equity-based compensation expense, are expected to be in the range of $9.2m to $10.2m, representing higher R&D headcount and lower allocation to cost of goods compared to the first quarter of 2013.

Of our anticipated total operating expenses from the first quarter, $1.4m is expected to be attributed to equity-based compensation expenses. Our non-GAAP OpEx is also expected to be in the range of $7.8m to $8.8m.

Net income is expected to be lower, and we anticipate approximately $500,000 per quarter due to lower investment yields. Tax rate for the first quarter is expected to be approximately 16% for GAAP and non-GAAP basis. Our share count for the first quarter is expected to be between 21.6m to 21.8m shares. And finally, US GAAP EPS is expected to be in the range of $0.06 to $0.08 per share, and our non-GAAP EPS, excluding an aggregate $1.2m for equity-based compensation expenses net of taxes is expected to be in the range of $0.12 to $0.14 per share.

And, operator, you can now open the floor for questions.

(Operator Instructions). Gary Mobley, Benchmark.

Hi, guys. Congratulations on a strong licensing quarter.

Thank you.

Thanks, Gary.

During your prepared remarks, did you mention, Gideon, that you expect royalty revenue to grow in fiscal year 2014?

Yes. That's what we anticipate. It's the same parameters that create the growth. If we want to go back to 2013, we have basically two headwinds. One is our legacy consumer electronics business, and the other parameter is the contraction of the feature phones that's gradually being replaced with smartphones. And indeed, we experienced in 2013 a significant growth in smartphone -- by the way, in smartphone, we're including both Edge, 3G and LTE, because also Edge is -- Edge smartphone. It's the same chip, it's just you don't have the 3G network that is not available in all those emerging markets. But in general we experienced significant growth but there was also a contraction, unit wise was higher than the smartphone.

Going into 2014 we believe that when it comes to the consumer electronics we are more or less in the baseline there. Of course, we have the seasonalities that -- because you all know about the consumer electronics but we are more or less in the baseline there. And we know all about the smartphone that is going to grow significantly and the ASP of course is higher and that's the base for the growth in 2014.

Okay, so assuming the normal seasonality in the June quarter, your broad -- just your 2014 royalty comments, would indicate that you have to grow royalty revenue about 20% sequentially for each of the last two quarters and that's well above normal seasonal trends. So is that seasonal -- above seasonal ramp a function of 4G shipments or diversity into other end markets?

We don't want to specifically comment about the number of growth, it's too early in the year, we don't know exactly the pace of the smartphone. But we don't need a dramatic unit growth, we need just more smartphone -- the unit growth of smartphone should be higher than the contraction in the feature phone, which is not the case -- it was not the case in 2013.

Okay. Let me switch gears and talk about license revenue. If I recall correctly your normal quarterly license guidance range is between $4.5m and $5.5m, you averaged $5.6m throughout 2013 and you are guiding for $6.25m in the March quarter. Have we now -- are you in a position now to maybe raise the quarterly license guidance range? And what the dynamics that are playing out in the near term driving the results above that -- the upper end that $5.5m range?

Gary, this is a good question. I would like to take this opportunity and elaborate the [deals] about the Q4, because Q4 was a good quarter not just because of the revenue number but because of the fundamentals behind it and I mentioned them in the prepared remarks. In the quarter there was no -- any megadeal, there was no -- any customer contraction it's just a spread across all the product lines baseband, imaging, vision, audio, connectivity also a far first time (inaudible). So that's -- we are -- this is in line with what's our growth strategy.

Now going forward, we are dealing here with applications that are emerging, just out. I think we met in CES, you saw those applications there, there is a lot of things happening in the areas that we are specializing in.

But these are new areas and it's very difficult to know the pace of adoption there and design wins, and to some extent also to -- as you know the licensing business itself it means a lot of uncertainty. So overall we stick to our $5m to $6m comfort zone. But there is specifically, there could be -- we feel in the coming quarter that we have good prospects.

All right, I'll hop in the queue, thanks guys.

Thank you.

Joseph Wolf, Barclays.

Thanks. Could you give us a breakdown as much as you will on the revenue mix of 3G versus feature and the unit mix as we start 2014?

Yes. So, Joseph, we, after evaluating the market and, we are coming out with a more accurate presentation of the shipment going forward. As Gideon explained 2G, 3G is not necessarily the right way to look at the market, but really you need to distinguish between feature phone and smartphone. And there are things -- smartphones today that could be 2G or there is Edge, it could be 3G and of course all the LTE are all smartphones.

So from now on they are really breaking up this -- our business and the world and then the handsets into those two categories and we don't really care what's the base, whether it's 2G, 3G or 4G but whether it's a feature phone or a smartphone.

And I could give you some interesting indications among data sources that we have sorted out for the entire year. Overall we saw a feature phone decrease of about 200m phones, 210m to be more precise down from 820m to about 600m in feature phones that we powered last year. On the other hand, on the smartphone we saw an 80% increase from 188m to north of 320m smartphones. And as Gideon mentioned the smartphone had different pricing.

Overall, I would say the average between -- the average ASP addition for CEVA between a feature phone and a smartphone is 2x but of course the more LTE and the more high-end this could be 2x, 3x and even 3x on the pricing as we go high.

So the unit contraction on feature phones, and this is what we alerted earlier, was more dramatic than the smartphone increase, but the smartphone is a much higher ASP for us as we go along.

From a ratio point of view, it's pretty much 54% feature phone and about 45%, 46% smartphone. That's true also for the annual basis. And also on an annual basis the revenue is for now 2013 was very similar between those two segments.

What we are going to focus on and guide on and continue to monitor really is smartphone versus feature phone. And the more it trends from these 600m that we already powered last year towards the smartphone, it's going to add more ASP and of course much more market share in those interesting types of segments.

Okay, that's actually very helpful. And then I guess if you look at the timing and these obviously new and emerging opportunities do you expect much or any revenue? I know some of this -- it's obviously dependent on success in the marketplace, but are we expecting first revenues in 2015 or could there be something in the end of the year? And then how would that fit into the whole ASP story that you just described?

On the non-baseline side right?

On the non-base and all the new opportunities, are they -- and I guess are they different by end market.

They are different not by end market because if you take the audio and energy division we go to the same smartphone, but it is incremental to our baseband traction there. The royalty ASP is higher. The end market is bigger because we are covering these product areas like automotive, like PCs, like tablets and all the areas that people are speaking about what is called application processing.

So we are speaking about higher worth ASP, we are speaking about a larger end market and we are speaking about more customer diversity. And that's the -- those are the fundamentals of the strategy that we want to leverage. We don't want to be dependent on single customer or a single market.

Okay, great thank you.

Sure, thank you.

Matt Robison, Wunderlich Securities.

Congratulations.

Thank you.

Thanks.

First of all, Gideon, I am intrigued by the success of your imaging platform. What -- how -- when you look at these customers are you -- do you see well defined product integration and the ability to deliver something to the consumer in relatively short order or are we more in the experimental stage? How do you look at those licensing deals in terms of their market -- mid-market cycle versus maybe some more familiar features that are (background noise).

Well, certainly it's not an experimental stage. We have -- as far as I can see there are two types of customers. One is the OEMs that are really struggling with how to differentiate, and they are building their chip for these purposes.

And then there are companies that want to not necessarily those big [AP], not now these big AP guys that -- those AP guys but those companies that are in the socket of smartphone, people are not aware about it but they are -- they do -- they are part of the sensor pipeline and they do their own chip. This is in my opinion those are the pioneers that are setting the direction.

Going forward and based on the pipeline that I see, these technologies will be integrated as part of the application processor. And when the application processor is basically a disruptive technology, this will take them further to DPV and automotive. We see a lot of similarities between all those new markets. But the usage method in the automotive or DPV is still in early stage.

So to answer your question, the smartphone sets the direction, the customer right now is OEM and the complementary, those that are near the sensor but going forward these will be integrated.

Okay. Completely different topic, do you expect to expand your buyback program?

I think we mentioned in the prepared remarks we have additional 1.2m shares. If you look at the last two years we returned about $47m and we are at $152m today so we will continue to be active on the buyback front.

Yes, well, I was interested if you are going to expand from that 1.2m.

Let's take it one step at a time, and we have some work to do related to the 1.2m as well.

While you're on the phone, comment on how many units for 3G and LTE?

No, so this is back to our prior explanation, out of the 212 the ratio is about 54% feature phone and the 46% are smartphone. Q4 is pretty much in line with the full year as well.

Okay. What was 3G and LTE?

No, we are looking at it a little bit differently as I mentioned just earlier. We don't really -- I'm not going to continue to monitor 2G versus 3G because it's really more of a smartphone versus a feature phone. The high-end smartphone could be as expensive as low-cost feature -- low-cost smartphones and therefore the ratio doesn't really matter other than looking at a feature phone versus a smartphone. So I think that's the new dye of data that we are collecting and we are going to guide as we go along (multiple speakers).

What was operating cash flow depreciation and CapEx?

For the quarter $10m was operating cash flow, depreciation around $200,000 and CapEx about $100,000.

Thanks.

Thanks, Matt.

Suji De Silva, Topeka.

Hi, guys, nice job on the quarter. So first of all with the -- first of all, these new customers your getting in new areas would you, Gideon, [need] expected OpEx or headcount increase to support the new applications that your targeting on a royalty basis.

Yes, overall if you look at the headcount from last year to this year the beginning of last year we were about 193 today we are about 207. All of the growth came from in R&D mainly a little bit in marketing and sales but mainly in R&D, and we have a few more open positions throughout this year. So we will be around the run rate of about 210-ish to 215 and a lot of it is contributing to the new product line.

And for the new customers do you need people specifically for each customer, just to understand?

No, it's the same business model. We come up with the platform, it's standard and we offer that to different segments of the market, to different new markets as we talked about, we don't do any customization work or rarely do some customization work to change our course. They're pretty much off the shelf specifically to different segments of the market and different applications; audio, imaging and video baseband, Bluetooth.

Good, it sounds very scalable. On LTE, it sounds like Samsung would be one of the first guys to ramp in volume. What's your handicap on what percent of Samsung's newer platforms will be in-house baseband versus continue to use Qualcomm, and where else would you get LTE units from in 2014 and 2015?

That's the wild card for 2014. You can come up with any number. But usually, between 10% to 20% of Samsung shipments if you take the application processor is based on in-house technology. Now they are now integrating in one chip both the modem and the application processor. So if they keep this practice doing -- if they follow this practice in 2014, so we speak about the huge amount of volume, keep in mind that Samsung ships last year 400m smartphones.

Okay, great. And then -- that helps, and then last question is an arrangement with foundry that you have this quarter. Is that new to the company, you working directly with foundries, have you done that in the past? And if so is there a broader implication of that kind of relationship versus the traditional customer relationship. Thanks.

That's a first-time deal that we signed directly with foundry. It's one of the known foundries, I cannot name it. We will probably do a press release shortly. But the idea is that we use their distribution channels to go to smaller size of customer. They provide both the distribution channel and the services for being able to manufacture in the foundry. And we, at least from our standpoint, we just get the license and the royalty.

Okay, thanks, guys, congratulations.

Thank you.

Vijay Rakesh, Sterne Agee.

Hi guys, good numbers here.

Thank you.

Just a couple of questions. When you look at the new licensing can you talk about what percent was handset and what was non-handset?

Out of the 11 deals three are pure based on handsets, three are based then -- the imaging is three, two are baseband and two are handsets, audio are both -- one of them is handset so it's about six to seven.

Six to seven non-handset right?

No, six to seven is handset related.

Smartphone related as well.

Got it. Okay, got it. And another on the smartphone side I missed the color but the licensing that you are seeing here is that baseband and on the non-handset is it audio, are you getting any audio DSP and imaging is that what you mentioned?

Yes. Three imaging division, two audio and one foundry deal that's more global, so -- and two connectivity. So, basically out of the 11 only three are pure baseband.

Yes that's very good. And when you look at the mix of 2G and 3G and 4G shipments now how does that split up now on the unit mix and how do you see that -- do you see that crossing over by the end of the year?

Yes, Vijay, one of the things that confuses many and by the way us as well is that you have these feature phone and the smartphone and you have 2G feature phone and you have 2G smartphone and you have 3G feature phone and 3G smartphones. So what we decided in order to simplify it, overall the industry is moving from feature phone to smartphone, and the network whether it's a 2G, a 3G and LTE depends on geography. There are places where you have LTE you go to places like India you don't have really 3G but you still have smartphone.

So we are changing the convention in order to simplify [our need] to everything to explain the trends in the market. So have the feature phone space and we have the smartphone space, and in the smartphone space it includes those even Edge smartphone which are from a network standpoint of 2G, now I think we said the numbers.

Yes, let me repeat the numbers Vijay as well so we get it right I may have mixed one with each other. On an annual basis we had one-third smartphone and two-thirds of the volume being feature phones, so the volume is much higher on feature phone and that's the trend that we are seeing the move toward smartphone.

Q4 as a standalone quarter we were 40%, 60%, so, 40% smartphone and 60% feature phones. And we continue to see that trend that feature phones are decreasing out of the whole pie and smartphones are increasing. And as I mentioned it had at least a 2x type of ratio and pricing between the two then the faster we are getting to LTE through the Samsung and [Frisk] and spread through on the Intels of the world, the higher the ASP could be on those specific LTE-based smartphones.

Got it.

So I hope I got it right this time.

Yes, that's really helpful. And last question here when you talk about -- obviously good -- a lot of good licensing deals here and obviously there is a gestation period before some of these ramp, when do you see some of these start to show up, when do you start to see it more, when do you start to monetize that?

In the last two years we signed 25 non-baseband deals, we hope that a few of them or a couple of them will start production towards the end of this year and of course 2015 should be much more robust from that angle just based on the timeframe of getting into mass production.

Got it, great thanks a lot good job, guys.

Thank you.

Anil Doradla, William Blair.

Hi, guys, a couple of questions. When we step back and look at the big picture we are talking about two years, three years something like that, now my understanding if my memory serves me right about 20% of your revenues on the royalty side come from non-handset and clearly the imaging product line seems to be gaining good traction with significant customers.

So walk us through a scenario where potentially CEVA becoming a -- kind of almost a non-handset-oriented DSP provider if some of these imaging and non-handset markets take off. Again volumes might be smaller but ASPs are higher, so do you see a scenario like that? Can CEVA evolve into a non-handset company or does -- what are the puts and takes and I have a follow up.

Anil, we definitely don't see us out of the baseband market. We have -- the baseband market we have a lot of opportunities there including penetrating to incumbents there, they don't have a DSP or use in-house DSP and we are in discussion with them and we see an entry point to get there.

We have -- all the base station and small cell, these are all base station, it's not handset but it's an opportunity. The IOP, the machine-to-machine, the slim model, in general is a market that's evolving. And we see new players there that we are in discussions. So overall if you look ahead two or three years, majority of our royalties will be baseband and it's a big market, and we'll be there.

You put it I think right that when it comes to imaging and vision and audio it's a much fragmented market, you don't have those mega customers that can ship 80m or 70m or 90m units a quarter, but it's a more diversified market, the ASP is higher. And it's hard for me to tell you now exactly the mix that we are going to see in 2015, 2016. The only thing that I want to emphasize that it is incremental to what we are doing in the baseband, it's not a replacement.

Okay, good. And, Yaniv, I think I must have asked you this in the past but again rev recognition on the licensing, is there any thought process on stretching it out more like software recognizing revenues over a period of time rather than being it kind of a one-off thing resulting in perhaps a little bit more smoothness to the P&L.

No, not at this point of time. This is, based on our business line is not services, it's not too -- it's not an easy A type of business. It's real processors, it's a process that we do off the shelf that we give out to the customers, the license and can recognize the revenue up front.

If we give and start giving more services and more work around it that could change the business model. I don't see that happening at least for now or in the near future, but it's always an option if we decide to change the business model a bit.

All right, thanks a lot, guys.

Thank you.

Jay Srivatsa, Chardan Capital Markets.

Thanks for taking my questions. Just one question at a high level, Gideon, a lot of attention is now being paid to wearables and over-the-top boxes from the likes of Netflix and Apple TV and stuff. Can you address this and say tell us whether you see CEVA being a player or participating in some of these products going forward? And when do you think some of that will start to become material for CEVA?

It's a good question. The main thing you mentioned wearable and the over-the-top, these are two categories of products that we have a different play there. In the wearable product the key is power consumption and DSP is the area that we use that's being used for -- is used mainly for power consumption, so things like audio, like sensor hubs, communication, of course Bluetooth. These are areas that we are exactly putting our focus there.

Over-the-top, over-the-top one of the -- other than audio obvious things that you are familiar the interface, [inter-cause], perceptual computing meaning interface to over-the-top or TV via just (inaudible). In voice recognition all those things, detection, voice recognition these are exactly the areas that we are covering with our imaging and vision platform and audio platforms.

Thank you.

Thanks, Jay.

Thank you. And at this time I would like to turn the conference back over to management for any closing comments.

Thank you very much. And thank you all for joining us again today and for your continued interest and support in CEVA. We will be attending the Mobile World Congress 2014 in Barcelona from February 24 to February 27, and you can also visit our website, the investor section of our website for a complete list of upcoming investor events. Thank you, and goodbye.

Thank you. The conference is now concluded. Thank you for attending today's presentation you may now disconnect. Have a nice day.