CEVA Inc (CEVA) 2017 Q3 法說會逐字稿

Good morning and welcome to the CEVA Incorporated Third Quarter 2017 Earnings Conference Call. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Richard Kingston. Please go ahead.

Thank you. Good morning, everyone, and welcome to CEVA's Third Quarter 2017 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 and provide general qualitative data. Yaniv will then cover the financial highlights for the third quarter and provide the fourth quarter and full year guidance for 2017.

I will start with the forward-looking statements. Today's conference call contains forward-looking statements that involve risks and uncertainties as well as assumptions that, if they materialize or prove incorrect, could cause the results of CEVA to differ materially from those expressed or implied by such forward-looking statements and assumptions. These forward-looking statements include our financial guidance for the fourth quarter and full year 2017, optimism about the licensing pipeline and our product portfolio, anticipated licensing opportunities and potential royalty revenue in trends relating to 5G and LTE IoT, projected customer ramp up schedules and optimism about the success of growth in the non-handsets space.

The risks, uncertainties and assumptions include the ability of the CEVA signal processing IPs for smarter connected 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 extent of the expansion of the LTE and 5G networks, LTE IoT and IoT space generally. Our ability to execute more broad portfolio license agreements, customer ramp up schedules and the impact on royalty revenues, 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. Our third quarter financial results dramatically exceeded our expectations driven by record licensing revenue and activity. Because of our product line, we are experiencing favorable licensing dynamics as customer are increasingly placing greater value in our platform-based strategy which offer a holistic solution to high entry barrier technologies, in particular 5G, neural network and short-range wireless.

Revenue for the third quarter came in at record high of $24 million, significantly higher than our guidance and up 35% year-over-year. Licensing and related revenue was also an all-time record high, it's $14 million, up 88% year-over-year. GAAP and non-GAAP net income and non-GAAP EPS also set company records. During the third quarter, we concluded 8 deals of which 2 were for our DSP cores and platform and 1 for our connectivity IPs. All of the deals were for non-handset baseband applications and 2 were for first time customer.

Customer product market for the licenses completed in the quarter were 5G base stations [said earlier] industrial and consumer IoT. On royalties, revenue came in in $10 million, down 4% versus last year, reaching from seasonal weakness in the smartphone market. This was, however, partially offset by new shipments for our known handset baseband segments, primarily for base station chips and computer regional product within smartphones, action camera and 360-degrees camera. Let me take the next few minutes to update you on recent market development which we planned to capitalize on by leveraging our technology excellence and strong track record in cellular.

Those development presents ongoing licensing opportunities and substantial royalty revenue potential as chips enabled our technology will reach mass production. That much, the 3GPP which is the body in charge of cellular (inaudible), decided to accelerate the milestone for finalizing the 5G new radio standard tower the end of 2017. This paves the way for 5G players as earlier as 2018 following by commercial products in 2019, one year ahead of what was originally planned. 5G is a disruptive technology that [pre work] for multiple new services and products, and now reach our high definition video streaming, undetailed virtual reality, augmentation reality, autonomous driving AIMO.

5G will also be the key enabler for industry 4.0 initiative for which machines and factory automations would be revolutionized by using AI algorithms readily in the cloud that will be accessible through fast and reliable 5G network. These substantial opportunities, live government and wireless, carry us to expedite investments and regulation for 5G. In June, the Chinese government announced that it will invest over $400 billion in 5G deployment over the next 10 years. In the U.S., the HTC has been working to free up new network spectrum or carriers to enable faster 5G network. In this respect, Verizon and AT&T have announced 5G services in 28 and 39 gigahertz spectrum for the last mile delivery.

It enable a much cheaper alternative to all broadband internet, so is it compared to fiber optic. South Korea is planning a commercial 5G network in time for the 2018 Winter Olympic. Last, the approval of the department of Justice on the pending acquisition of Time Warner by AT&T, and Verizon acquisitions of AOL and Yahoo set the state from video streaming services over 5G. Our (inaudible) advanced DSP platform, the XC12, has already been licensed to be out of the top 5 base station OEM, while intensively working our in-house chip solution for 5G. We're also making progress with few other key players in this space which we have not had business relationships deals in the past.

Furthermore, we have number of customers designing 5G mobile broadband chips for smartphone in home router based on our CEVA XE platform. For 5G, the technology breakpoint requiring new expertise in product offering. We saw so deep needs and investing ahead of the market enabling us to offer our customer a head start as the 5G market takes off. In additional recent market acceleration, these LTE IoT, the position of LTE standard specifically target for a low call or a low data royalty application. According to recent report from GSNA, by 2026 as many as 308 billion LTE-based IoT connections will be in operation for applications such as smart meter, smart cities, shared bike, agriculture and more.

China Mobile is leading the pace aiming to invest $6 billion in the next 2 years. The pension of the proliferation of LTE IoT based chips in applications, we have taken significant steps with our technologies to reduce the entry barrier for many semiconductor companies who have no prior experience in cellular and are looking to benefit from these sizable and diversified markets. In that regard, we have recently expanded our partnership with ASTRI of Hong Kong, a reputable (inaudible) analog design service IP company. CEVA X is one stop shop for complete drop-in narrowband IoT solution. China Sanechips, formally known as ZTE Microelectronics, has already launched the RoseFinch7100, its first narrowband IoT chips based on our CEVA X IoT processor. This chip is expected to be in high volume production early next year.

Moving towards this, the third quarter royalty revenue reflects a soft smartphone market, which is what appears to be combination of transformation in the high growth Indian smartphone market where entry penetration is still small and the push out of a top tier flagship (inaudible). We [already] were encouraged by the growing shipments of base station baseband and vision products in smartphone and camera, which partially offset the decline in the handset royalty revenue.

On close, I am very pleased with our all-time high licensing performance and profitability in the third quarter on the back of stellar first half of the year. We are extremely excited about the recent licensing dynamics driven by lucrative opportunity in 5G LTE IoT neural networks, WiFi, Bluetooth (inaudible). The impact of this licensing momentum goes far beyond the initial revenue from these [fields]. This momentum possess significant future royalty revenue potential for those extremely sizable market.

That said, let me turn the call over to Yaniv for the financials and the guidance.

Thank you, Gideon. I'll start by reviewing the results of our operations for the third quarter of 2017. Revenue for the third quarter was within all-time record high of $24 million, up 35% on yearly basis. The revenue breakdown is as follows: licensing and related revenue was approximately $14 million representing 58% of our total revenue, 88% higher as compared to the third quarter of 2006 [sic] [2016], second sequential record high. Royalty revenue was $10 million reflecting 42% of our total revenue and 4% lower on a year-over-year basis. Gross margins were 93% on both U.S. GAAP and non-GAAP basis. Our non-GAAP quarterly gross margin excluded approximately $0.1 million of equity-based compensation expenses.

Total operating expenses for the third quarter were just over the mid range of our guidance at $16.1 million. OpEx also included an aggregated equity-based compensation expense of approximate $2.1 million and $0.3 million for the amortization of acquired intangibles of RivieraWaves. Total operating expenses for the third quarter excluding these 2 items was $13.7 million, just over the mid range of our guidance.

U.S. GAAP net income and diluted EPS for the quarter, both increased dramatically by 73% to $5.8 million and to $0.26 per share respectively third quarter of last year. U.S. GAAP net income also reached an all-time record high. Non-GAAP net income and diluted EPS for the third quarter, both reached an all-time record high and increased 59% and 50% year-over-year to $8.3 million and is $0.36 per share. (inaudible) excluded equity-based compensation expenses net of tax of $2.1 million and the impact of amortization of acquired intangibles of RivieraWaves of $0.3 million.

Other related data. Shipped units by CEVA licensees during the third quarter of 2017 were 250 million, down 7% and 10% sequentially and from the third quarter reported shipments from last year respectively. Of the 250 million units shipped, 189 million or 76% were for handset baseband chips, reflecting a seasonal decrease -- a sequential increase of 15% from 220 million units in the handset baseband chips shipped during the second quarter of 2017, a 13% decrease from [2018] million units shipped a year ago.

Non-handset baseband volume shipments continue to increase about 30% sequentially and 3% on a year-over-year basis. The substantial increase is due to higher quarterly Bluetooth, vision and baseband shipments. From a revenue perspective, third quarter non-baseband royalty revenue increased sequentially by strong double digits with volume increase and on a year-over-year basis approximately doubled, contributing approximately $2 million of royalty revenues in the quarter.

As for the balance sheet items. As of end of September, CEVA cash, cash equivalent balances, marketable securities and bank deposits grew to size of $178 million. Our DSOs for the third quarter were 49 days compared to the prior (inaudible) quarter of 46 days. During the third quarter, we generated $7.1 million of net cash from operations. Depreciation was $0.5 million and purchase of fixed assets were $1.1 million, mainly due to new software [activation]. End of September '17, our headcount was 306 people, of which 246 were engineers.

Now for our guidance. Licensing has demonstrated throughout this year, we experienced good interest for our technologies, also we expect acceleration in 5G standardization and the proliferation of LTE IoT to create demand on our cellular solution. As such, we are once again raising our annual licensing target the third time this year from approximately $32 million last year to a new annual target of just $43 million for 2017, representing over 35% annual growth. Royalty after a soft third quarter in the handset space, we expect sequential increase in the fourth quarter in both the handset baseband and non-handset based products. Overall, this should enable us to record a new all-time annual royalty revenue of over $43 million or possibly 7% annual growth.

Our guidance for the fourth quarter of 2017 is as follows: revenue for the fourth quarter is expected to be in the range of $20.5 million to $21.5 million. Gross margin is expected to be approximately 90% on GAAP basis and 91% on non-GAAP basis. This exclude an aggregate $0.1 million of equity-based compensation expense. Both gross margin plan for the quarter are a bit lower than the norm due to the cost of good expenses associated with our new partnership in a narrow band IoT space. Overall OpEx should be similar to the third quarter. Q4 OpEx is expected to be in the range of $15.6 million to $16.6 million. Of our anticipated total operating expenses for the fourth quarter, $2.4 million expected to be attributed to equity-based compensation expenses and $0.3 million to the amortization of acquired intangibles.

Therefore, our non-GAAP operating expenses is expected to be slightly lower than the third quarter we just reported and in the range of $13 million to $14 million. And interest income is expected to be about $0.75 million. Tax rate for the fourth quarter similar to the third quarter actual level on GAAP basis 17% and on non-GAAP basis 13%. Share counts for the fourth quarter is expected to be about 23 million shares and that will bring us to U.S. GAAP fully diluted earnings per share is expected to be in the range of $0.12 to $0.14. In non-GAAP, EPS is forecast, excluding the equity-based compensation expenses and amortization, is expected to be in the range of $0.23 to $0.25 per share. For the full year revenue, our forecast to be in the highest level of the company's history and just shy of $87 million. On a non-GAAP fully diluted EPS of approximately $1.16 which represents over a 20% year-over-year growth.

Operator, we can now open the Q&A session.

(Operator Instructions). Our first question comes from Gary Mobley with Benchmark.

Congratulations on a strong third quarter licensing number. Yaniv, as a point of clarification, did you just say base station SoC royalty dollars in just reported quarter were $2 million?

In not just the base station, but all the non-handset the royalties were $2 million, which is double than where we were a year ago.

What contribution are you now seeing on the base station front end? Is that from just 1 royalty contributor of the 2 so far?

It's initial ramp ups. I think we said in the past that we are still sort of studying and learning as we go the timing, the magnitude, the ramp up of this and made one customer for now. And it started I think like 2 quarters ago, our first reports, and it's continuing. So we still don't know the full effect and the full growth opportunity, but there's no doubt that this is a very large market opportunity, both (inaudible) our customers, which they're gaining market share from a free scale where the [TIs] of the world had dominated the space.

And then -- Gideon, last one more thing towards the [LTE] space, the continuation of the base station started 2 quarter ago and last quarter we've seen another [queue] or another chip that went into production.

Okay. What were the LTE royalty units in the quarter?

Gary, we didn't hear the question.

What were the LTE royalty units in the quarter?

It's 66 million. One thing to remember base -- back in the base station, we signed another deal with the new customer on the base station front is this last quarter. So that of course no royalty you get, but another deal that's in the third out of 5 big player that we could be enabling their solution. And all these 3 base station does are for 5G.

Okay. One last question I want to address related to the licensing front. So I'm curious to know what drove the average deal size up. Presumably it was up substantially since you've had only a license deals versus 13 last quarter and obviously a big sequential increase in revenue. Your deferred revenue went up sequentially as the main source of backlog. And so the point of questions are what drove the average deal size increase and why are you expecting a low in licensing revenue on what has been a pretty stellar fiscal year '17?

Good question and I'll try to help you out. We always explain from time to time that it's not right to take the licensing revenue and divide it by the number of deals because not necessarily you were able to recognize all the deals that you signed within the core. We are reporting deals that was signed, it's not necessarily the deal that you recognize. And in the last 2 quarters, if you recall, we have increased our backlog last quarter. We reached all-time record high in backlog and that backlog we were able to pull it into Q3 because of the massive R&D investments that we had to deliver by the end of the quarter to a significant customer, a big piece of the cloth here. And as soon as we have done that, we were able to release the backlog. So the backlog is not necessarily deferred revenue, depends if they paid or not, but more importantly the fact that in last 2 quarters, we signed deals not necessarily recovered or recognized all of them. And 2 very large deals were delivered and they fully executed from an R&D point of view from a delivery point of view in Q3, and that's what pulled in revenue maybe from Q4 for future quarters because we were able to get the work done. With that said…

Can I -- let me ask if -- let me ask about to that. So then is the backlog down substantially on the sequential basis and how would you characterize the overall license pipeline?

We didn't say that the backlog went down substantially. I didn't give you the context of the (inaudible), what is prepared for that job. This is in connection to what I said about the 5G. People are rushing to go into the 5G and we will ask the customer to deliver technology in Q4. We will ask (inaudible) deliver it and that's the reason if you recognize out of the rest, the licenses and I think I said it in the prepared remarks, looks very good not just in the 5G space, but across all our product regions due to in the case of (inaudible) like products (inaudible). So it's the change in this we look out. Again that we have backlog, that large backlog from customization. With this, let me finish it and deliver it and the customer can go ahead and it's…

The actual backlog at the end of the third quarter is lower of course than the second quarter because of that. But back to the other part of your second question, the Q4 guidance for licensing were back to normal. I mean this was a nice add-on. Hopefully we could have more like this in the future. But I think we're looking at the same level in as Q1 the $9 million to $10 million that we started the year with and we've seen a quite a few achievements around that. So based on business -- normal business, nothing is wrong. We didn't take the licensing down for the next quarter because this Q4 was much higher than that. But on the contrary, we're back to the normal level although we had a very good quarter. And this is the reason that we're taking the license, the annual licensing revenue up from $40 million a few months ago to north of $43 million. That's the reason.

The next question comes from Matt Ramsay with Canaccord Genuity.

I guess the first question I would ask and congratulations on adding a third base station player into the licensing mix. Gideon, maybe you could talk a little bit about in aggregate, what percentage of the, I guess, 4.9G or 5G base station rollout volumes you guys are anticipating being represented by CEVA based silicon in the base station modems from the aggregate of those 3 big players that you now have, just so we can get an idea of context as to what it means for your business as the 5G business rolls out.

Thanks. I don't want to be specific on what would be the percentage, but let me say the following. Comes to 5G, the landscape and then the ranking of [whom] the first, second and third is about to change because there are few companies that invested ahead and somewhat it has an advantage. And a few landscape CEVA's (inaudible). LTE we just stop achievement 2 quarter ago. We saw a [moving] I said that -- I also said that we are seeing another shift, another skew that just came out into our world meaning chips in this quarter. We are ready for a few more quarter. So we better see the trend in the (technical difficulty). Back on the call.

Thanks guys. Sorry, I think we're -- I'm having some audio issues on my end, but thank you for that, Gideon. And follow up there on the licensing side. Yaniv, maybe you could talk about expectations for next year. I know it's early, but this year was obviously great organic performance in licensing business and had a couple of onetime big bumps. So like how should we think about licensing business in aggregate for 2018 and the run rate going forward?

Yes. I know what we've seen this year that these new technologies, new market really manage to open up much bigger opportunities for us to license our technology and to offer our technology in multiple markets, multiple customers in each of these markets and the licensing activity has paid off. Our R&D investments have paid off and we've seen that in the licensing line. As you said, it's a bit early. In next quarter on January earnings call, we'll give much more detail the guidance and licensing, but I think we said already throughout the year that we would like to keep these types of -- let's say the 4 years type of licensing revenue versus the 3 years that we worked for the last couple of years before 2017. So we are exactly we are in that, and how we will guide and what will be the input we need to do a little bit of research and talk with our customers and potential ones and new ones in each of these markets. We will try to prepare and get you a good answer in few months. But there is no doubt that we are seeing more interest and we want to keep these higher numbers as part of our model going forward.

Got it. And just let me squeeze one more in. Gideon, the 3G number in terms of baseband unit shipments in the royalty business has declined pretty sharply and I think the market certainly moving to 4G quickly. But I guess a couple quarters ago, Samsung brought in MediaTek as a supplier in that mid-tier range and a few bumps in the road potentially for Spreadtrum. So I just wanted to -- maybe you could talk us through a little bit about how that 2G, 3G combined base of your royalty business in terms of unit shipments with partners might go from here or potentially stabilize or just how those trends are in the mid-tier?

(inaudible) that about 3G is something like is certainly in between sandwiched between the 2G and the LTE. So the 2G has still live, in particular in India and you mentioned probably onto the feature phone which is in. In terms of growth today, too big flagship in India and other markets and in particular [royalty], the penetration there is very low. To check on [decision], that's the reason that we had the say some softness in the second quarter, which we should take that it's doesn't look like an industrial issue or a market issue, it's more like a transition. The growth where the price was still introduced some work in this price point I think in this respect the spread will flourish. And potential is there. Now the question is the pace, how fast India will move to LTE and they will move to LTE and for the best, all the emerging markets now is good billions of subscribers that's about to upgrade, maybe in bigger -- big time.

The next question comes from Sujeeva Desilva with Roth Capital.

Congratulations on the strong licensing progress here. Thanks for breaking out the non-baseband revenue, it's helpful. The royalty revenue came in about 20% and grew nicely last 3 quarters. Maybe 1 or 2 years out, you could talk about what the expectation of mix would be. I know there's a lot of moving parts in the royalty with the baseband smartphone and the non-baseband several segments. But could you handicap for us what you think the non-baseband percent might be as we look out 4 quarters to 8 quarters or so?

Sure. I mean sure, it's not easy but we've promised you guys that probably early next week, we'll update it our 3 -- yes, next year, not next week. We'll update the famous 3-year or 4-year expectation and volume and maybe even the dollars and royalties. And this is what we had put in place back in 2015 when we started this diversification and looked at the 4-year from say beginning of '15 to the end of say '18, and wanted to see and pin and print out how we see these markets evolving for us. Some numbers were hitting, some maybe not in the volume side and some were moved very well, maybe a bit slower. But Bluetooth, 2 years ago when we started, we were less than 40 million units a year and we're up to maybe 200 million 2.5 years after. And this is the run rate for the end of the -- more or less the end of this year. So we're seeing a lot of these markets start to build in. There is no doubt that if in the past for many, many years 90% of our royalties came from handsets, this last quarter was the first time that that 10% grew to 20%. And of course we want to see it. We want to be in a position that the non-baseband as big as the handset side, if not even potentially bigger with all these design wins that we are seeing and these licensing activities will flourish in 3 years or 4 years down the road. So again, I don't have the full picture of how that slide yet with look like, but all our licensing activity and all our customers are eager to get into production, are eager to sell their new chips into their new markets. Not just we mentioned we yet but -- in the prepared remarks, but in the last call we saw 2 consumer devices going to production for the first time with our solutions inside, one in the region, one in the another consumer device. And the more we continue to see there that we have a better picture of how those royalties will reflect. Look like for sure, it's coming up. We don't want to keep it 10% or 20% but much, much more.

Okay, let me add my perspective. The non-handset based -- [between] the non-handset based (inaudible) market are beginning to deploy than the cellular. Cellular we did with mega customer and the certain (technical difficulty). So, Yaniv, will go from 0 to 100%, see if we are not gradual on built up. It's composition of a few small companies that are getting and because we were -- the licensing activity was so intensive that we're transforming it, all of them are more or less getting into the -- as Yaniv mentioned, just like quarter through [few] royalty payers from the non-handset baseband started to shift. And we -- toward the baseband, the [ESQ] in the base station that again -– our experience is that we beyond the quarter we'd like to see how far -- how much we need to get to a point to the full swing point and then we'll be able to be more specific.

Yes, hello. Sorry, and then on the licensing effort, you talked about some customers expediting it this past quarter. Can you talk about what end markets and products those customers were targeting? What -- where there is a rush to get into that you saw this quarter?

The continuation of the license revenue in the quarter is basically 2 components. One is the licensing agreement is signed and we've had (inaudible) delivering to a customer. I mentioned it (inaudible) that we see expedition in the opinion of (technical difficulty) we will ask to fill in and our -- and before, on the job, expediting the (inaudible) we know you could recognize it. On that as the licensing deal.

(Operator Instructions). At this time, 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. And thank you all for joining us today and for your continued interest in and support with CEVA. We will be attending the following upcoming events and invite you to meet us there and get an update. The ROTH Technology Corporate Access Day on November 15 in New York, Exane BNP Paribas MidCap forum on November 29 in London and Barclays Global Technology, Media and Telecommunications conference on December 6 in San Francisco. Please visit the Investor Section of our website for further information on these events and other events we will be attending. Thank you all and goodbye.

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