CEVA Inc (CEVA) Q4 2018 Earnings Conference Call Transcript

Our fourth belt royalty revenue reflects above-seasonal weakness at the handset universe due ought higher inventory levels, chiefly attributable ought China and emerging markets. However, we scream on continued expansion of our non-baseband customers, at exceptional with Bluetooth, and the recovery with ZTE's basis stop business.

Total revenue during the fourth belt of 2018 came at can $21.4 million. The licensing eyesight continues ought exist strong and we managed ought record $10.5 million of licensing and related revenue, and ought groan 13 new agreements, of which six were with first time customers. during the quarter, we signed one of the largest license agreements at the company's history with a visitor targeting the 5G market. The visitor licensed a customized next-generation processor during a 5G employ case, which we will create can the next few quarters, and we will confess isolate of the revenue associated with this business during that timeframe.

We too signed an significant jam with a well-known US-based semiconductor company that will strategically capitalize can our Bluetooth audio technique ought multiply into the drive growing fair of ingenious audio devices. Our narrowband-IoT technique too continued ought obtain traction with two new agreements. NB-IoT continues ought display good dynamics and prospects during many semiconductor companies with no cellular background get ought us during an IP solution that can decrease the high entrance barriers of cellular. The universe poses a vast volume opportunity, with the fair expected ought attain 4.1 billion connections by 2024 according ought the tendency Ericsson Mobility report. aim applications during the other agreements signed at the belt include advanced consumer cameras, surveillance cameras, automotive connectivity, ingenious speakers, Bluetooth earbuds, Wi-Fi routers and other IoT devices.

For the full-year 2018, revenue came at can $77.9 million, down 11% from final year. Licensing and related revenue was $40.4 million, down 6% from final year. Royalty revenue was $37.4 million, down 16% from final year. We continued ought strengthen our visitor basis with 49 license agreements signed at total, of which 16 were with first-time customers. A hard growth at licensees at diversified markets is the key driver during new royalty streams, at like ought incremental revenues from existing royalty sources.

At our Investor and Analyst appointment final month, we disclosed that we consume 40 (ph) royalty paying customers today and additionally 60 customers are actively designing new chips, which we desire ought gradually catalog out during produce can the coming years. We count that this visitor basis will nearly double our annual royalty revenue at 2022.

As we influence ought 2019 and beyond, we linger focused can capitalizing our growth engines over licensing and supporting our customer's design. The confidence during our sustainable growth latent is based can a number of strategic catalysts. The first is the acceleration at beg during basis stop and few cells during mobile operators about the dust are accelerating investment can LTE-A and 5G mobile broadband. back 12 consecutive quarters, year-over-year revenue decline at basis stop RAN space, the overall RAN fair increased 7% at the third belt of 2018 versus the alike belt at 2017 according ought Dell'Oro group report. The headmaster drivers during growth are migration ought faster multi gigabit-per-second speeds offered by the latest advancements at LTE-A and 5G, and new convention models during vast IoT, fixed wireless access, public safety and enterprise. Our gigantic experience, across with our strategic relationships with key OEMs such during Nokia, ZTE and their semiconductor partners, attitude us at the forefront of the upcoming upgrade cycle during 5G. We too aim ought multiply our visitor basis with great incumbents and newcomers at 2019.

Second, our strategic resolution ought promote up at the evaluate fasten over total of our produce lines. There are two headmaster merits during a such comprehensive move. The first is, by developing both the hardware and software, we are capable ought holistically catalog the most price and energy effective solution during our customers. Secondly, by enriching our offering with state-of-the-art algorithms, software and AI technology, we are streamlining our visitor produce deployments and economics, which at get will enable us ought strengthen our relationships with our customers and ought accept higher royalty ASP during our technology.

A tendency case of our value-added tactic is the WhisPro, a neural network based noise recognition technology, which we announced together with a new allpurpose DSP architecture, the CEVA-BX, at the tendency Consumer Electronics display at Las Vegas. By binding these two technologies across with our other noise and echo cancellation technology, ClearVox, we are paving the method during our customers ought employ laguage during a capital user interface during a broad hill of markets such during smartphones, ingenious home, headsets and hearables, automotive and industrial. A tendency learn by Yole investigation forecasts that 1.7 billion units of these noise enabled devices will boat at 2023. Our other vertically integrated platform during AI, computer vision, 5G, Wi-Fi and Bluetooth supply us with a dramatic amplify at visitor attain and value, during reflected at our tendency licensing performance.

On royalties, 2018 turned out ought exist a challenging year during the total cellular industry, at exceptional at the first half of 2018. With that said, part obtain at a great US handset OEM coupled by higher ASP during LTE shipments led ought a stronger second half and year-over-year growth versus the second half of 2017 at LTE royalty revenue. Our non-handset baseband classification continues ought multiply with shipments up 41% year-over-year during new CEVA based SKUs are being deployed especially at the drive growing Bluetooth fair that is expected ought attain 5 billion units annually by 2022.

As during 2019 royalties, we count the headwinds at the cellular fair and the higher, channel inventory, will delay during one or two more accommodation into the first half of the year. It is expected ought exist followed by a stronger second half of 2019 both at units and ASP. at our other non-handset category, we desire hard promote and growing contribution from Wi-Fi and AI at like ought the drive growing Bluetooth market.

As during basis station, based can commentaries by our visitor and operator, 5G deployment at 2019 will exist at a slower velocity than originally expected during operator stage their rollouts and due ought a few unresolved interoperability circulate with handsets. during such, due ought the cheap visibility at the timing and the magnitude of 5G deployment at this year, we are taking a prudent stance at honour ought growth from basis stop during this year. With that said, total indications and commentaries, including those emanating (ph) from CES, uncover that 5G is coming and operators scream on the benefits of driving 5G buildout, especially at the US, China, Korea and Japan, Yaniv will shorty quantify our opinion can 2019 royalties.

In summary, at 2018, we continued ought mill the seeds during our growth by capturing a great attitude of create wins over our targeted segments. Accumulating those create wins, which is the hardest isolate of our business, invent us stronger and more resilient ought local economic factors. We are committed ought last ought relentlessly trace multiple growth opportunities at the ingenious and connected dust poses during us.

Finally, I used to similar ought confess this occur ought thank total of our employees during their difficult trade and healthy execution. We made a large promote at 2018 and reaffirmed our attitude during the headmaster and valuable IP supplier during vertically integrated solutions during cellular, connectivity, vision, laguage and AI. I used to similar too ought stretch my due ought our partners, suppliers and final however no least our investors during their support. We desire you total a favourable and prosperous year.

With that said, I'll now get the scream can ought Yaniv, who will draft our financials and guidance.

Yaniv Arieli -- Chief economical Officer

Thank you, Gideon. Good morning. I'll go by reviewing the results of our operations during the fourth belt of '18. revenue during the fourth belt was $21.4 million, during compared ought $21.6 million during identical belt final year. The revenue breakdown is during follows: Licensing and related revenue was nearly $10.5 million, reflecting 49% of total revenues, 17% higher during compared ought the fourth belt of 2017. Royalty revenue was $10.9 million, reflecting 51% of total revenues, down from $12.6 million during the identical belt final year, that too included $0.9 million royalty capture up following an audit of a customer.

Gross margins were 91% can a GAAP basis and 92% can a non-GAAP basis. Our total operating charge during the fourth belt was at alike flat during the prior belt and fair beneath the high-range of our guidance at $17.2 million. OpEx too included an aggregate equity-based compensation charge of $2.2 million, and $0.2 million during the amortization of acquired intangibles of RivieraWaves. Our total operating expenses during the fourth quarter, excluding these items were $14.8 million, too alike ought the third belt flat and at the high-end of our non-GAAP OpEx guidance.

US GAAP net salary and diluted EPS during the belt decreased 27% and 29%, respectively, ought $2 million and $0.10, can the fourth belt of 2017. Our non-GAAP net salary and diluted EPS during the fourth belt decreased 9% and 8%, respectively, year-over-year ought $5.2 million and $0.23, respectively.

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

In non-handset baseband, volume shipments continued ought amplify 17% sequentially, and 43% can a year-over-year basis. The amplify is chiefly due ought higher quarterly Bluetooth and vigorous shipments from our customers. From a revenue perspective, fourth belt non-baseband royalty revenue increased 32% sequentially with alike volume increase.

The fourth belt was the first time we surpassed 100 million non-baseband shipped at a only quarter, truly reaching 114 million units during the quarter. Of these, 91 million were Bluetooth chips, which were up 45% can a year-over-year basis.

As during the year, our total shipments decreased 20% year-over-year ought 929 million units, which equates ought nearly 30 CEVA-powered devices sold each second at 2018. These unit shipments represented an annual royalty revenue decrease of 16% year-over-year.

Annual shipments of smartphones decreased 36% year-over-year, largely due ought lost of fair part by our great Chinese handset visitor and mutual maturity of the market. However, our median royalty per unit at smartphones increased 31% year-over-year, during we gained volume at a tier 1 US smartphone OEM.

Non-handset baseband royalty revenue continued ought get and reached a record flat of fair shy of $9 million, up from $8 million at 2017 and up from $4 million at 2016. at condition of units, our non-handset baseband unit shipments were up 41% year-over-year ought a record 374 million units, with Bluetooth contributing a new record of 303 million units during the year.

As during our remainder part items. during of December 31, 2018, CEVA's cash, money match balances, marketable securities and bank deposits were $168 million. We continued our energetic buyback plan, repurchasing nearly 129,000 shares during the fourth belt during nearly $3 million. undergo at can '18, our Board of Directors approved the expansion of the existing buyback scheme and during of year-end, we consume a total of 367,000 (ph) shares available during repurchase.

Last, our adjusted ASC 606 DSOs during the fourth belt last ought exist cheap at the flat of 46 days. during the fourth quarter, we generated $4.5 million of net money from operations; depreciation of the $1 million and buy of fixed assets was nearly $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 investments during 2018, opening a new create facility at Bristol, UK, increasing our R&D headcount by about 11%, or shy of 30 engineers, thereby enabling us ought introduce new licensable IP products and expanding our overall TAM ought nearly 17 billion units by 2022. These R&D achievements contributed ought higher licensing revenue during the final few years. We last ought flourish ought attain new economical milestone, revenue growth, new customers and markets, and concentrate can shareholder values.

Now during our guidance. final year was another choice year at licensing revenue with can $40 million, a 13% CAGR from 2013, mail the implementation of our diversification strategy. however licensing revenue tends ought exist lumpy, we count our healthy produce portfolio leads ought a strong beg environment. We're forecasting licensing revenue ought exist alike ought slightly improve than 2018.

On royalties, during Gideon alluded ought earlier and alike ought 2018, at baseband, we desire a stronger second half of the year, attributable ought the liberate of new smartphones. at non-handset baseband, royalties are expected ought last and multiply with new visitor SKUs over total of our produce lines. We are forecasting some year-over-year contribution from basis stop royalty at row with commentaries by key players and operators. total at all, at this stage we are expecting annual royalty growth at the part of 4%, ought nearly $39 million during the total year. We will journal total of this can a quarterly basis during we obtain more insight from our customers about expected produce ramps, especially with our basis stop customers.

In price of goods, we desire higher expenses of nearly $1.7 million due ought R&D customization related charge that will exist allocated from the R&D charge row ought the price of merchandise beneath the great 5G business that Gideon discussed earlier.

On OpEx, with our new announced produce and continued momentum with our existing licensing business, we will last ought innovate and reinforce our leadership, however with disciplined investments at R&D. Our OpEx amplify is largely associated with investments at headcount, employee-related costs and EDA tools. Overall, OpEx amplify will exist at the part of $4 million, total of which contributed ought our R&D line. Equity-based compensation is too forecasted ought exist at the alike flat of 2018.

Annual total margins are forecasted ought exist at the part of 88% ought 89%. advantage salary slightly higher at 2018 at the flat of $0.9 million per quarter. Taxes are expected ought exist lower can a dollar basis however higher percent of pre-tax income. The US GAAP impose evaluate of about $0.5 million during the year and non-GAAP impose evaluate of about 14%.

Share calculate during 2019 is expected ought exist alike ought the 2018 level.

Specifically during the first belt of 2019, total border is expected ought exist nearly 85% can GAAP basis and 87% can non-GAAP basis. Both GAAP and non-GAAP based margins are expected ought exist bit lower than the norm, due ought the price of merchandise allocation expenses with that concrete customization trade that I fair mentioned.

Overall, OpEx is expected ought exist at the hill of $17.4 million ought $18.4 million. Of the anticipated operating expenses during the first quarter, $2.3 million is expected ought exist attributable ought equity-based compensation charge and $0.2 million (ph) ought other amortization.

Our non-GAAP OpEx is expected ought exist alike ought the first belt of 2018, due ought the timing of some R&D confer payments, and higher at the following quarters. Overall, our first belt OpEx hill -- non-GAAP will exist at the hill of $15 million ought $16 million. Net advantage salary $0.9 million. Taxes during the first belt can GAAP basis is less than $200,000 and non-GAAP and nobody can GAAP and part counts alike ought the first belt of this year.

Kelly, you could now hole the Q&A session, please.

Questions and Answers:

Operator

We will now go the question-and-answer session. (Operator Instructions) The first puzzle will depart from Gary Mobley of Benchmark. amuse promote ahead.

Gary Mobley -- Benchmark -- Analyst

Good morning, gentlemen. fair asking a puzzle or clarification about your non-baseband royalty revenue at 2019, did you speak that was $9 million you need?

Yaniv Arieli -- Chief economical Officer

Hey, fair shy of $9 million, yes, Gary.

Gary Mobley -- Benchmark -- Analyst

And that compares ought what -- at 2017?

Yaniv Arieli -- Chief economical Officer

About 8.

Gary Mobley -- Benchmark -- Analyst

And with respect...

Gideon Wertheizer -- Chief Executive Officer

Gary, at row that we had posted (ph) basis stop revenue this year during a originate of the (inaudible).

Gary Mobley -- Benchmark -- Analyst

Okay. And -- I'm sorry, getting you -- you're a small bit difficult ought listen can your commentary about the 5G licensees, that's during basis stop SoC, correct?

Gideon Wertheizer -- Chief Executive Officer

No. We didn't speak that. We said about 5G and we cannot farther elaborate can what exactly, however during you know, we consume -- our offering we consume during both end, both can the handset phase and the basis stop side, I mean, it's applicable ought incumbents and new one.

Gary Mobley -- Benchmark -- Analyst

Okay. however during there's some customization involved, we consume ought presume it's can the infrastructure side, right?

Gideon Wertheizer -- Chief Executive Officer

No, it doesn't necessarily the case. You're loyal about customization, that's what we say. The new visitor decided ought confess an enhanced translation of what we offer, and that's what we're going ought conduct at the next few quarters.

Gary Mobley -- Benchmark -- Analyst

Okay. That ought make us guessing. total right. With honour ought Spreadtrum, obviously, you had some fair part struggles at 2018, how conduct you feel about that royalty payer and licensee with some upgraded modem technique and how that can translate into part preservation or part gains at the calendar year 2018 timeframe?

Gideon Wertheizer -- Chief Executive Officer

So Spreadtrum had a part obtain loss, they lost a key customer, which is always -- at some cases occur at this fair although it's extremely competitive and that ought refocus their strategy. And they're playing at the cheap tier of the LTE business and they consume great advantages there at condition of cost. And they consume a healthy relationship with Reliance at India, this will -- at 2017, they consume some up at LTE, at 2018 some Reliance material saw a bit -- they consumed a bit of this one.

So going forward, I study they will refocus at this universe and make at mind, and we said that too at the Analyst Day, the mobile broadband, which is LTE basically is however unfit when it comes ought emerging market. And what we scream on at the low-end, 2G is going down, 3G is going down. This will at length will change ought a new LTE, during nation are no buying 2G phone, or they're no buying 3G phone, accordingly their next influence will exist during LTE, similar at total of us. We were at the identical status two years ago at the (inaudible). accordingly Spreadtrum is, at my opinion, at a good catalog ought multiply at this space.

Gary Mobley -- Benchmark -- Analyst

Okay. I will pause there and hole it up ought others. Thanks.

Gideon Wertheizer -- Chief Executive Officer

Thanks, Gary.

Operator

The next puzzle will depart from Matt Ramsay of Cowen. amuse promote ahead.

Matthew Ramsay -- Cowen & Co -- Analyst

Thank you identical much. Good morning and good evening. A link of things, guys, I guess, following can on the basis stop market, it's interesting ought listen some of the commentary it seems that you're hearing from your visitor basis about basis stop volumes and deploying those during 5G, and then juxtapose that again some of possibly the early our stronger commentary out of a company similar Xilinx that they'd exist using FPGAs during some of those baseband products instead of ASICs. So, possibly you could report broadly about is the -- is it delays at deployment of modem ASICs that your technique is at within the basis stations? Or conduct you feel similar most of it is fair a small bit slower rollout of basis stations at total from the vendors at that fair and if you could discern among those two, that used to exist helpful. Thank you.

Gideon Wertheizer -- Chief Executive Officer