Edited Transcript of CEVA earnings conference call or presentation 13-Feb-19 1:30pm GMT

In addition ought the economical results prepared can accordance with the principally accepted accounting principles, or GAAP, we will also award certain non-GAAP economical measures today. CEVA's management believes that can addition ought using GAAP results can evaluating our business, it also can exist useful ought journal results using certain non-GAAP economical measures. Investors and latent investors are encouraged ought journal the reconciliation of non-GAAP economical measures with their most regulation coat GAAP economical results, which can exist found can the allowance review liberate issued today.

A reproduction of today's review liberate although the belt and year ended December 31, 2018, and the related economical tables and management commentary, which were included can our modern interpret can rgeister 8-K filed today, also can exist found can the Investor Relations part of our website immediately after this call.

With that said, I will now hand can ought Gideon.

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Gideon Wertheizer, CEVA, Inc. - CEO & Director [3]

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

Our fourth belt royalty revenue reflects above-seasonal weakness can the handset universe due ought higher inventory levels, largely attributable ought China and emerging markets. However, we cry on continued expansion of our nonbaseband customers, can special with Bluetooth and the recovery with ZTE's base station business.

Total revenue although the fourth belt of 2018 came can on $21.4 million. The licensing view continues ought exist healthy, and we managed ought record $10.5 million of licensing and related revenue and ought signal 13 new agreements, of which 6 were with first-time customers.

During the quarter, we signed one of the largest license agreements can the company's history with a visitor targeting the 5G market. The visitor licensed a customized next-generation processor although 5G apply case, which we will invent can the next few quarters, and we will confess divide of the revenue associated with this business during that time frame. We also signed singed an important treaty with the well-known, U.S.-based semiconductor corporation that will strategically capitalize can our Bluetooth-audio technique ought increase into the fast-growing just of ingenious audio devices.

Our Narrowband IoT technique also continued ought earn traction with 2 new agreements. NB-IoT continues ought appear good dynamics and outlook during many semiconductor companies with no cellular background grow ought us although an IP solution that can lessen the high-entry barriers of cellular.

The universe poses a huge volume occur with the just expected ought attain 4.1 billion connections by 2024 according ought the tendency Ericsson Mobility Report. purpose applications although the other agreements signed can the belt contain advanced consumer cameras, surveillance cameras, automotive connectivity, ingenious speakers, Bluetooth earbuds, Wi-Fi routers and other IoT devices.

For the entire year 2018, revenue came can on $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 base with 49 license agreements signed can total, of which 16 were with first-time customers.

A firm growth can licensees can diversified markets is the key driver although new royalty streams, can addition ought incremental revenues from existing royalty sources. can our Investor and Analyst engagement final month, we disclosed that we eat 4 (sic) [40] royalty-paying customers today, and additionally 60 customers are actively designing new chips, which we desire ought gradually rgeister out although produce can the coming years. We trust that this visitor base will about double our annual royalty revenue can 2022.

As we impress ought 2019 and beyond, we remain focused can capitalizing our growth engines across licensing and supporting our customer's design. The faith although our sustainable growth latent is based can a number of strategic catalysts. The first is the acceleration can demand although base station and few jail during mobile operators approximately the world are accelerating investment can LTE-A and 5G mobile broadband. after 12 consecutive accommodation of year-over-year revenue declined can base station RAN space, the overall RAN just increased 7% can the third belt of 2018 versus the coat belt can 2017 according ought Dell'Oro orchestra report. The major drivers although growth are migration ought faster multigigabit per second hasten offered by the latest advancement can LTE-A and 5G and new custom reproduction although huge IoT, fixed wireless access, public safety and enterprise. Our huge experience, across with our strategic relationship with key OEMs such during Nokia and ZTE and their semiconductor partners, lay us can the forefront of the upcoming upgrade cycle although 5G. We also purpose ought increase our visitor base with large incumbents and newcomers can 2019.

Second, our strategic resolution ought proceed up can the estimate bind along entire of our manufacture lines. There are two major merits although such comprehensive move. The first is by developing both the hardware and software, we are capable ought holistically invent the most cost- and power-efficient solution although our customers. Secondly, by enriching our offering with state-of-the-art algorithms, software and AI technology, we are streamlining our customers' manufacture deployment and economics, which, can turn, will enable us ought strengthen our relationship with our customers and ought accept higher-royalty ASP although our technologies.

A tendency case of our value-added tactic is the WhisPro, a neural network-based noise recognition technology, which we announced together with the new all-purpose DSP architecture, the CEVA-BX, can the tendency Consumer Electronics appear can Las Vegas. By binding these 2 technologies, across with our other noise- and echo-cancellation technologies, ClearVox, we are paving the way although our customers ought apply degree during a major user interface although a broad range of markets such during smartphones, ingenious home, headsets and hearables, automotive and industrial. A tendency tactic by Yole investigation forecasts that 1.7 billion units of these voice-enabled devices will boat can 2023.

Our other vertically integrated platform although AI, computer vision, 5G, Wi-Fi and Bluetooth supply us with a dramatic increase can visitor attain and value, during reflected can our tendency licensing portfolio.

On royalties, 2018 turned out ought exist a challenging year although the full cellular industry, can special can the first half of 2018. With that said, piece earn can a large U.S. handset OEM, coupled by higher ASP although royalty shipments, led ought a stronger second half and year-over-year growth versus the second half of 2017 can LTE royalty revenue.

Our nonhandset baseband kind continues ought expand, with shipment up 41% year-over-year during new CEVA-based SKUs are being deployed, especially can the fast-growing Bluetooth just that is expected ought attain 5 billion units annually by 2022.

As although 2019 royalties, we trust the headwinds can the cellular just and the higher channel inventory will delay although 1 or 2 more accommodation into the first half of the year. It's expected ought exist followed by stronger second half of 2019, both can units and ASP. can our other nonhandset category, we desire firm promote and growing contribution from Wi-Fi and AI can addition ought the fast-growing Bluetooth market.

As although base station, based can commentaries by our customers and operators, 5G deployment can 2019 will exist can a slower velocity than originally expected during operator stage their rollouts and due ought few unresolved interoperability issues with handsets. during such, due ought the signify visibility and the timing and the magnitude of 5G deployment can this year, we are taking a prudent stance can regards ought growth from base station although this year. With that said, entire indications and commentaries, including those emanating from CES uncover that 5G is coming, and operators cry on the apply of driving 5G buildout, especially can the U.S., China, Korea and Japan. Yaniv will immediately quantify our meaning can 2019 royalties.

In summary, can 2018, we continued ought mill the seeds of our growth by capturing a large put of invent wins along our targeted segments. Accumulating those invent wins, which is the hardest divide of our business, invent us stronger and more resilient ought local economic factors. We are committed ought flourish ought relentlessly track multiple growth opportunities can the ingenious and connected world poses although us.

Finally, I used to alike ought confess this occur ought thank entire of our employees although their difficult vocation and sturdy execution. We made large promote can 2018 and reaffirmed our site during the main and valuable IP supplier although vertically integrated solutions although cellular connectivity, vision, degree and AI. I used to alike also ought lengthen my due ought our partners, suppliers and final except no least, our investors although their support. We desire you entire a favourable and prosperous year.

With that said, I'll now grow the summon can ought Yaniv, who will mould our financials and guidance.

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Yaniv Arieli, CEVA, Inc. - CFO & Treasurer [4]

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Thank you, Gideon. Good morning. I'll commence by reviewing the results although our operations although the fourth belt of '18.

Revenue although the fourth belt was $21.4 million during compared ought $21.6 million although the same belt final year. The revenue breakdown was during follows: licensing and related revenue was about $10.5 million, reflecting 49% of our entire revenue, 17% higher during compared ought the fourth belt of 2017. Royalty revenue was $10.9 million, reflecting 51% of our entire revenue, down from $12.6 million although the same belt final year that also included a $0.9 million royalty capture up, following an audit of a customer.

Gross margins were 91% can GAAP base and 92% can non-GAAP basis. Our entire operating charge although the fourth belt was can alike flat ought the foregoing belt and fair beneath the high range of our guidance can $17.2 million. OpEx also included an aggregate equity-based compensation charge of $2.2 million and $0.2 million although the amortization of acquired intangibles of RivieraWaves.

Our entire operating expenses although the fourth quarter, excluding these items, were $14.8 million, also alike ought the third belt flat and can the high-end of our non-GAAP OpEx guidance.

U.S. GAAP net allowance and diluted EPS although the belt decreased 27% and 29%, respectively, ought $2 million and $0.10 can the fourth belt of 2017. Our non-GAAP net allowance and diluted EPS although 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% from the fourth belt of 2017 reported shipment. Of the 249 million units shipped, 134 million units, or 54%, were although handset baseband chips, reflecting a sequential diminish of 19% from 165 million units of handset baseband shipment shipped during the third belt of 2018 and a 35% diminish from 205 million units shipped year-over-year.

In nonhandset baseband, volume shipments continued ought increase 17% sequentially and 43% can a year-over-year basis. The increase is largely due ought higher royalty -- ought a higher quarterly Bluetooth and strong shipments from our customers. From a revenue perspective, fourth belt nonbaseband royalty revenue increased 32% sequentially, with coat volume increase. The fourth belt was the first time we surpassed 100 million nonbaseband chips shipped can a only quarter, indeed reaching 114 million units although the quarter. Of these, 91 million were Bluetooth chips, which were up 45% can a year-over-year basis.

As although the year, our entire shipments decreased 20% year-over-year ought 929 million units, which equates ought about 30 CEVA-powered devices sold each second can 2018. These unit shipments represented an annual royalty revenue diminish of 16% year-over-year.

Annual shipments of smartphones decreased 36% year-over-year, largely due ought loss of just piece by a large Chinese handset visitor and habitual maturity of the market. However, our medium royalty per unit can smartphones increased 31% year-over-year during we gained volume can a Tier 1 U.S. smartphone OEM.

Nonhandset baseband royalty revenue continued ought fetch and reached a record flat of fair shy of $9 million, up from $8 million can 2017 and up from $4 million can 2016. can condition of units, our nonhandset 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 although the year.

As although our remainder slice items. during of December 31, 2019, CEVA's cash, money same balances, marketable securities and bank deposits were $168 million. We continued our sturdy buyback plan, repurchasing about 129,000 shares during the fourth belt although about $3 million. uphold can May, '18, our Board of Directors approved an expansion of the existing buyback plan, and during of year-end, we eat a entire of 367 (sic) [367,000] shares available although repurchase.

Last, our adjusted ASC 606 DSOs although the fourth belt flourish ought exist signify can the flat of 46 days. during the fourth quarter, we generated $4.5 million of money -- net money from operations, depreciation was $1 million and buy of fixed wealth was about $0.4 million. can the purpose of the year, our headcount was 341 people, of which 278 were engineers.

Overall, we continued our R&D investment during 2018, opening a new invent facility can Bristol U.K., increasing our R&D headcount by approximately 11% or shy of 30 engineers, thereby enabling us ought introduce new licensable IP products and expanding our overall TAM ought about 17 billion units by 2022. These R&D achievements contributed ought higher licensing revenue although the final few years. We flourish ought flourish ought attain new economical milestone, revenue growth, new customers and markets and concentrate can shareholder value.

Now although our guidance. final year was another prime year can 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 trust our sturdy manufacture portfolio leads ought a sturdy demand 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, can baseband, we desire a stronger second half of the year, attributable ought the liberate of new smartphones. Nonhandset baseband royalties are expected ought flourish and increase with new customers SKUs along entire of our manufacture lines. We are forecasting some year-over-year contributions from base station royalties can row with commentaries by key players and operators.

All can all, can this stage, we are expecting annual royalty growth can the district of 4% ought about $39 million although the entire year. We will journal entire this can a quarterly base during we earn more insight from our customers approximately expected manufacture ramp, special with our baseband -- base station customers.

In wage of goods, we desire higher expenses of about $1.7 million due ought R&D customization-related charge that will exist allocated from the R&D charge row ought the wage of estate can the large 5G business that Gideon discussed approximately earlier.

On OpEx, with our new announced products and continued momentum with our existing licensing business, we will flourish ought innovate and reinforce our leadership, except with disciplined investments can R&D. Our OpEx increase is largely associated with investments can headcount, employee-related costs and EDA tools. Overall, OpEx increase will exist can the district of $4 million, entire of it contributed ought our R&D line. Equity-based compensation is also forecasted ought exist the alike flat of 2018.

Annual full margins are forecasted ought exist can the district of 88% ought 89%, apply allowance slightly higher can 2018, can a flat of $0.9 million per quarter. Taxes are expected ought exist lower can a dollar basis, except higher percent of pretax income. U.S. tax -- U.S. GAAP taxes of approximately $0.5 million although the year and non-GAAP tax evaluate of approximately 14%. piece calculate although 2019 is expected ought exist alike ought the 2018 level.

Specifically although the first belt of 2019, full edge is expected ought exist about 85% can GAAP base and 87% can non-GAAP basis. Both GAAP and non-GAAP base margins are expected ought exist a slice lower than norm due ought the wage of good allocation expenses with that concrete customization vocation that I fair mentioned.

Overall OpEx is expected ought exist can the range of $17.4 million ought $18.4 million. Of the anticipated operating expenses although the first quarter, $2.3 million is expected ought exist attributable ought equity-based compensation charge and $0.2 million 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 endow payments and higher can the following -- can the following quarters. Overall, our first belt OpEx range, non-GAAP, will exist can the range of $15 million ought $16 million. Net apply allowance $0.9 million. Taxes although the first quarter, can GAAP basis, less than $200,000 and -- can non-GAAP and none can GAAP, and piece calculate alike ought the fourth belt of this year.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first issue will grow from Gary Mobley of Benchmark.

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Gary Wade Mobley, The Benchmark Company, LLC, investigation part - investigation Analyst [2]

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Wanted ought commence asking a issue or clarification approximately your nonbaseband royalty revenue can 2018, conduct you say that it was $9 million, Yaniv?

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Yaniv Arieli, CEVA, Inc. - CFO & Treasurer [3]

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Just shy of $9 million. Yes, Gary.

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Gary Wade Mobley, The Benchmark Company, LLC, investigation part - investigation Analyst [4]

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And that compares ought what can 2017?

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Yaniv Arieli, CEVA, Inc. - CFO & Treasurer [5]

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About $8 million.

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Gideon Wertheizer, CEVA, Inc. - CEO & Director [6]

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Gary, that's can row that we had the pulls can base station, revenue this year is the originate of the prohibit can ZTE.

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