CEVA Inc (CEVA) 2018 Q1 法說會逐字稿

Good day, and welcome to the CEVA, Inc. Q1 2018 Earnings Conference Call. (Operator Instructions) Please note today's event is being recorded.

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

Thank you, Rocco. Good morning, everyone, and welcome to CEVA's First Quarter 2018 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 highlights from the first quarter and provide general qualitative data. Yaniv will then cover the financial results for the first quarter and also provide qualitative data for 2018.

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

Forward-looking statements include our financial guidance for the second quarter and reaffirmation of the guidance for the full year 2018; optimism about the LTE smartphone demand and a gradual return to normal inventory levels during the second quarter and thereafter; optimism about our licensing prospects associated with 5G, cellular IoT, AI and Bluetooth products; as well as market acceptance of our PentaG, ClearVox and NeuPro products; and projected customer ramp-up schedules.

For information on the factors that could cause the difference in our results, please refer to our filings with the Securities and Exchange Commission. These 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 and maintaining our market position in existing markets; the ability of new products incorporating our technologies to achieve market acceptance and offset the maturity of the handset market; the speed and extent of the expansion of the LTE and 5G networks, AI, LTE IoT and the IoT space generally; our ability to execute more broad portfolio license agreements; and customer ramp-up schedules and the impact on royalty revenues.

CEVA assumes no obligation to update any forward-looking statements or information, which speak as of their respective dates.

In addition to the financial results prepared in accordance with generally accepted accounting principles or GAAP, we will also present certain non-GAAP financial measures today. CEVA's management believes that in addition to using GAAP results in evaluating our business, it can also be useful to review results using certain non-GAAP financial measures. Investors and potential investors are encouraged to review the reconciliation of non-GAAP financial measures with their most direct comparable GAAP financial measures, which can be found in the earnings press release issued today.

A copy of today's press release for the quarter ended March 31, 2018, and the related financial tables and management commentary, which were included in our current report on Form 8-K filed today can also be found on the Investor Relations portion of our website after this call.

Before handing the call over to Gideon, I would like to remind you that CEVA adopted the new revenue accounting standards known as ASC 606 as of January 1, 2018. Under the new standards, our royalty revenue represents what our customers shipped during the first quarter of 2018 or our best estimates for such shipments. The numbers stated on this call for the first quarter are based on ASC 606 unless otherwise stated. However, as our Q1 2018 financial results are not directly comparable to our Q1 2017 financial results, which we reported under the old revenue accounting standard known as ASC 605, we will also provide you on today's call our Q1 2018 financial results as reported under ASC 605 to allow for an apples-to-apples comparison on a year-over-year basis. We will have this dual reporting approach throughout 2018 as required by the Financial Accounting Standards Board.

With that said, I will now hand the call over to Gideon.

Thank you, Richard, and welcome, everyone. The results of the first quarter of the year reflect continued strength in our licensing business stronger and a stronger-than-anticipated seasonal decline in revenue, which is attributable to excess channel inventory in the low-end smartphone and feature phone segment.

Total revenue came in at $17.6 million, 17% lower on a year-over-year basis. License revenue came in at $10.1 million based on 14 agreements signed during the quarter, 8 of which were for DSP and AI products and 6 for connectivity IPs. 3 of the agreements were with first-time customers, and the rest were with existing customers that are expanding their existing business or upgrading to newer products.

In particular, we are proud to reveal that we signed 2 lead customers for new CEVA NeuPro AI processor line and 2 customers for new CEVA ClearVox noise suppression and beam forming software technologies. Customers' target application include ADAS equipment in 2 areas: smart camera and vehicle-to-vehicle communication; cellular-IoT, surveillance camera, voice-enabled wireless headset, car infotainment and advanced consumer cameras.

Royalty revenue under ASC 606 came in at $7.5 million. Yaniv will elaborate on the comparable metrics under ASC 606 and ASC 605 later during the financial section of this call.

Baseband shipments were below our expectations, primarily due to excess channel inventory in the low tier smartphone and feature phone market. However, we believe there is a secular demand for low-cost LTE smartphone and features phone in highly-populated geographies like India and Africa, which will likely drive the return to normal inventory level and gradual shipment increase starting from the second quarter of 2018.

Non-handset shipments in Q1 continued to expand nicely, with approximately 58% unit growth and 39% revenue growth over Q1 2017 actual shipment. Also, during Q1, Nokia, a Tier 1 OEM in base station RAN market, announced its new ReefShark chipset that incorporates CEVA DSPs. This chipset is planned to go into production in the second half of the year.

Let me take the next few minutes to elaborate on the underlying dynamics for 3 of our products for which we see good licensing momentum in the short term and substantial royalty revenue potential as those licensees enter into production. The first of this is voice-enabled Bluetooth headphone. Last quarter, we signed 4 agreements with customers targeting this space. Apparently, the success of Apple AirPod headphone has paved the way for broad use of wireless headphones, not just for music streaming or voice calls, but also for seamless communication with voice assistant services such as Alexa and Siri.

The Bluetooth headphone space is a new multibillion unit opportunity for CEVA that we can address with both our reputable Bluetooth technology and with our voice DSP combined with the ClearVox noise suppression software technology. CEVA is one of the very few companies and the only IP company that has expertise and is a one-stop shop for low power Bluetooth connectivity and voice hardware and algorithms, which apply to multitude of emerging voice-enabled devices such as headphones, headsets, hearing aids, smart speakers and smart home devices.

The second is the growing cellular IoT market, where we continue to do recent licensing momentum with 2 new agreements for our vertically integrated CEVA Dragonfly NB-IoT platform. The deployment of NB-IoT services by network operators continues worldwide. Verizon confirmed its plans to build nationwide NB-IoT network covering 2.6 million square miles by the end of this year. China Mobile reported at MWC that it has launched NB-IoT network in 346 cities.

Cellular IoT is expected to be world's fastest growing connectivity technology through 2025, supporting 4 billion devices by the end, according to analysis from ABI Research. We already have 8 active customers developing product in this space, 5 of which licensed with Dragonfly platform in the last 2 quarters. In addition, earlier in the year, a well-known market leader in the wireless market announced that it is expanding to cellular IoT with a module that is powered by our DSP technology.

As a result of this recent success and our market prospects ahead, we stepped up our investment in the space by acquiring core technologies and licensing right for our partner ASTRI of Hong Kong. By owning these technologies, we can enhance our cellular IoT value proposition for customers looking to expedite their entry into these burgeoning market.

The third product relates to AI at the edge. At the CES event earlier this year, we unveiled our new product line for AI processing dubbed NeuPro. It is our first non-DSP product line targeting general AI application in the edge -- in devices such as smartphones, surveillance camera, autonomous car and a variety of other device. NeuPro is a highly optimized processor, which supports a wide range of neural network algorithm used for vision, voice assistant and data analytics. The NeuPro hardware is accompanied by our reputable CDNN compiler technology, which optimizes neural network for processing in low-power and compact edge devices.

I'm extremely pleased and appreciative of our team, who managed to commercialize the product and conclude 2 agreements in Q1 2018 with customers targeting surveillance camera and ADAS application. We are in discussion with many other customers on the NeuPro product line and are very optimistic about the opportunities for this exciting new domain.

Before handing the call over to Yaniv, let me update you on our strategy and achievement in cellular 5G. The 5G usage model extends beyond smartphone and includes fixed wireless as an alternative to costlier fiber optic solution. This solution is currently being promoted by Verizon. It's also a key enabler for robot-based manufacturing, self-driving car and edge computing. The 5G service rollout continues to expand, with the announcement of launch plans and commercial offering as early as next year from T-Mobile and Sprint, who are joining AT&T and Verizon. CCS Insight forecasts 2.5 billion subscribers by 2024.

Against that backdrop, we came out at MWC with the new 5G product aimed to solidify our position and prospect in the 5G UE space. CEVA PentaG is a full reference design for 5G modem that capitalizes on our long and in-depth experience in cellular baseband with more than 8 billion CEVA-enabled phones shipped to date. It accelerates 5G New Radio design by offering a complete hardware and software modem solution supporting up to 10 gigabit per second download speed and is software configurable to the next 5G NR upgrade Release-16.

One of PentaG unique feature is an AI processor that addresses the increase in complexity and vulnerability of the 5G communication channel in a highly efficient manner. The PentaG architecture modular, providing customers with a choice to adopt either the complete hardware and software solution or certain processing engine that it can be integrated with its internal modem design. It therefore extends our serviceable market to large companies that use in-house core or other incumbencies, but still wants to benefit from the advancement that PentaG offers in terms of software-defined radio, AI and more.

A second 5G announcement we made at MWC was the deployment of our CEVA-XC DSP technologies within Nokia latest baseband chipset called ReefShark. The ReefShark baseband unit yields 64% lower power consumption compared to the similar unit used today in Nokia base stations. Nokia stated that it's actively embedding ReefShark within network of 30 operators around the world and expect ramp-up field deployment during the third quarter this year. This announcement affirms our statement in prior calls for an upcoming production ramp by a Tier 1 player in the RAN space.

To summarize, we continue to experience healthy licensing environment, the key ingredient for our future royalty growth, in particular for our cellular IoT, AI and Bluetooth product. We are happy with the market acceptance of our latest product, PentaG, ClearVox and NeuPro. These products apply to many new industries and extend dramatically our prospects for growth. On royalties, while we remain conservative about the handset space in general, we believe the first quarter softness is primarily an inventory advertisement in preparation for newer models' ramp-up during the later part of this year.

With that said, let me turn the call over to Yaniv to discuss our financials and guidance.

Thank you, Gideon, and good morning, everyone. I'll start by reviewing the results of our operations for the first quarter of 2018.

Revenue for the first quarter, based on ASC 606, was $17.6 million. The revenue breakdown is as follows. Licensing and related revenue was $10.1 million, reflecting 57% of our total revenue, 6% higher as compared to the first quarter of 2017. Royalty revenue was $7.5 million, reflecting 43% of our total revenue, a decrease of 27% on a year-over-year basis compared to $10.2 million for Q1 '17 based on actual shipments that were reported in the second quarter of 2017 following the revenue rules under 606.

Quarterly gross margin was 89% on a GAAP basis and 90% on non-GAAP basis. Our non-GAAP quarterly gross margin excluded approximately $156,000 of equity-based compensation expenses.

Total operating expenses for the quarter was just below the high end of our guidance at $18.5 million. OpEx included an aggregated equity-based compensation of approximately $2.8 million and $2.4 million (sic) [$0.4 million] for the amortization of acquired intangibles of RivieraWaves and our investment in the narrowband IoT technologies. Total operating expenses for the first quarter, excluding the 2 items, was $15.5 million, also below the high end of our guidance. U.S. GAAP loss and diluted loss per share for the first quarter was $2.2 million and $0.10, respectively. Our non-GAAP net income and diluted EPS for the first quarter was $0.9 million and $0.04, respectively.

Our first quarter 2018 financial results under 605, the old rules, for a direct comparison to our Q1 2017 financial results were as follows. Total revenue was $19.5 million, U.S. GAAP loss and loss per share of $0.50 million and $0.02. And our non-GAAP net income and EPS for the first quarter of 2018, under the old 605 reporting standard, was $2.5 million and $0.11, respectively.

Other related data. Shipped units by CEVA licensees during the first quarter of 2018 were approximately 196 million, down 26% sequentially, based on Q4 2017 shipments under 605; and down 27% from Q1 2017 actual shipments reported in the second quarter of 2017. Of the approximately 196 million units shipped, 122 million units or 62% were for handset baseband chips, reflecting a 35% sequential decline and a 45% decline on a year-over-year basis.

In non-baseband, volume shipments reached 74 million units, down only 5% sequentially and up 58% on a year-over-year basis based on the 605 rules, as Bluetooth shipments continued to be strong.

As for the balance sheet. At the end of March 2018, our cash, cash equivalent balances, marketable securities and bank deposits were approximately $183 million. During the first quarter, we paid ASTRI its first payment installment of $0.9 million for the new narrowband IoT technologies, as Gideon discussed earlier. Also, we started to become active again on our buyback trend, repurchasing approximately 41,000 shares during the quarter at an average price of $35 per share for approximately $1.5 million. We currently have 270,000 shares that remain authorized for repurchase under the existing plan.

Due to the new rule ASP 606, we also need to record quarterly accrued revenue for the full first quarter royalty report that was not received or billed during the quarter, and we obviously exclude those from our DSO calculation. Our DSOs for the first quarter were 62 days, down from 70 days in the prior quarter.

During the first quarter, we generated $1.8 million of net cash from operations. Our depreciation was $0.6 million. And purchase of fixed assets was $0.5 million. At the end of March, our headcount was 319 people, of which 255 are engineers.

As for the guidance. On licensing and related revenue, we continue to experience healthy demand across the entire range of products we offer. Therefore, we maintain our yearly guidance of approximately $43 million.

On royalty, as Gideon explained, we believe the softness we experienced in the first quarter in the low tier smartphones and feature phone segment was related to excess channel inventory rather than demand issues. As such, we expect a gradual improvement starting this quarter, with stronger impact in the second half of the year.

We're also closely monitoring the implication of the U.S. Department of Commerce ban on component sales to ZTE, which incorporate our DSP platforms. At this stage, we lack the visibility into the ongoing discussions between the parties, nor do we have the visibility into ZTE's existing inventory levels and production plans for this quarter. Yet, for prudency, we have modified our royalty expectation for the second quarter in this regard. We will update investors in upcoming earnings calls for any developers in this front or divergence from the annual guidance, which we provided earlier in the year.

Nevertheless, we currently maintain our annual guidance for royalty and forecast that 60% to 70% of our own annual royalty revenue included in our guidance will be reported in the second half of 2018. This is based on anticipated base station product schedule, holiday season-related shipments and return to normal inventory levels in the low tier handset segment, coupled with all the risks and the moving parts we discussed today.

Specifically for the second quarter for this year, gross margin is expected to be approximately 91% on both GAAP and non-GAAP basis, excluding an aggregated $0.2 million of equity-based compensation expenses for non-GAAP. Overall, OpEx is expected to be in the range of $17.9 million to $18.9 million. Of that GAAP number, $2.9 million is expected to be attributed to equity-based compensation expenses and $0.4 million attributed to amortization of acquired intangibles. Our non-GAAP OpEx is expected to be in the range of $14.7 million to $15.7 million.

Net interest income is expected to be about $800,000. Tax rate for the second quarter, 19% on GAAP, 13% on non-GAAP. Last, share count for the second quarter is expected to be approximately 23.2 million shares.

So with that said, Rocco, you could open the Q&A session, please.

(Operator Instructions) Today's first question comes from Gary Mobley of Benchmark.

I want to start out with a question about your royalty guide for fiscal year '18. Just to be clear, you're maintaining the assumption that royalty revenue in total grows 10% this year?

Yes, that's correct.

And does that -- just to be clear as well, you're taking ZTE out of your forecast and you still get the 10% growth. And that obviously puts a heavy weight on the second half of the year. How much of that strength in the second half of the year do you expect to be fueled by mobile handsets and how much do you expect to be fueled by base station licensees like Nokia?

One correction with regards to ZTE. ZTE was just taking the number out only for the second quarter. And as we said, we will monitor the development of the different discussions going on between the U.S. and China, and they're all trying to resolve this. So if this continues, we may need to update our annual guidance. For now, we're only taking the hit in the second quarter, maybe a relative hit, we don't know yet, but we have taken that out from our expectation only for the second quarter.

So I want to expand on the cellular IoT because this is clearly going below our expectation. I should say that we thought that -- at least internally, we cannot show between in Q1 -- and keep in mind that Q1 is the low season according to the new rules which we report. We came out with -- came out (inaudible) to provide between $1.2 million to $1.5 million, and this is accreted to the cellular. And then all other part of the business went really well for revenue on a yearly basis and then the seasonal decline on the non-handset side. Now in the non-handset side, the historical seasonal decline in this space was between 10% to 15%, where the event in Q2 2016 was about 25%. This quarter, the similar decline and it relates to inventory that was built up in the high season. Industry-wise, it was 30% seasonal decline. We came out with in the smartphone space about 32% and the feature phone about 40%. And when you have -- when you are in the low tier side for revenue overshoot, a bit overshoot than the industry in general. But this is -- we are hearing from different sources that inventory now are getting to normal levels and now they are -- in Q2, it's going to be, kind of, a setup, preparation for the high season and Q3 and Q4 should be in relatively good quarters.

Okay. Last question I have relates, again, to ZTE. Can you share with us approximately how much you were hoping to get from ZTE in royalty revenue or the base station SoC market in general if you don't want to be too specific? And your assumption that ZTE may rebound in the second half of the year, is that predicated on the definition of who your licensee is and whether it's U.S.-based? Or is it predicated on the appeal that ZTE has filed with the U.S. Commerce Department and the political ramifications?

Well, let me start with the later part. The bandwidth associated with components made in the U.S., sold to ZTE. So it's not necessarily only our chip or the chips that are embedded in our technology, but different components that go into a base station that ZTE has the many U.S. vendors. Many chip vendors supply to them. So if they don't have the full amount of chips, if they cannot build a base station, they're not going to ship them, even though maybe they have less of a problem with one chip that is not U.S.-based or is U.S.-based. So it will halt every shipment of base stations until it gets resolved and they have all the right components to make the design work. So probably mainly with other vendors in the space that if you don't have enough components to build a car, you cannot sell a car without the motor or without the wheels and you're just stuck and you're not going to get royalties in those amount of cars that are sold. So that's where we put ourself from of the chip vendors incorporating our technology into the (inaudible) U.S.-based, and that's a problem -- next problem. But the bigger problem is that if they don't have all the ingredients, then they are in the hold position. And as we said, we don't exactly know the inventory levels that they had going into the second quarter. That's the second part of the question. The first part of the question is, as you know, the base station market is a very large royalty contributor to us going forward. And I would say the first part that we're building with ZTE, for example, can be in handful of millions of dollars for this year. So that's the magnitude, more or less, maybe $1 million for the second quarter. This is what we're trying to be prudent with. And for now, we're taking out of our guidance. And we haven't taken more of that for the rest of the year with hope that they get resolved over time.

And our next question today comes from Mike Walkley of Canaccord.

With success in your 5G base station licensing, do you believe you can add another top-5 OEM that is currently developing in-house? And also just switching gears to the 5G smartphone baseband licensing opportunity, how should we think about your strategy there with different processor engines? Does this open opportunities to new CEVA customers that currently don't use your baseband technology today?

Yes, I mean, the answer to your question are both yes. When it comes to base station and 5G, it is. Because it's a disruptive technology and people cannot rely on incumbency there. We have a very big shot there to expand our presence in this market to companies that didn't give the [relationship] of developing things in-house. So we are in active discussion there and progressing. Eventually, these are very strategic agreements and one size does not fit all so it takes time. But I'm optimistic about the progress in this respect. When it comes to handset and also like (inaudible) mentioned, other use case like fixed wireless and autonomous driving, here the way we built the PentaG modem technology is that we built it in a [modular] way that even to people [that use] the experience in-house or has other incumbency, they can take advantage of portion of this technology. And this technology offers a cellular [new wave] and attractive methodologies to implement. I mentioned AI, also we have software-defined [IDN]. I think we are the only company in the industry, both in the filming side and definitely IT side, that also define the platform that are efficient enough that people can take advantage of it. So when it comes to 5G handset and user equipment, we see some people will adopt not the whole platform, but a portion of it, and we are fine with it.

Okay. And just to -- yes, nice to see the reiteration of the 10% year-over-year royalty revenue, can you maybe break it down for us a little bit? You seem to be getting success in the non-handset markets, so DC non-handset market up much more than that and the handset market down year-over-year. Can you maybe give us some rough parameters kind of how you see non-handset related basebands versus handset-related basebands' royalty revenue for 2018?

Sure, I think it's a bit early and premature to build a model. Of course, we have our expectations, but there are so many moving parts as we learned about the ZTE band, which our estimates a few weeks ago are now maybe different than they once were. And we're still, as Gideon said, we're still waiting for the first launch of the Nokia ReefShark chip in the third quarter. And you need to see the magnitude and their design cycles, although they're quite optimistic about their efforts with T-Mobile and other design wins that they have going on for them around that deployment. But there are so many moving pieces, the inventory issues that many of the semiconductor and component players in the wireless handsets talked about, maybe quoted in the last couple of weeks in earnings season, is not something that was built in the models earlier in the year. So I think we need to take it step-by-step. If we take the old rules, for example, the old accounting rules and look at our revenue there at $10 million, which is acute for shipments, but compared to last year, we're only down [15%] on an apples-to-apples basis. And from there, that's our starting point into the year with all the rest of the moving parts. So we're happy to add more color as we go along, but there is some very basic data points like the recovery, like the base station and other non-handset products that we want to see ramping up and then we'll share the breakdown and the information then.

Let me just add and maybe this explains why we are not changing our annual guidance at this stage. The reason that we're not changing it because the fundamental or the underlying assumptions that we had at the beginning of the year did not change. I'm putting aside the [VP], because if that's continuing this prolonged, we will have to change. But right now, it's one quarter. We see all sorts of -- we have a lot of programs that was made to (inaudible) and stuff like this. So maybe things will go in the right direction sooner. But if you take the non-handset space or when you look just year-over-year and you're looking on the transition for the high season, which is the fourth quarter and the first one, the first quarter is supposed to be the post-Christmas season. There is barely a seasonal decline and one of the reasons that our new shipments coming into the market starting from this year. When we take -- at the beginning [of the year], we didn't speak about Nokia. Now it's public and they, by themselves, including the CEO are extremely positive about the second half of the year. When you see -- the mobile, we were initially conservative about this space. The inventory is (inaudible) usually go back because the demand is there. So when you look on the fundamental versus our underlying assumptions, they are not changing. Again, assuming the VP will be resolved shortly.

Last question from me and I'll pass it on. As you look at some of the catalysts for the royalty growth in the second half of the year, what are some of the more important factors? Is it ZTE getting settled? Is it the Nokia timing of their ramp? Is it maybe Intel share gains in new iPhone platforms? Can you maybe just help us think about some of the areas you see as the bigger drivers for second-half improvement over first half besides the seasonal aspects?

It's all of the above. The base station is a key ingredient. In the end, I think it's the first time that we get into production with this customer. ZTE of course (inaudible) we know more or less what to expect because this customer is shipping already smartphones. We more or less mentioned what [all we think] and the rest we have plenty of non-handset baseband product starting from Bluetooth (inaudible), different market. And all of them are showing the progress. I mean, we are monitoring the customer progress. We're monitoring the pattern of the shipments. And at this stage, things are in the right direction. And I also refer to the product brochure that Richard distributed earlier today. It has a lot of new products, drones and the like that Gideon mentioned, you can some of these examples that are ramping up because they are in production now earlier in the year. So if they have -- if we have them on a full year basis, [that's our] new contribution to our non-baseband royalties.

And our next question today comes from Joseph Wolf of Barclays.

I was hoping to get a little bit more color on some of the -- you talked about the seasonality of the handset market, and expecting that to come back. But the feature phone market fell significantly compared to where we thought it was going to fall. And I'm just wondering, as you think about the recovery, what kind of mix do you expect in the handset market? As it transitions into lower cost markets to better handsets, are we calling them feature phones? Are we calling them smartphones? And what kind of ASPs are we looking for as you think about that second half recovery?

Yes, Joseph. Let's start with the feature phone. I mean, feature phone, we are all asking ourselves how long can this market continue to generate hundreds of millions of new phones a year? And in the last couple of years, we were surprised how is this going to raise, and how long it's still around? Maybe this is the first change, because this year's dramatic decrease as Gideon said, sequentially like 40%. We have not seen that magnitude before. We are not 100% sure if this is a demand issue or more of an inventory issue, because of the high end. And maybe you have your deck of cards that everybody was assuming that Apple will have different results than they actually had and from thereon, the lower smartphones were prudent and the very low-end feature phones also even took a more aggressive approaches, as Gideon mentioned earlier, and this is how we got to the level. About a year ago, I think we introduced something that we saw in the emerging [colonies] something called an LTE feature phone. It's still a very simple phone. It's still very inexpensive. But it starts to use the LTE networks and of course, our ASPs are twice or 3x (inaudible) LTE device than a feature phone device. It did pick up for a while. There were some [sockets]. There were some of the carriers reduced pricing or gave different discount just for people to use them. But we haven't seen -- year after, we haven't seen that as a key driver of the new market evolving from those feature phones. The next step up, and it looks -- this is something we've been saying for a couple of years. If the price is right. If the smartphone -- low-cost smartphone pricing is right, and I'm not sure what is it, it could be [$40,] it could be [$30,] maybe it could be mid [$20] type of a phone or have significant subsidies from the operators. That could then jump from those feature phones that we lost in Q1 directly into these low-cost smartphones. Hard to predict, we're seeing a lot of these models out there today. We have seen them a year, 2 years ago as well but, again, not in the right price point. And we will keep monitoring, see if that inventory correction finds itself -- finally for the feature phones. And as for the smartphone, because we have seen operators in India, for example, sign up just in Q1, more LTE subscribers than they ever had. So the fundamentals are still there for emerging markets. We need to see now that the inventory correction flies according to that direction. The high end, I think we mentioned, and we cannot talk more about this, about different vendors to other high-end devices. And it's a lot of moving parts. Not sure if we have the crystal ball for it. The more smartphones, the more LTE, the better off we are with ASPs. At the end of the day, we haven't seen an ASP royalty in any of the segments (inaudible) in the last couple of years. So I think it's a lot of more volume. It's timing of SKUs. The introduction of SKUs. The inventory issues that we have now or didn't have with the high-end and everybody is expecting to have and a lot of moving pieces. We are just trying to monitor and put it all together. I think that's what we want to see or think that will happen there (inaudible) for the second quarter, but not stronger in the later part of the year in the second half. I hope (inaudible)

Okay, that's helpful. If you think about the baseband opportunities, specifically the ReefShark product and I know it's too early to tell exactly what's going on. But can you remind us, if we are to hear about certain rollouts in certain geographies, how many -- like how does that flow through? Is it per base station? How many DSPs are there? How much -- what's the ASP content? What can we be thinking about there in terms of that? And then, I'm assuming you're going to account for that in non-handset revenue. Or how should we be thinking about that?

Yes. Let me start with and then Gideon will help me out here. Yes, so for sure it's a non-handset component in our business. Every once in a while we break out and you'll see in the 10-Qs. We have the vision. We have connectivity. As soon as this becomes a big enough contributor for us, we may open up in a different line item. Right now, it's other baseband devices. And it's an expensive chip. And we put one of these very sophisticated chips in a base station. This could be $100 to $150 device. And in general, without being too specific on one customer or another, if you look at the market size, the number of chips that are deployed in that market. I think all of them that are still public use more than $3 billion of semiconductor content in the EV market. If we get our 1% or so, we are talking about a pretty significant ASP per chip for us and of course very sizable opportunity in royalties from the overall market having today maybe 50% market share, design-wise as we mentioned. And Gideon mentioned earlier to a different question, maybe, you could win more of that market as time goes by. I think these are some of the parameters that I would look at the size and the opportunity. And we mentioned, we have seen royalties from [VP] already. And Nokia, we're just -- acquiring around the corner and hopefully the second half of this year starts soon and that's when we see the first royalty reports.

Okay. And just finally one more granular question about the mix. You mentioned the voice-enabled Bluetooth is a big opportunity. I'm just wondering within the units that you talked about for the non-handset opportunity, which I think was $74 million. Bluetooth grew in the nonseasonal way. Is it any of the new Bluetooth? And I guess by my math, I still assume that the baseband or the handset product is still 65% to 70% of the royalty revenue. Is there going to be a quick -- if the second half develops the way you think, is it fair to think about that mix as closer to 60-40 or even 55-45 by the end of the year with some sort of reasonable mix of non-handset? Or maybe I'm starting the year wrong?

No. You maybe are running a bit fast. If I look back a year or 2 years ago, for many years, the non-handset was 10%. Last year, for the first time, we went to -- from 9%, 10% to 18%, just shy of 20%. Eventually, with these things continue, it should help us get to 40% and maybe 50%. I'm not sure yet to tell you if it's this year or next year, or we have for the full year basis, 2 or 3 customers shipping base station. Again, a lot of moving parts, but there is no doubt that we are seeing -- this is Q1 is an [unnoticeable] season or quarter for us, because of the seasonality. And we had 62% handset in volume, and the rest went to non-handsets. So this is -- we're almost there with 40%, but this quarter is not a typical quarter. So I think if you go back, anywhere between 20-something percent and the more non-handset the bigger percentage of the contribution we could get from the new markets (inaudible). Bluetooth (inaudible) by the way, units 61% year-over-year. So we're seeing more handsets. We're seeing more connected devices. We're seeing more bracelets, and [weights] and hearing aids, and hearing -- and headsets, a bunch of different Bluetooth devices. As we remember, it's maybe lower in speed, but the volume opportunity is quite big. One last thing and I -- we could be wrong. Just in last quarter, we signed 4 deals of Bluetooth audio type of applications, just in Q1. So it is a very interesting and hot market for us.

And our next question today comes from Suji DeSilva of Roth Capital.

First question on the smartphone markets. On the high end, are customers awaiting new models? And do you still break out LTE units? Or is LTE really kind of the bulk of the units now and not worth breaking out?

We're happy to break it out. We have 57 million units shipped in Q1 versus 71 million a year ago, and we review on year-over-year basis.

And the high-end market, are -- do you think [VC] customers waiting for new models. I know at the low-end it just sounds like an inventory correction, but any color there would be helpful.

High-end smartphones. I'm not sure, I mean timing, every OEM comes with different timing these days. The [low-end] ones in September and earlier in the year, but those are the high end. I think the volume -- just every couple of months you could find. And then the question is more not the timing, but how successful they are and if we are in or other vendors are in instead of us, I think that's the (inaudible) part.

Yes, the way it works -- mainstream, but chip is basically a kind of a separate quarter. So there is big inventory, big channel to do in Q3, Q4, all the ones that you're going to see the high volume. And in short, the inventories, we don't know exactly how low is the inventory. But we understood that it's a healthy level, and they need to rebuild it. Because the demand, there is no change in the demand from -- in a structural way. Q4 was a bit slow, high season and they have to go through their adjustments, but they are starting the year with new hopes and there are new models and all those things that we hope are still in place.

Okay. And then another housekeeping question, did you give the Bluetooth unit numbers in the quarter?

Bluetooth was 50 -- just a second. Bluetooth number 57 million this quarter.

What are the royalty rates we should expect for some of the newer products like [Denby] IoT, ClearVox, NeuPro, PentaG. Just to understand the magnitude of the ASP there versus the traditional royalty -- unit?

It's interesting to see that the ClearVox, the royalties that we are getting is between 2x to 3x of the hardware itself. This is the first time...

It's an add-on. Yes. (inaudible)

I am explaining it. This is the first time they are actually giving software, which is a bit maybe higher on the food chain than just the QIP or the percentage of the chip. So these are add-ons that OEMs usually pay a lot after they have already the chip in there to get it to work and have access to that technology. We're trying to bypass that and be the provider for that technology. So again, in this [golden] production, we could give a bit more color and show you those devices, but [there is still] The add-on is on top of the DSP core that's in the chip itself.

Okay. And then lastly, can we talk about the imaging products and the voice products, what kind of year-over-year we've seen in those non-baseband subsegments?

Not sure if I have here the breakdown of the different markets. But for sure, we're seeing more low [vision] devices than we have seen in [a year] or now [9] 2 years ago. If you remember last year, 2017, on an annual basis, not on a quarterly basis, we (inaudible) for the first time from zero to 7 million units of vision related products in 2017. Our hopes and goal for this year is to have a 2-digit number and hopefully few 2-digit of millions of units. We are just starting. So I don't remember whether it is in Q1, but from 0 (inaudible) and plan to take it much further up -- higher.

And our final question today comes from David O'Connor of Exane.

Maybe Gideon firstly, can you talk about the competitive dynamics around the AI processor IP in smartphones? And I see Huawei and also MediaTek are using competitor IP for the newer engine. So just wondering how we should think about your ability to capture some this newer engine market and smartphones. That's my first question. And then a follow-up on Nokia. Just to understand it better, how aggressive a ramp-up are you seeing for Nokia in the second half with the rollout of ReefShark? Is that based on Nokia inputs? Or is it more based on the RAN market forecast?

Okay. So starting with (inaudible) we have a few competitors. You mentioned the Huawei, (inaudible) is kind of a hybrid company. They are a semiconductor company and not a IP, pure IP company but [realistically] they do it. Our advantages are in 2 respect. One is the performance. We showed the highest of performance, and there are reports, the (inaudible) reported that (inaudible) stated. And the other advantage that we have is our software. Our software, because we started earlier our software, what we call SCDNN is the only (inaudible) the only software that show maturity and features (inaudible) that is called (inaudible) RP. So these are 2 relatively high entry barrier for people to compete with us in this. When it comes to Nokia, of course, we cannot discuss our discussion with Nokia but our assumption is a combination of parameters. We'll have to see because this is something, the pace of the ramp-up is something that I'm not so sure that Nokia knows at this stage.

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

Thank you, everyone, for joining us today. And for your continued interest and support of CEVA. We will be attending the following upcoming events and invite you to meet is there. The CEVA annual stockholders meeting will be held next week, and we encourage all shareholders to participate through casting their proxy votes or attending the event. We will also be attending the Oppenheimer 19th Annual Israeli Conference in Tel Aviv on May 13. The Cowen 46th Annual Technology Media and Telecom Conference in New York on May 30. Jefferies Israel Tech Trek in Tel Aviv, Israel on June 5. The Stifel 2018 Cross Sector Insight Conference in Boston on June 13. The 10th Annual Credit Suisse Semiconductor Supply Chain conference in Boston on June 14. And the Roth London Conference in London on June 18 through 20. Please visit the investor section of our website for further information on these events and other events will be attending. Thank you and goodbye.

Thank you. Today's conference has now concluded. We thank you all for attending today's presentation. You may disconnect your lines, and have a wonderful day.