CEVA Inc (CEVA) 2018 Q4 法說會逐字稿

Good day, and welcome to the CEVA, Inc. Fourth Quarter and Year-end 2018 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded.

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

Thanks, Carrie. Good morning, everyone, and welcome to CEVA's Fourth Quarter and Full Year 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 the highlights from the fourth quarter and full year 2018 and provide general qualitative data. Yaniv will then cover the financial results for the fourth quarter and full year 2018 and also provide qualitative data for the first quarter and full year 2019.

I will start with the forward-looking statement. 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 qualitative data for the first quarter and full year 2019; optimism about CEVA's 60 customers' ability to design new chips and such customer base enabling CEVA to double its annual royalty revenue by 2022; optimism that CEVA can leverage its Bluetooth, NB-IoT and voice recognition technologies as well as capitalize on the 5G upgrade cycle; optimism about sustained growth in nonhandset baseband product lines and customer production ramp-ups; optimism that the cellular market will recover in the second half of 2019; and positive forecasts from Ericsson Mobility and Yole Research.

For information on the factors that could cause a 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 be -- continue to be strong growth drivers for us; the traction with edge technology for AI; 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 5G network and wireless connectivity, AI, LTE-IoT and the IoT space generally; our ability to execute more broad portfolio license agreements; and customers' ramp-up schedules and 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 the 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 also can 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 result, which can be found in the earnings press release issued today. A copy of today's press release for the quarter and year ended December 31, 2018, and the related financial tables and management commentary, which were included in our current report on Form 8-K filed today, also can be found on the Investor Relations portion of our website shortly after this call.

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

Thank you, Richard. Good morning, everyone, and thank you for joining us today. CEVA had an excellent fourth quarter in licensing, with a number of important agreements with premier customers. The resilience of our licensing business, despite the softening macro environment, demonstrates that our comprehensive technology portfolio is valued by a broad base of companies addressing the smart and connected world.

Our fourth quarter royalty revenue reflects above-seasonal weakness in the handset space due to higher inventory levels, primarily attributable to China and emerging markets. However, we see continued expansion of our nonbaseband customers, in particular with Bluetooth and the recovery with ZTE's base station business.

Total revenue for the fourth quarter of 2018 came in at $21.4 million. The licensing landscape continues to be healthy, and we managed to record $10.5 million of licensing and related revenue and to sign 13 new agreements, of which 6 were with first-time customers.

During the quarter, we signed one of the largest license agreements in the company's history with a customer targeting the 5G market. The customer licensed a customized next-generation processor for 5G use case, which we will design over the next few quarters, and we will recognize part of the revenue associated with this deal during that time frame. We also signed an important agreement with a well-known U.S.-based semiconductor company that will strategically capitalize on our Bluetooth-audio technology to expand into the fast-growing market of small ambient audio devices.

Our Narrowband IoT technology also continued to gain traction with 2 new agreements. NB-IoT continues to show good dynamics and prospect as many semiconductor companies with no cellular background turn to us for an IP solution that can reduce the high-entry barriers of cellular.

The space poses a huge volume opportunity with the market expected to reach 4.1 billion connections by 2024 according to the recent Ericsson Mobility Report. Target applications for the other agreements signed in the quarter include advanced consumer camera, surveillance cameras, automotive connectivity, smart speakers, Bluetooth earbuds, Wi-Fi routers and other IoT devices.

For the full year 2018, revenue came in at $77.9 million, down 11% from last year. Licensing and related revenue was $40.4 million, down 6% from last year. Royalty revenue was $37.4 million, down 16% from last year. We continue to strengthen our customer base with 49 license agreements signed in total, of which 16 were with first-time customers.

A steady growth in licensees in diversified markets is the key driver for new royalty streams, in addition to incremental revenues from existing royalty sources. At our Investor and Analyst Day last month, we disclosed that we have 4 (sic) [40] royalty-paying customers today, and additionally 60 customers are actively designing new chips, which we expect to gradually roll out for production over the coming years. We believe that this customer base will approximately double our annual royalty revenue in 2022.

As we move to 2019 and beyond, we remain focused on capitalizing our growth engines through licensing and supporting our customers' design. The conviction for our sustainable growth potential is based on a number of strategic catalysts. The first is the acceleration in demand for base station and Small Cell as mobile operators around the globe are accelerating investment on LTE-A and 5G mobile broadband. After 12 consecutive quarters of year-over-year revenue decline in base station RAN space, the overall RAN market increased 7% in the third quarter of 2018 versus the comparable quarter in 2017 according to Dell'Oro Group report. The main drivers for growth are migration to faster multigigabit per second speed offered by the latest advancement in LTE-A and 5G and new usage model for massive IoT, fixed wireless access, public safety and enterprise. Our vast experience, along with our strategic relationship with key OEMs such as Nokia and ZTE and their semiconductor partners, put us at the forefront of the upcoming upgrade cycle for 5G. We also target to expand our customer base with large incumbents and newcomers in 2019.

Second, our strategic decision to go up in the value chain across all of our product lines. There are 2 main merits for such comprehensive move. The first is by developing both the hardware and software, we are able to holistically produce the most cost- and power-efficient solution for our customers. Secondly, by enriching our offering with state-of-the-art algorithms, software and AI technology, we are streamlining our customers' product deployment and economics, which, in turn, will enable us to strengthen our relationship with our customers and to receive higher-royalty ASP for our technologies.

A recent example of our value-added strategy is the WhisPro, a neural network-based voice recognition technology, which we announced together with the new all-purpose DSP architecture, the CEVA-BX, at the recent Consumer Electronics Show in Las Vegas. By binding these 2 technologies, along with our other noise- and echo-cancellation technologies, ClearVox, we are paving the way for our customers to use speech as a primary user interface for a broad range of markets such as smartphones, smart home, headsets and [hearables], automotive and industrial. A recent study by Yole Research forecasts that 1.7 billion units of these voice-enabled devices will ship in 2023.

Our other vertically integrated platform for AI, computer vision, 5G, Wi-Fi and Bluetooth provide us with a dramatic increase in customer reach and value, as reflected in our recent licensing portfolio.

On royalties, 2018 turned out to be a challenging year for the entire cellular industry, in particular in the first half of 2018. With that said, share gain at a large U.S. handset OEM, coupled by higher ASP for royalty shipments, led to a stronger second half and year-over-year growth versus the second half of 2017 in LTE royalty revenue.

Our nonhandset baseband category continues to expand with shipment up 41% year-over-year as new CEVA-based SKUs are being deployed, particularly in the fast-growing Bluetooth market that is expected to reach 5 billion units annually by 2022.

As for 2019 royalties, we believe the headwinds in the cellular market and the higher channel inventory will prolong for 1 or 2 more quarters into the first half of the year. It's expected to be followed by stronger second half of 2019, both in units and ASP. In our other nonhandset category, we expect solid progress and growing contribution from Wi-Fi and AI in addition to the fast-growing Bluetooth market.

As for base station, based on commentaries by our customers and operators, 5G deployment in 2019 will be at a slower pace than originally expected as operator stage their rollouts and due to few unresolved interoperability issues with handsets. As such, due to the low visibility and the timing and the magnitude of 5G deployment in this year, we are taking a prudent stance in regards to growth from base station for this year. With that said, all indications and commentaries, including those [emanating] from CES reveal that 5G is coming, and operators see the benefit of driving 5G buildout, particularly in the U.S., China, Korea and Japan. Yaniv will shortly quantify our view on 2019 royalties.

In summary, in 2018, we continued to plant the seeds of our growth by capturing a large set of design wins across our targeted segments. Accumulating those design wins, which is the hardest part of our business, make us stronger and more resilient to local economic factors. We are committed to continue to relentlessly pursue multiple growth opportunities the smart and connected world poses for us.

Finally, I would like to take this opportunity to thank all of our employees for their hard work and strong execution. We made great progress in 2018 and reaffirmed our position as the leading and valuable IP supplier for vertically integrated solutions for cellular connectivity, vision, speech and AI. I would like also to extend my thanks to our partners, suppliers and last but not least, our investors for their support. We wish you all a happy and prosperous year.

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

Thank you, Gideon. Good morning. I'll start by reviewing the results for our operations for the fourth quarter of '18.

Revenue for the fourth quarter was $21.4 million as compared to $21.6 million for the same quarter last year. The revenue breakdown was as follows: licensing and related revenue was approximately $10.5 million, reflecting 49% of our total revenue, 17% higher as compared to the fourth quarter of 2017. Royalty revenue was $10.9 million, reflecting 51% of our total revenue, down from $12.6 million for the same quarter last year that also included a $0.9 million royalty catch-up, following an audit of a customer.

Gross margins were 91% on GAAP basis and 92% on non-GAAP basis. Our total operating expense for the fourth quarter was at similar level to the prior quarter and just below the high range of our guidance at $17.2 million. OpEx also included an aggregate equity-based compensation expense of $2.2 million and $0.2 million for the amortization of acquired intangibles of RivieraWaves.

Our total operating expenses for the fourth quarter, excluding these items, were $14.8 million, also similar to the third quarter level and at the high-end of our non-GAAP OpEx guidance.

U.S. GAAP net income and diluted EPS for the quarter decreased 27% and 29%, respectively, to $2 million and $0.10 over the fourth quarter of 2017. Our non-GAAP net income and diluted EPS for the fourth quarter decreased 9% and 8%, respectively, year-over-year to $5.2 million and $0.23, respectively.

Other related data. Shipped units by CEVA licensees during the fourth quarter of 2018 were 249 million, down 5% sequentially and down 13% from the fourth quarter of 2017 reported shipment. Of the 249 million units shipped, 134 million units, or 54%, were for handset baseband chips, reflecting a sequential decrease of 19% from 165 million units of handset baseband shipment shipped during the third quarter of 2018 and a 35% decrease from 205 million units shipped year-over-year.

In nonhandset baseband, volume shipments continued to increase 17% sequentially and 43% on a year-over-year basis. The increase is primarily due to higher royalty -- to a higher quarterly Bluetooth and sound shipments from our customers. From a revenue perspective, fourth quarter nonbaseband royalty revenue increased 32% sequentially, with comparable volume increase. The fourth quarter was the first time we surpassed 100 million nonbaseband chips shipped in a single quarter, actually reaching 114 million units for the quarter. Of these, 91 million were Bluetooth chips, which were up 45% on a year-over-year basis.

As for the year, our total shipments decreased 20% year-over-year to 929 million units, which equates to approximately 30 CEVA-powered devices sold every second in 2018. These unit shipments represented an annual royalty revenue decrease of 16% year-over-year.

Annual shipments of smartphones decreased 36% year-over-year, mainly due to loss of market share by a large Chinese handset customer and general maturity of the market. However, our average royalty per unit in smartphones increased 31% year-over-year as we gained volume at a Tier 1 U.S. smartphone OEM.

Nonhandset baseband royalty revenue continued to grow and reached a record level of just shy of $9 million, up from $8 million in 2017 and up from $4 million in 2016. In terms of units, our nonhandset baseband unit shipments were up 41% year-over-year to a record 374 million units with Bluetooth contributing a new record of 303 million units for the year.

As for our balance sheet items. As of December 31, 2019, CEVA's cash, cash equivalent balances, marketable securities and bank deposits were $168 million. We continued our active buyback plan, repurchasing approximately 129,000 shares during the fourth quarter for approximately $3 million. Back in May '18, our Board of Directors approved an expansion of the existing buyback plan, and as of year-end, we have a total of 367 (sic) [367,000] shares available for repurchase.

Last, our adjusted ASC 606 DSOs for the fourth quarter continue to be low at the level of 46 days. During the fourth quarter, we generated $4.5 million of cash -- net cash from operations, depreciation was $1 million and purchase of fixed assets was approximately $0.4 million. At the end of the year, our headcount was 341 people, of which 278 were engineers.

Overall, we continued our R&D investment during 2018, opening a new design facility in Bristol U.K., increasing our R&D headcount by about 11% or shy of 30 engineers, thereby enabling us to introduce new licensable IP products and expanding our overall TAM to approximately 17 billion units by 2022. These R&D achievements contributed to higher licensing revenue for the last few years. We continue to thrive to reach new financial milestone, revenue growth, new customers and markets and focus on shareholder value.

Now for our guidance. Last year was another excellent year in licensing revenue with over $40 million, a 13% CAGR from 2013, post the implementation of our diversification strategy. While licensing revenue tends to be lumpy, we believe our strong product portfolio leads to a healthy demand environment. We're forecasting licensing revenue to be similar to slightly better than 2018.

On royalties. As Gideon alluded to earlier and similar to 2018, in baseband, we expect a stronger second half of the year, attributable to the release of new smartphones. Nonhandset baseband royalties are expected to continue and expand with new customers SKUs across all our product lines. We are forecasting some year-over-year contributions from base station royalties in line with commentaries by key players and operators.

All in all, at this stage, we are expecting annual royalty growth in the region of 4% to approximately $39 million for the full year. We will review all this on a quarterly basis as we get more insight from our customers about expected product ramp, particular with our baseband -- base station customers.

In cost of goods, we expect higher expenses of approximately $1.7 million due to R&D customization-related expense that will be allocated from the R&D expense line to the cost of goods on the large 5G deal that Gideon discussed about earlier.

On OpEx, with our new announced products and continued momentum with our existing licensing business, we will continue to innovate and reinforce our leadership but with disciplined investments in R&D. Our OpEx increase is mainly associated with investments in headcount, employee-related costs and EDA tools. Overall, OpEx increase will be in the region of $4 million, all of it contributed to our R&D line. Equity-based compensation is also forecasted to be the similar level of 2018.

Annual gross margins are forecasted to be in the region of 88% to 89%, interest income slightly higher in 2018, at a level of $0.9 million per quarter. Taxes are expected to be lower on a dollar basis but higher percentage of pretax income. U.S. tax -- U.S. GAAP taxes of about $0.5 million for the year and non-GAAP tax rate of about 14%. Share count for 2019 is expected to be similar to the 2018 level.

Specifically for the first quarter of 2019, gross margin is expected to be approximately 85% on GAAP basis and 87% on non-GAAP basis. Both GAAP and non-GAAP base margins are expected to be a bit lower than norm due to the cost of good allocation expenses with that specific customization work that I just mentioned.

Overall OpEx is expected to be in the range of $17.4 million to $18.4 million. Of the anticipated operating expenses for the first quarter, $2.3 million is expected to be attributable to equity-based compensation expense and $0.2 million to other amortization. Our non-GAAP OpEx is expected to be similar to the first quarter of 2018 due to the timing of some R&D grant payments and higher on the following -- in the following quarters. Overall, our first quarter OpEx range on non-GAAP will be in the range of $15 million to $16 million. Net interest income $0.9 million. Taxes for the first quarter, on GAAP basis, less than $200,000 and -- on non-GAAP and none on GAAP, and share count similar to the fourth quarter of this year.

Carrie, you could now open the Q&A session, please.

(Operator Instructions) The first question will come from Gary Mobley of Benchmark.

Wanted to start asking a question or clarification about your nonbaseband royalty revenue in [2019], do you say that was $9 million [that you need]?

Just shy of $9 million. Yes, Gary.

And that compares to what in 2017?

About $8 million.

Gary, that's in line that we had the pulls in base station revenue this year is the result of the ban on ZTE.

Okay. Yaniv -- I'm sorry, Gideon, you're a little bit hard to hear on your commentary about the 5G licensees, that's for base station SoC, correct?

No, we did not say that. It -- we said about 5G, and we cannot further elaborate on what exactly. But as you know, we have -- our offering is for both ends, both on the handset side and the base station side, and it's applicable to incumbents and new one.

Okay. But since there's some customization evolved -- involved, we have to assume it's on the infrastructure side, right?

No, it doesn't necessarily -- the case. You're right about customization, that's what we say. The new customer decided to take an enhanced version of what we offer and that's what we're going to do in the next few quarters.

Okay. Keep us guessing, all right. With respect to Spreadtrum, obviously, you had some market share struggles in 2018, how do you feel about that royalty payer and licensee with some upgraded modem technology and how that may translate into share preservation or share gains in the calendar year 2019 time frame?

So Spreadtrum had a share gain/loss. They lost a key customer, which is often and in some case, this happens in this market because it's extremely competitive, and they have to refocus their strategy. Is -- that plays in the low tier of the LTE investment, and they have big advantages there in terms of cost. And they have a strong relationship with Reliance in India. This will -- in 2017, they have some -- a penalty. In 2018, the -- from Reliance, things are a bit -- they consume a bit of this one. So going forward, I think they will refocus in this space. And keep in mind and we said at the -- also in the Analyst Day, the mobile broadband, which is LTE basically is still unfit when it comes to emerging market. And what we see in the low end, 2G is going down, 3G is going down. This will eventually, it transform to a new LTE, because people are not buying 2G phones, they're buying 3G phones. So their next move will be to LTE, like all of us. We were in the same situation 2 years ago in the western profit. So Spreadtrum is, in my opinion, in a good shape to expand in this space.

The next question will come from Matt Ramsay of Cowen.

A couple of things, guys. I guess following on, on the base station market, it's interesting to hear some of the commentary. It seems that you're hearing from your customer base around base station volumes and deploying those for 5G and then juxtapose that against some of maybe the earlier or stronger commentary out of a company like [SYlink Sys] seems to be using FPGAs for some of those baseband products instead of ASIC. So Gideon, maybe you could talk broadly about is the -- is it delays in deployment of modem ASICs that your technology is in within the base stations? Or do you feel like most of it is just a little bit slower rollout of base stations in total from the vendors in that market? If you could distinguish between those 2, that would be helpful.

I think there are 2 elements in -- to answer your question. One is the deployment itself. We're coming into the base station with ASICs. FPGA is for customers -- for some customers, could be a temporary solution, for other customers, it could be a more permanent solution. But when it comes to all our customers at least in VPN, in Nokia, they are going into ASICs. But the 5G deployment itself is going to be stable, meaning they're not -- the expectation was that in 2019, it will be the point of no return. And everybody will deploy it, one will be at a smaller pace, one will be at a faster pace, some regions. So we are not in this position as we thought in -- last year. The initial deployment is now, they will not install it everywhere, they will install it in certain cities. There are some -- as I said in the prepared remarks, there are some leftover interoperability issues. So the way our customers are saying, Nokia is pretty open about it, they see it second half of the deployment and [Ripsaw Computers] by the way, the issues that they have, they've got interoperability issues is not as [bad] more in the upper spectrum. So we just need to wait for that to happen. And there is enough room for everybody, FPGA, ASICs, that's the 2 options.

Matthew, highlight of that maybe, what we have done this year versus the last year, that we got this timing wrong is that we did not bake in that growth yet in the second half of the year, and we want to see more data and maybe the first royalty report before we come out with that. So I think that's a bit of the difference this year and then plus trying to understand better that market and when that opportunity kicks in. So we don't miss the -- don't miss our guidance.

Got it. But I -- as a follow-up question, I guess, going back to the handset market, it seems like we're going to get some announcements from some OEMs, potentially of early 5G or I guess "5G handsets" in Barcelona here in a month or so. And I would imagine Qualcomm will feature in the majority of those, and your customers seem to be coming on the heels maybe more quickly on 5G than they did when 4G deployed a number of years ago. I guess, maybe you can talk about how you're seeing the path of your customer based on 5G baseband for handsets. And secondly, what that might mean for a per unit pricing on a relative basis to where you're at right now with the 4G mix.

So when it comes to 5G, I believe, the first wave of forms that you're going to see -- that you will see will be all Qualcomm-based and the lot -- as far as I can see it, it would also be operator [log]. So it will be very localized, meaning operators will decide to promote baseband forms and it will be 5G and not necessarily fully interoperable just to [LTE]. Our customers are working on 5G, and we have several customers. When they come out into the market of late 2020, maybe 2021, depending on how the market will evolve, and there's something that we'll know better when we see the base stations -- they need the base station to put them to install them first. So we'll see. The one thing for 5G, and we have a new platform is then open, the G will be higher than LTE. By the way when it comes to mobile broadband LTE, if you take, for example, Q4 quarter-over-quarter data, so Qualcomm went down 20%, we went down 11% in smartphone 3G and LTE. So in a way, when it comes to the mainstream market LTE, we are doing better. And I think that's the mass market for us to focus in this year and maybe first half of next year.

The next question will come from Mike Walkley of Canaccord Genuity.

Just kind of a question on the overall royalty growth of about $2 million you expect for calendar '19. Can you walk us through some of the puts and takes? You look at Intel maybe gaining better share year-over-year on iPhone even though volumes are weak, Spreadtrum's obviously going through some issues, but then ZTE should be recovering, Nokia should be something versus nothing in the year. So can you kind of just walk us through your thought process of just slightly up year-over-year royalties and where maybe we're seeing declines in the business? Because it seems like a lot of your customers should be slightly up year-over-year.

Sure. Thanks, Mike. I think you got all the points right. Mainly one thing that you missed is the allocation of those throughout the year. And I think we mentioned that earlier. Last year, we started the first 2 quarters quite low for different reasons. That will continue into next year in 2019. We talked about the inventory, we talked about the overall matureness of the handset space that we've all seen in Q4. And that will probably spill into Q1 or Q2, so we'll have very similar levels to where we were a year ago, and we believe that, that will start picking up from the second half for all the right reasons. From the Apple volume being much stronger in the second half, especially around the September launch, where the Spreadtrum gaining more and more [sockets] and over the last 2 weeks, we've seen maybe 5 or 6 different SKUs that were published all over -- that they've won. So now we just need to see the volume and the timing of these new SKUs. A lot of different OEMs -- different OEMs, and ZTE we hope that there will not be any halts like we mentioned earlier, and you saw last year, of 1.5 quarters of not reporting and not working. So I think that should be more linear throughout the year, with potential, when 5G picks up and that we did not bake into numbers yet. We will see potentially, a much stronger second half compared to this second half with ZTE and Nokia on board. For now, that's not included in our models, we did take some increase for ZTE and hope to see something from Nokia, but not to the full extent that, that could happen, and then we just want to wait and see. All the other pieces, then that we talked about, this is the third year in a row that our nonhandset baseband, both units and royalties are going up year after year. That should continue into 2019 unharmed. Yet, a lot of new markets that we're not in, automotive is still tending in no volume yet, but we have a couple of design wins. We're talking about sound and there's relatively new opportunity for royalties, we're talking about Narrowband IoT, with a dozen deals in the last 2 years but not royalties yet, and we just saw probably the first chip out there that could hit the markets in early 2019. So a lot of these other parts are all are looking good, and we should continue a vigorous dollar contributor, of course, and the nonhandsets business is coming from base stations and that, for now, we've taken a pretty prudent approach in growth on a year-over-year basis.

Okay, that's helpful. And my follow-up question, just on a clarification for research and development, did you say up about $4 million year-over-year? Is that exclusive of the extra cost bearing through -- cost of goods sold? So you have the extra R&D in cost of goods sold plus another $4 million? Or does it include that $1.7 million expected in costs to goods sold?

It's plus. You're right, $4 million on the R&D line. That is mainly through a split other than the ongoing project that we talked about and Gideon explained, it's really to support our customers. In the last 4 years, we signed 200 deals and 81 new customers that have never worked with us. That causes much more pressure for us. If we want to make them successful and those customers, or a big portion of them, to get into production, we realized that it needs a bit more of a R&D level of support and that's part of the reason for that increase. So it's both on the OpEx, that $4 million and on top of that, you have the allocation of cost of goods for that specific 5G design win.

The next question will come from Suji Desilva of Roth Capital.

Question on the large multi-quarter license agreements for the 5G there. Why didn't deferred revenue go up? Is that because there's customization milestones you have to achieve to collect the revenue -- the cash? Is that the reason?

Yes, that's correct. It's a pretty big deal. I think we said probably the biggest deal we've ever signed, and we have the technology milestones over 5 or so or 6 quarters. So we're starting to work on it, and we'll recognize and invoice as we go along.

Okay, that helps. And then is that customer a new customer to CEVA or an existing customer?

We cannot speak or give you any clue to this one.

Okay. And then more broadly on wireless infrastructure as you ramp up here. Are you guys more levered to macro-cell or small-cell? I mean, I have a perception that you guys might have an even better content opportunity in small cells if those take off in 5G. But is that a misperception? Is it really just -- you're in the core macro, and you have opportunities in small cell? Which of the 2 is it really?

We are all over the place. Our technology is scalable. And we address both the macro and the small-cell and the fixed wireless, by the way. And that's the beauty about 5G because the usage model and where we can be there is much more diverse and there's an -- big, the LTE. Right now, the deployment that we are is in the LTE market. But when it comes to 5G, we are going to be in all those places and that's the plan so far on customer.

Okay, that's very helpful. One last quick question on a nonbaseband, you talked about '19 growth. Can you rank order the subsegments of nonbaseband that would support that growth the best in your opinion in '19?

So dollar-wise, as we mentioned early, base station is strong and probably the biggest contributor in dollars. After that, we're seeing the vision picking up. By the way, we started 3 years ago, with no vision products. And the last 3 years, year-after-year, that specific segment of cameras and sport devices like the GoPros and the drones of different kinds have been using more and more CEVA devices, so volume-wise and dollar-wise, that has been going up over the last 3 years. Not yet significant amounts, but we are scratching the million dollars from that. Same goes with sound devices, a few million dollars, less than a handful of Bluetooth, we talked about 50% unit growth, from 200 million to 300 million in just one year. The opportunities, as we said earlier, are hundreds of millions of units, if not more, for us, and we don't see that volume decreasing in the near future. We're winning more and more -- this will be the best licensing year for our Connectivity, both Wi-Fi and Bluetooth that we've ever had so far. So we anticipate those volumes to continue to increase. So I think we're seeing from every front a contribution but the biggest dollar amount is base station, I would say, then after that the connectivity, vision and sound. Narrowband IoT is not there yet, and that's a new segment on top of that.

The next question will come from Tavy Rosner of Barclays.

When looking at the nonbaseband unit, we did see some growth. So the unit didn't grow I guess as fast as I would've expected in emerging opportunities, since the license shift began a few years ago. So I guess in the growth that you guided for royalties in 2019, what kind of growth are you expecting for nonbaseband? And to the same extent, are there any areas that could outperform significantly from this guidance?

You want to start?

Of course. We'll start with the second part of the question, and I think we're quite clear on that, that we did not want to make the same mistake we had last year, which was not in our control. So we tried to build a prudent royalty forecast, not taking into account potential ramp-up of Nokia or at least very small amounts there because we don't have yet the exact date and quantity to quantify it. So that's, for now, most of that is out of the equation, and quite a few new design wins that we talked about, 60 companies that we have or customers that we have today in design phase, we do expect anywhere between 10 to 20 to go into production in 2019. We don't know to what -- exactly to what extent. So that's something that we are still working on, and we'll see how that evolves. But there is no doubt that overall unit volume growth for 2019 versus where we are today, we're looking at 15%, 20% growth in units. So that should be still significant tens of millions of units of new products. Of course, from a dollar perspective, again, we need the baseband devices to be there and that will help, overall.

I will -- Tavy, 2 things first of all, regarding your question, how things can go better, it could go better all over the place. Keep in mind that when it comes to the nonhandset minus base station, let's call it IoT, we have so many designs in process that we don't have that exact visibility when exactly and what pace they will go in the market. So we just took those that we know, and we know that they are -- how they're going to progress this year. With base station, Yaniv already covered. On this 5G, we are taking very prudent, both for Nokia and ZTE. So ZTE right now is just LTE, and 5G in China will get boost even faster than [ES] to send it to the cloud. And then comes the baseband. The baseband, our concern is the macro, not the share, not the potential for us to expand and I gave example to one other question, what happened? I mean we are doing relatively good, if you put the size in macro. So it's the macro in -- that the trade dispute that implies into the handset market. If the macro improves, and you'll see there are so many 2G, 3G that were not both issues, [that the Belgian was not going to be]. So then you speak about magnitude, those trends that will come in a very short period. So these are still unknown volumes. We didn't want to be too optimistic about it. But again, the potential is there.

Our last question today will come from David O'Connor of Exane BNP Paribas.

Maybe a question again on the 5G. Maybe you can give us an idea of where are we in the 5G licensing cycle? What's your expectation in 2019? How many 5G licensing deals do you expect to close? And then maybe going back to the deal you signed in the quarter, what exact aspect of that do you may that the biggest one today's? And I have a follow-up.

So let me take the second question first because I feel that the people are curious about this 5G. When a customer signs a big deal and take a so-called risk of waiting for us to finish what you want -- what the customer wants, it's a serious player, a serious customer. It's the only thing that we can say. As soon as we can give more clarity, we'll give. So that's when it comes to the specific deal. When it comes to the 5G in general, we -- what I said in the prepared remarks that we're expecting 2019 to expand our footprint in 5G, first of all, base station, because we've -- we're targeting few more customers and believe we have a [shot at] to license our new technologies and same goes for the handset. The technologies that we have also, we called it PentaG, we announced it last year in MWC. The thing about this technology that it is a platform. And you don't necessarily take it or leave it, but you can take -- if you are an incumbent, and you believe there is a portion that you miss in your 5G, you can take this portion of PentaG. And if you are a newcomer, there are newcomers in the 5G, you can take it all. So there is a, I would say, very hectic and dynamic engagement that we have for 5G customer, for handset and the other [material] equipment, a part that we are addressing, and I cannot give you any commitment how many -- which I don't know exactly how many signed, but the only thing that I can tell you is it's a very dynamic engagement.

Okay, got it. And then maybe a follow-up for Yaniv. Within the 2019 royalty growth, what's the assumption around handset baseband ASPs across 3G and 4G?

In 3G -- in 2G, we didn't see any change over the last year. Just because there are not too many players and competition in that space as much. In 4G, when we added the high-end U.S. OEM, that helped with the overall ASPs. And I think they should continue to stay at the higher elevation. Again, the mix here is important. If we have Spreadtrum coming in and the low-end LTE like we discussed earlier, suddenly picks up to a more healthy environment, we'll be happy with that. Maybe the ASP will be pushed back a bit, but the dollars and the royalty contribution will be much higher. So I think a combination somewhere of flattish ASPs if we're more or less the same versus lower ASPs if the volume will pick up, that's what we see today. But nothing out of the ordinary as much as we could tell, for now.

Okay, got it. And maybe just one final one, the LTE shipments in Q4?

75 million.

Sorry, what was that?

75 million in Q4.

And this concludes our question-and-answer session. I would now 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 your continued interest in and support of CEVA. As a reminder, the prepared remarks for this conference call are filed as an exhibit on current report on Form 8-K and accessible through the Investors section of our website at investors.ceva-dsp.com.

With regards to upcoming events we will be attending, these include: Mobile World Congress from February 25 through 28 in Barcelona, Spain; the Susquehanna Technology Conference on March 12 in New York; and the 31st Annual ROTH Conference, March 18 and 19 in Dana Point, California. Please visit the Investors section of our website for further information on these events and other events we will be attending.

Thank you, and goodbye.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines. Have a great day.