CEVA Inc (CEVA) 2014 Q1 法說會逐字稿

Good morning, and welcome to the CEVA, Inc. first quarter 2014 earnings conference call. (Operator instructions.) Please note this event is being recorded.

Now I would like to turn the conference over to Richard Kingston, Vice President, Investor Relations and Corporate Communications. Please go ahead.

Thank you, and good morning, everyone. Welcome to CEVA's first quarter 2014 earnings conference call.

I'm 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. Yaniv will then cover the financial results for the first quarter of 2014 and supply guidance for the second quarter.

I will start with the forward-looking statements. Today's conference call contains forward-looking statements that involve risks and uncertainties as well as assumptions that, if they materialize or prove incorrect, could cause the results of CEVA to differ materially from those expressed or implied by such forward-looking statements and assumptions.

Forward-looking statements include our financial guidance for the second quarter of 2014 and third party qualitative data referenced herein; anticipated mass production timetables by CEVA's customers and the expected resulting royalty revenue growth; licensing growth opportunities in the audio, embedded vision, and mobile infrastructure and networking spaces; benefits for CEVA's business resulting from China's mass deployment of LTE and increased shipments of low cost 3G phones; the licensing deals signed in the last 12 to 24 months translating into new royalty revenues; the anticipated Israeli R&D grants; and CEVA's buyback program illustrating the company's long term growth prospects.

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 speed and extent of the expansion of the 3G and LTE networks; the effect of intense industry competition and consolidation; global chip market trends; the possibility that markets for CEVA's 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 like to now turn the call over to Gideon.

Thank you, Richard, and welcome, everyone. I am pleased to report a strong start for 2014, for our total revenue and earnings per share exceeding our guidance.

Total revenue for the first quarter of 2014 was $13.7 million, up 13% compared to the first quarter of 2013.

Licensing and related revenue were significantly above our expectations at $7.9 million due to the execution of comprehensive agreements with key customers. Royalty revenue was in line with expectation, reflecting a seasonal inventory adjustment of handsets in preparation for new product releases.

During the first quarter, we concluded four new license agreements. Three of the agreements were for our CEVA DSP cores platform and software, and one for our SATA/SAS technologies. Geographically, three of the license agreements were in the US and one was in Asia.

Let me know expand on two key agreements signed in the quarter. The first noteworthy agreement that we signed during the quarter is with a major semiconductor company that is looking to strengthen its cellular networking position by adding software defined radio-based processing for LTE and Wi-Fi that will be enabled by our CEVA-XC DSP platform.

High data rate technologies in the form of LTE and 8211 AC, along with the proliferation of new usage models such as the Internet of things, are driving OEMs and network operators to rapidly install new networks. These opportunities attract major semiconductor companies who were not previously part of the infrastructure value chain to enter this lucrative space by leveraging our DSPs.

This important agreement further strengthens our market position in wireless infrastructure where we already have several design wins with major OEMs and semiconductor companies. It is another step toward our strategic objective to becoming the de facto DSP provider for the next generation of wireless infrastructure.

The second agreement of note relates to the handset space. It is widely known that there are only a handful of companies that have the technology and the financial strength to be viable players in this very competitive market.

We have positioned our business to enable a number of these companies, including Intel, Broadcom, Spreadtrum, Samsung, and Leadcore. There are, however, a few other companies with sizeable market share that use in-house DSPs.

We are continuously looking for new opportunities to engage with these key customers and keep an open dialogue with them on how they can leverage our DSP excellence.

To this end, we were able to capitalize on our efforts during the first quarter by signing an agreement with a dominant player in the low and midrange segments of the smartphone space, particularly in China. This customer is looking to establish a stronger foothold globally via a new world phone SOC that, in addition to the ubiquitous LTE, HSPA, and GSM modem, will also incorporate CDMA2000 modem technology which will be based on our DSP.

This will allow the customer to expand its addressable market to the CDMA network including tier one operators such as Verizon, Sprint, SoftBank of Japan, and China Telecom, totaling 302 networks globally. It is expected that this state of the art new SOC will be in mass production as early as next year.

The last two quarters have been very strong with regards to our licensing performance. This outperformance is the result of consistent execution of our strategy to diversify and expand our customer base.

Looking ahead, our licensing opportunities continue to show promising trends in the following areas. First, the audio market -- a byproduct of the proliferation of LTE smartphone via the devices and wireless speaker is the need for more sophisticated audio processing.

Advancing features such as always-on voice triggering and audio post-processing for a richer audio experience require a DSP engine delivering substantial performance with low power consumption.

Our CEVA-TeakLite-4 DSP efficiently processes these workloads and, as a result, can free up the CPU from such tasks. An important catalyst in this direction comes from the latest Android operating system release, KitKat, that incorporates built in software support for audio offloading onto a DSP.

Next, the embedded vision space -- the recent CS and Mobile World Congress event showcased burgeoning trends to enhance the smartphone user experience and to increase car safety via the use of embedded vision technologies and algorithms. Applications such as augmentation reality, automotive ADAS, and perceptual computing all require the performance and the power benefit that our CEVA-XC MM3101 provides.

Lastly, mobile infrastructure and networking -- as I commented a few minutes ago, this is an emerging space for our CEVA-XC platform. Beyond the macro and the small cell LTE advanced baseband processing, we are experiencing increasing demand to our DSP for additional workloads such as Wi-Fi, digital frontend, and wireless backhaul.

So, in summary, while the licensing business in general can be volatile due to timing on closure of agreements, our strong fundamentals and solid product strategy are propelling the business forward and positioning us to capture new growth opportunities.

Turning to our royalty business, fourth quarter shipments, which are recorded now in first quarter royalty revenue, are typically softer than the third quarter due to Samsung and other OEMs' practice to reduce inventory in preparation for introduction of new smartphone models.

During the quarter, we continued to see growth in LTE shipments, and initial shipments of new and more advanced 3G smartphones supporting both TD-SCDMA and HSPA with quad on-core Wi-Fi integration and multiple DSP cores.

LTE is forecasted to grow globally and particularly in China. According to IHS research, 4G smartphone shipment in China is expected to reach 72 million units this year, up from approximately 5 million in 2013.

However, 3G smartphones are still forecasted to hold the lion's share of handset space in the coming years. Per analysis of Cisco, 59% of the wireless connections in 2018 will be 3G, while LTE will be 15%.

China-based OEMs, both branded and white box, are targeting, in addition to China, overseas expansions into places like India, Latin America, Eastern Europe, and Africa with low cost smartphones for first time users. In India, for example, per research data by Media Sales, 2014 smartphone sales are estimated to reach 225 million, with 207 million being first time users.

So, in the short term, there are three main themes that I would like to highlight with regard to CEVA customer shipments. Excluding Spreadtrum, CEVA's larger customers are now fully focused on 3G and LTE smartphones and away from feature phones.

This has been evident in our shipment data over the past 18 months as CEVA based feature phone shipments have been in decline. Spreadtrum, however, continues to have sizeable market share in the feature phone market, and see a good growth potential for smart feature phones that use EDGE connectivity for mobile Internet access.

Of particular note is the announcement made at MWC this year by Spreadtrum and Mozilla introducing a $25.00 Firefox OS based smartphone targeting developing regions.

For low cost 3G smartphone shipments, we fully expect to build on our smartphone shipment growth from 2013, as our customers are continuing to grow in this area. Spreadtrum recently introduced a new wideband CDMA smartphone product line. Broadcom and Spreadtrum are coming out with new TD-SCDMA smartphone chips.

And later this year, Intel's first integrated [ops] plus baseband 3G smartphone chip, known as SoFIA, will be in production. This development will further expand and strengthen our presence in the low cost smartphone and tablet space.

On LTE, industry reports indicate that our customers are gradually closing the gap with QUALCOMM. Both Samsung and Intel have now cut fixed LTE advanced chipsets' availability. In China, the adoption of our DSPs with semiconductor companies targeting this segment is substantially larger.

In addition to Spreadtrum and Intel, both of whom announced that they will have commercial products for the Chinese market in the second half of the year, there are multiple local semiconductor companies that have selected our DSP for LTE and plan to have commercial chips by the end of the year. Among these are Leadcore and TYLT, in addition to others that are not well known outside of China.

We believe that the supplier landscape for LTE chips in China can replicate the tablet landscape where the local Chinese chip suppliers are gradually increasing market share over international brands as a result of lower pricing and local support.

So, to summarize, while we expect some further decline in feature phones in the coming quarters from some of our customers, we are well positioned for sustainable growth both in 3G and, later in the year, LTE smartphones. And as we have stated previously, both 3G and LTE smartphones carry a higher royalty per unit for CEVA when compared to feature phones.

With that said, let me hand over the call to Yaniv for financials and guidance.

Thank you, Gideon. I'll start by reviewing the results of our operations for the first quarter of 2014.

Revenue for the first quarter was $13.7 million, a 13% increase compared to the same period last year. The revenue breakdown is as follows.

Licensing and related revenue hit an all-time record high of $7.9 million, reflecting 58% of our total revenue. This is 57% higher on a yearly basis.

Royalty revenue was $5.8 million, reflecting 42% of our total revenue, down 19% on a yearly basis.

Our quarterly gross margin was 92% on both GAAP and non-GAAP basis. Non-GAAP basis includes approximately $58,000 of equity-based compensation expenses.

Our total operating expenses for the quarter were $10.4 million, including higher R&D headcount and related benefit expenses. Total OpEx included aggregated equity-based compensation expense of approximately $1.4 million.

And our total operating expenses for the first quarter, excluding equity-based compensation expenses, were $9 million, slightly above the higher end of our guidance.

US GAAP net income for the first quarter was $2 million and fully diluted net income per share was $0.09, an increase of 16% and 13% respectively compared to the first quarter of 2013.

Non-GAAP net income increased by 16% to $3.4 million as compared to the same period a year ago. Non-GAAP fully diluted net income per share increased 23% to $0.16 per share as compared to the same period a year ago.

These figures exclude approximately $1.4 million and $1.2 million of equity-based compensation expenses, net of taxes, for the first quarters of 2014 and 2013 respectively.

Other related data -- shipped units by CEVA licensees during the fourth quarter of 2013 were 212 million, down [technical difficulties] percent sequentially and down 25% from the fourth quarter shipments of 2012.

Of the 212 million units shipped, 191 million units, or approximately 90%, were for baseband chips, reflecting a sequential decrease of 11% from 215 million units of baseband chips and down 27% from 264 million shipped units of a year ago.

As of March 31st, 2014, 28 licensees were shipping products incorporating our technologies, one less than the prior quarter. And we had 36 shipping customers under licensing agreements, same as the prior quarter.

As for the balance sheet items, as of March 31st, CEVA's cash, cash equivalent balances, marketable securities, and cash deposits were approximately $153 million.

Our DSOs for the first quarter of 2014 continued to decrease even below our normal levels, to 20 days from 37 days in the prior quarter, the lowest figure in the last three years.

With regards to our share buyback program, during the first quarter we purchased approximately 236,000 shares of our common stock at an average price of $17.50 for a total contribution of approximately $4.1 million. At the end of the first quarter, we have additional 990,000 shares available for repurchase under our 10b-18 plan.

The continued execution of our buyback program illustrates our confidence in the longer term growth opportunities for CEVA, the company's strong fundamentals, and our considerable earnings leverage.

Now for the guidance. First quarter shipments are traditionally vulnerable to inventory adjustments, particularly in the consumer electronic space, which led to historical double-digit declines from fourth quarter to first quarter shipments in the last couple of years.

For the first quarter, we referenced Intel's commentary in its recent earnings call on the decline in the high volume feature phone shipments and the company's focuses on 3G and LTE smartphones.

As a result, we presently anticipate that this will have a short term impact to be effective in our next quarter's royalty revenue. Therefore, we expect for the second quarter a sequential royalty decline of 10% to 15%.

As Gideon noted, 3G and LTE smartphone shipments continue to grow. A recent customer focus on rolling out new products should further strengthen our market position in the later part of the year.

Licensing will continue to experience substantial interest for extended product lines. The new markets we have entered and deals that we have signed in the last 12 to 24 months should eventually translate into new streams of royalties in the early part of next year and beyond.

Our guidance of the second quarter of this year, revenue for the second quarter is expected to be in the range of $10 million to $11 million.

Gross margin is expected to be approximately 90% on GAAP and 91% on a non-GAAP basis, excluding equity-based compensation expenses.

Operating expenses, including equity-based compensation expense, are expected to be similar to the first quarter, in the range of $9.8 million to $10.8 million. Of our anticipated total OpEx for the second quarter, $1.3 million is expected to be attributed to equity-based compensation expense.

Our non-GAAP OpEx is expected to be in the range of $8.5 million to $9.5 million.

Net interest income is expected to remain low, as we anticipated earlier, about $450,000 per quarter due to lower yields.

Tax rate for the second quarter is anticipated to be approximately 16% on a GAAP and non-GAAP basis.

Share count for the second quarter is expected to be in the range of 21.4 million to 21.6 million shares.

US GAAP loss per share in expected to be in the range of minus $0.02 to $0.00 per share. And non-GAAP EPS, excluding aggregates of $1.3 million of equity-based compensation expenses net of taxes, is expected to be in the range of $0.03 to $0.05 of earnings per share.

Last, not reflected in the second quarter guidance, we expect to decrease OpEx due to Israeli R&D grant payments of approximately $600,000 either in the second or third quarter of 2014.

In housekeeping data, we have onboard today 211 employees worldwide. Our operating cash flow for the quarter was $4.8 million, OpEx $100,000, and depreciation around $200,000.

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

Thank you. (Operator instructions.) Gary Mobley, Benchmark.

I was hoping to delve a little bit deeper into your licensing activity. I know that the number of deals signed in the just concluded quarter was only four. And that's a couple below your historical average, but yet you're at a record level of licensing revenue.

I'm just wondering what's driving the increase in the average deal size. Was it recognition of some sort of deferred revenue from a prior license deal? Does it have to do with the wireless infrastructure licensee for CEVA-XC that was signed recently? Any explanation would be helpful. Thanks.

Okay, Gary. This is Gideon. No, it's not a deferred revenue. Let's put it straight.

Second thing, the number of deals is not indicative for the business itself. You know that we are handling prospects -- I would say even tens of prospects every day basically, and we don't have full control of when these deals will signed.

Specifically to the quarter, out of the deals I mentioned, two I think very important deals. The wireless infrastructure is just part of our march to be basically the de facto standard. We have technologies over the incumbent, which is TI.

And this is a company that is well known and wants to get to our CEVA-XC platform into what is called the access, meaning a combination of baseband processing and base station and digital content and other things. I think a very important agreement, and eventually it will be also sizeable.

The other agreement is in the handset space. You know that in the handset space it's a consolidated market. You don't have the activities other than which I mentioned in the LTE context in China. In China, you do have customers that are interested in developing the LTE modem.

But, in general, when it comes to the incumbent, when it comes to the big names, those that are open to use outside DSP are already in our camp. We do have a few that don't. And this was an example of an entry point to a company that didn't use our DSP, and we are now working with them on the context of CDMA2000. It's not yet beyond the CDMA2000.

Okay. Just to clarify, this handset chip licensee, is this a merchant licensee? And what type of market share are we talking about for this licensee, mid single digit?

Yes, it's a merchant chip company. They have a very big volume. What they are going -- and here it's now something that we will have to see.

But, what they are doing, they're building this world phone, and eventually it's a platform. So, they can go into use the same chip across all their shipments, and then the volume will be big.

Okay. And on the royalty front, you mentioned the first half of 2015 as being perhaps the first time period when you start seeing some diversity away from just baseband units. I'm hoping that maybe you can characterize or name some of the applications that you anticipate driving some diversity in royalty units in the first half of the year and give us some sense of the magnitude of that additional contribution. And that's it for me. Thanks.

Yes, that's a good question. First of all, something that is important to note is the context of LTE. The LTE is an SOC. It's a system on a chip. And you have DSP islands. Not just the baseband DSP islands, you have audio DSP islands and you have imaging and vision DSP islands. And also, in the baseband portion, you can -- we can do 3G. We can do the LTE. We can do -- the CDMA2000 is the example.

So, when it comes to diversity or when it comes to what else we can have in the -- beyond baseband maintained in the context, so first is -- so it will be audio in the platform. We have imaging and vision. People are doing -- in this respect I have to admit that I am extremely surprised how fast people deploying our MM3101 in their SOC.

It's much faster that they're using -- and I can understand it because in baseband it takes more time because of the certification, but here is extremely -- so we are going to see MM3101 and a range of applications starting from smart grid and connectivity and you name it. I mean, we are -- people are using our XC platform and the other platform to a range of communication applications.

Suji De Silva, Topeka.

First of all, on the large handset license, the one you have now, can you talk about the potential to expand that relationship beyond the CDMA2000 technology you're going to be offering? Is that unlikely, or is that -- will that be a challenge?

I hope I -- your line is pretty bad, but I hope I understood the question about CDMA2000. So, I want to go back to what I answered to Gary.

When it comes to LTE in general, this is an SOC. And in this SOC, you have various DSP islands, meaning use case where you use the DSP. So, it could be CDMA2000. It could be 3G HSPA. It could be LTE. It could be audio. It could be vision.

Now, at the end of the day, it will be one SOC that will be sold in LTE smartphones. And we're going -- I mean they're going to deploy it all over the place.

And if this customer -- I mean this is a dominant player. So, there is a high likelihood that this customer will manage to get sizeable share. The fact that we do CDMA2000 does not reduce the volume, because we will be -- it will be part of an SOC to go to all the LTE chips.

And to add to what Gideon had to say, at the end of the day, we will of course try to enrich our offering with that specific customer beyond just the CMDA part.

I think that was the question, and that's obvious. This is the first time we got our foot in the door. Now the next challenge for us is really to try to open the door a bit wider than just CDMA. But, for sure this is all incremental ROCEs, because for now -- until today we have had no ROCEs whatsoever from baseband from that customer.

And their engineers are using our tools. They're getting our technology -- getting acquainted with our technology. So, there is a good opportunity, and we hope that we could make more business out of that new customer.

Great. Thanks. That was my question. You guys heard it correctly. And then also, Nokia, what are the -- what's your exposure to the remaining, I guess, feature phone units there?

It's still a sizeable volume there. You know that they are -- they didn't come -- they didn't go specifically, but the tone of their results was not good in the feature phone. We have exposure there.

And then, my last question is it seems like, if I do my math, your ASP seems stable at this point. Is that a trend you expect, or ASPs have the opportunity to improve going forward? Can you talk about that trend? Thanks.

Sure, let me pick that up. On a sequential basis, it's flat. On a year over year basis, it's up about 8%. And that's in line with our expectation that as long as we get more of the smartphone in and less of the feature phone mix, that will increase ASP, and of course the roll through contribution, if the volume from smartphone is strong enough.

So, the answer is yes. I mean, we are looking forward to the later part of the year, mainly from the LTE and the continued deployment in 3G and -- sorry, in the smartphones, which among them are 3G and LTE.

Joseph Wolf, Barclays.

This may be related a little bit to the first question. But, if I look at the guidance and take the midpoint of the sequential decline in the royalties and the overall number, it looks like you're looking for kind of an equal split on licensing and royalty. And I know you guys are typically conservative on the licensing.

But, if you take a look at what happened in the first quarter, could you just describe or give us a little bit more color about where you were surprised? Was it the size of the deal? Was it the number of customers looking at potential deals and how that developed across the quarter, and whether the second quarter guidance is just not wanting to get too excited about the further opportunity?

Joseph, I wouldn't be -- I wouldn't say that we were surprised. Eventually, we are happy with these kind of deals. And these are the -- in licensing, you never know what's the pace on how deals will converge during the quarter itself and/or eventually to the end of the quarter.

So, in looking at licensing, I think the way to look into this one is the importance of the customer about the goal of getting royalties or expanding the business further.

The mobile infrastructure deals is surmised on this, because newcomers that want to go, and there are newcomers that want to come into this space, cannot ignore the fact that we are almost with -- we are getting to be engaged with all the key players there.

So, it will encourage other people to come and license. And eventually hopefully we'll be dominating the market. The handset space I spoke -- or with the entity I spoke a lot of the implication, which is also important.

So, the licensing is -- the pipeline is good because we have a broader product line to offer. And in the last few quarters, it translated to above the norm. Hopefully it will continue. But, you know you never know in this kind of business.

And therefore -- to add to that, therefore we are keeping, as we said, the midrange of our guidance in licensing, which has been for a while $5 million to $6 million, and hope to do better. But that's, I think, the better and conservative approach.

And then, just to follow up on the infrastructure win, I know some of these infrastructures, when you get into the base stations, you've got multiple DSP opportunities with significantly higher ASP opportunity. Is that the story here? Can you give us a little bit more color about the actual case usage for the win that you have?

Yes, exactly. First of all, when you speak about the multiple curves, you speak about a higher ASP bell curve. And the mobile infrastructure will eventually be a big market in two respects.

Number one, as opposed to a 3G network, in the LTE you have to do -- to add what is called small cell. Other people call it femtocell or picocell or microcell. So, the number of chips is much higher. That's one thing.

The other thing, the other areas which I mentioned also in my prepared remarks about digital frontend and backhauls, these are areas that in the past were not part of DSP like we are doing, like our DSP platform. And now with all the programmability that you need, they are looking to add DSP like our CEVA-XC. So, we are speaking about a much larger market at higher ASP.

Higher in these markets could be tens of cents, not few but tens.

Anil Doradla, William Blair.

So, just to clarify, for the June quarter royalty, you are assuming an uplift in ASPs, or stabilization in ASPs?

We didn't get all the reports to answer that question. But, I don't see a reason for it to go down, but I really don't have the insight right now because we are still pretty early. In some of those royalty reports, we get an estimate and not the detailed number of the ships and all that.

So, in principal, we see that the smartphone continued to increase. The non-baseband part in our Q2 guidance versus last year's second quarter is pretty flattish, so we don't really see any headwind coming from non-baseband.

And the major reason for the decreased in royalties is just the feature phones, which as we said, we've first been experiencing in the second. Intel came with their focused new roadmap, which has some short term implications, of course, in the markets and on us.

So, switching gears to the wireless infrastructure, who are you replacing and what are the key areas where you're being used?

So, the incumbents are TI, who is the most dominant, also Freescale. They both don't have any now DSP roadmap. So, companies that are in this area, first of all, the OEMs that are already there find our DSP significantly better and higher performance. We are looking for -- more advanced. So, that's one thing, and that's for the macro.

When you go to other new LTE related form factor in these small cells and backhaul and wireless backhaul and digital frontend, here there are newcomers. There are semiconductor companies that are strong in building an SOC and in SOC. And they are entering into this space, and they need DSP like what we offer.

Gideon, when you look at the total addressable market, I think Freescale and TI provided most of the DSPs. I mean, we are talking about, at least on the chips, several hundred million dollars now. You would get 1% to 2% of that. Is that the right way of looking at it, or how do you look at the TAM?

The TAM can be in the range of $400 million to $500 million in order to sum up everything. And then, the ASP is higher, significantly higher.

Now, it depends how many cores in the range, in the system, in the SOC. But, on the whole, this is higher.

So, $400 million to $500 million in DSP chips. But, from your point of view, are you talking about 1% to 2% of this, or from a CEVA point of view?

Yes, that's --.

The TAM.

That could be our overall, in line with some of the models.

Okay, great. And final question is what was your calculation for the baseband TAM in the first quarter?

We had 31%, or 191 million phones out of 617 million. And Strategy Analytics forecasted this as Q4 shipments, which we report in Q1.

Jay Srivatsa, Chardan Capital Markets.

Gideon, there seems to be some sense that, at the higher end, the smartphone market might weakening, partly due to saturation, partly due to some shift from US and Europe into China. Help us understand, how do you see your larger licensees performing with this transition happening in the market?

Yes. Jay, let me, if I may, expand the scope of your question to a bit wider -- provide a wider scope, going to what happened in 2013, 2014, and 2014 going forward.

So, when it comes to 2013 and we look on our customer shipments, our smartphone shipments grew 79% in 2013. This is compared to 43% for the overall smartphone market. So, you see we are ahead of the -- significantly ahead of the market in terms of smartphone shipments.

Now, in feature phones, on the other hand, it's a declined market. And we have the dominant position there, and that's the reason that we are not -- I mean this outstanding ramping smartphone is not seen in our total revenue, because the feature phone has declined.

Now, why feature phone is declining? Feature phone is declining because, at the low end, the prices of the feature phone are not coming down -- or the prices of the smartphone, even the low cost smartphone, are not coming down to the feature phone level, which is $30.00, $40.00.

This is the thing. You don't have -- I mean, if we look on our customer shipments, and these are in the low tier -- low mid-tier of the smartphone, the prices are between $80.00 to $150.00. That's the reason that the feature phone -- people are holding buying feature phones, because they are waiting that the prices will go down -- will come down. And they are holding feature phones, and that's the reason our feature phone shipments declined.

Going forward to 2014, we see the chips for expanding the low cost tier -- the low cost part of the smartphone, which we are specializing. So, the Spreadtrum that I mentioned in my report, the Spreadtrum $25.00, this is a smart feature phone. This is something that can move those feature phone people to start buying a smartphone, and eventually the volume will go up from those people.

And then, it comes to LTE, which is also a matter of price reductions, and I mentioned also the context that there are Chinese semiconductor companies that are building LTE chips for the China market.

And if I take the case study of tablets and what happened to companies like Allwinner and Rockchip that basically shipped more than QUALCOMM and everybody else in the tablet space, in this case study it returned those guys will take the share and control the China market.

So, overall our customers are not in the high end -- I mean in high volume or shipments in the high end. We are in Galaxy S5. We are in those flagship type of phones, but our bread and butter is in the mid low-end. And that's where the volumes are.

Okay. Following up on your comment about Spreadtrum, with the ASPs of these 3G phones coming down significantly, are you concerned about your own royalty stream that could emerge as the prices depress in the 3G side?

We see the value that we are providing for 3G phones is significantly higher than 2G. And that's the reason that the prices are significantly higher than the feature phone 2G that we used to be.

By the way, when we look at the -- Jay, when we look at the year-over-year comparison, we don't really have that big of an issue at all in pricing now in smartphones because of the integration. And it was not just the modem, but also the application processor in most cases.

So, that's the very strong anchor that helps us, more features. As Gideon explained, quad core ARM is inside, more DSPs, Wi-Fi. The more you add content into the smartphone chip, this is something that we did not have at all in the feature phone segment, and this should help us going forward.

Okay. Last question from me, Gideon. If I step back here and I look at CEVA's earnings and revenues over the last seven, eight quarters, you've been operating somewhere in the $10 million to $14 million range. With a lot of the newer licensing deals you've signed, when do you expect to get back on a continuous path towards growth both in revenues and earnings?

Well, there are two elements in this. Number one is the pace of the royalty growth. Again, I mean, we -- the royalty eventually will decline, and that's the reason that our revenue declined in the last, let's say, year, year and a half.

And let's come back to what I said about the feature phone. Right now the feature phone declines. And what Intel was saying in their earning call that will -- that they are basically deemphasizing feature phone and focusing on 3G and LTE. It's another indicative.

When prices of low cost smartphones will get to the level that people are speaking -- they are not there yet, $40.00, $30.00, the decline in feature phone will stop. It will be replaced with smartphone, and we'll gain both units and a higher ASP.

That's -- the timing of that is not clear, but it's ongoing because we see all these chips, new chips coming. So, one element in our return to growth is some kind of stabilization in the feature phone unit decline which we will replace by smartphone. It's ongoing, you see. I gave you the numbers. 79% in smartphone last year versus the market of 43%. It's all some kind of local.

The other thing is all the deals that we signed in the non-baseband areas, audio, even embedded vision, that's inside design cycle. We hopefully will see a few early -- the early birds by end of the year, and in 2015 we hope to see more.

A follow up from Gary Mobley, Benchmark.

Looking at your guidance, it looks as though, based on the OpEx that you're running at right now and you're guiding for for the second quarter, you're expecting strong licensing revenue but you're not confident enough to put that in your top line guidance. Could you give us what the puts and takes there are in terms of your budgeting thought process, and then as well maybe the trajectory of operating expenses for the balance of 2014?

Yes. When we start a quarter, and you've seen the last two quarters were on a pretty strong note, you don't really know what deals can sign and which deals will materialize to signature and revenue recognition.

And a good example is the last two quarters, that sometimes we have more -- a larger number of deals with smaller size. Sometimes we have fewer deals with larger size. It could be a multi use. It could be a single use based on the actual customer, their design and activity and their needs. So, that varies.

And this is true for every quarter, including second quarter. As Gideon said, we have a quite few -- a long list of prospects. Some of them are in evaluation. Some we are discussing and showing the benefits, different stages.

We take that into account. We try to analyze it and come up with -- if our guidance of $5 million to $6 million is reasonable, whether it's -- if it was all 100% sure and we were at a higher number, we would have given it today. There is no reason to wait, because those deals are not closed yet.

We are -- we stick with our traditional guidance and hope to make those numbers or better. But, there is always the risk that, until a deal is signed and recognized, it's much more difficult to forecast.

And so, I think that from a revenue point of view, we're not guiding anywhere different on the licensing than we have for long time now. And we try to make that number, sometimes with very nice success, sometimes with a little bit less success.

And the royalties, we pinpointed the exact issue that we have with the feature phones in the market dynamics. It's now that we have some network changes in the market specifically with Intel. All the rest of the pieces are in good shape.

So, smartphones are up. The non-baseband are pretty similar to last year, so we don't have that headwind anymore. So, we are really -- if we did not have the Intel change in their focus, then we wouldn't have seen that type of guidance from the feature phone perspective. So, I think that would -- that's on the revenue side.

Okay. On the OpEx side, just to be clear, the R&D tax credit, that is not incorporated into your OpEx guidance for Q2?

Right. We are keeping Q2 at around $9 million just because we are not sure yet if those $600,000 we will receive in the second quarter or third quarter. One of the two quarters will be lower by $600,000, but we don't have good visibility when that check will arrive.

Okay. And you ended the quarter with 221 employees. Is that correct?

211.

211. And by how much did that increase?

It was at 205, if I recall last quarter, and just below 200 about a year ago.

Okay. I'm just trying to get a sense of what's driving the elevated OpEx right now. Is it --?

R&D, mainly R&D. In SG&A, it's not going to be much different than last year. These are more employees because of the new product lines, because of the tools that we need to develop to those product lines. It's all around the R&D and the enhanced product offerings.

And I think that that's $9 million minus a few hundred thousand dollars when we get some of these grants every couple of quarters. That would be the right level to think for now.

And this concludes our question and answer session. I'd like to turn the conference back over to Richard Kingston for any closing remarks.

Thank you, Emily. Thank you again for joining us today and for your continued interest and support of CEVA.

We will be attending the following upcoming conferences and invite you to join us there. Oppenheimer's 15th Annual Israeli Conference in Tel Aviv on May the 11th, the Benchmark Company One-on-One Investor Conference in Milwaukee on May 29th, and William Blair's 34th Annual Growth Stock Conference in Chicago on June the 11th.

Thank you, and goodbye.

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