CEVA Inc (CEVA) 2023 Q1 法說會逐字稿

Good day, and welcome to the CEVA, Inc. First Quarter 2023 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.

Thanks, Rocco. Good morning, everyone, and welcome to CEVA's First Quarter 2023 Earnings Conference Call. Joining me today on the call are Amir Panush, Chief Executive Officer; and Yaniv Arieli, Chief Financial Officer of CEVA.

Before handing over to Amir, I would like to remind everyone 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 market trends and dynamics, opportunities for Wi-Fi and 5G; our market position, strategy and growth drivers, including with respect to potential benefits of our acquisition of the 3D spatial audio business from VisiSonics; demand for and benefits of our technologies; expectations and financial guidance regarding future performance, including guidance for the second quarter of 2023; and our plans for attending investor events.

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 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 technology to achieve market acceptance; the speed and extent of the expansion of the 5G and IoT markets; our ability to execute more base station and IoT license agreements; the effect of intense industry competition and consolidation; global chip market trends; and our ability to successfully integrate Intrinsix into our business. CEVA assumes no obligation to update any forward-looking statements or information, which speak as of their respective dates.

In addition, we will be discussing certain non-GAAP financial measures, which we believe provide a more meaningful analysis of our core operating results and comparison of quarterly results. A reconciliation of non-GAAP financial measures is included in the earnings release we issued this morning and in the SEC filings section of our Investor Relations website at investors.ceva-dsp.com.

With that said, I'd like to turn the call over to Amir, who will review our business performance for the quarter and provide some insight into our ongoing business. Amir?

Thank you, Richard. Welcome, everyone, and thank you for joining us today. Our first quarter results show continuous progress in diversifying and expanding our licensing business. However, royalties were impacted by customer inventory adjustments and prolonged weak demand for smartphones and PCs.

Looking at licensing in more detail. Thanks to the hard work and efforts of our team, we signed 13 new licensing and NRE agreements in the quarter. We continue to have excellent traction across our wireless connectivity portfolio, in particular where our 5G and Wi-Fi 6 platforms are in strong demand. Of note, 3 of the licensing agreements we signed in the quarter are of strategic significance: one for our DSPs with a leading Android smartphone OEM for their in-house 5G modem efforts; one for our PentaG2 platform for broadband IoT; and one for our Wi-Fi 6 Access Points IP with a global OEM who is one of the leading providers of Wi-Fi access points and other networking devices. I will expand on these deals shortly.

Other deals signed in the quarter target Bluetooth connectivity for TWS earbuds, consumer IoT and industrial devices, Wi-Fi 6 for access points and mesh use cases, sensor fusion for robot vacuum cleaners and AI for automotive ADAS.

In royalties, the magnitude of the decline in smartphone and PC related royalties was primarily driven by a pull-in of handset baseband shipments in the fourth quarter, which combined with the traditional seasonality, resulted in a correction in the first quarter due to inventory buildup.

Following conversations we have had with customers and others in the supply chain, we understand the demand has resumed and expect a return to more normal level as early as the second quarter.

Outside of smartphones, we saw excellent growth in our Wi-Fi and cellular IoT royalties, both of which contributed all-time high royalty revenue in the quarter. Wi-Fi royalties more than doubled sequentially, thanks in part to 3 new royalty paying customers that reported Wi-Fi 6 shipments to us for the first time. Bluetooth also continued to perform well across the broad consumer IoT markets, where we have a large presence. While Bluetooth royalties from smartphones were affected by the correction I spoke of. Overall, handset royalties declined 64% sequentially and 71% year-over-year, while base station & IoT royalties declined just 4% sequentially and 7% annually.

On our last earnings call, I outlined 3 areas I identified as key growth driver for CEVA, which align with the longer term global megatrend. I want to make the opportunity now to update you on our progress in relation to this.

The first is Wi-Fi, where we saw excellent progress in both licensing and royalties during the first quarter. In licensing, we signed 3 new customers in the quarter, bringing our total number of Wi-Fi 6 licenses to more than 35. While Wi-Fi 6 has achieved a high penetration rate in smartphone and PC to date, the adoption of Wi-Fi 6 in industrial and the broad consumer IoT markets such as TVs, set-top boxes and other smart home devices is still nascent.

This is the market opportunity that many of our Wi-Fi 6 licensees are targeting. And following strong licensing activity among IoT devices customers in the past 2 years, we are now also engaging with customer licensing our Wi-Fi 6 and 6e solutions for access points, including with the strategic customer that I mentioned earlier.

This is a significant development, as access points are an unchartered market for us, with minimal exposure and traditionally dominated by the incumbent Wi-Fi chipset providers. There is a strong appetite for new chipset providers to enter this market and they are able to accelerate their design activities with our industry-leading Wi-Fi 6 IP.

These new Wi-Fi chip customers include network equipment OEMs and semiconductor companies, such as the global OEM I alluded to earlier. Moreover, the royalty associated with access points are higher than those from consumer IoT devices, providing a new potentially lucrative royalty stream. And as our customer base expands, our future royalty opportunities for Wi-Fi 6 continues to grow.

Market research firm Techno Systems Research forecasts that Wi-Fi 6 device shipments will reach 2.8 billion devices annually by 2027, growing at a CAGR of 25%. As we have discussed previously, we believe the market opportunity for us in Wi-Fi 6 based on our customer design wins is as big as Bluetooth, but with greater royalty revenue potential. Our actions this quarter only serve to reinforce my belief that our Wi-Fi business will be a key royalty growth contributor in the coming years.

The second area I would like to update you on is 5G, where we signed 2 important agreements in the quarter. The first of this is a strategic deal with one of the world's leading Android smartphone OEMs. This OEM licensed our DSPs for the first time as they begin their own in-house 5G modem efforts aimed at reducing their reliance on the 5G merchant semiconductor companies. These trends of OEM designing chips for their own devices bodes very well with semiconductor IP companies like CEVA.

OEMs do not have the in-house capabilities to design all aspects of the chip and turn to IP licensors to get many key components of the chip, reducing the risk and allowing them to focus on areas of the chip where they can achieve differentiation and utilize their in-house expertise.

In late 2020, this OEM also licensed our Bluetooth and Wi-Fi IPs, the first chips of which are expected to be in production shortly. If they are successful with their connectivity and 5G chips, this smartphone OEM has the potential to become a key royalty customer for CEVA in the coming years.

The second 5G deal we signed in the quarter was for a customer looking to develop a 5G broadband IoT modem, targeting a wide variety of end markets, requiring high data throughput, low latency and large data volumes. These end markets include connected cars, wearables, smart grid, surveillance, AR/VR devices, industrial automation and more.

According to the latest Ericsson Mobility report, there will be more than 3 billion 5G broadband IoT connection worldwide by the end of 2028. This is an exceptional market opportunity. This customer licensed our PentaG2 platform specifically designed for 5G broadband IoT, which would allow them to seamlessly develop their 5G RedCap-enabled chip with reduced risk, thanks to our integrated platform offering, which provides the key building blocks of a 5G modem.

Also, at Mobile World Congress in February, we announced our most powerful and efficient DSP architecture to date, the CEVA-XC20. The CEVA-XC20 addresses the massive compute requirements of 5G-Advanced and beyond and can scale to fit customers' requirements from smartphone SoCs through to the Wi-Fi 5G advanced ASICs for base stations, private networks, ORAN and other wireless infrastructure.

We believe there is a strong demand for new 5G chips across the wireless industry and among many equipment OEMs. CEVA-XC20 can help to significantly lower the entry barriers for new entrants and incumbents who wish to accelerate their chip designs for these lucrative market opportunities.

The third area is application software for embedded system. In addition to earnings, we also announced our acquisition of the 3D spatial audio business from VisiSonics today. Spatial audio is emerging as one of the most interesting areas in audio, enabling a real-world audio experience within the digital world. This is increasingly becoming a feature of headsets and TWS earbuds to enhance the user experience for watching movies, gaming, listening to music, podcast and even conference calls.

VisiSonics has been our partner for 3D spatial audio for the past year, and we developed a joint products which combine their spatial audio software with our head tracking technology to deliver a complete spatial audio experience.

This joint solution, known as RealSpace, is now going into production with our first joint customer, boAt, India's first hearable and wearable company. THX, the world-class audio and video certification and technology company, is already an existing customer, a testament to the quality of this software.

Following on from the success of the collaboration with boAt and understanding the significant opportunity for spatial audio across end markets, we made a decision to acquire the business and own the complete spatial audio software solution. Initially, with our dominant presence in TWS earbuds market through our Bluetooth and audio DSP customers, we intend to offer headphones and earbuds OEM the capabilities to seamlessly add spatial audio to enhance their product lineups. We can also address a broad set of other markets where spatial audio is being adopted, including AR/VR/AR, audio conferencing, health care, automotive and media entertainment.

Market research firm, Future Market Insights, estimates that 3D audio revenue will grow 4.1X from 2022 to 2032, reaching nearly $31.9 billion in 2032, indicative of the significant market opportunity that spatial audio possesses. The team is located next to our sensor fusion R&D team in Rockville, Maryland, making the integration of this team straightforward. We believe this modest acquisition provides excellent potential to increase our application software royalty opportunity in the coming years as spatial audio becomes a must-have feature of wireless audio devices.

In summary, despite market challenges this quarter, I believe the opportunities we have in front of us continue to grow. We have an outstanding portfolio of wireless connectivity and smart sensing technology, and have fostered strong, strong relationship around the world with leading fabless companies and OEMs. I met with a number of key customers around the world in the quarter, and I'm encouraged by their appetite to expand their relationship with us.

Finally, the VisiSonics spatial audio business acquisition we announced today is an additional step in building our future strategy, bolstering our application software licensing business.

Now I will turn the call over to Yaniv for the financials.

Thank you, Amir, and good day to all. I'll start now to review the results of our operations for the first quarter of 2023. Revenue for the first quarter was $28.7 million as compared to $34.4 million for the same quarter last year.

The revenue breakdown is as follows: licensing, NRE and related revenue, reflecting 72% of our total revenue, was $20.7 million as compared to $22.4 million for the first quarter of 2022. Royalty revenue, reflecting 28% of our total revenues, was $8 million as compared to $12 million for the same quarter last year. Quarterly gross margin came as expected on GAAP and slightly lower non-GAAP basis due to lower royalty revenue in the quarter. Gross margin was 82% on GAAP basis and 84% on a non-GAAP basis compared to our 82% and 85% guidance on GAAP and non-GAAP, respectively.

Our non-GAAP quarterly gross margin excluded approximately equity-based compensation expenses of $0.4 million and amortization of acquired intangible of $0.3 million. Total GAAP operating expenses for the first quarter was above the high end of our guidance at $28.2 million due to the timing of the Israeli Innovation Authority grants received, lower allocation of Intrinsix's NRE costs from NRD -- NRE (sic) [R&D] into the cost of revenues, and higher professional fees.

Total non-GAAP operating expenses for the first quarter excluded equity-based compensation expense. And amortization of intangibles and holdback expense were $24.1 million, also above the high-end of the guidance due to the same reasons I just explained.

GAAP operating profit -- loss for the quarter was $4.8 million [down from a GAAP operating profit of] $0.5 million in the same quarter a year ago. GAAP quarterly operating profit included equity-based compensation of $3.9 million, the impact of amortization of $0.7 million associated with an acquisitions of Intrinsix and Hillcrest business, and $0.3 million associated with [Intrinsix] acquisition. Our non-GAAP operating profit was $0.1 million, lower than the first quarter of 2022 of $5.5 million.

GAAP and non-GAAP tax expenses were $1.4 million, mainly associated to withholding tax deducted by our customers that could not be utilized and were expensed. And our GAAP loss was $4.9 million and diluted loss per share was $0.21 for the first quarter of '23 compared to a net loss of $1.7 million and diluted loss per share of $0.07 for the first quarter of 2022.

With respect to other related data. Shipped units by CEVA licensees during the first quarter were 297 million units as compared to the fourth quarter of 2022 reported shipments of 375 million units, primarily for the following reasons Amir discussed earlier. Of the 297 million units reported, 27 million units or 9% were for handset baseband chips. Our base station and IoT product shipments were 270 million units as compared to 308 million for the fourth quarter of 2022 and 531 million units for the first quarter of 2022.

Bluetooth shipments were 190 million units in the quarter as compared to 220 million units for the fourth quarter of 2022, mainly due to lower shipments from Bluetooth smartphone customers associated with the inventory correction.

Cellular IoT units were 19% up sequentially to an all-time record high of 29 million units. Wi-Fi shipments were 21 million units as compared to 37 million for the fourth quarter of 2022. However, we're encouraged by the Wi-Fi product mix as it starts to shift towards Wi-Fi 6, which commands a higher average selling price resulting in higher royalties. This positive trend reflects the long-term Wi-Fi royalty opportunity for us.

Other shipments under the base station and IoT umbrella totaled 30 million units for the quarter. This includes our computer vision, AI, audio sensor fusion, 5G RAN and DSPs for non-cellular communications.

As Amir stated, both Wi-Fi and cellular IoT contributed all-time record high in this category for royalty revenues in the quarter. Wi-Fi royalties more than doubled from the last quarter, thanks in part to 3 new royalty paying customers that reported Wi-Fi 6 shipments for the very first time and have started the Wi-Fi 6 royalty cycle for us.

As of the balance sheet items. At the end of the quarter, our cash, cash equivalents, balances, marketable securities and bank deposits were approximately $145 million. Our DSOs for the first quarter increased to 69 days from 34 days in the prior quarter. During the quarter, we used $5.1 million cash from operation activities. Ongoing depreciation and amortization were $1.4 million and the purchase of fixed asset was $0.1 million.

At the end of the first quarter, our headcount was 497 people, of whom 413 were engineers. This is up from a total of 487 people at the end of 2022.

Now turning to our outlook. As Amir discussed, the smartphone and PC markets continue to experience soft demand. However, within the handset and base station customer mix, we expect strong chip shipment recovery in the second quarter. Our licensing, NRE and related revenue business continue to generate customer traction across our diversified portfolio.

In royalties, with several new customers that recently started production and with the expectation for a meaningful higher shipment volumes of our handset and base station customers in the second quarter, we forecast a sequentially higher royalties. Also, the strength of our wireless connectivity markets and customers will continue throughout the year.

In light of the macroeconomic environment, we continue to monitor our expenses closely, and we'll take all the appropriate steps as we see fit. In this regard, we're currently planning for non-GAAP OpEx to be slightly lower than the first quarter level in each of the following quarters of the rest of the year.

Specifically for the second quarter. Gross margin is expected to be similar to the first quarter level of approximately 82% on a GAAP basis and slightly higher sequentially on non-GAAP basis to 85%, excluding an aggregated based compensation expense of $0.4 million and $0.3 million for amortization of intangibles.

OpEx for the second quarter is expected to be flattish with the first quarter and in the range of $27.7 million to $28.7 million, excluding an expected $4.1 million of equity-based compensation, $0.2 million for Intrinsix's holdback related expenses and $0.3 million for amortization of acquired intangibles. Our non-GAAP OpEx is expected to be slightly lower than the first quarter in the range of 23.1% to 24.1%.

Net interest income is expected to be approximately $0.7 million. Taxes for the second quarter is expected to be flattish at $1.4 million, again, derived mainly from withholding taxes and the share count for the second quarter is expected to be approximately 24.4 million shares.

Rocco, we could now open the Q&A session, please.

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

I guess in the short term, Amir -- I just want to see if I can characterize this correctly. It seems to me that all the long-term business trends are the way that you guys hope they would be and the licensing momentum diversifying and very strong. But there were just a couple of inventory corrections. One in China handset modems with the well-known weakness there with your sort of large customer in China. And the other one in Bluetooth in Scandinavia. Is that really all that's going on here in the short term that affected royalties and everything else is kind of, I don't know, running as expected on the broader business?

I will say, in a high level, this is very correct. But I will add a little bit more color on a few things just to make sure this is clear. So first, in terms of the overall trends, as you pointed out, we're very, very encouraged by the type of deals and licenses that we got this quarter. Really some of them will drive a very strong long-term royalty potential for us and continue great momentum for our Wi-Fi and 5G opportunities overall.

In terms of the royalty this quarter, definitely, as you pointed out that with one key customer in China, the corrections in the smartphone and specifically in Q1, we expect meaningful and strong recovery sequentially from Q1 to Q2 in regards to that one specifically. And then I would say about Bluetooth, it's really, to the most part, the impact from the same smartphone impacts of the Bluetooth. If we look at our Bluetooth outside that, it actually has been very solid and continuing with the trend. And on top of that, of course, what we mentioned about Wi-Fi and narrowband IoT, all-time high, and we see basically the continued growth of these technologies with more companies are basically shipping our products.

Got it. No, that's really helpful. And I'm sure that stuff will just work its way through the system and we're noticing that with many of your peer companies in the ecosystem as well.

For my follow-up question, I wanted to change gears a little bit and talk about some M&A that's happened in and around your company and by your company. I think the first one is, as you guys announced the VisiSonics deal today alongside of the earnings, and I wonder if you might expand on the technologies, the people a little bit more and what your plans are for that business. On the flip side, I did notice that one of your customers in a particularly interesting area around automotive called Autotalks was acquired by Qualcomm. And I believe that is an important licensee for CEVA.

The Qualcomm guys, it's a small deal, a tuck-in for them, and they've not said too much about what they plan to do with it. But if you could talk a little bit about what the technology stacks there are and potentially for that being an entry into a new market for CEVA royalties. That would be really helpful.

Yes. So first on the VisiSonics deal. As I mentioned in the prepared remarks, basically, 3 pillars of growth that I've highlighted: the Wi-Fi, the 5G and software embedded application. We have already licensed to some of those customers and some OEMs our sensor fusion. And with partnership with VisiSonics, we basically combine it into a complete 3D spatial audio solution. What we've seen in the market for TWS earbuds and so on, really very strong demand for 3D spatial audio. We see it as one of the key emerging technology for that space.

With this technology, which is really state-of-the-art for those type of capabilities, we are looking to expand it significantly into additional customer base. We recently announced basically the customers vote as licensing this technology, and now we can offer that as a complete solution.

Also from an integration point of view, this is a so-called seamless integration as both the location and the technology and the road map that we have worked together is already in place, and we'll basically continue that as a one theme. And then the last piece on that, I would say, it's also going to be accretive as a non-GAAP within 2023. So all along, we see it as a great deal to keep expanding our software embedded application technologies and be able to provide more innovation and differentiation to our OEM customers in the ecosystem.

In terms of the other deal, you want to take?

Yes.

Yes, please.

Sure. So we have a long relationship and history with Autotalks. This is the benefit of being an IP company. You could help the small ones that don't have the capabilities, especially around cellular and communication, which is quite complex to come up with an interesting product. And they want to be acquired by the giants and the leaders in the space. So obviously, we know them and help them out from day one as a young start-up with the communication skills and technology that we brought. They already started to ship products last year, and we got the initial royalty reports from them.

So in this market, when a bigger company acquires you as a customer, first, you start a relationship and it needs to bypass or work with you on the way to integrating the product and getting the rights. So that's an interesting opportunity for us. And we'll see where it takes us to the next step. It would be nice to be in their product line in the future. And if not, this is part of the startup world and part of our add-on as a IP company to help the smaller companies. And sometimes, we make and build the relationship with the bigger companies and continue with them and show them and give them other products that we can in the future. And sometimes, it ends with, at least in the near term, some nice royalty opportunity for us coming from a bigger company.

And I would add on that is that in the past, again, when people thought about 3G, 4G and 5G technology to enable so-called smartphone communication, we for a while talked about really how we will help the ecosystem and our customer base basically to enable the new use cases that 5G really brings to the segment, right? And this is a great example when we have innovators in the market to come with the new use cases and technology that 5G enables, and then from there, basically to help expand for us the royalty base and technology and the innovation to be deployed in the marketplace.

So a vehicle to infrastructure or vehicle to vehicle, so-called V2X is a great technology that we believe will expand nicely in the markets in the future years. And we believe there are also many other 5G use cases and opportunities for us to enable in the market and expand the technology and the business.

And our next question today comes from Kevin Cassidy of Rosenblatt Securities.

Just a follow-up on the 5G modem application. Will that include millimeter wave?

Which slide do you mean?

General offering or the specific customer?

Yes, the specific customer.

About Autotalks you're asking?

Yes, I think so.

Yes, whether it's going to be just the sub 6G or is it...

Yes, I would say we provide the DSPs -- yes, I would say, in general, we provide the DSP. It's quite agnostic so-called to the radio technology. And our customers basically tune it to their needs. Specifically, about their product releases and plans, I will defer that as they announce more about their product releases.

Okay. I understand it's up to the customer. And on the -- the ASP increase with Wi-Fi 6 -- I guess I'm just trying to gauge how large that market can be for you. And does it double your TAM or -- and if the units stay the same or do you see Wi-Fi 6 units far exceeding previous generations?

That's a great question, Kevin. So there are 2 aspects here, maybe even 3. One is the volume. Last year, we managed to power 1 billion Bluetooth devices, and we only started to ramp up our Wi-Fi. It was just shy of 200 million, I believe. There's no reason that the volumes of Wi-Fi shouldn't reach over a short period of time the Bluetooth type of volumes or even surpass that as they go along because of the use cases, the much wider use cases that Wi-Fi has. That's one. So the volume is a big push for us, and we saw the new customers, 3 out of 35 customers that have licensed Wi-Fi 6. So the potential with volumes from existing and new customer is the answer of why those volumes should increase.

Second, ASP. Because of the use cases that the Wi-Fi 6 is in our higher end, our industrial, our medical, our -- lots of other devices that ASP was overall of the chip and the solution is higher, then we get a larger portion. It could be 2x or 3x of what we're getting from a Bluetooth device. And those are the ratios of the chip prices.

And number three, a lot of our customers are combo customers that want both Wi-Fi and Bluetooth today or in the future. And therefore, the overall added value for us and ASP is higher if we could provide 2 technologies and charge for 2 instead of one. So we have a lot of very good aspects working in our favor, and it's a significant, very short-term opportunity.

Look at the numbers from Q4 to Q1. With all the inventory issues and all the slowdown that we are reading and seeing, we have doubled our Wi-Fi revenue from Q4 to Q1 this year in dollars.

I would add to that there is -- basically, as you look at the so-called -- there is the so-called -- I would call it the simple client Wi-Fi, and now we are going through the upgrade from Wi-Fi 4 to Wi-Fi 6, that on its own. Of course, in general speaking, the same is in the market. The value of a Wi-Fi solution is higher than Bluetooth. And then on top of that, what you have is the more complex sophisticated enhanced throughput Wi-Fi 6 client. And then on top of that, you have the Wi-Fi 6 access point that we are just now basically are going to start ramping more and more.

And I would say, as the market typically the different pricing in the market for those solutions, as a silicon solution out there, you can draw basically analysis of our potential from an ASP point of view. But it's meaningfully and very significantly above what you would expect on average for a Bluetooth solution on a mix basis.

Okay, great. And just a quick question on the acquisition. Does this include engineers?

Yes. It includes a small number of engineers that basically located in the same place, and they will join us immediately after the close.

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

My first question on spatial audio is maybe can give us more details to help us understand the competitive dynamics in that market. Who are you competing with? And where are the competitors positioned in terms of market verticals?

A competitive dynamics...

I can take that sure. Martin, Richard here. So when you look at the spatial audio market, we're still -- it's pretty nascent, and we're still in the beginnings of it. In the smartphone space, it is really Apple that seeded the market and they have their own internal solution. Obviously, Dolby is playing there as well with some other players. But really, the difference between what we're bringing to market here versus what these other guys are is normally, you have to have a link between the handset and the earphones. They both have to have technology on them in order to make this work.

With the solution that we're bringing to market for spatial audio with VisiSonics, this is only on one side. So it's only in the headset. You don't need any particular codecs or any particular software on the handset for this to work. And this is a game changer for, I would say, the low- to mid-end of the earbud and headset market where today spatial audio is not really playing.

So when we think about the opportunity, there's probably 400 million midrange TWS headsets a year. You've got the gaming headsets and all these other opportunities there, where we feel there's a very good opportunity for us to double down on our strong presence in the handset -- sorry, in the headset market that we already have today. We know the customers, we know the industry there, and we can take the spatial audio solution into these markets, the much broader midrange and lower range of the market and address it with the spatial audio solution that we have, something that today is not really available there.

So that's our focal point and target. It's not so much competing with Dolby and Apple at the higher end of things. It's going for the mass market option here.

The other thing to enhance on what Richard said is that what's unique also about our technology is really to develop that such that it can get into a very small form factor, very optimal in terms of size and power, which really can enable these use cases to penetrate more and more the mid- and the low-end markets of the TWS also where the volume is very, very high.

And ladies and gentlemen, our next question today comes from Suji Desilva at ROTH MKM.

So on Wi-Fi 6, it's good to see that coming out of the gate. What do you expect to be the pace of unit adoption here relative to other Wi-Fi standards in the past? And what end markets are initially driving the Wi-Fi 6 units?

I would say Wi-Fi 6 -- the replacement from Wi-Fi 4 to Wi-Fi 6 is very, very strong. So we definitely see it first on the client side. And I would say in the consumer, it started first in smartphones and PCs. And now it's propagating so-called to the old IoT consumer or client devices around us. And then from there, of course, more and more penetrating the access point field as well.

The pace -- again, I'm not sure if we could continue with doubling like we did from Q4 to Q1, but the pace no doubt should be now with more players starting to really ship Wi-Fi 6, either the first ones that have joined the team, and the potential, as I said earlier, from the 35 customers is quite big. We think it's going to be one of the faster growth driver for us this year when looking at all the different segments and product lines we have.

And overall, I would say the expectation in terms of the transition, if we look at the history of Wi-Fi, right, the fastest and the strongest transition was from [11 G to 11 N] back then in terms of performance and capabilities. And now it's basically into [11 ax] and Wi-Fi 6, right? So this is really the biggest one in the last few years in terms of transition of Wi-Fi technology. And we are well, well established right now across the ecosystem with our IP embedded into our customer product line.

So I would expect it to really grow very, very nicely through the years and continuing through 2024, 2025.

Good. It sounds like you're well positioned there. And my second question is on the acquisition. It seems to be a software licensing model. Can you just remind us how many products you guys have now that are software licensing versus typical license royalty? And what percent of revenue could that be as a mix, part of the mix, in 1 to 2 years as part of your strategic plan?

Great question. Thank you, Suji. This brings us back to what we talked about even last earnings call, of the 3 pillars of growth for us. One of them was an embedded software. We started 3 years ago to remind you with the Hillcrest acquisition sensor fusion. We got into TVs, laptops, vacuum cleaners...

Electronic fans.

Electronic fans, yes, correct. So this is how it started. We added in the last 2 or 3 years, 2 different audio solutions. And now this is probably the fourth if I'm counting just the standalone pieces of software, embedded software that we're licensing. Trying to target sometimes the OEMs. The value there and the proposition is much higher both for us and as a differentiator for the OEMs. And it's worked extremely well, very high margins on that. We have more than doubled the revenues of some of those aspects when we 3 years ago got into the business. And on top of that, we're also starting to add AI software packages on top of the processor and the solution itself.

So I'm not sure if I have a number as a percentage of revenue. But for sure, this is one of the strategic avenues for us to go after. I think we know how to run these types of businesses. And this recent acquisition from today enforces that.

(Operator Instructions) Today's next question comes from Chris Reimer of Barclays.

Actually, most of the topics have already been addressed. Just one touching on China, have you seen any changes in the dynamics there, maybe impact from the reopening? And when you mentioned that demand has resumed, are you talking about that area? Or are you talking about in general?

Thanks for that, Chris. It's good to emphasize that a lot of our business and customers in China are well-known chip vendors to top guys or OEMs around the world, all over the world. And they, in most cases, ship mainly outside of Mainland China. So the manufacturer and the design is there, but the products and the end markets are all around the world. That's true for the Bluetooth and Wi-Fi, and sound and even modem. Even the handset modem, most of it goes out to the emerging economies in India and other large countries for the low and mid-range phones.

So when we talk about demand, it's not necessarily for Mainland China, but throughout the world in all the different segments I think we have mentioned we talked about earlier.

I would add also that the reduction that we've seen this quarter is from the handset market and our key customers there. I would say, in terms of -- we already see indication of restocking that started in March and will continue through April and now beyond it. So Overall, we are quite confident and very confident that basically we'll see a sequential recovery quarter-over-quarter.

And again, the demand is global demand and specifically also in the different emerging markets where our customers serve quite strongly, we start seeing a strong recovery and restocking of the inventory.

The way -- I may add one thing that we didn't talk about. If you ask about the licensing and not the royalty or move to the licensing, we see no slowdown whatsoever in China. There's still good demand for technology development and didn't see any really change in the last 2 quarters coming from China. One of the interesting changes that we have seen globally is coming from Europe, and this is a lot of new money coming from government to the EU to develop their semiconductor company in the market. And this is a brand-new opportunity for CEVA as being an IP company. And we talked about Autotalks as one of the nice example, but there are many, many others as soon as money flows in.

We've seen the trend in China for the last decade. The U.S. has started with their Chips Act, and we see a lot of potential there for us. And last but not least, maybe 2 or 3 weeks ago was this new stronger trend of investments in Europe, and we are there to try to make the best of it.

So from a licensing perspective, the contrary. There's a lot of money that's being put in around the world to do your own chip designs. And the IP model fits exactly that avenue.

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

Maybe, Yaniv, on the topic of licensing following on from your commentary there. Any reason that you can't get back to year-over-year growth this year on licensing? And then on royalties, maybe also for you, Yaniv. Any additional color on the kind of how we should think about the year-over-year growth on royalties? That Q-over-Q recovery you talked about, how strong is that going to be and sustainable through the rest of the year?

Yes, sure. It won't be -- if I restate the first question, I don't see a drop in the licensing. We do see a drop in the royalties, and we explained why. In licensing, as we know this business and has been in this business for a long time, $1 million up or down doesn't change the trend. It doesn't change the outlook or anything around that. So yes, maybe we're a little bit short of the typical '21 to '22-ish, but it's nothing that we are concerned about and nothing that has changed.

And we mentioned specifically the quality of the deals in Q1. And this is not -- we can't say that every quarter because sometimes we license to start-ups, and we have no idea how successful and when they'll come up with the product and if the product will go into mass market. The design wins that we have licensed, and Amir talked about, earlier in could get us to a single, double-digit royalty contribution annually from those deals. So from licensing, I don't see a problem.

On the royalty front, Q1 was an anomaly. We understand in the hindsight why the handset market did take a beating, as you said, and the numbers did drop there. We think it's a short term, and we talked about the correction into the second quarter. When you look at the rest of the business and what has been growing at CEVA for the last couple of years, dramatically, and this is the base station and IoT royalties, there was only a 4% sequential decrease from Q4 to Q1. And even if I compare it to last year's first quarter -- and obviously, it's a different environment to many companies and the demand, inventory levels are different -- we're only down 7%, and some of the internal markets there like Wi-Fi and cellular IoT did extremely well.

So we think those trends will continue throughout the year. We believe that the second quarter should be sequentially higher with high magnitude, maybe not to the same norm that we were used to a year ago in handset, but they should start correcting themselves nicely in the second quarter.

Could we make up the loss of the handset royalties in the first quarter throughout the year? That's the question that we -- it's harder for us to answer. We don't usually give guidance on royalties because we don't have the insight of exactly how much each customer could ship and when, and we have never done that, and I don't think we are changing our methodology because nothing has happened or we don't get the royalty reports ahead of time from the OEMs.

But the trends of Wi-Fi 6, higher ASPs, multiple products, more embedded software that also possesses higher ASPs and the ramp-up in some of these end markets that we talked about, that's something that we are very positive and do believe that they will continue to have. We seen that growth also happening in Q1. So I tried to answer the different sides of your question. Hopefully, I didn't miss anything.

No, that's super helpful. And maybe just one follow-on for Amir on the strategic agreement with the Chinese OEM and 5G smartphones. So they're coming to market now with their Bluetooth and Wi-Fi chip that they licensed from you guys 3 years ago. How meaningful is that going to be this year? And is that kind of a 3-year timeframe about right? How we should think about them to come to market with a 5G modem?

Sure. In regards to the Wi-Fi, Bluetooth, again, we expect production to start this year. The exact magnitude, it's hard to know because it depends really on the level of penetration they will use this technology across their product lines and how they will propagate it there. So I would say the significant portion of that upside will come toward the second half of the year and then next year.

In terms of their deployment of the so-called the 5G solution, I would say it's -- I wouldn't say 3 years, but probably in the range of 2025 as we see it today.

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

I have just one follow-up regarding spatial audio. Is it right to assume that RealSpace technology always integrates with Hillcrest sensor fusion? Or does it always have some elements of motion tracking either from you or from someone else?

Sure. So yes, it -- you can do spatial audio with or without head tracking, but it's much more effective with head tracking. So the solution that we offer into the market is Hillcrest sensor fusion integrated with the RealSpace into a single product, which we call RealSpace going forward. So that's the technology. It's much more attractive to OEMs that way. It gives a much better spatial audio experience, and that's the avenue we're going down.

With that said -- Martin, with that said, part of the acquisition was also to bring on THX, a well-known audio solution provider. This is VisiSonics customer and our CEVA customer, and they have used the VisiSonics standalone solution in their use cases.

So as Richard said, it could go both ways, but we already have customers in production, both in India and in the U.S. with this technology in these 2 avenues. One on a stand-alone basis; and the second with the CEVA-Hillcrest technology.

Maybe I will add on top of that Richard's comments. Generally speaking, again, if there are OEMs that would like to see some portion of our technology and that would make sense, we can definitely support it. But the real value of the technology, and that's why strategically also from a technology point of view, we decided to go ahead is that we have best-in-class sensor fusion technology that is really, I wouldn't say massive, but very, very important components to make 3D spatial audio a good solution.

VisiSonics brings really great algos and capabilities on the audio domain related to that. And as you combine these 2 together, that brings to bear basically a top-notch 3D spatial audio solution. And as I mentioned previously, it's also the way that we combine it into embedded [card] that is small in size and very low power. It's a great, great fit to the TWS market and to help penetrate these features from the top tier all the way to the mid- and low tier of that market.

Thank you. Ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to Richard Kingston for closing remarks.

Thanks, Rocco. Thank you, everyone, 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 events, we will be participating in the following conferences: the TD Cowen Israel Investor Trip on May 16 in Israel; Oppenheimer's 24th Annual Israeli Conference, May 21 in Israel; and Cowen's 51st Annual TMT Conference, May 31 and June 1 in New York. Further information on these events and all events we will be participating in can be found on the Investors section of our website. Thank you, and goodbye.

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.