CEVA Inc (CEVA) 2016 Q3 法說會逐字稿

Hello, and welcome to the CEVA Third Quarter 2016 Conference Call. All participants will be in listen-only mode. (Operator Instructions). After today's presentation, there will be an opportunity to ask questions. (Operator Instructions)

Please note that this event is being recorded. I would now like to turn the conference over to Richard Kingston, Vice President, Market Intelligence, Investor, and Public Relations. Please go ahead, Mr. Kingston.

Thank you. Good morning, everyone, and welcome to CEVA's Third Quarter 2016 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 in the quarter and general qualitative data. Yaniv will then cover the results for the third quarter and provide guidance for the fourth quarter of 2016 and the full year. I'll 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 fourth quarter of 2016 and the entire year, future revenues to be generated from the executed portfolio license agreement and optimism about extending such a licensing model to other customers; optimism about the licensing pipeline and customer ramp-up schedule; our ability to capitalize on emerging market opportunities including cellular IoT, machine learning, non-baseband, LTE, and 5G; and resolution of our accounts receivable balance issued by year end.

The risks, uncertainties, and assumptions include the ability of the CEVA signal processing IPs for smart or connective devices 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 extend of the expansion of the 3G, LTE and 5G networks, Bluetooth 5, and the IoT space; customers' ramp-up schedules and the impact on royalty revenues, and the effect 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 would now like to turn the call over to Gideon.

Thank you, Richard, and welcome, everyone. We are pleased to report a very successful third quarter with record-high revenue, strong execution in licensing, and continued positive royalty trajectory, which led to our highest non-GAAP quarterly EPS in more than 4 years.

In addition, with [have enriched our] technology leadership, announced two new DSP-based platforms targeting to the fast-growing spaces of machine learnings and IoT.

Quarterly revenue came at a record high $17.8 million, up 10% year over year. Licensing and licensing-related revenue came at $7.5 million, with 13 licensing deals signed, including a comprehensive technology portfolio agreement, the first of which signed in CEVA history. Of the agreements signed, four were for CEVA DSP cores and platform, eight were for connectivity products, and one was the portfolio agreement that I just mentioned.

[Seven] of the agreements were for non-handset baseband applications, and six were with first-time CEVA customers.

Geographically, four of the deals signed were in the US, seven in the APAC region, and two in Europe. We ended the quarter with record-high booking, mainly due to two large agreements with market leaders, which I will elaborate on shortly.

[Royalty] revenue came in a record high $10.4 million, up 36% year over year, and 8% sequentially, driven by new rollout of handset baseband (inaudible), and growing shipments of non-handset chips by our customer which reached an all-record high of 59 million units. The third quarter licensing dynamics highlights the strength of our diversified portfolio and the strategic benefit it offers to our customer (inaudible).

Let me take the next few minutes to discuss three deals signed during the quarter in more detail. The first deal is with a tier-1 handset OEM with in-house baseband design capabilities. It is our first licensee for 5G mobile broadband to be deployed in next-generation smartphone, connected cloud, (inaudible).

While mass deployment of 5G is about 2 years out, leading operators such as Verizon, AT&T and Korea Telecom, are pushing the ecosystem to expedite solution, despite the lack of full consensus on the 5G standard. Our customer is targeting the 2018 Winter Olympics in Korea for its product, which will be the first large-scale event where 5G will be widely used.

Our CEVA-XC DSP software-defined radio platform benefits our customer both in terms of shorter time to market, and the flexibility to converge with the full 5G standard once it is ratified, without the need to [re-spin] a costly chip design.

On our last earnings call, we commented that we have a stronger-than-normal pipeline with a number of customers looking for comprehensive engagement to take advantage of our technology portfolio and the new expertise. In this respect, we are happy to announce that we have concluded two such agreements during the quarter.

The first is a portfolio license agreement, the first of its kind for us, with a very large semiconductor company, amounting to a few million dollars over the next few years. Under the agreement, the customer has a predetermined annual spending account that can be utilized for chip designs enabled by our off-the-shelf portfolio of baseband, vision, audio, and connectivity IPs.

Revenues will be recognized on an annual basis, and once the customer's actual spending exceeds this [given] amount. We are extremely proud that this key customer has decided to adopt our portfolio of IPs, and believe that this business model can be extended to other tier-1 customers who are looking for a one-stop shop for technologies that are at the center of every smart and connected device.

The second important agreement that we signed is with a large reputable OEM for hearing instruments, a spend that is expected to grow with aging population. As part of the agreement we will announce our Bluetooth technology to support stereo-audio streaming from a smartphone or a smart TV into hearing devices.

The revenue recognition will be tied to the progress of the design work performed by CEVA. The potential of high-quality stereo-audio over Bluetooth extends far beyond the hearing instrument market. Apple's Airport that was recently announced, addresses a similar use case in underlying technology, revealed its in-house W1 chip. We believe the Apple initiative to displace the television and cordless earbuds with the wireless ones will drive other smartphone vendors to follow suit, which creates significant market opportunity for us to capitalize on in our innovation in this space.

At a technology leadership forum, we recently announced two new DSP-based platforms that address the performance, cost and low-power (inaudible) for next-generation machine learning and [further] IP application. The CEVA XM6 is our fifth generation image and vision technology addressing the performance and power requirement for VIP network and advanced camera processing for next-generation smartphone, automotive, ADAS, surveillance, and more.

Powered by new CEVA XM6, a combo (inaudible) DSP engine, the platform includes an array of value-added technologies, including special-purpose co-processor to boost the performance of VIP network and image [world] processing, along with comprehensive computer vision software, and our highly-acclaimed neural network software framework (inaudible) tool, which streamlines the development required to add deep learning capability to any embedded device.

The CEVA XM6 platform is 8x higher performance versus its predecessor, the CEVA XM4, and up to 25x better power efficiency for deep learning workload, (inaudible) from [PX1 GT].

The second part that we announced is that lightweight DSP for cellular IoT market forecasted to automotive 1 billion new connections by 2020 on, according to the latest edition of the Ericcson Mobility Report. We started in service such as smart home, smart utilities, asset tracking, real-world health and environmental monitoring, and more.

The CEVA X1 DSP is optimized for this stringent low-power and low-cost modern requirement of the 3GPP IoT standard, such as Cat-M1 and narrowband IoT, as well as the coming 5G standard. It also functions as a processing hub for other IoT-related standards such as Wi-Fi, Bluetooth, (inaudible), volume, positioning and sensing workload.

Its unique architecture consolidates DSP and CPA instructions and architecture, allowing for single-core to render both the modem and the protocol (inaudible), with saved cost of having separate CPU core.

We believe that cellular IoT and machine learning technology enabled unparalleled efficiencies for consumer and industrial spaces. It will therefore be a key driver for many new products and use of model for mass deployment. We are highly optimistic of the value proposition that the CEVA XM6 and the CEVA X1 platform offer, and we will work diligently with our customers to leverage those opportunities.

Moving to revenues, our quarterly revenue growth trajectory continued in Q3, with an increase of 8% sequentially and an impressive 36% year over year. This was driven by growing shipments of smartphones powered by our DSP, and a record long baseband (inaudible) shipment.

With respect to non-baseband segment, we are also experiencing a good progress with new customer design and production ramps. The following a short update on new customer products.

Rockchip, a leading Chinese semiconductor, recently introduced two chips enabled by our CEVA XM4 vision DSP, the RK 1108 and the RK 1608. The RK 1608 is expected to go into production with tier-1 smartphone OEMs shortly. The RK 1108 is also targeting machine vision application for a range of markets including 360 degree, action cam, (inaudible), surveillance and so on.

Both of these chips become available just 9 months after licensing our CEVA XM4, illustrating the maturity of our IP and our experience in supporting customers.

[SilverStream] Networks started production of its gen-5 platform, which is based on our CEVA XC DSP, with volume gradually building up into 2017. This production ramp is at the back of significant supply contracts with major US and UK utility companies.

Actions Semiconductor of China launched recently the ATJ2167 high-end audio chip-enabled by our DSP. It enables power efficiency solution for [local] audio recording that's providing a (inaudible) audio experience for the mass market of [wireless speakers].

Fujifilm has announced that it will release the Fujifilm X-T2 mirrorless camera. It uses our vision DSP for color reproduction and offers still in video and with high ISO and low noise.

HMicro, a California-based company targeting high-volume clinical and industrial IoT applications, recently announced together with STMicroelectronics, the industry first single-chip solution for cleaning (inaudible) single-use disposable smart pictures and biosensors. The product, WiPoint, intends to displace about [5 billion] wired sensors that is used in hospital for [wipe and sign] monitoring annually, with an advance wireless disposable sensor base on our [Wi-Fi PIN], which Micro is about to enter high-volume production with leading medical component supplier shortly.

China (inaudible) a supplier of Bluetooth and Wi-Fi chips, has announced the new xp 32, a low-cost Bluetooth and Wi-Fi combo chip. The chip is powered by our new (inaudible) technology and covers a wide range of (inaudible) uses.

In summary, we are believers in the vast results of record-high revenue, our highest non-GAAP quarterly EPS in more than 4 fours, and new strategic engagements, including our first portfolio agreement.

Our broad product portfolio for royalty connectivity vision and audio IP appeals to many customers looking to be part of smart and connected world, and our CEVA XM6 and CEVA X1 put us at the forefront of emerging machine learning and LTE participation.

On royalties, we continue to extend in the baseband space, and are encouraged by the progress in the non-handset baseband space, both will result in ongoing shipments and production rights.

With that said, I will turn the call over to Yaniv for a third-quarter financial and full-year guidance.

Thank you, Gideon. I will start by reviewing the results of our operations for the third quarter of 2016. Revenue for the third quarter was $17.8 million, our fourth consecutive quarterly all-time record high achievement. This was 10% higher on an annual basis, and 4% higher sequentially.

The revenue breakdown is as follows. Licensing and related revenue was $7.5 million, reflecting 42% of total revenues, 13% lower as compared to the comparable quarter in 2016, but in line with our plans and expectations.

[Royalty] revenue was $10.4 million, reflecting 58% of our total revenue, an impressive increase of 36% on a year-over-year basis, and the seventh successful quarter that we delivered year-over-year quarterly royalty growth.

Operating margins were 92% based on a US GAAP and non-GAAP basis. The non-GAAP quarterly gross margin excluded approximately $65,000 of equity-based compensation expenses.

Total operating expenses for the quarter were lower than expected and also lower as compared to the first two quarters of the year, mainly due to the magnitude and timing of the research and development grant payment that we received from the Office of the Chief Scientist of Israel. Overall, we recorded OpEx of $12.6 million, at the lower range of our guidance.

OpEx also included an aggregated equity-based compensation expense of $1.5 million, and $0.3 million for the amortization of acquired intangibles of RiverieraWaves. The total operating expenses for the third quarter, excluding these two items, were $10.8 million, below the mid-range of our guidance, and the lowest quarterly OpEx for the year.

Taxes for the quarter GAAP and non-GAAP were around a million dollars, a bit higher than the norm, due to a one-time tax expense relating to a tax acquired mainly associated with (inaudible) tax position relating to prior years.

US GAAP net income for the quarter was $3.4 million, quite similar to last year's comparable quarter of $3.3 million. The US net EPS was $0.15 for the third quarter this year, and $0.16 for the same quarter last year.

Non-GAAP net income and diluted EPS for the third quarter of 2016 increased 10% and 9% year over year to $5.2 million and $0.24 per share, respectively. Non-GAAP net income and diluted EPS for the third quarter of 2015 were $4.7 million and $0.22, respectively. These figures for the third quarter of 2015 and 2016 exclude equity-based compensation expenses, net of taxes of $1.5 million and $1.2 million, respectively; and the impact of amortization of acquired intangibles of RivieraWaves net of taxes of $0.3 million and $0.2 million for the quarters in both years.

Other related data; shipped units by CEVA licensees during the second quarter of 2016 were 278 million, up 23% [sequentially], and 23% last year. Of the 278 million units shipped, 218 million units or 79%, were for baseband chips, reflecting the sequential increase of 14% from 192 million units of baseband chips shipped, and a 22% increase from 179 million units shipped a year ago.

During the quarter, two customers started mass production of handset baseband. One is incorporated in the premium smartphone, and the second to a major low-end type smartphone at a significant volume. The later contract is more limited, and as such there's lower ASPs compared to our normal rate.

In the non-baseband, volume shipments increased dramatically, 76% sequentially and 29% year over year. The increase is due to a record high quarterly unit shipment in Q2 and a continued ramp-up of our audio, voice product powered by DSP.

The quarterly handset baseband royalty ASP declined 8% sequentially, but increased 15% on a year-over-year basis. This is due to a higher volume of smartphones as compared to feature phones. Our overall corporate blended royalty ASP declined 12% sequentially, but increased 10% year over year, due to our product mix.

As for the balance sheet items; as of the end of September our cash, cash equivalent balances, marketable securities, and bank deposits were approximately $145 million. Our accounts receivable balance at quarter end was unusually high, approximately $17 million, due to one of our large customers internal changes of its financial and legal entity which affected the timing of payments to us. We expect this issue to resolve itself by the end of the year.

During the third quarter we generated $3.3 million net cash from operations. Depreciation was $0.4 million, and purchases of fixed assets were $1.3 million, mainly for platform tools for our DSPs. At the end of September our headcount was 281 people, of which 223 were engineers.

Now for the guidance; according to a new report from research firm Strategy Analytics, smartphone unit shipments increased by 6% in Q3 2016 compared to the respective quarter in 2015. Based on preliminary royalty reports from our smartphone customers for the third-quarter shipments, we expect to significantly surpass the market, anticipating more than 100% growth in comparison with third quarter of this year to last year in regards to unit volume.

This momentum along with the continuous progress in non-baseband shipments are set to deliver another record-high in royalty revenue, up more than 40% from Q3 of last year, and more than 40% over all annual royalty increase for 2016 over 2015.

On licensing, as Gideon noted, we are benefitting from having a broad portfolio of IPs to license, and our customers appreciation of these technologies, and expect fourth quarter licensing activity to be in line with recent quarters.

Our guidance for the fourth quarter of 2016; revenue for the fourth quarter is expected to be in the range of $18.5 million to $19.5 million. This is again the highest quarterly revenue guidance in the Company's history.

Gross margin is expected to be approximately 92% in both GAAP and non-GAAP basis. Overall expenses should be a bit higher than prior quarter, with an annual basis within the range of OpEx guidance we set at the beginning of the year.

US GAAP operating expenses are expected to be in the range of $13 million to $14 million. Of our expected operating expenses for the fourth quarter, $1.5 million is expected to be attributed to equity-based compensation, and $0.3 million to the amortization of acquired intangibles. Net of these two items, non-GAAP OpEx is expected to be in the range of $11.1 million to $12.1 million.

Net interest income is expected to be approximately half a million dollars for the quarter. Tax rate on a non-GAAP basis, [15%]; and on GAAP basis, 18%.

Share count for the third quarter, approximately 22.4 million shares; and on an annual basis, approximately 22 million shares.

US GAAP fully diluted earnings per share is expected to be in the range of $0.15 to $0.17. And non-GAAP EPS forecasted, excluding equity-based compensation and the amortization of intangibles net of taxes, is expected to be in the range of $0.24 to $0.26 per share.

Overall, for 2016 we are forecasting revenue growth of approximately 18%, which will contribute significantly to our earnings. Both non-GAAP net income and fully diluted EPS are forecasted to grow north of 60% on an annual basis year over year.

Our strong cash position will continue to assist our efforts in the diversity of our technology offerings and market reach.

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

(Operator Instructions) Gary Mobley, Benchmark

Hi, guys. Congratulations to a strong finish to the year, or what is expected to be. I had a housekeeping question to start out with. What were the 4G royalty units in the third quarter?

Third quarter we had 62 million units, which is in line with what we said the earlier conference call last quarter. The surprise comes with the fourth quarter. We anticipate around 80 million LTE units next quarter.

Okay. And on that note, I'm assuming that any sort of disruption and what has seriously been your top customers, with Spreadtrum, battery issues and whatnot, is going to be more than offset by new avenues of growth, such as another high-end smart phone. Am I summarizing that correctly?

It's (inaudible). It's all of the above, as you can see from the guidance. Things are going well on our side.

Okay. All right. With respect to the revenue recognition for this new portfolio agreement, the way it was described it sounds as if there's going to be one quarter out of each year in which there will be-- there will be an amount of revenue recognized. Is that going to create in the future a lumpy fourth quarter, as that licensee either does or does not exceed some predetermined threshold for revenue recognition?

So the annual basis is not calendar basis. This is a deal that we signed during the third quarter. So if we-- as we said, the revenue recognition will be annually. That means that the second quarter of next year, either by then recognized a part of that revenue, or maybe earlier if that customer reaches its annual spending account, then we could recognize that earlier than the 1-year wait. So the 1-year is the maximum for the next couple of years. Then if they take this different technology that Gideon talked about, then we could potentially recognize it a bit earlier.

So I'm not sure if we're looking for a lumpy same quarter or second quarter in the next couple of years. But we're sure that adds backlog color to those second-quarter in the next few years, or hopefully a bit earlier.

Okay. I noticed the deferred revenue almost doubled sequentially. Was that a function of the recently launched CEVA X1 and XM6 before they're generally available, or is it a function of some of these new portfolio-like license agreements?

Just the later. The example of those deals that we signed, we got paid for some of them or partially paid. And we haven't yet recognized revenues because of the different rules in this one, the portfolio license that we talked about. The other big one that Gideon talked about is more of a service-oriented, and we haven't recognized the big portion of that. And that agreement is what we have in administrative up-front payment like most of these licensing activities.

So that over the next couple of quarters will be used as part of our revenue recognition.

Okay. Last question from me relates to 5G market share. You've been humming along here for a couple of years at a mid-30% baseband market share. It sounds as if, as it relates to 5G, you're dominant in baseband processing in base stations. It sounds as if you're growing your footprint on the mobile handset side with respect to 5G with some of these portfolio agreements and whatnot. At this point in time, would you expect your overall baseband share to increase in the future as we transition to 5G and maybe any additional detail with respect a 40% threshold, a 50% threshold commentary, would be helpful?

Yes, Gary this is Gideon. About 5G, you said right. The 5G footprint that we so far, until this deal that announced today, is in the base station. And this was the first 5G mobile broadband which takes us to the handsets and automotive and all the things that 5G is targeted for, when it comes to high bandwidth. I'm not talking about IoT.

Now the standards for the 5G is not yet ratified. So people are-- and there are not that many companies who are those that have strong technology base are rushing to come to the market with a pre-standard 5G. And our customer is rushing on this one.

Going forward in terms of (inaudible), our current market share is 36% now. And going forward, we have about 2.4 billion chips going to handset in a year. And we are at about 900 million this year. So we are expecting, going forward, because of the emerging 5G and because of the movement in the mid-range and low end where we are (inaudible), to include that market share.

Okay. Thank you, guys. That's it from me. Thanks.

Josh Wolf, Barclays

Name change thrown in there. Good morning, guys. I have a question on the-- if you look at the non-Bluetooth unit count that you gave, when you look into that number and the growth there, and I think you mentioned audio and voice. Do you see specific areas-- is that an eclectic group in that number? Now, I know it's a smaller number. Or is there anything in there that could potentially be a large blockbuster product, which is in early stages, and we should see a big ramp-up in 2017 with what you're already selling?

Yes. I think it's a combination of products. Right now out of the 60 million, by the way next quarter we are looking at the new record high of probably about 70 million, so annualizing that with the sight of 800 million run rate for now. The big driver for the last two years was Bluetooth. This was the more mature product, and the first product out [RivieraWaves].

The second wave comes from the (inaudible) market. Obviously we're seeing a lot of interest around-- and pick-up around our always-on type of functionality with the speakers and things like that. We have a few Wi-Fi deals that should be ramping up next year. I think the most exciting one is a newcomer, is the vision platform. And Gideon mentioned quite a few new names, like Rockchip, like others that are now-- the Fujifilm in camera in vision application. And I think this was a highest ASP in average for these non-baseband type of devices that we'll have on our hands. And the value market opportunity we've seen picking up.

So I think these are the three elements, other than Bluetooth, with the most interesting and exciting opportunity around the vision.

Okay. And then a second question; if you look at the handset market, the baseband market, there used to be specific seasonality where the fourth quarter of the year was the strongest. So you saw that in your first quarter. Then it kind of shifted because of customer mixes back to the third quarter. So your fourth quarter was the strongest. The fourth quarter guidance is for significant growth. Where do you think we are given your new customers? You talked about the large premium customer. Where do you think the seasonality for the handset market is right now? Should we expect a falloff in the first quarter, or is there growth in the first quarter?

It's hard to say. Because today in the handset market, you don't have really seasonality (inaudible), so calendar year, pre-Christmas, post-Christmas; each company has its own timeline for introducing new mobile. Probably they're not taking even tactical approaches. And to make this even more complicated, we are in a market share gain. We are entering into activity where we're expanding in the smartphone market. And so we cannot fully associate it with seasonality.

The trend, and that's what I'm talking-- the trend is clear. We are expanding in the baseband where we want to expand. And this is the smartphone space.

All right. Thank you very much.

Matt Ramsay, Canaccord Genuity

Good afternoon, guys. Thank you for taking my questions. Gideon, there's obviously a lot in the press and a lot going on at Samsung, which is obviously one of your key partners for 4G and it sounds like for 5G going forward. Looking into next year, maybe you could talk about some of the dynamics from a royalty perspective of what you think can be driven out of Samsung LSI semiconductor division.

I mean you have obviously new mid-tier products, potentially some brand disruption, and product disruption at the high tier, and some new opportunities with them longer term, like MediatTek winning a couple of sockets there for the first time. So there's a lot of moving parts there, and it's a question I get a lot from investors. So any commentary you might have on outlook for that particular customer next year would be really helpful. Thank you.

Generally, we cannot comment on 2017. It's too early. But the trend that we expect next year is to grow as much from this as the baseband side. And of course in the non-handset baseband, we see the trend, we see the trajectory in the last quarter. We expect this to continue next year, and even the next year.

That's fair enough. It's early days. I understand that. You made some good commentary, I think, in the prepared remarks about progress with Rockchip. And I think-- I'd be really interested to hear about-- a little bit more about progress on launches of devices that collect royalties from other chipset vendors in China. I know there's been-- Leadcore has been a partner in the past. And I believe Leadcore is licensing some of its modem technology to some other semiconductor groups with smartphone vendors in Asia.

So I think folks obviously focus on Intel Spreadtrum, Samsung; but I know there's some other dynamics in play in China. And if you could give us an update on the progress there that would be helpful. Thank you.

Well, it's a good question what you are asking. I think what we are encouraged to see in the vision side is the smartphone evolution. Smartphone is kind of behind in the (inaudible) region. But if you take iPhone 7, for example, the plus version where they have a camera to get a better focus and zoom capabilities, usually the vision processor for this kind of workload, there are people speaking with context of 260 degree cameras in smartphones. And that's something that you need the vision processor like we offer.

So OCP is one example. What they do is basically a chip that will be a companion chip to the bigger, we also the other bidder Qualcomm, MediaTek, and this will be a core processor dedicated for the camera. So our OCP ramping, we mentioned Fujifilm, with a few other customers going into also optimization regarding the camera.

On top of this, we mentioned on the connectivity, a company that people may not be familiar because they are not actually in the US, but they are in China quite known, and pushing also on top of consumer product, whether it's a wireless speaker. There's a lot of innovation about-- just think about Amazon Echo. There are in China tons of companies now doing similar products. Think about wearable devices.

So all of these things, the good thing about us with our technology base is generic enough and agnostic enough to get into all those end products. And this is where we see the design wins and the production wins.

That's helpful. And then just last one from me and I'll jump back in the queue. Yaniv, you guys have talked about for a while a target of non-baseband royalty units out to 2018, I believe 800 million was that number at the midpoint. And obviously that guidance was given a couple years ago. And things are moving around. Just good to see that number inflecting higher in terms of the units in the quarter and in the guidance. But a progress report towards that number would be great. Thanks, guys.

Sure. So as we start ramping up the year, it's a bit early. But at least from a royalty perspective and the unit perspective, what we have seen is maybe two or three interesting indicators. First of all from a volume perspective on baseband, we're probably around [14% and 15%] higher than last year. But with a very, very interesting chunk of smartphones, probably closer to half a billion devices, compared to 300 million last year. So that's a big increase in the smartphone compared to the feature phone.

And in the non-baseband units, if you [expedite], if you were about 167 million last year, we're looking at a 20% growth for this year, so just short of 200 million.

If I look to the fourth quarter, and annualize that, the number is much better than 200 million. If you annualize 70 million, this is more or less the number that we are forecasting for the next quarter, and you annualize that, 280 million total and a starting run rate for next year, which starts to close the gap toward the 800 million.

So as you said correctly, when we put this out in 2015, three years out, we haven't touched the target. But I think one of the very interesting things happening to us both in the volume and even more important on the dollar royalty contribution in 2018, revenue we'll off of the base station royalties kick in.

So we are slowly closing the gap. And we're not yet at 100% sure, as Gideon mentioned, about next year volumes and dollars. We'll talk about it and do our homework towards the next earnings call, as usual. But from a unit progression, I think we are doing quite well this year, both in non-baseband and in the baseband itself.

Thank you very much.

Suji Desilva, ROTH Capital

Hi, Gideon. Hi, Yaniv. Congratulations on the strong results here. Can you talk about where we are in the emerging markets upgrade cycle for LTE smartphones, China, India and just some indication of the expectations into 2017? I know you can't talk much about 2017, but some thoughts that would be helpful.

Yes. This is a good question. The interesting point, China is completely LTE-centric. We don't see too many 3G going there. India, what we understand that all the-- or the majority of the phones going there, even though they don't have the network, are LTE phones. And we see companies in China trying to do the more local LTE than today. But in general, that's a good trend for us. Because whenever we go to a smartphone and whenever it's an LTE, it drives our ASPs higher.

Okay. Great. And then on the overall blended ASP for the Company; should we focus on Bluetooth units as dominating and the mix impact the next several years, and will that stabilize?

So we never really like to put ASP as a target or as a working tool. It's really a consequence of the volumes in the different products. So I don't think we have a goal for ASP. It's either the goal for volume, a goal for different markets. And if they all work out, then each one has a different ASP, whatever comes on average for the Company, this is what we could report.

I don't think we have a model that takes it out, or that this is a target market for us. It's just more of the outcome of the different-- but I think we talked about the different volumes in these different markets, and the progress that we are seeing this year.

Of course, with LTE kicking in much stronger this year, more than 3x volume from last year; we had a very, very positive momentum from the ASP perspective. But we have vision. And we have some of these other elements that we talked about in the call, and all these different flavors that it should increase the royalties, and it's a positive effect for us.

Great. And my last question really-- these portfolio licenses that you've achieved, can you just review for us the significance of them, so it's clear for us. Thanks.

I'm not sure I understood the last question, sorry?

Oh, I'm sorry. The portfolio licenses, if you could just speak of the significance of achieving those.

The portfolio licenses; yes. So in order for me to explain the merit of the idea, how is this is working out?

Yes. What the customers are seeing that drove them to take the whole portfolio.

Okay. I think this is a company that knows us. We did not use a variety of IPs, and we look for a way to simplify the uses of our IP. So instead of negotiating each deal separately, instead we're having a lot of infrastructure and a lot of legal teams and accounting teams and business teams view with us, we tried a much bigger portfolio license, and even expand out the technology base, then vision, audio, connectivity, Wi-Fi-, Bluetooth; you have a sort of prepaid buy in corporate. And each division in IP, could take it off the shelf in a very, very simple activation code. And that's the model behind it. We were trying to build an easier access and clearer access for technology. If it does work out for us over the next couple of years, hopefully we have more products, more chips and more market that this large company could utilize our technology, generating revenue streams for us.

I would like add, this is more a strategic-- this deal is from a strategic standpoint. Because other than I made the processor now-- made the deal for this specific project and that's it. It's now like a futuristic, where you take a few years ahead, and say, I don't know exactly what I want to do, but I want this product to be available for me so I can use it for my next-generation and next-next generation products. So it's more like a few years provides them with collaboration with the customer.

Thanks, guys.

Matt Robison, Wunderlich

Thanks for taking my question. I just wanted to ask you about-- you mention two-- I think if I heard you right, you mentioned two new mass market products, one being low-end. Is that low-end product an LTE product?

We mentioned two? No. This is Gideon. We mentioned two handset baseband products, both are in high volume. One is a premium handset maker. Another one is a high-volume company that makes low-range products. So these are the two new royalty payers in volume production.

Yes. I was just asking if the second one, the high-volume lower-end, if it's LTE.

It's an LTE phone, but our content there is, as we mentioned before, is lower, meaning that we are dealing with (inaudible) part, and not necessarily the LTE.

Thanks.

David O'Connor, Exane BNP Paribas

Yes. Good morning, gentlemen. Thanks for taking my question. Maybe the first one, Yaniv, for you on the portfolio licensing deal. What's your expectation when you look across your range of customers at the moment for those type of deals recurring? Should we be thinking kind of on an annual basis, or is it going to be a lot more on the kind of every 2-3 years that those type of deals come along? That's my first question.

The second question, maybe going back to-- you spoke, Gideon, on the vision co-processor for cameras. It's going to be implemented as a kind of co-processor chip in the first generation. I'm just wondering when you look at that over time, is that going to be something going to be integrated into the ASP longer term, or is going to sit there as a co-processor in the next couple of years? That's my second question.

And then maybe if I could get in one more, a lot of talk at the moment around the vision systems in ADAS and into automotive. I'm just wondering how your discussion is trending with kind of auto OEMs or any auto suppliers at the moment. Thanks.

(Inaudible) with the last questions we always got like a three-for, we forget the first question.

It's like food. You know, when you smell and see it, you get the appetite.

Yes. Okay. That's fine. I remember now. Regarding the portfolio, again, I think the way to look on the portfolio, again it is not on the licensing line. The licensing line is predetermined and will define on both, on the amount and on the revenue recognition. The benefit is that when a customer is going to use us or claim to use us, is mainly a lot of our products. And the way to look into this one is the potential for royalties coming from this transaction going forward. And this is the benefit regarding the portfolio.

I think the question was, will this repeat itself once a year or once a few years. Of course, as I mentioned, with the food comes the appetite. We think it could be a great opportunity with such a large company. It doesn't work with a startup. It doesn't work with a first-time image design win. Because they don't know yet how many chips they're going to have or how successful that product is. So there's much-- there's limited with the consolidation in the space. There is more limited type of company. But for sure, this is something we'll try out with others as well. It's hard for us right now to comment if this is a 1-year or every couple of years. But there's no doubt that (inaudible) people are aware of this deal, we are aware of such a deal, and as we mentioned as part of our comments today, we see a lot of advantages for that.

So we'll try to copy it. Can't promise, at least today, that this is something that we'll have for sure next year as well.

Yes. Let me remind-- we're almost out of time. I want to respond to the vision question. Because this is an important question. As you pointed out, currently it's a co-processor that stay in between the ISP chip and we shall see whether it's a Qualcomm or MediaTek. We don't know exactly. And going forward, this technology could be either possibly integrated in the (inaudible), and the (inaudible) of customer service could be integrated into the transfer chip, or it could be a co-processor, a chip kind of in between all these things.

And we are agnostic in regard to all this location (inaudible), and for us at this stage what encourages us is the use cases with customers coming out of how to use vision processor, and deep learning to improve vision, to improve the camera performance or the camera sensing.

Hello? Are we on?

Mr. O'Connor, did you have any more questions?

Yes, just my follow-on question on the ADAS, the vision system into ADAS and auto. That was my third question. What kind of discussions are you having with auto OEMs or suppliers, and how is that trending? Thanks.

Yes. That's-- sorry for forgetting this question. It's also an important question. When it comes to ADAS or automotive (inaudible), we see this is a different market that the consumers that they are really-- the timelines are different, and the acceptance criteria is different. But it is a very dynamic area. We are-- we have a plan that we are selling and trying to engage in customer. Well, there are few companies. One of them started to ship this quarter. It's an after-market, a non-OEM market. But it is a (inaudible). We're optimistic about it because we see the fit.

And this does conclude our question-and-answer session. I would like to turn the conference back over to Richard Kingston for any closing remarks.

Thank you, everyone, for joining us today, and for your continued interest and support in CEVA. We will be attending the following upcoming conferences and invite you to join us there for an update-- the Bernstein Technology Innovation Summit on November 7th in New York, the second annual ROTH Technology Corporate Access Day on November 16th in New York, and Barclays Global Technology Conference on December 7th in San Francisco.

For further information on these events and other events that we're hosting, please visit our Investor section of our CEVA website. Thank you, and good-bye.

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