CEVA Inc (CEVA) 2021 Q1 法說會逐字稿

Good day, and welcome to the CEVA, Inc. First Quarter 2021 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, Investor and Public Relations. Please go ahead, sir.

Thank you, Rocco. Good morning, everyone, and welcome to CEVA's First Quarter 2021 Earnings Conference Call. I'm joined today by Gideon Wertheizer, Chief Executive Officer; and Yaniv Arieli, Chief Financial Officer of CEVA. Gideon will cover the business aspects and the 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 the second quarter and full year 2021.

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: statements regarding demand for and benefits of our technologies, including 5G technologies, and our BlueBud platform IP and related deal flow; expectations regarding market trends, including growth in shipments of Ultra Wide Band devices and True Wireless earbuds; and secular growth in the IoT space; beliefs regarding benefits of the Intrinsix acquisition as well as the closing of the acquisition; our ability to help customers mitigate risks associated with supply constraints and guidance and qualitative data for the first quarter and full year 2021.

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 scope and the duration of the pandemic; the extent and length of the restrictions associated with the pandemic and the impact on customers, consumer demand and the global economy generally; the ability of CEVA's 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; the speed and extent of the expansion of the 5G and IoT networks; our ability to execute more base stations and IoT license agreements; the effect of intense industry competition and consolidation; and global chip market trends, including supply chain issues as a result of COVID-19 and other factors. CEVA assumes no obligation to update any forward-looking statements or information, which speak as of their respective dates.

And with that said, I will hand the call over to Gideon.

Thank you Richard. Good morning everyone and thank you for joining us today. 2021 is off to a robust start with strong licensing execution and royalties exceeding our expectations. During the quarter, we unveiled BlueBud, a first-of-its-kind IP platform for the booming market of True Wireless TWS earbuds, smartwatches, gaming headsets and other wearables. Today we are announcing the acquisition of Intrinsix, a Marlborough, Massachusetts based leading chip design and secure processor IP Company with an extensive experience and solid business in the aerospace and defense market. I'll elaborate shortly on these strategic initiatives.

Total revenue for the first quarter of 2021 was $24.4 million, up 8% year-over-year. The licensing environment continues to be healthy with $14.4 million in licensing revenue, down 1% year-over-year. We signed 11 new agreements, of which 2 were with first-time customers. China continues to be a very strong market for our wireless connectivity technologies, with high adoption rate both by strong incumbents and newcomers. We are experiencing increasing interest for our 5G technologies, specifically, the new 5G provision known as RedCap or Reduced Capability, which is targeted for the proliferation of IoT devices such as wearables, industrial wireless sensors, surveillance cameras and more.

Our Bluetooth and Wi-Fi technologies continue to be in high demand for a variety of IoT devices for smart home and mobile devices. We also signed up a lead customer for Ultra Wide Band, UWB, technology that we are currently developing. UWB is a shortrange wireless communication that is able to precisely triangulate location of devices, with high security. It is already widely used in the automotive industry, and recently Apple, Samsung and Xiaomi have embedded UWB in their flagship models and are gradually embedding UWB in other high volume devices such as the recently announced Apple Airtag. According to ABI research, 285 million UWB devices are expected to be shipped this year and forecast to reach to 1 billion devices by 2025.

Royalty revenue reached $11 million, up 21% year-over-year, ahead of our expectations. This was driven by a robust demand for our consumer and IoT products and above seasonal demand in smartphones. We believe our customers are facing tight supply constraints, as is most of the industry, and are working hard to expedite shipments for high-demand products.

Let me now go through the rationale for the acquisition of Intrinsix, which we are announcing today. Intrinsix is a leading chip design and secure processor IP specialist targeting the growing chip development programs in the aerospace & defense market, and a range of other IC designs for medical and industrial products. Intrinsix has successfully executed more than 1,500 complex chip design projects in its 34 year history and built a successful business that generates more than $20 million in annual revenue. Over the years, they have built strong relationships with blue chip semiconductor companies and OEMs among which are Intel, IBM, Leidos, Lockheed Martin, Honeywell and many more. Their chip design skills and expertise are scarce and include proven competencies in RF, mixed signal, digital, software security and RISC-V processors.

With the addition of Intrinsix, CEVA stands to benefit from 3 growth pillars: first, extending CEVA's market reach into the sustainable and sizeable aerospace & defense space, a market forecasted to reach to $6 billion in annual semiconductor spending; second, increasing our content in customers' designs and accordingly increasing the license and royalty revenue opportunity by offering turnkey IP platforms that combine CEVA's connectivity and smart sensing IP with Intrinsix' chip design expertise and security and interface IP; third, expanding CEVA's IP portfolio with secure processor IP for IoT devices and Heterogeneous SoC interface IP for the growing adoption of chiplets, which offer a faster and less expensive alternative to the high R&D costs and complexities associated with monolithic IC developments. We welcome the Intrinsix team to the CEVA family and look forward to the exciting opportunities ahead. We expect the closing of the agreement to take place during this quarter. Yaniv will discuss the financial aspects of this acquisition later on.

Another important product we recently introduced is the BlueBud platform IP. The proliferation of True Wireless earbuds is skyrocketing as millions of workers, students, doctors and other professions are required to spend much more time in voice or video calls and need a stable and high-quality audio experience from their wireless earbuds. According to recent data from Counterpoint Research and Strategy Analytics, the TWS market is expected to reach to 600 million units by 2022 and to see 70% CAGR over the next 3 years. The underlying technology used for TWS has broader uses and can be carried forward to smartwatches, over-the-counter hearing aids, mobile gaming, AR headsets, home entertainment speakers and smart home appliances. With the BlueBud proposition, CEVA strives to become the de facto standard for wireless audio in the IP industry. Our unique technology competencies and holistic view allow us to address the substantial technology challenges derived from the need for extreme low power consumption and intelligible audio quality.

BlueBud is a self-contained platform enabled by our high runner CEVA-BX1 DSP and incorporates all the software framework and hardware peripherals required for a wireless audio system. BlueBud also offers optional value add SDKs including our WhisPro AI based voice recognition software, ClearVox, our echo cancelation and noise suppression software, and MotionEngine Hear, for IMU based user control. I am pleased to share that we have already signed up a high-volume lead customer for BlueBud at the beginning of the second quarter and are expecting more deals to follow as the product is released to the wider market.

So in summary, we are very pleased with our solid performance in the first quarter. Our business fundamentals are strong and with the acquisition of Intrinsix, we are expanding into the aerospace & defense market and enriching our value proposition and content by offering turnkey IP platforms and new IPs for security and HSoC interface. With our technology base, core competencies and customer relationships we are well positioned to capitalize on secular growth in the IoT space. Lastly, we are monitoring closely the impact of the industry wide supply constraints and will help our customers to mitigate their risks and challenges where we can as they become apparent.

With that said, let me handover the call to Yaniv for the financials.

Thank you Gideon, I'll start by reviewing the results of our operations for the first quarter of 2021. Revenue for the first quarter was up 8% to $25.4 million, as compared to $23.6 million for the same quarter last year. The revenue breakdown is as follows. Licensing and related revenue was approximately $14.4 million, reflecting 57% of our total revenues, just slightly lower than $14.5 million for the first quarter of 2020.

Royalty revenue up 21% to $11 million, reflecting 43% of total revenues, compared to $9.1 million for the same quarter last year. Quarterly gross margin was 91% on a GAAP basis and 92% on a non-GAAP basis, both better than what we projected. Non-GAAP quarterly gross margin excluded approximately $0.1 million for equity-based compensation and $0.2 million for the impact of the amortization of acquired intangibles.

Total GAAP operating expenses for the first quarter was just over the high end of our guidance at $24.4 million. Our total operating expenses for the first quarter, excluding equity-based compensation expenses and amortization of intangibles, were $20.7 million, also, just over the high-end of our guidance.

Tax expense for the first quarter came higher than expected due to an uncommon revenue mix in which the majority of revenues recognized are associated with our connectivity products, Bluetooth and Wi-Fi, originating in France, which has a high corporate tax rate of 26.5%. On an ongoing basis, our corporate tax rate should be lower and in line with our original expectations, but mainly dependent on the outcome of the revenue allocation mix.

U.S. GAAP net loss for the quarter was $3.6 million and diluted loss per share was $0.16 for the first quarter as compared to a net loss of $1.2 million and $0.05 loss for the first quarter of 2020. Our non-GAAP net income and diluted EPS for the first quarter were $0.3 million and $0.01, respectively. This is compared to the first quarter of 2020 with $3.2 million (sic) [$2.6 million] of net income and zero -- or $0.11.

With respect to other related data, shipped units by CEVA’s licensees during the first quarter of 2021 were 341 million units, down 30% sequentially and up 31% from the first quarter 2020 reported shipments. Of the 341 million units shipped, 129 million, or 38%, were for handset baseband chips, reflecting a sequential decrease of 41% from 217 million units of handset baseband chips shipped during the fourth quarter of 2020 and a 16% increase from 111 million units shipped a year ago. Our base station and IoT product shipments were 212 million units, down 21% sequentially and up 41% year over year.

As for the balance sheet items, as of the end of March 31, CEVA's cash, cash equivalent balances, marketable securities and bank deposits were $174 million. We did not exercise our buyback program this quarter, as we focused on the Intrinsix acquisition and the expansion in the business. Upon closing the deal, our cash balances will be reduced by approximately $33 million in acquisition consideration as well as deal costs.

Our DSOs for the first quarter of 2021 was 49 days, similar to the prior quarter. And during the first quarter, we generated $15.2 million of net cash from operations; depreciation expenses and amortization was $1.5 million and the purchase of fixed assets was $1.1 million. At the end of the first quarter, our headcount was 412 people, of which 346 were engineers, up from a total of 404 people at the end of 2020.

Now for the guidance, we continue to experience a healthy licensing environment and our pipeline is solid. On royalties, we believe our customers are still dealing with industry-wide supply constraints, which may prolong for the remainder of the year. With that said, the demand for products based on our technology is strong and our customers with our support are working fiercely to fulfil their purchase orders.

As we announced earlier today, we agreed to acquire Intrinsix and expect to close the deal later in the quarter. From a financial point of view, we expect Intrinsix to contribute between $10 million to $11 million to CEVA's top line in the second half of the year and that this deal will be accretive as early as 2021 on a non-GAAP basis. We will provide more information on our next earnings call. On the back of this, we forecast our new total revenue for 2021 to be between $116 million to $117 million, compared to about $100 million in 2020. This is subject to the Intrinsix acquisition closing on the anticipated time line.

Specifically for the second quarter of 2021, gross margin is expected to be approximately 89% on a GAAP basis and 91% on a non-GAAP basis, excluding an aggregated $0.1 million of equity-based compensation and $0.2 million of amortization of other assets. OpEx for the second quarter should be lower than the first quarter. For the second quarter, GAAP-based OpEx is expected to be in the range of $22.9 million to $23.9 million.

Of our anticipated total operating expenses for the second quarter, $2.9 million is expected to be attributed to equity-based compensation and $0.6 million to the amortization of intangibles. So our non-GAAP OpEx is expected to be in the range of $19.5 million to $20.5 million. Net interest income is expected to be approximately $0.45 million. Taxes for the second quarter are expected to be around $0.7 million on both GAAP and non-GAAP basis, in line with our prior expectations and models. Share count for the second quarter is expected to be approximately 23.5 million shares.

Rocco, you can now open the Q&A session.

(Operator Instructions) Today's first question comes from Matt Ramsay with Cowen.

Good afternoon, good morning, everybody. Congratulations on the acquisition, Gideon. Maybe you could give us a little bit more background on Intrinsix, your relationship with them. Have you guys collaborated with them on other projects in the past? And if you could walk us through what are the particular pulls from the, I guess, the aerospace and defense and government sectors for technologies that are appropriate for CEVA's portfolio; which pieces you might have had in-house, which pieces you're acquiring? It looks like a good deal. It was just a little bit -- anyway, we externally weren't familiar with the company. I imagine a lot of your investors weren't. So if you could give us a little background, that would be great.

Let me start by explaining about Intrinsix and the rationale from our posture. So it's very hard to find such a skillset under one roof that they can do complex design, involve different disciplines like RF, mixed signal, security, which everybody has to do it in the IoT and do it all the way from specification to a design. And we found this company, and they have 35 or 36 years of track record of doing such projects. Now with that in mind, we plan to take advantage of it in 2 growth pillars. One is security and aerospace and defense. This is a market that we were looking to expand into, in conjunction with what we do in the consumer and the telecom market. It's a big market. It's DSP intensive, because you do a lot on right now GPS, you do a lot of DSP processing. And they have designs, they have a very solid business.

In general, on aerospace and defense, you have big standard big spender system companies. It's a high entry barrier to penetrate. But once you are there, it's for the long haul. So what we plan to do there is basically increase the content, because we can maintain our DSP in conjunction of the design that they do and the customers that they have. And with that in place, we get exposure to the market that anyway we plan to do, and much faster exposure and higher content with our IPs, all the portfolio that we're going to do. That's one pillar.

The second pillar is what we call internally a turnkey IP or what we define a turnkey IP. There are many system companies today that they want to build a chip to create a competitive edge. And those guys are -- not all of them can build a team, a design team, because this is, again, scarce, very hard to find, take a long time to build a cohesive design team. So those guys go either to IC company, or other way or ASP company and want them to change.

So what we plan to do is take our IP and TWS is one example like BlueBud and basically come to the customer with a proposition that not just we'll surround IP with other hardware and basically provide to the customer the design of the chip and then they can go directly to the foundry and manufacture the chip. And this is something that we see a lot of interest from customers coming and requiring such capabilities to do it.

You can think it's -- it's a very equivalent to what AMD is doing in semi-custom, when AMD design chips for PlayStation or Xbox, they bring in their IP and provide the design for Sony or Microsoft. Same thing and a different example close to what the market that we are in is what led Marvell to acquire Avera, because Marvell had the IP and Avera can do the tailor-made design for the customer. So we are not going to be chip manufacturing. We'll be an IP company, but we allow our customers to go directly to the foundry and not take any intermediary in between. So that's the second pillar.

A third pillar is addition that we didn't have, and this is the security -- secure processor IP. This is something that you have to have in any IoT device and IoT is our main market. And if you don't do it, you'll be hacked. And they have the technology, they deal with it for many years, starting from big data projects.

And the other IP that they bring in is what is called HSoC, which is hybrid SoC. And this is basically chiplets. Going back to those system companies is very difficult, very complicated to do a monolithic SoC like what Apple is doing in their chips or semi companies is doing. And chiplets is basically -- you take different die and connect it under what is called (inaudible). You combine them into one chip.

And Intrinsix has a strategic relationship with Intel that is a leader in this area and one of the anchors of their foundry strategy, the new foundry strategy. So we will be looking to capitalize on this. So that's all the consideration that led us to -- for this transaction. Intrinsix is very familiar with DSP, very familiar with our technology. We didn't have projects in the past, but we already communicated and shared with key customers this capability and got good feedback.

Great. Thanks, Gideon, for all the details there. Good luck with the deal. Yaniv, a couple of financial questions. One set is on the acquisition. I think you said on your script $10 million to $11 million for the back half of the year. If you could give us any sense of the rest of the P&L of the acquisition around margins, OpEx, taxes, things like that. And I guess the second part of the question is on the core business. The tax rate in the March quarter, very different than any of us had modeled. And I get the mix of revenue between Europe and the U.S., et cetera, and Asia. But it sounds like something must have went differently in the quarter than you guys had forecast initially in terms of revenue mix. And if you could enlighten us on that, that would be great.

Let me answer Matt's second question, and to give you a background for the revenue mix that we had. I mean this revenue came with, I would say, unexpected surge in revenue. We started seeing things in the second half of last year where the demand of our connectivity product, we saw much stronger demand than we do. But what happened late in the year and in this quarter is that it comes with noncomprehensive agreements with customers.

They are looking for the portfolio for technology. They are looking for architecture licenses. These are a much more expensive product lines. And in the Q1, we had kind of a concentration of these 2 or 3 large agreements in the connectivity space that basically we didn't anticipate this demand. But on the other hand, it's good news because you talk about large customers that are willing to pay and appreciate our technologies.

So take that very strange mix that even for us was a surprise, as Gideon explained, (inaudible) supply is one of the deals that are a million-dollar deal, many millions of dollar deal, with a leading handset OEM. But it all happened in France. The tax rate is much higher, so the concentration was almost everything in France in the first quarter.

On an annual basis, that will level out. I mean it was more of a -- we see it as just something very awkward, but we had a large payment to the top line. But when we add the next couple of quarters at the same run rate that we talked about last quarter or the annual guidance, we did give 22% and said that France has more business these days, not in the level of Q1, across the year.

But if you go back to the normal mix of revenues between Israel, U.S., Ireland, not just France, we should be back in more normal territory and we have never seen that type of concentration in France yet. And I don't see that repeating itself in the near future. It could happen, but it's very rare. It's very rare.

So I think from a tax perspective, we will have a higher tax dollar overall the year. The percentages in the next couple of quarters were not changed. We kept them all the same, the 22% with a higher Q1. With that said, we see the standalone before Intrinsix, we already added or are adding about $1 million to our prior guidance. So instead of the $106 million, we're looking more like $107 million for this year. This is CEVA standalone, higher taxes, and a very solid entry into the second quarter.

Gideon talked about the pipeline. I mentioned what we see both in royalties and in licensing. So we don't give quarterly revenue guidance, but we are looking and feeling very comfortable with at least the licensing environment that we have control over. So over the year, that by itself could close the gap or start closing the gap versus the higher Q1 taxes. And if you add to that Intrinsix, which you had a good question, top line, we're adding maybe $10 million of revenues in the second half. I would look at operating margins of about 10% for this type of business.

And on that front, we should have a tax benefit in the U.S. when we combine that business with CEVA. So all in all, that is going to be accretive based on the current volume that we have today with actual Q1 and with higher taxes. And that should be able to also offset the Q1 expenses.

So all in all, better revenues for the year, specifically with Intrinsix acquisition, if all closes on time. And some recovery, maybe even all of it, we just don't know and we don't guide for EPS, we just give the trends in the business, but we could see some corrections in those few cents that were lost in Q1, making it either from higher revenues or just more expense monitoring and things like that. And better normal tax rates for the rest of the year.

And our next question today comes from Suji Desilva with ROTH Capital.

Congratulations on the Intrinsix acquisition. Based on your last acquisitions, I'd be expecting good things from this one as well. Can you talk about the competition for Intrinsix, And also the secure IP, the RISC-V IP, what opportunities there are to take that outside the aero and defense market?

You were broken up. The only thing that I managed to capture is the secure -- question about security. And the other question?

And the competition, Gideon. Yes, Gideon the competition.

The competition, okay. So security is basically a complete solution based on RISC-V. It's a hardware-based platform that was developed on a few projects for the DARPA and it's -- the security or secure (inaudible) is it's a very dynamic market because threats are being developed or innovated every day, and you need to find a way to somehow depict and deal with it. And Intrinsix has this platform available. They -- as a company, they didn't do IP business thus far, because that's not where they focus here. They couldn't afford doing both things. We have the platform. We have the sales channels to do it. In terms of competition, Rambus is a competitor. I think this is the main competitor will -- as time goes by, we look more closely on the competitive landscape and add our own flavor to make it IP business. But for us, it's an easy licensing add-on because we come to the customer with a basket. We have the connectivity. We have the sensors, and now we are adding security into the mix.

Okay. Very helpful. And then perhaps on the current royalty run rates, the wireless infrastructure market, 5G infrastructure, can you talk about how that's been trending this quarter -- last quarter, this quarter? And then what the outlook for the rest of the year is including perhaps new customers coming online as well?

Yes. The trend is positive. So we see the growth moving both on a year-over-year and also on a quarter-over-quarter. I would say that it's a bit slower than we thought about it. And we see it across the board because it's a matter of the operator or capital spending on the next wave or the next services in 5G, which are small sales and private network. But it's moving and no question about that it will come. In terms of the customer, we have one customer. Another customer publicly said that it goes into production in this quarter. So we are positive.

Maybe I'll add some color, Suji. If you look at some other factors of the base station IoT, Bluetooth was up 84% year-over-year in royalties and our sensor fusion was up 51% year-over-year. So these are pieces of IP that like now with Intrinsix we bought over the years. We invested there and we see the fruits in recent years. Hopefully, that's what we'll see in a few years from Intrinsix as well. But the overall growth in the first quarter also has positively surprised us. And for now, our customers, especially in the IoT space and consumer devices, TV, robot cleaners were super strong in the first quarter, which is obviously, an anomaly because they usually [post on] Christmas quarter, and that was not the case this year with COVID around.

And our next question today comes from Tavy Rosner with Barclays.

This is Peter Zdebski on for Tavy. I wondered if you could comment on the type of growth that Intrinsix has had historically and maybe your going-forward expectations, say, 1 or 2 years out, given some of these synergies and customer overlap that you discussed earlier?

Okay. So the Intrinsix as a stand-alone business is a growing business. We see -- I mean we saw from their financials, it's a consistent growth from -- starting from 2007 where they really turned the corner in the aerospace and defense. The aerospace and defense space is a growing space, more spending by the DoD in semiconductor. It has highest priority than 5G from DoD standpoint and also the highest priority than AI. And Intrinsix is basically growing by taking more projects, more lucrative projects that they bring in [as an inertia].

Now what we are adding to this one is what we're seeing is the IP. So when you go to the defense, we're going to present to the prospect, the customers, the IP that we have. And most of them, they need the DSP there or connectivity, things that we have. And the other thing that we're going to go is to go to our end customers, a lot of them are now coming to us to purchase IP.

And we turn to them, why don't you take -- we do for you the whole design, including IP because we are the expert in IP, and we can combine all the -- we have the most experience and internet understanding on combined IP with the design around IP. So that's the initiative that we're going to take. And as I mentioned, they also bring in IP that we're going to add it to our IP.

Let me try to summarize and if we are looking at on a half year, for this year, we are looking at $10 million. Obviously with simple math, you could double that for next year. On top of that is the pillars that Gideon talked about growth. We'll give more color after we close the deal and when we get closer to 2022. But there's no doubt that with CEVA on board and bringing these together, that $20 million, we see it as a growth driver in the next couple of years, both organic and the nonorganic as the combination of services and IP.

Okay. Great. That's helpful color. And then just wanted to ask about the licensing results, given that revenues were pretty strong sequentially, but the deal count was a bit lighter. Was that simply related to some of those deals last quarter that were signed but not yet recognized in revenues?

Yes. This is a question we have always asked and we said it's not that important to divide the dollars by the deal count. Some are not able -- we are not able to recognize some. Specifically in this quarter, there's a very large deal that we talked about earlier with a OEM, handset OEM, which was a multimillion dollar deal. And at the end of the day, if you look at $14-and-something million, this is a first time ever that CEVA was recording a $14 million and higher in its history. It was all in the last year and 5 quarters that it happened, starting in Q4 '19 for the very first time, and then again in Q1 and again now. So this is just to show that this combination of new markets and new technologies has worked out well and the pipeline for us and the backlog for us for the second quarter is as strong.

And our next question today comes from Martin Yang at Oppenheimer.

First, I want to ask about the turnkey IP business model. And can you comment on what are -- how long are the design cycles? And does that usually involve just onetime fees from customers or maybe higher royalties as they choose to go with turnkey IP?

Yes. The time line or the cycle -- the design cycle, depends on the complexity of the project. And it could range between 6 months to 1 year even. Then this is the magnitude of the project. In terms of payment, it will be -- it's a component that we are familiar, a license fee for the IP, NRE for the development and royalties, it will be higher because we combine both for the combination of the design and the IP.

Great. Can you also comment on the development of Bluetooth new LE audio? Now it's been announced for over a year now. How are the adoption rates in the market? And do you see that as a meaningful driver for your Bluetooth products?

Yes. It does carry a big potential. The platform that we are -- we announced, the BlueBud, supports both the BLE audio and the classical Bluetooth. The BLE audio is not yet deployed in mass market, but we have a lot of legacy to support. So the BlueBud supports the dual mode, which is a combination of the BLE and the classical Bluetooth. But the benefit of BLE audio is substantially higher than the classical Bluetooth, is more modern one. And we expect this to be mainstream, but it's going to take a few years.

And our next question today comes from David O'Connor at Exane BNP Paribas.

Great. Maybe, Gideon, just going back to the Intrinsix deal. Just to clarify, was the business entirely designed services as it exists today? So I imagine they get paid per NRE per design? And is the plan to transform that existing business of theirs into more classic, say, the licensing and royalties, where you get paid per shipment versus just NRE on the design?

And also then on that NRE side of things, I mean, how scalable is that? Because I mean it's all relative to the number of engineers that you have and the ability to kind of rapidly grow that part of the business. That's my first question. And then a follow-up on the Ultra Wide Band. Can you just give us a quick overview of the Ultra Wide Band, how many customers you have today? Is this your first customer in Ultra Wide Band, what the pipeline looks like, and what is the end application for this customer in terms of end markets?

So let me start with Intrinsix. Indeed, the Intrinsix model is, on an NRE basis, they get paid to the resources that they put in this project. The model under CEVA will be a hybrid of those too, because we continue in the primary market into this model and add licensing or IP, which is just a license fee and royalties. But when it comes to what we call the turnkey IP, here it's more of backend payment, meaning higher royalties that it's more close, as you pointed out, to what we do in the IP model. We'll get NRE for the project.

And think about the same thing that what people in the semiconductor are doing, they take some burden of the cost. So the cost could be -- the payment will be higher than the past. But it's -- on the back end, you get higher royalties. So that's in terms of Intrinsix. Now Ultra Wide Band, it's a very promising space that we decided to do. We have a lead customer. We didn't finish the design. It will take us a few more months to finish the design. In terms of go to the market strategy, we -- that's another entry point to the mobile. What we have in the handset space in terms of baseband, and last quarter, we signed another big deal of connectivity. Meaning people are using our technology, not for the baseband, but also for the connectivity side, Wi-Fi and Bluetooth, and this was an agreement that some of it came into revenue this quarter. This was a very big agreement.

And that's a way to get into the mobile ecosystem or mobile customer base through the connectivity. Ultra Wide Band will be a third entry point into the market. I believe that most of the flagship model will include Ultra Wide Band, because people would like to see the benefit of location, a precise location, and the Airtag of Apple is just one example to do it. I believe that going forward, we'll put it in TWS and watches because you tend to forget those all over the place. So it's a technology that we decided to develop, we have the resources working. We have a lead customer that affirms the direction that we do. And it's a big market. I put the numbers in the $1 billion as far as I recall by 2025.

Very helpful. And if I could just squeeze one in for Yaniv. Yaniv, maybe I missed it, but the gross margin for Q1 that you mentioned, I think it was better than expected. What was it within the mix there that drove that better-than-expected gross margin?

Sure. So 2 things. One, sometimes we do some type of customization or changes to our customers when we license in some projects in Q1 because most of the deals are Bluetooth and Wi-Fi, and that's a standard almost off the shelf. We had less of a mix of R&D costs that we needed to bring up to the cost of goods. So that was one reason. And that's why we had more mature deals coming out of France because that's usually 100% recognizable with no additional work.

The second because the DSP also was lower than the normal mix, we had less payments to the Israeli Innovation authorities than in a normal course. These are the 2 elements that brought up slightly, but nicely, the margins.

Ladies and gentlemen, this concludes the question-and-answer session. I'd like to turn the call back over to the management team for any final remarks.

Thank you, Rocco. Thank you all for joining us today and for your continued interest in CEVA. As a reminder, the prepared remarks for this conference call are filed as an exhibit to the current report on Form 8-K and accessible through the Investors section of our website.

With regards to upcoming conferences and events, we will be attending, we will be attending the Needham Virtual Technology & Media Conference, May 17th; Oppenheimer's 22nd Annual Israeli Conference on May 23rd; the Cowen 49th Annual Technology, Media & Telecom Conference on June 1; the Baird's 2021 Global Consumer, Technology & Services Conference, June 8 through 10. All of these conferences we will be attending virtually. And for further information on all these events we will be participating in can be found on the Investor section of our website. Thank you and good-bye.

Thank you, sir. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.