Earnings Call: Q2 2020

Aug 10, 2020

Good day, and welcome to the CEVA Inc. 2nd Quarter 2020 Earnings Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity 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 2nd quarter 2020 earnings conference call. I'm joined today by Gideon Veritizer, Chief Executive Officer and Yaniv Ariali, Chief Financial Officer of CEVA. Gideon will cover the business aspects and the highlights from the second quarter and provide general qualitative data. Yaniv will then cover the financial results the second quarter and also provide quantitative data for the third quarter full year 2020. 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 if some These forward looking statements include guidance for the third quarter 2020 and qualitative data for the remainder of 2020, optimism about 5G opportunities, including expectation of royalty revenue increase in the third quarter associated with 5G base station RAM in China. Optimism associated with the CEVA XC DSP portfolio and Penta G5G modem platform, CEVA's ability to play a pivotal role in the O RAM space. Sever's ability to leverage opportunities that may arise from the pandemic and the U. S.-China trade tensions and positive market data by GSMA Intelligence And Forrester Research. For more information on the factors that could cause a difference in our results, please refer to our filings with the SEC. These include the scope and the duration of the pandemic, The extent and the length of the shelter in place and other 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 achieve market acceptance, the speed and extent of the expansion of the 5G, Oran, Wi Fi and IoT markets, our ability to execute more non handset baseband license agreements, the effect of intense industry competition and consolidation and global chip market trends. CEVA assumes no obligation to update any forward looking statements or information which speak as of their respective dates. With that said, I'd now like to turn the call over to Gideon. Thank you, Richard. Good morning everyone and thank you for joining us today. We are living in an armed refident at times, where we all continue to adapt to the indication of the COVID 19 pandemic. First and foremost, we continue to look out for the health and safety of our employees customers and partners worldwide. O and P employees have stepped up to ensure we meet our customer milestone and maintain the development schedule of our new products. I would like to take this opportunity to thank our employees further hard work under these difficult circumstances. 2nd, we are closely monitoring the impact of the measure to control the spread of the coronavirus on our ongoing business and also the strategic opportunities that pandemic uncovered. I will allude to this later in the call. Despite this lingering uncertainty, we had a very good second quarter with revenue of 20 $3,600,000, up 28 percent year over year, the highest 2nd quarter revenue we ever recorded. The licensing environment continues to be healthy with $13,500,000 in licensing revenue, up 25% year over year. We signed 8 new license agreements, of which 3 well for smart sensing and 5 well for connectivity products. 1 out of the 8 deals world with first time customers. Product application of our customer include automotive powertrain, a new growth opportunity for us in the automotive space, we are then doing wireless stereo airbag and a range of IoT devices. Royalty revenue came in ahead of expectations at $10,100,000 up 10% sequentially and 33% year over year, driven by strength in the base stations and IoT product line formerly referred to as non handset services. This product line posted 70 70 percent year over year revenue growth to $4,300,000. Comparable to our all time record high and driven by record high Bluetooth and Wi Fi royalties resulting for many new IoT production set up in our royalty revenues in the third quarter associated with the fast deployment and share gain of 5G base station run-in China. The handset product line also showed growth were solid demand for new low cost smartphone from a U. S.-based customer more than offset weakness in the long tier LTE shipments into emerging markets. India, which is currently the 2nd largest handset market by volume, experienced a 48% year over year decline according to panelist report due to supply and demand constraint as a result of the Indian government measure to control the spread of the virus. Let me take the next few minutes to walk you through our perspective on COVID-nineteen and the geopolitical tension between UF and China. On COVID-nineteen, recent market data from research film GSMA intelligence predicted that IoT net addition for this year are its expected to be down 45% on a yearly basis due to this pandemic. GSMA intelligence is our ever maintaining its forecast for 2025 of 24,000,000,000 devices doubling 2019 levels because we expect strong post pandemic activities to offset the current decline. With that said, the social distancing measure and uncover new services for mobile technology, including education, health, skills, and industrial. The latest NESCO figures claimed that nearly 1,400,000,000 students around the world have shifted to remote study via mobile technology, in particular, an emerging market where wired broadband is not available. Furthermore, Forester Research predicts that more than 1,000,000,000 virtual care visits are expected within the US this year. The magnitude and the pace call for the persistent and expedited deployment of 5g Networks, where we believe there will be attractive opportunities for a strong technology portfolio. As I commented earlier, based on discussions with our customers, we expect to see a sizable production ramp and noticeable set up in royalty revenue for 5G base station 1 in third quarter. Furthermore, COVID-nineteen brings forward new usage model for 5G including fixed wireless access, 5G enabled PC and V2S. With our latest feedback feedstock portfolio, and our 1030 5g model platform, we are well equipped and positioned to address this new usage model for incumbents and newcomers. On to the geopolitical tension between China and the U. S, Existing export control wounds do not directly apply to our current technology developed in Israel and Europe. We continuously monitor development on this front and are prepared to adapt our business as required. And by product of the trade tension, the U. S. Government is looking to stimulate the use of often one of Oran Technologies for 5G mobile network. Oran enables mobile operator to mix and match hardware and software components from different suppliers, rather than use vertical solution for a few Tier 1 OEMs. Oram dramatically reduced the entry barrier for software and hardware companies, The majority of which are U. S.-based, such as intents, Facebook, Cisco, Microsoft, as well as new startups like AlteoStar, Maribel, and parallel wireless. CEVA is aiming to play a pivotal role in the oral space using that our efficiency in our of our DSP platform for the stringent one time and low latency requirement associate with baseband processing. We have gained a lot of experience and heavily in the run space to be able to proliferate the suppliers. On the China phone, the central government came out in March with new ambitious plan called new infrastructure. The plan highlights investment in 7 areas of which 40% to 50% of the investment are associated with 5G AI and IoT. These are areas in which CEVA already has strong presence and deployment in China. We are continuously us with our major Chinese customer and how we can expand our presence in China based on this plan. So in closing, our business in the first half of the year was robust, despite the volatility and the hand certainly thought about by COVID 19. This has influenced the strength of our company, vision and business model. Furthermore, the current situation presents the opportunity for us to expand in Orange and China's new infrastructure plan. While I'm satisfied with our first half performance and opportunities ahead, the recovery from the pandemic slowed than was anticipated early in the year, and the U. S. China threat tension poses additional uncertainty. We are the 4 laser focus on our efficiencies, productivity, and most importantly, our customer engagement. Our organization is agile and alert to respond to any positive or negative development in the coming months. With that said, let me hand over the call Thank you, Vinod. I'll start by reviewing the results of our operations for the second quarter of 2021. Revenue for the second quarter was up 28 percent to $23,600,000 as compared to $18,400,000 for the same quarter last year. It was the highest 2nd quarter revenue we ever recorded. The revenue breakdown here is false. Licensing and related revenue was approximately $13,500,000, reflecting 57% of our total revenues, 25% higher than $10,800,000 for the second quarter of 2019. Rollty revenue was $10,100,000, reflecting 43% of our total revenue, 33% higher than $7,600,000 for the same quarter last year. Realty revenue from our base station and IoT product line in the quarter was $4,300,000. This is comparable to the all time record high we reached in the fourth quarter of 2019. Florney gross margin was 87% on GAAP and 89% on non GAAP basis, both slightly better than what we projected. Non GAAP quarterly gross margin excluded approximately $200,000 of equity based compensation expenses and $200,000 for the impact of the amortization of acquired intangibles. Our debt operating expenses for the second quarter was just below the high end of our guidance at $22,100,000. OpEx also included aggregate based compensation expenses of approximately $3,300,000 and $600,000 for the amortization of acquired intangibles. Total operating expenses for the second quarter excluding these two items, were $18,300,000, just above the high end of our guidance. U. S. GAAP net loss for the quarter was $1,100,000 and diluted loss per share was $0.05. This compares to a net loss of 1,500,000 Our non GAAP net income and diluted EPS for the second quarter of 2020 increased by 130 and 140 percent respectively to $2,900,000.12. Non GAAP net income and diluted EPS for the second quarter of 2019 were $1,200,000 Other related data. Ship units by CEVA's licensees during the second quarter of 2020 were 231,000,000 units. Down 11% sequentially and up 6% from the second quarter of 2019 reported shipments. Of the 231,000,000 units shipped 99,000,000 units or 43% were for handset baseband chips, reflecting a sequential decrease of 11% from 111,000,000 units of handsets baseband shift during the first quarter of 2020. And a 19% decrease from 102,200,000 units shipped a year ago. Our base station and IoT product shipments were 132000000 units down 12% sequentially and up 37% year over year. As a reminder, we have categorized all our non handset basement chips under the umbrella of base station and IoT products since the beginning of this year. This product line posted 77% year over year growth with 17% sequential revenue growth, to reach $4,300,000. And for the balance sheet items, As of June 30, 2020, CEVA's cash and cash equivalent balances and marketable securities and bank deposits, were $157,000,000. We did not repurchase any shares this quarter under the term of our 10b5 plan. Certainly have approximately 500,000 shares available for repurchase. Our DSOs for the 2nd quarter of 2020 was 27 days, significantly lower than the 63 days we recorded for the first quarter of this year. During the second quarter, we generated $6,200,000 of net cash from operations Our depreciation and amortizations were $1,500,000 and purchase of fixed assets was $600,000. At the end of the second quarter, our head count was 401 people, of which 333 were engineers, up from a total of 3 ninety people at the end of March, 2020. Now for the next. As demonstrated by our results for the first half of this year, Siva's product and customer diversity enabled us to migrate the economic challenges the pandemic presented. We remain focused on our near term objectives and continue to invest in future growth. As for the second half outlook, for launch measures to contain the spread of the coronavirus post economic uncertainty, partially in emerging markets, particularly in emerging markets, where our primary exposure is for low tier handsets. On the other hand, we are encouraged by the indicators we have noted in recent customer reports, reflecting to the base station and IoT product line And as Gideon just alluded to, we expect a step up in the 5G base station royalty revenue in the third quarter royalty reports. So with that said, we believe the 2nd half royalty revenues will be higher than the first based on the assumption of the gradual recovery in economic activities, the current restrictions are listed. Licensing, we maintain the licensing target we have focused at earlier this year, of up $2,000,000 to $4,000,000 over the 2019 record annual licensing revenues. Specifically for the third quarter of this year. Gross margin is expected to be approximately 88 percent on GAAP basis and 89% on non GAAP basis. Excluding aggregate $200,000 for both equity based compensation expenses and the amortization of other assets associated with our immune vision investment. OpEx for the third quarter is forecasted to be slightly lower than the first two quarters of 2020. GAAP based OpEx is expected to be in the range of $21,500,000 to $22,500,000. Of our anticipated total OpEx for the 3rd quarter, $3,400,000 is expected to be attributed to equity based compensation of enciled and $600,000 to the amortization of acquired intangibles. Our non GAAP OpEx is expected to be in the range of $17,500,000 And interest income is expected to be approximately 700,000. Taxes for the 3rd quarter at expected to be approximately $500,000 on both GAAP and non GAAP basis. And our share count for the 3rd quarter is expected to be approximately 23,100,000 shares. Welcome, you could now open the Q And A session. Today's first question comes from Matt Ramsay with Cowen. Please go ahead. Thank you very much. Good afternoon and good morning everybody. Gideon, I wanted to start with a question about 5G in general for sort of both sides of the business, the infrastructure side and the handset side. And maybe you'd step back and kind of characterize where you guys feel like you are competitively and maybe more important where your licensees are competitively on 5G. It sounds like things are going to start to materially ramp in the 3rd fourth quarter on the base station side. But on the flip side, we've seen some share consolidation with Qualcomm and MediaTek on the 5G handset side at the expense of some of your licensees. So if you could just kind of level set how you're thinking about the 5G opportunity for the company? That would be helpful. Thank you. Hi, Matt. So let me start with the 5G run, run is ready to exercise my best base station. Let me start by saying that 5G has substantially more addressable market for us than in LP. And there are 4 new components in 5G that were in IP. The first one is what is called active antenna in LTE the antenna was passive. Now when you go to 5G and yet this high bandwidth and the fact that you have massive amount of antennas. So you move some of the baseband processing into the antenna, today is done by, by SPJ primarily. And Huawei was the 1st company that managed to build with their own DSP. And now our customer moved and come out with a the solution based on our DSP. So that's a pretty sizable market because for every base station, you're going to have between 3 to 100 and 10. Each of them will have a processing out of the processing done, on the antenna itself. On top of what you do on the base station itself. So that's one area. The other area is, in fact, you're going to have many more small cells then you have NLP because of microwave or millimeter wave, gradually operator will start rolling out these services. The cell component that you had in 5G run is what is called private network. So there was announcement coming from Peioca with our customer and 4, they all install private base station in their manufacturing line. To get this low latencies and the security that they need for their robots in the manufacturing. And the first one, I I referred in the call is, the Owan. Owan is, is initiative that is for a long time now with the polarization between China and the U. S, it's stimulated by the, by the government. And that's a very good sweet spot to guys like Intel, like Facebook, they're already active in this area. Microsoft made acquisition in this scenario. All of them more or less will and some others intersect what we offer. So all those are areas that were in NMP and 5G and in 5G we are doing. And One of the reasons that we have a step up in China is the antenna and the fast deployment and we we failed all those components. And we are we have a good visibility and very optimistic about the prospects there. I think you asked about handset or so, I mean, you put it right. It's a consolidated area. India Tech and Qualcomm is that we are engaged with our customer in China. This customer has initial rainfall on the files. On 5G. The way to, for us to approach the 5G, not through the modern side that is consolidated and people were to build their own stuff other than, you know, customers that we have there is to go to the application process because we is now revolutionized and open up. So the camera becomes much more with DSP oriented with feature AI. And also, what is called conversational AI or NLP natural language process think this is moving to the edge, this is moving to the smartphone. And that's where we are coming with our smart sensing portfolio and getting traction there. So you may not see, we will not be news in terms of Qualcomm MediaTek in 5G modern, but there are other avenues that we're going to approach and have engagement. And the market is not just the ASSP, the merchant chip. It's also is OEMs that are building their own chips and looking for our stuff as well. No, thank you, Gideon. That's great perspective all the way around. As a follow-up for me, any of you talked about in the guidance, royalties being higher in the second half of the year versus the first half. And it's notable that I would expect the revenue you get from the Intel modem would be significantly less in the back half of the year. So if you could talk about the maybe the magnitude that you're expecting out of 5G base station, in the back half of the year, just kind of the moving parts on the royalty side would be helpful. Thank you. Yes. So as we said, there are many moving parts that it was always the case in the CEVA model. And this is why, in one hand, it's quite difficult to model this out. And based on the new rules of the 606, we just wait for the customer report at the end of 30 days after the quarter end. And then we get the real visibility of how the quarter works out. So in every segment, we have and downs in every segment we have seasonality. This year, I think seasonality in COVID-nineteen has completely changed We saw vacuum cleaners being very, very strong. Our TVs in the first half of the year, something that is not commonly common practice because people wanted to have more time to shop for at home or wanted their house to be cleaner or have more kids around different rooms and needed TVs. That's true for Bluetooth, Wi Fi devices. Let me just came out of our strongest royalty numbers ever for Bluetooth and Wi Fi in the second quarter. And remember, when we 2nd quarter, the end of the first, we believe that, Q2 will be the low point of the year for us. And from there on, it's going to pick up. So how long are we? Just two and a half or 3 months ago. So Very difficult to predict and answer the right answer knowing today how Q3 and Q4 are going to look like. We talked, you mentioned correctly the handset space. There is a change, at least with 1 well known OEM in the 5G aspects, but they came out with a very, very successful, low cost version, and we're just doing extremely well. I think all of us were super surprised by the excellent results they came up with 2 weeks ago, not everybody by surprise. And that's part of the very strong second quarter for us. As well. We couldn't have known that in advance nor do we know how Q3 and Q4 will look like from that aspects or from different exits? So that's one area. Another area is the emerging economies Gideon mentioned, India was down close to 50% in the consumptions of Soles last quarter. This was because of the perfume and Corona direct impact of people not walking around, being able to go stores and buying Amazon is maybe less of a way to buy those lower cost phones. And we and now when things open up gradually in 3rd or fourth quarter, that segment of the market should strengthen for us. Last but not least, the base station, Vivian just talked about it in length. This is different indications that we are seeing from from our customers. We shared to you last quarter that they have won significant design wins in China, and we'll have more of 30% market share in that segment and that's starting to ramp up and be deployed. So as soon as we get those royalty reports, we'll have a much better vision of what's the magnitude of it. There's no doubt that per the different and use and deployment data that we're getting, this could be quite significant, but there are moving pieces. So overall, we believe it's going to be stronger second quarter. I don't think we have the data to guess right now, like we were wrong on the positive side that a few months ago for Q2. And we'll just need to look how these play out in the second half on a quarterly quarter basis. So opinionics to give you a little bit more color on these different moving parts. Thanks very much for that. I'll jump back in the queue, but much appreciated. Thanks. And our next question today comes from Tavy Rosner with Barclays. Please go ahead. Hi, this is Peter Zemski on for Tavi. Congratulations on the quarter. Regarding the continued strength in licensing, wondering how we should think about the sustainability of that into 2H. And given that we saw a bit fewer deals in the quarter versus Q1, Is that a headwind at all or is it that you're just seeing a bigger deal size? And then if I could have a follow-up I was hoping if you could give us an update on the integration of the imaging and sensor fusion acquisitions, both from the operational but particularly from a commercial point of view? Let me take, first, the licensing. So the way we see it is the momentum continues. Don't look the fact that you have 8 or 10 or 11 does not mean. Licensing is a lumpy business. You have fix and valleys, you have to look things in perspective. The pipeline looks solid. We managed to continue with those days now. We have strong interest in our Wi Fi product. We have strong interest in computer vision product. We have strong interest for Bluetooth, we signed a very, important agreement in the powertrain in cars. This space by itself is going to grow 30%. It's out of the electrification. Of course, this space is going to grow by 30% CAGL between 2020 2030. So I mean, we don't see any weak trends. Again, this is licenses. Expanding of closing the bills. We want to do the completed valuation, discuss the legal negotiation, properly, commercial negotiation, properly, but we are on a solid calendar. Regarding integration of sense of fusion and imaging. So the sense of fusion, it's part of CEVA already. It's strong contributors. You mentioned vacuum cleaner, part by product of the pandemic, we start seeing significant increase in royalties there with our hit your skin, we are at the PC space with the agency, we are much stronger on the BTV space. We do cross sales between the field of products like voice and sense of future. So it was a smooth integration, like what's even doing. When we acquired a company, we look on the history, we look at this team, know what they do and And then based on this, we make a decision. So that's to do Did you ask another question? Well, I'll add you one more thing that we said earlier that from the licensing front, overall, not on a per quarter basis, we are still reiterating our guidance from earlier this year, which is like $2,000,000 to $4,000,000 on top of the 48 $1,000,000, which was all time record high last year. And this means that we're looking to cross the $50,000,000 level, for the first time, and this 2020. So with all that said, this is still our plan. We kept it last quarter. We are still very confident with this for this quarter. And this is where we are targeting for the rest of the year. Very helpful perspective. Thank you. Sure. Today's next question comes from Suji Desilva with ROTH Capital. Please go ahead. So, the second half guidance for an improvement, can you talk about what you're assuming there in the consumer exposed non smartphone market the volume markets. Are you expecting a seasonality recovery or kind of still muted demand? A lot of the other areas were had your comments on, but I'm curious just the broader consumer non smartphone? So this ties a bit to what we tried to convey a bit earlier. It's an excellent question. And it historically, Q3 was season long in a lot of these consumer devices. This year, we hope that that's still the case, especially after on one hand, some of the manufacturing was lower in the the beginning of the year and picked up in the 2nd quarter, demand as people start, going back to normal or sort of normal long side COVID and continue work, it should, not historically, at least, it did pick up. Q2 was down in the in volume in a lot of these IOT devices, although we saw new product ramps, of new devices for the first time. So with those in mind and those new products that just hit the shelves in Q2, with relatively lower volumes because of the pandemic. We do believe that they will continue to pick up. The pace of all this whether it's a TV or earbuds or, vacuum cleaner TV or all of these other devices that we are powering, is a, is a lot of moving pieces and from lots of different segments. And even one of our customers in the action camera, space came out surprisingly with a very strong quarter and increased their guidance for Q3, which is again, it's not not the easiest guess for us if people don't start taking a bit more vacations going out to the outdoors. So even there, that has a good sentiment and good sign that Q3 seasonality is maybe, I don't want to say back on track, but on the right track. And these are the moving parts that you want to see. No, I appreciate the color that you gave. I mean, sounds very optimistic in a challenging environment there. And then, the automotive market, you started talking about Gideon, but talk about how many wins you have now? You have one you talked about in the press release and what the timing of potential revenue contribution there is, maybe the content per car and things like that? We need to, do you know, in automotive, you need to take a deep breath until you go to production. I mean, we have activities ongoing with that customer and other customer, for older products. I think in the late 2021, we'll see, initial color for the automotive significant specifically for this product. If all goes well, that's 2023 mass production. Okay, great. Thanks guys. Thank you, ladies and gentlemen, this concludes the question and session. I'd like to turn the conference back over to the management team for any final approval. Thanks, Waco. 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 at investors. Siva.com. With regards to upcoming events we will be participating in, these are the following virtual events that we'll attend in August September. Starting with Oppenheimer's 23rd annual technology internet and communications conference, August 12th, Jeffrey Semiconductor, IT, Hardware And Communication Infrastructure Summit, September 1 2nd, and Citi's 2020 Global Technology Conference September 8, 910. 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. This concludes today's conference call. You may now disconnect your lines and have a wonderful day.