CEVA Inc (CEVA) 2015 Q4 法說會逐字稿

Good morning and welcome to the CEVA Inc. fourth-quarter and year-end 2015 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 this event is being recorded.

I would now like to turn the conference over to Richard Kingston, Vice President Market Intelligence, Investor and Public Relations. Please go ahead.

Thank you and good morning everybody. Welcome to CEVA's fourth-quarter 2015 and year-end 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 general qualitative data. Yaniv will then cover the financial results for the fourth quarter and provide guidance for the first quarter of 2016 and some quantitative data for the full-year 2016.

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 financial guidance for the first quarter of 2016, royalty revenue growth and increase of smartphone market share in 2016, high confidence in the licensing business for 2016, optimism about our abilities to capitalize on the continued adoption of LTE, smartphone adoption in India, market opportunities in computer vision, 5G, Bluetooth and Wi-Fi, as well as the exploration of strategic investments and continuation of our buyback program. The risks, uncertainties and assumptions include the ability of the CEVADSP cores to continue to be strong growth drivers for us, our success in penetrating new markets, specifically non-baseband markets, and maintaining our market position in existing markets, the ability of new products incorporating our technologies to achieve market acceptance, the speed and extent of the expansion of the 3G and LTE networks worldwide and the IoT space, and the impact of intense industry competition and consolidation, global chip market trends 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 hand the call over to Gideon at this stage.

Thank you Richard. Good morning everyone and thanks for joining us today.

I'm very pleased to report a strong finish for 2015 with fourth-quarter results coming in above the high end of our guidance range. The licensing performance was once again outstanding on the back of a record five days in a single quarter for CEVA-XM4 imaging and vision DSP.

On royalties, we concluded another strong quarter with 24% year-over-year growth, which marked the fourth successive quarter that we delivered year-over-year royalty growth. We are entering 2016 with a healthy industry backdrop for royalty growth, stronger than ever licensing pipeline, and compelling product line that is exceptionally well positioned to the technology plans of our market.

Total revenue for the fourth quarter was $16.1 million, representing 16% year-over-year growth. Licensing and other revenue was $8 million, up 9% year-over-year. Royalty revenue was $8.1 million, up 24% on a year-over-year basis and our strongest royalty quarter since Q4 2012.

We signed 13 new license agreements in the quarter, just one shy of our all-time record quarterly total of 14 wins in the second quarter of 2015. Eight of the agreements were for our CEVADSP cores, platforms and software, and five were for our connectivity product. All of the deal signed were with customers delivering non-handset baseband applications, five of which are first-time CEVA customers.

Geographically, one of the deals signed was in Europe and 12 were in Asia, including Japan. On the deals signed, the adoption of our imaging division DSP platform, the CEVA-XM4, was particularly strong with five deals signed, a record high in terms of number of deals in the quarter for this category of products.

The XM4 is a key enabler for many new market categories, among which are autonomous car, drones, virtual reality, augmentation reality, intelligent surveillance camera and of course smartphones. According to research firm Tractica, computer vision technology will reach $33 billion by 2019.

Our unparalleled leadership in vision processing performance along with our comprehensive offering of software and vision algorithm, which include deep neural network technology, was further reinforced by a very successful consumer electronics show in Las Vegas where we engaged with dozens of companies for business and strategic collaboration opportunities. Furthermore, the XM4 recently won the prestigious Best Processor IP Award for 2015 from the Linley group, the industry-leading source for independent technology analysis.

An additional important agreement concluded in the quarter that is worth noting is with an existing Tier 1 OEM customer in the base station market. As part of this agreement, we will design a leading edge DSP for next generation 5G-based cellular base station. The revenue from this deal will amount to a few million dollars and will be recognized through the course of 2016 as we reach silicone development milestones.

For the full year, our total revenue was $59.5 million, representing 17% of annual growth. Licensing revenue came in at record high of $32.1 million, up 14% year-over-year. Royalty revenue was up 22% to $27.4 million. Our annual non-GAAP EPS growth was $0.53, up 51% on a yearly basis. We generated over $19 million in operating cash flow and returned $10.1 million to our shareholders via our share buyback program.

Let me take the next few minutes to review the year, both on the licensing and royalty fronts. On the licensing front, we had our most successful year ever, which is a direct result of our strategic initiative and investment to diversify our business.

We signed 47 new license agreements, a record high number of deals signed in a year. Out of the total deals signed, 43 were for non-handset business application and 21 were with first-time CEVA customers.

Year-to-date we continue to invest in our R&D in order to fully exploit the lucrative opportunity we have identified, particularly around computer vision, LTE, Bluetooth and Wi-Fi. Reflecting on this investment, we delivered new products during the course of 2015 that target each of these areas.

For computer vision, we launched the aforementioned CEVA-XM4 imaging and vision DSP and also [CB&M] software technology that allows our customers to implement deep learning systems at 30x the power efficiency of existing market solutions. We also released the ISO 26262 compliant safety design package for the XM4, which is a key milestone for deployment of our XM4 in automotive ADAS systems.

Frankly, we launched two new low-power DSP platforms, the XC5 and XC8, targeting the most advanced LTE provision for machine to machine, LTE Cut 0 and Cut M. These standouts will be used broadly smart homes, smart CPs, industrial and other extremely low-power devices.

(inaudible) we delivered and certified our Bluetooth Smart and Smart Ready 4.2 IPs, which provide key building blocks for our customers developing chips for smartphone, renewable, headset and many more portable products.

For Wi-Fi, we completed and certified our lowest power most cost-effective 802.11ac Wi-Fi IP. Our Wi-Fi portfolio spans all over the Wi-Fi segment from extremely low-power wielders to high-performance access points. These leading-edge products coupled with our complementary competency in software algorithm and system design are key success factors and provide us with high confidence for our licensing business in the year. The deals we plan to sign in 2016, along with those already signed, position us well for future royalty revenue growth.

Going forward, we have identified several market opportunities that we plan to address by accelerating developments during 2016. This will position us at the forefront of next generation products in the following areas -- vision, advanced processor for deep neural network to be used in autonomous car, cells and droid drones, virtual reality and augmentation reality. (inaudible) 5G-baseband processors for handset and infrastructure and next-generation low-power LTE for IoT, such as narrowband IoT and LP1. For connectivity, next-generation Bluetooth 5.0 and advanced multiuser MIMO Wi-Fi for access point.

Turning to royalties, we delivered our strongest annual royalty revenues since 2012, primarily driven by the continued ramp up of our DSP in 3G and LTE smartphone. [IDC] predicts that worldwide smartphone shipment grew at approximately 10% in 2015. CEVA-based smartphone shipments reflected this market growth with 10% year-over-year growth. However, our smartphone growth was highly weighted to the second half of the year as we outperformed the market in the second half of the year, showing more than 30% year-over-year smartphone unit growth for this period.

Our success is attributed to our focus to first-time smartphone buyers and replacement buyers. A good example for this dynamic of first-time user is India, the second largest market after China in terms of number of cellular subscribers in the population with more than 1 billion subscribers.

The penetration of 3G smartphone in India is around 25%, and LTE is 2%. This data suggests there is a sizable opportunity ahead in India. Our customer, Parthus, just recently stated that it has become the largest 3G smartphone SoC vendor for India's smartphone market.

Another customer of ours, Samsung, emerged as the biggest LTE player in India with its popular sub-$150 model such as the Galaxy J2.

On a global basis, LTE worldwide penetration is just 12% according to Strategy Analytics. LTE will keep growing fast in the next five years and reach annual shipment of 1.9 billion units in 2020, which will equate to 72% of the phones shipped. We believe we are ideally positioned to leverage this trend and expect to grow our smartphone market share during 2016.

So, in summary, 2015 was a prosperous year for CEVA through which all our strategic growth engines flourished while we continued to strengthen our technologies and customer relationships. As we embark on 2016, we remain determined to further extend our business in cellular vision, audio and connectivity and feel confident that our technologies and roadmap will continue to lead the industry.

I would like to take this opportunity to thank our investors, customers, and suppliers for the win-win collaboration between us. Last but not least, I would like to thank our phenomenal employees for their relentless days and nights of hard work that allow us to deliver our best-in-class value proposition to our customers.

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

Thank you Gideon. I'll start by reviewing the results of our operations for the fourth quarter of 2015.

Revenue for the fourth quarter was $16.1 million, above the high end of our guidance, primarily due to strong licensing revenue. Revenue breakdown was as follows. Licensing and related revenue was $8 million, reflecting 50% of our total revenue, 9% higher as compared to 2014. Royalty revenue was $8.1 million, reflecting 50% of total revenue, up 24% on a year-over-year basis, and the fourth successful quarter that we deliver year-over-year royalty growth.

Quarterly gross margin was 91% in US GAAP basis, and 92% on non-GAAP basis, excluding 123 R related expenses.

Total operating expenses for the quarter were $12.4 million, just shy of the high end of our guidance range due to higher sales commission related to year-end revenue target and employee compensation accruals. OpEx also included an aggregated equity-based compensation expense of approximately $1.2 million, and $0.3 million for the amortization of acquired intangibles of RivieraWaves. Our total OpEx for the fourth quarter, excluding equity-based compensation amortizations, were $10.9 million, also slightly below the high end of our range.

US GAAP net income for the quarter was $2.2 million and diluted net income per share was $0.10. This compares to US GAAP net loss of $1.9 million and diluted net loss of $0.10 per share for the fourth quarter of 2014.

Non-GAAP net income in diluted per share for the fourth quarter of 2015 was $3.6 million and $0.17 respectively, representing a significant increase of 106% and 113% over the $1.7 million and $0.08 reported for the fourth quarter of 2014 respectively. Our non-GAAP net income in diluted per share for the fourth quarter this year excluded equity-based compensation expenses, amortization of intangibles, and for last year, on top of that, costs associated with RivieraWaves and a write-down of the deferred tax asset relating to the fourth quarter of 2014.

Other related data. Shipped units received by licensees during fourth quarter of 2015 were 253 million, up 12% sequentially and down 1% from the fourth-quarter shipments of 2014. Of the 253 million units shipped, 202 million, or approximately 80%, were for baseband chips, represented a sequential increase of 13% from 179 million units of basebands shipped, and a decrease of 9% from 223 million basebands shipped a year ago.

In non-baseband, volume shipments continued to increase approximately 11% sequentially and 57% year-over-year, primarily driven by ramp up in Bluetooth shipments from a number of customers.

The quarterly handset baseband royalty ASP was down 7% sequentially, but up 40% on a year-over-year basis. This is due to a product mix of LTE products as well as Bluetooth devices.

A few other interesting annual data points. Our annual feature phone shipments decreased by about 70 million to reach 450 million units in 2015 while smartphone shipments, both for 3G and LTE, increased 10% year-over-year to reach approximately 300 million.

Non-baseband annual shipments almost doubled, and reached a record high of 167 million units with Bluetooth shipments recording a 206% increase on a year-over-year basis to reach 121 million Bluetooth devices.

Our total shipments grew 4% year-over-year and reached 917 million units, which equates to approximately 29 CEVA-powered devices sold every second in 2015.

Handset baseband royalty ASP on an annual basis were up 32% due to a more favorable mix of smartphones, and overall blended ASP across all our product lines on an annual basis grew by 17% to about $0.03 per unit.

As for the balance sheet items, as of December 31, 2015, CEVA's cash, cash equivalent balances, marketable securities and bank deposits were approximately $139 million. In 2015, we paid about $3.7 million as part of our prior commitments in acquiring RivieraWaves. In addition, we have future pending payments of approximately $2.3 million in connection with this acquisition.

Our DSOs for the fourth quarter were below normal level at 23 days, down from the third-quarter level of 52 days.

Regarding our share buyback program, we repurchased about 80,000 shares during the last quarter with an average price of $23.40 per share for approximately $1.9 million. For the full year, we invested approximately $10 million in our buyback program. We plan to continue our buyback program throughout 2016 and look for other strategic investments that can reinforce our market leadership, both in DSP and connectivity IPs.

During the last quarter, we generated $11.6 million from operating cash flow. Our depreciation was $0.30, and purchase of fixed assets was about $1 million.

At the end of the year, our headcount was 259 people, of which 202 are engineers.

Overall, we demonstrated excellent financial performance in 2015 and earnings leverage. In addition to growth in total revenue, we generated a non-GAAP operating income increase of 57%, non-GAAP EPS increase of 51%, and we more than doubled our (technical difficulty) free cash flow from operations, reaching north of $19 million. Backlog at year-end is at record highs, the deal pipeline is robust, and royalty momentum appears to continue in our favor.

Now for the guidance. On licensing, as Gideon described, we are experiencing a healthy demand across our entire range of products we offer. While licensing revenue tends to be lumpy due to the timing of deal closures, we believe we have the fundamentals to continue with the current trend in licensing revenue, and expect to be in the range of $30 million to $32 million for the year.

On royalties, we strongly benefited in the second half of 2015 from the expansion of smartphones in general and for market share capture within Samsung. For 2016, we believe our expansion in the smartphone market will continue, in particular within the segments of low-cost smartphones for first-time users and midrange smartphones.

Similar to last year, we expect the first half of 2016 to be a transitional period where smartphone manufacturers are reducing inventories, followed by an expedited growth in the second half of the year as new models are released. We therefore believe our royalty revenue for the year will grow at the range of 20% to 40%, taking into consideration the adoption rate of CEVA-based smartphones and growing royalty revenue contribution from non-baseband shipments.

Our guidance for the first quarter 2016. Revenue for the first quarter is expected to be in the range of $15.8 million to $16.8 million. Gross margin is expected to be approximately 91% on both GAAP and non-GAAP basis. US GAAP operating expenses are expected to be in the range of $12.6 million to $13.6 million. Of anticipated total operating expenses for the first quarter, $1.5 million is expected to be attributed to equity-based compensation expenses directly related to employee retention efforts and $0.3 million will continue to be the amortization of acquired intangibles from RivieraWaves.

Our non-GAAP OpEx is expected to be in the range of $10.8 million to $11.8 million, reflecting our plans to accelerate new product developments during 2016, as mentioned by Gideon.

Net interest income is expected to be approximately $300,000 for the first quarter, tax rate similar to last year, a 13% non-GAAP tax rate. Share counts for the first quarter of a range of 21.6 million to 21.8 million shares. And that will bring us to US GAAP fully diluted EPS of approximately $0.07 to $0.09 and non-GAAP EPS forecasted, excluding the $1.5 million of equity-based compensation expenses and amortization expenses, in the range of $0.15 to $0.17 per share.

At this stage, we will be happy to open the Q&A session.

(Operator Instructions). Gary Mobley, Benchmark.

Hi guys. Thanks for taking my question. Congrats to a strong finish to the year, and we should all be pleased with the fiscal year 2016 guide. But I wanted to just nitpick for a second and just explore why your LTE royalty units were down sequentially in Q4 relative to what seemed to be some pretty robust sequential growth in non-4G baseband royalty units.

Okay. So, currently, we are in kind of a transition period. We still have customers that are ramping up production in the what we call the midrange or replacement cycle. This is a market that is transitioning. On that end, we have customers that are bringing up everything.

Okay. If I could just explore that in a little more detail, what are the puts and takes at your largest 4G LTE royalty shipper, Samsung, with respect to maybe some share shifts at the high end of their product offerings in the upcoming months versus what seems to be some share gains for you in some of their mid-tier and low-end smartphone offerings?

Hi Gary. Good morning. It's Yaniv. Let me try to address it a bit differently because I'm not sure we want to go specifically in each one of the four large potential players that work with us in LTE. The names I think we all know are Spreadtrum, Samsung, Intel, Elitecore. These are the four names that are powering our LTE devices.

The guidance we gave for Q1 on royalties and the overall revenue stream looks at about 30% to 35% growth Q1 2016 versus 2015 on royalties. That includes about 35 million LTE phones.

So, if we just closed a record year with 70 million for the entire year, just the first quarter, based on Q4 shipments, is $35 million. So, I think that it's going to be pretty difficult to go step-by-step or customer-by-customer, SKU-by-SKU to see who ramped up, who had inventory issues. But if you look at the overall picture of Q4 shipments, we were up significantly to a record high 35 million, and this was just the beginning of the year. I think we are happy with this type of number.

Okay. That's helpful. Last question and I'll jump in the queue. This base station licensee, which I assume you have been working with for a while now, who is developing a new ASIC for 5G baseband processing, you mentioned you closed the deal. I'm wondering if you have received the cash payment entirely upfront already, hence the increase in deferred revenue, or is this backlog from this licensee not fully recognized in deferred revenue but yet will be recognized over multiple periods throughout 2016?

Good question. That is divided into two. The answer is no for the first part with a baseband provider. Unfortunately, it's not that easy. And as Gideon explained, this is almost a year type project for us. There are a lot of new developers around 5G and usually we don't get paid up front. We do sometimes get paid up front on deals, but we have off the shelf type delivery. And at least one of those, they are going to take place. We're in the cut-over period and will take place in the first quarter which we will be able to recognize. So the deferred revenue was a part of a different year, but we got paid earlier than the final delivery and the actual revenue recognition.

Great. Thank you guys.

Joseph Wolf, Barclays.

Hey guys. It's Brian Finneran on for Joe. I guess my first question, can you just -- you had touched on it on the call a little, but can you talk a little bit more about LTE momentum heading into 2016 in China and India, and then if you're seeing any impact from the uncertainty in the economy going on in China in particular.

This is Gideon. Specifically, LTE, or in the most broad definition smartphones, as I said in the prepared remarks, we see two areas that we are expecting to grow this year. One area is a huge amount of community people that don't have today smartphones and they are looking to upgrade to smartphones. I mentioned, I gave example in India, but beyond that, we have other emerging markets in Africa and things like this.

Just to give you an example, even today, there are about 6 million or 7 million -- 600 million to 700 million feature phones that are being sold. And all those eventually will be replaced by smartphone people, and this is what we call satisfying a smartphone buyer.

The other category is more centralized in China, and this is LTE. And these are people already own a smartphone. It could be 3G; it could be low-cost kind of LTE smartphones that people purchased a year ago, or two years ago. And these phones are getting kind of irrelevant because of the performance changes that you have in smartphones; you see it every year. So those people are being what we call replacement, and we experience significant growth in China in LTE and going forward in India. So, these are the two segments that we expect I think like growing in the smartphone space, and that will drive our royalty revenue from baseband this year.

Great. Thanks. And then secondly, as a follow-up, can you talk a little bit more about the automotive opportunity? I know you guys had signed I think two license agreements with OEMs, but what's the pipeline look like and how are conversations going? And then as a follow-up to that, how many years out before we can start to think about those deals contributing meaningfully to the royalty line? I think they take probably a little longer to turn to royalties than the baseband opportunity.

People know -- I mean the automotive market is working at a different pace, significantly slower pace, than the other industries. We are approaching the automotive market through our vision technologies. And people are speaking about autonomous driving, ADAS, which is safety in car (inaudible) that you have in car like adaptive cruise control and automatic braking. So we have our technology and we have clutch customers.

The market is sizable, roughly speaking 2020 about 80 million, and between six to 12 cameras in the car for different uses models. In chipset model, I was speaking about north of $100 chips. So we -- this is a market that we are ready to play. With the technology today in place, we are approaching customers. We are speaking with all sorts of partnerships. Meaningful as this, I think you're going to see somewhere between 2019 and 2020.

Great, thanks.

Daniel Amir, Ladenburg.

Thanks a lot and congrats on a good quarter and end of the year here. A couple questions. First, you mentioned a bit some of the areas of investment I guess this year around 5G baseband connectivity and some of the automotive and drones area -- or imaging and video, excuse me. Can you elaborate a little bit more kind of what is the priority in terms of those areas of investment, and how will it change compared to last year? Because these are areas of investment that you had last year as well. Thanks.

You put it right. These are the important new areas in terms of things that we didn't address. We have activities in the three areas that I named, cellular connectivity and vision. What we want to do is to expedite, what we plan to do is to expedite our next generation product to bring it to the market earlier than we thought if you would ask us this question a year ago. We believe we are behind the market -- definitely we are not behind the market, but we see where the market is growing at and we want to be at the forefront. And we know exactly what we want to achieve there. And our objective is to bring this product in the market this year.

Okay, great. And then, on the connectivity side, the big success there has been obviously around Bluetooth. Can you elaborate kind of where Wi-Fi stands for you guys in terms of opportunity? Thanks.

Wi-Fi is a relative opportunity. The market size of Wi-Fi is enormous. The opportunity is big for us because you don't have that many integration of Wi-Fi into the larger SoC. So in other words, there are still SoC companies that they understand they need to integrate Wi-Fi in order to be competitive and not leave this socket to companies like Broadcom that are not part of the smartphone space or other areas that are in volumes.

So, the trend in the Wi-Fi is what is called 802.11ac, and multi-years are mindful. This provides significant better user experience. And our approach is to have this ready. We are giving a full solution, not just DSP for their purposes, the full solution, and we will address all those companies that plan to integrate into their biggest SoC with application, also [MT&O data] and other stuff that they want to -- that they already handle.

Okay. And the last question for me, any comment off of CES? It seems like you had a pretty successful show there in terms of opportunities there, or in terms of traffic and with customers here potentially for this year? Thanks.

CES was a very intensive event for us, in particular our vision technologies and the connectivity. Vision automotive, drones, these are areas that become sophisticated when it comes to vision. Connectivity on the narrowband side, on the narrowband side of things is earlier that we met several customers. And that's more or less what we have seen at CES.

We are going to be in this month, the end of this month, to Barcelona to the Mobile World Congress, MWC, and I believe we are going to see a lot of LTE 5G discussions there.

Great. Thanks a lot.

Suji Desilva, Topeka.

Nice job on the quarter and the strong year here. First of all on the smartphones, LTE in particular, it sounds like with the first-quarter guidance you gave, I know it's a seasonally strong quarter, but if you run rate that, you get to approximately 2X growth in 2016. Is that the right way to think about the LTE opportunity in 2016 versus 2015?

Sure. Usually Q1, if you look historically, is not a great quarter. Q4 shipments report in Q1. Sequentially, that historically has not been the case. On a year-over-year basis, this is going to be the fifth sequential quarter of growth. And we stopped about 30% to 35% in Q1, 2016 versus 2015 in overall royalties. So that's one point.

On an annual basis, we believe that we could at least double the LTE volume from the 70 million that we had last year. The run rate to start off with, as we said, about 35 million will be reported in Q1. And we believe or hope that the second half of the year will ramp up like we had seen in the second half of last year, based on the timing of new products and the adoption of new technologies by our customers. So this is the way we see it, for now at least doubling but hopefully there's the potential for more if the second half of the year will look strong.

Great. Very helpful color Yaniv. And then also on the imaging product, lots of licenses this quarter for the next-gen 4. Can you talk about the timing of the royalties if they are not already hitting when they would be hitting, and what the relative royalty rate for the XM4 is versus the traditional average you have there?

I believe we will see one of our first [LL3K]. This is the older generation of products in the market now in Q1 which will report in Q2. I think they are one of the first customers. Another one is in production with an aftermarket device for the car that you have pretty neat DVR capabilities of not just recording but also having a bunch of different safety hazardous like lane detection and pedestrian crossing, warning from that aftermarket. It also has a very interesting back mirror. So if you feel fatigued or if you fall asleep or try to fall asleep, God forbid during driving, it will beep or give you some warning signs. These are already products we see on the Web and they are starting to promote them now. So it's more up to them of a specific customer to ramp up its product and for us to see the royalties accrue in the year. So these are probably the first two that we have seen, they are still based on the older technology.

The XM4, which was really a great performer in Q4, I would say probably somewhere in the neighborhood of a year and a half to two, we should start seeing them. There are a bunch of newer applications by the way, as Gideon mentioned, growing in automotive and DSLR cameras and handsets. So it does probably take somewhere between a year to a year and a half to design the chip, and I would add somewhere another six months to a year, it depends on how successful the customer is in actually getting that chip into mass production and into a product.

And the relative royalty fees?

Much higher. We were talking about 2X, sometimes more, coming out of vision. It's very sophisticated technology. It's very power efficient after all these devices unlike GPU which will drain your battery and sometimes we're not feeling those prices, use cases. In silicon devices, we have a very nice opportunity, a very exciting opportunity from a royalty contribution with a lot of new players in this field and a lot of new markets in the field. But royalty rate is probably average 2X.

Great. Thanks guys.

Matt Robison, Wunderlich.

Thanks. Congrats on the progress and market expansion. The baseband or rather the base station deal you talked about, is that -- should we look at the licensing to be somewhat frontloaded or more linear over the course of the year? And should we assume that's the same customer that you talked about three or four years ago that was strategic? And then I guess the royalty -- okay, go ahead.

Both are right. One should be pretty linear just because it's word that we're going to be over almost a year, so unfortunately we cannot finish it in one quarter and recognize it all up front. So it's pretty linear. And it is, we said it's a recurring customer, so it is the same one that we talked about a few years ago.

Okay. And then on the -- for the -- so I guess basically we should probably be thinking about licensed -- or modeling the licensing on kind of a run rate basis then. And on the royalties, should we be thinking about a dip in the second quarter before back-half inflection?

Not sure. Let's start with Q1. We know, for the last couple of years, we stopped trying to get to try to get the market and the dynamics. I think we see all around us with much bigger players than seen and it's a very difficult to move, whether it's with Apple or Samsung or anybody else in the space today. Too many moving parts.

So with Q1, we are very happy on a year-over-year comparison. I don't think that any of the quarters this year should be lower in royalties than in 2015, which is I would say one data point. That's one we could give. But we don't know yet. It's a bit too early to guess if Q2 will be flat, higher or lower. Let's keep that for a few more months and we will have a little bit of a better picture when we give the report.

On the last call, and there wasn't a lot of contribution from the midrange or I guess low end of the high-end range of Samsung for LTE. Was that a factor in the fourth quarter? And should we think of that as being one of the incremental aspects for the first quarter?

And then also, there was some discussion of -- in retention incentives falling off the R&D line for 2016. It sounds like a lot of work ahead in terms of new product development from what Gideon was saying and in terms of your guidance for your OpEx. Should we think in terms of these initiatives just completely dwarfing any effect from retention incentives rolling off?

There were two questions. One is about the shipment side on the royalty. The second question I don't think I fully understand. I may ask you to repeat it.

But the first question, right now, we are, in terms of LTE shipments, we are in different classes of categories. We are in the high end; we are in the midrange phones. You mentioned Samsung. We have other phone categories. And this is ongoing. When I'm saying it's ongoing, it's just a matter of increasing this year due to the power metals we mentioned in the quarter.

Second question I love to share about, what you ask about investment. (multiple speakers)

RivieraWaves' retention in SaaS was a factor in R&D looking back, and it was -- those were going to timeout.

Yes. That's true that there is part of the (inaudible) dealer, there was a two-year retention scheme that goes on until the middle of the year. But I think when we mention retention, we more know when (inaudible) equity-based compensation. Of course, we want to keep them as well as other employees in the Company that deal with all of these new technologies that Gideon talk about, happy and on board. And I think when we talked about the incentives for them that's what remains moreover 123 R. I'm not sure if I'm answering your question. If not, I'll be happy to refine.

I'll take it off-line. Thanks. Appreciate the time on the call.

Matt Ramsay, Canaccord Genuity.

Thank you very much guys for letting me get on at the end here. You need -- the guidance for royalty growth for 2016 obviously is a pretty wide range. I guess the questions I would ask are two.

One, maybe could just lay out your views of the puts and takes of whether you're at the low or high end of that range, And second, what contribution do you think ends up being from non-baseband applications for next year versus what it was for 2015? Thanks.

Sure. That's a difficult question. But let's look at it maybe on an annual basis with some history. If you recall, 2015 was the first time we actually agreed and had data points and believed that we could grow our royalties after three years of decline. So the guidance we gave a year ago was 10% to 30% growth in EBIT, find our stuff in 22% growth for the entire year. And back then, we also explained that it's going to be back-end loaded, meaning the second half of the year.

For the same reason I just answered a different question, I think it's very, very difficult to guess at today, the beginning of February, how the entire year will look like. What we could do is look at the entire market, look at the players, look at what has happened pricing-wise in this industry over the last two years. And with some of the problems that the bigger players are facing, whether they are OEMs or chip vendors in the handset space, we realize that low-cost smartphones are the next big thing on a worldwide basis. It's not necessarily related to the US, so to Western Europe or to some of the more -- other regions, but much more to the bigger markets of India, Latin America, Eastern Europe, and then a lot of the emerging economies. Those prices and those phones over there will be in the range of $40, even $30 to $60. That's the sweet spot for a smartphone. And that smartphone will have all the bells and whistles in the Galaxy or in iPhone.

And those price points, I don't think QUALCOMM has, at least didn't have historically, any success whatsoever, and that puts us and MediaTek to compete on that front. Our customers are four very large players in the industry with lots of capabilities. Those are the Spreadtrums, the Leadcores, Intel and of course Samsung. Each one is taking a little bit of a different approach in trying to tackle that market, but we believe that they are coming up with the right pricing and the right products, which they did not have a few years ago. And therefore when you look at the market size, when you look at their ramp-ups, we look at the different SKUs that are in line for the rest of the year through our technology and their own chips at much lower costs than the QUALCOMM chip, that gives us confidence to build 20% to 40%. Yes, it's big, but at least we believe that it could be a pretty significant or nice growth in a market that is not growing on one hand, and the semiconductor market that is also suffering from lack of significant growth in the last two years. (multiple speakers)

That's helpful. Just follow up on the dynamics from outside of the smartphone market, you guys had sets some milestones long-term to be 700 million units to 900 million units. I think the numbers where we see lots of really good licensing activity I guess relative to that longer-term target, how do you feel like the market is setting up and the ecosystem is setting up there to hit those targets longer-term?

I think the licensing has been great, but it's hard for us on the visibility for units shipped side, and you guys might have more visibility to that. So just an update there would be great. Thanks.

First of all, I think we are about 25% through this number, this number of 700 million to 900 million baseband, non-handset baseband shipment, and it's growing. We expect this year to grow. The way it's going to work will be different than smartphone. Smartphone as you know is a consolidated market, and each customer is sizable in volume.

In the non-handset base that you speak about, tons of customers, each of them is between 10 million to 30 million units a year. And all of those -- majority of those customers we started to sign somewhere in 2014, late 2013, 2014. And also those customers that will sign up in 2016 will still manage to finish the product and be in the market in 2018. So the pattern of the royalty growth or the unit growth will be in a way that we will see some gradual growth like we see today where we are at the 25% point. And there will be some gradual somewhere in 2017 and noticeable 2018. All of them will come together, will start ship together. And you'll see suddenly tons of customers shipping small amounts, or we will see tons of customers shipping this amount. So if you're asking if we are on track, yes, we are on track to be there in 2018.

That's really helpful. Thanks Gideon. Maybe just to sneak one in, the OpEx on the outlined areas of investment, that was in the Q1 guide higher than at least I had modeled. Is that what we should think about sort of the new run rate going forward, or are there going to be things that move it around a little bit seasonally through the rest of the year? I'm just trying to get an idea of OpEx for the year. Thanks.

Sure. I think looking at somewhere around the $11.1 million to $11.3 million average for the fourth quarter. There may be one a little bit higher, one a little bit lower, but this is probably the new zone that we are at because of these new investments. Again, most of these investments are just additional R&D resources for us to be able to develop and to come to market and to supply their customers with the technology they need. So it's mainly around headcount, and it's somewhere in the neighborhood of $10.9 million as an average, $10.8 million an average last for year, it's probably going to somewhere in the $11.1 million to $11.3 million (technical difficulty) for the year. Non-GAAP.

This concludes our question-and-answer session. I would like to turn the conference back to Richard Kingston for closing remarks.

Thank you and thank you all for joining us today and for your continued interest and support of CEVA. We will be attending Mobile World Congress in Barcelona February 22 to 26, and the ROTH conference in Dana Point, California on March 14. Please visit the Investor section of our website for further information on these events and other events we will be attending. Thank you and goodbye.

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