Good day, welcome to the CEVA, Inc. second quarter 2020 earnings conference call. After today's presentation, there will be an opportunity to ask questions. 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 second quarter 2020 earnings conference call. I'm joined today by Gideon Wertheizer, Chief Executive Officer, and Yaniv Arieli, Chief Financial Officer of CEVA. Gideon will cover the business aspects and the highlights from the second quarter and provide general qualitative data. Yaniv will then cover the financial results for the second quarter and also provide qualitative data for the third quarter and 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 assumptions.
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 RAN in China, optimism associated with the CEVA-XC DSP portfolio and PentaG 5G modem platform, CEVA's ability to play a pivotal role in the O-RAN space, CEVA'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 to achieve market acceptance. The speed and extent of the expansion of the 5G, O-RAN, 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 unprecedented times where we all continue to adapt to the implications 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. Our employees have stepped up to ensure we meet our customers' milestones and maintain the development schedule of our new products. I would like to take this opportunity to thank our employees for their hard work under these difficult circumstances. Second, we are closely monitoring the impact of the measures to control the spread of the coronavirus on our ongoing business and also the strategic opportunities the pandemic uncovers. I will allude to this later in the call.
Despite this lingering uncertainty, we had a very good second quarter with revenue of $23.6 million, up 28% year-over-year, the highest second quarter revenue we ever recorded. The licensing environment continues to be healthy with $13.5 million in licensing revenue, up 25% year-over-year. We signed eight new license agreements, of which three were for smart sensing and five were for connectivity products. One out of the eight deals was with first-time customer. Target application of our customer include automotive powertrain, a new growth opportunity for us in the automotive space, wearable, new wireless stereo earbuds, and a range of IoT devices.
Royalty revenue came in ahead of expectation at $10.1 million, 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 products. This product line posted 77% year-over-year revenue growth to $4.3 million, comparable to our all-time record high and driven by record high Bluetooth and Wi-Fi royalties resulting from many new IoT production ramps. In this product line, we expect a step-up in our royalty revenues in the third quarter associated with the fast deployment and share gain of 5G base station RAN in China. The handset product line also showed growth where solid demand for new low-cost smartphone from a U.S.-based customer more than offset weakness in the low-tier LTE shipments into emerging markets.
India, which is currently the second-largest handset market by volume, experienced a 48% year-over-year decline according to Canalys 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-19 and the geopolitical tension between U.S. and China. On COVID-19, recent market data from research firm GSMA Intelligence predicted that IoT net addition for this year are expected to be down 45% on a yearly basis due to the pandemic. GSMA Intelligence is however maintaining its forecast for 2025 of 24 billion devices, doubling 2019 level because it expects strong post-pandemic activities to offset the current decline. With that said, the social distancing measure have uncovered new services for mobile technology, including education, healthcare, and industrial.
The latest UNESCO figures claim that nearly 1.4 billion students around the world have shifted to remote study via mobile technology, in particular in emerging markets where wired broadband is not available. Forrester Research predicts that more than 1 billion virtual care visits are expected within the U.S. this year. The magnitude and the pace of adoption of these new services call for the persistent and expedited deployment of 5G networks, where we believe there will be attractive opportunities for our strong technology portfolio. As I commented earlier, based on discussions with our customers, we expect to see a sizable production ramp and noticeable step-up in royalty revenue for 5G base station RAN in the third quarter. COVID-19 brings forward new usage model for 5G, including fixed wireless access, 5G-enabled PC, and V2X.
With our latest CEVA-XC DSP portfolio and our PentaG 5G modem platform, we are well equipped and positioned to address these new usage models for incumbents and newcomers. On to the geopolitical tension between China and the U.S. The existing export control rules 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. A byproduct of the trade tension, the U.S. government is looking to stimulate the use of Open RAN, or O-RAN, technologies for 5G mobile networks. O-RAN enables mobile operators to mix and match hardware and software components from different suppliers rather than use vertical solution for a few Tier 1 OEMs.
O-RAN dramatically reduce the entry barrier for software and hardware companies, the majority of which are U.S.-based, such as Intel, Facebook, Cisco, Microsoft, as well as new startups like Altiostar, Marvell, and Parallel Wireless. CEVA is aiming to play a pivotal role in the O-RAN space using the power efficiency of our DSP platform for the stringent runtime and low latency requirement associated with baseband processing. We have gained a lot of experience and pedigree in the RAN space to be able to proliferate the supplier base. On the China front, the central government came out in March with new ambitious plan called New Infrastructure. The plan highlights investment in seven areas, of which 40%-50% of the investment are associated with 5G, AI, and IoT. These are areas in which CEVA already have strong presence and deployment in China.
We are continuously discussing with our major Chinese customer in how we can expand our presence in China based on this plan. In closing, our business in the first half of the year was robust despite the volatility and the uncertainty brought about by COVID-19. This affirms the strength of our company vision and business model. Furthermore, the current situation possess new opportunities for us to expand in O-RAN and China's New Infrastructure plan. While I'm satisfied with our first half performance and opportunities ahead, the recovery from the pandemic is slower than was anticipated early in the year. In the U.S., China trade tension possess additional uncertainty. We are therefore laser focused on our efficiency, 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 to Yaniv for financials and guidance.
Thank you, Gideon. I'll start by reviewing the results of our operations for the second quarter of 2020. Revenue for the second quarter was up 28% to $23.6 million as compared to $18.4 million for the same quarter last year. It was the highest second quarter revenue we ever recorded. Revenue breakdown is as follows. Licensing and related revenue was approximately $13.5 million, reflecting 57% of our total revenue, 25% higher than $10.8 million for the second quarter of 2019. Royalty revenue was $10.1 million, reflecting 43% of our total revenue, 33% higher than $7.6 million for the same quarter last year. Royalty revenue from our base station and IoT product line in the quarter was $4.3 million. This is comparable to the all-time record high we reached in the fourth quarter of 2019.
Quarterly 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 $0.2 million of equity-based compensation expenses and $0.2 million for the impact of the amortization of acquired intangibles. Our GAAP operating expenses for the second quarter was just below the high end of our guidance at $22.1 million. OpEx also included aggregate-based compensation expenses of approximately $3.3 million and $0.6 million for the amortization of acquired intangibles. Total operating expenses for the second quarter, excluding these two items, were $18.3 million, just above the high end of our guidance. U.S. GAAP net loss for the quarter was $1.1 million, and diluted loss per share was $0.05. This compares to a net loss of $1.5 million and diluted loss per share of $0.07 for the second quarter of 2019.
Our non-GAAP net income and diluted EPS for the second quarter of 2020 increased by 130% and 140% respectively to $2.9 million and $0.12. Non-GAAP net income and diluted EPS for the second quarter of 2019 were $1.2 million and $0.05 respectively. Other related data. Shipped units by CEVA's licensees during the second quarter of 2020 were 231 million units, down 11% sequentially and up 6% from the second quarter of 2019 reported shipments. Of the 231 million units shipped, 99 million units or 43% were for handset baseband chips, reflecting a sequential decrease of 11% from 111 million units of handset baseband shipped during the first quarter of 2020, and a 19% decrease from 122 million units shipped a year ago. Our base station and IoT product shipments were 132 million units, down 12% sequentially and up 37% year-over-year.
As a reminder, we have categorized all our non-handset baseband 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 and 17% sequential revenue growth to reach $4.3 million. For the balance sheet items, as of June 30th, 2020, CEVA's cash and cash equivalent balances and marketable securities and bank deposits were $157 million. We did not repurchase any shares this quarter under the terms of our 10b5- plan. Currently have approximately half a million shares available for repurchase. Our DSO for the second 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 $6.2 million of net cash from operations. Our depreciation and amortizations were $1.5 million, purchase of fixed assets was $0.6 million.
At the end of the second quarter, our headcount was 401 people, of which 333 were engineers, up from a total of 390 people at the end of March 2020. Now for the guidance. As demonstrated by our results for the first half of this year, CEVA'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, prolonged measures to contain the spread of the Coronavirus pose 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.
As Gideon just alluded to, we expect a step-up in the 5G base station royalty revenue in the third quarter royalty reports. With that said, we believe the second half royalty revenues will be higher than the first, based on the assumption of the gradual recovery in economic activities as the current restrictions are lifted. Licensing, we maintain the licensing target we have focused at earlier this year of up $2 million- $4 million over the 2019 record annual licensing revenues. Specifically for the third quarter of this year. Gross margin is expected to be approximately 88% on GAAP basis and 89% on non-GAAP basis, excluding aggregate $0.2 million for both equity-based compensation expenses and the amortization of other assets associated with our Immervision 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 $21.5 million-$22.5 million. Of our anticipated total OpEx for the third quarter, $3.4 million is expected to be attributed to equity-based compensation expenses and $0.6 million to the amortization of acquired intangibles. Our non-GAAP OpEx is expected to be in the range of $17.5 million-$18.5 million. Net interest income is expected to be approximately $0.7 million. Taxes for the third quarter are expected to be approximately $0.5 million on both GAAP and non-GAAP basis. Our share count for the third quarter is expected to be approximately 23.1 million shares. Rocco, you could now open the Q&A session, please.
Thank you. We will now begin the question and answer 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. Maybe you 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 third and fourth quarter on the base station side. 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. 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. Let me start with the 5G RAN. RAN is Radio Access Network, that's the base station. Let me start by saying that 5G has substantially more addressable market for us than in LTE. There are four new components in 5G that weren't in LTE. The first one is what is called active antenna. In LTE, the antenna was passive. When you go to 5G and you have this high bandwidth and the fact that you have massive amount of antennas
You move some of the baseband processing into the antennas. Today it's done by FPGA primarily. Huawei was the first company that managed to build it with their own DSP, and now our customer moved and come out with a solution based on our DSP. That's a pretty sizable market because for every base station, you're going to have between 3 antennas- 100 antennas. Each of them will have a part of the processing done on the antenna itself, on top of what you do on the base station itself. That's one area. The other area is, in 5G, you're going to have many more small cells than you have in LTE because of microwave or millimeter wave. Gradually, operators will start rolling out these services. The third component that you have in 5G RAN is what is called private network.
There was announcement coming from Toyota with our customer and Ford. They all installed private base station in their manufacturing line to get these low latencies and the security that they need for the robots in the manufacturing. The first one I referred in the call is the O-RAN. O-RAN is a initiative that is for a long time now with the polarization between China and the U.S. It's stimulated 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 area. All of them, more or less, will, and some others, intersect what we offer. All those are areas that weren't in LTE and in 5G we are doing.
One of the reasons that we have a step up in China now is the antenna and the fast deployment, and we sell all those components. We have a good visibility and very optimistic about the prospects there. I think you asked about handset. You put it right, it's a consolidated area. MediaTek and Qualcomm is there. We are engaged with our customer in China. This customer has initial ramp on 5G. The way for us to approach the 5G, not through the modem side that is consolidated and people wants to build their own stuff other than customers that we have there, is to go through the application portal. This is now revolutionized and opened up. The camera becomes much more DSP oriented with feature AI and also what is called conversational AI or NLP, natural language processing.
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. You may not see, there will not be news in terms of Qualcomm, MediaTek in 5G modem, but there are other avenues that we're going to approach and have engagement. The market is not just the ASSP, the merchant chip, it's also the OEMs that are building their own chips and looking for our stuff as well.
Thank you, Gideon. That's great perspective all the way around. As a follow-up from me, I think, Yaniv, you talked about in the guidance, royalties being higher in the second half of the year versus the first half. 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. If you could talk about maybe the magnitude that you're expecting out of 5G base station in the back half of the year, just the moving parts on the royalty side would be helpful. Thank you.
Yes. As you said, there are many moving parts. It was always the case in the CEVA model, and this is why, in one hand, it's quite difficult to model this out. Based on the new rules of the 606, we just wait for the customer report at the end of the 30 days after the quarter end, and then we get the real visibility of how the quarter worked out. In every segment, we have ups and downs. In every segment, we have seasonality. This year, I think seasonality and COVID-19 has completely changed. We saw vacuum cleaners being very, very strong, or TVs in the first half of the year, something that is not common practice because people wanted to have more time to shop at home or wanted their house to be cleaner or had more kids around different rooms and needed TVs.
That's true for Bluetooth, Wi-Fi devices. We just came out with our strongest royalty numbers ever for Bluetooth and Wi-Fi in the second quarter. Remember, when we stepped into the second 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. How wrong were we just two and a half or three months ago? Very difficult to predict and answer the right answer, knowing today how Q3 and Q4 are going to look like. You mentioned correctly the handset space. There is a change, at least with one well-known OEM in the 5G aspects, but they came out with a very successful low-cost version, which is doing extremely well. I think all of us were super surprised by the excellent results they came up with two weeks ago. Caught 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 aspect or from different aspects. That's one area. Another area is the emerging economies. Gideon mentioned India was down close to 50% in the consumptions of phones last quarter. This was because of the curfew and Corona. Direct impact of people not walking around, being able to go to stores and buying, Amazon is maybe less of a way to buy those lower-cost phones. Now when things open up gradually in the third or fourth quarter, that segment of the market should strengthen for us. Last but not least, the base station. Gideon just talked about it at length. This is different indications that we are seeing from our customers.
We shared with you last quarter that they have won significant design wins in China, and we'll have more than 30% market share in that segment, and that's starting to ramp up and be deployed. As soon as we get those royalty reports, we'll have a much better vision what's the magnitude of it. There's no doubt that per the different news and deployment data that we're getting, this could be quite significant, but there are moving pieces. Overall, we believe it's going to be a stronger second quarter. I don't think we have the data to guess right now like we were wrong on the positive side a few months ago for Q2, and we'll just need to look how these play out in the second half on a quarter-by-quarter basis.
Hope I managed to give you a little bit more color on these different moving parts.
No. Thanks very much for that. I'll jump back in the queue, but much appreciated.
Thanks.
Our next question today comes from Tavy Rosner with Barclays. Please go ahead.
Hi, this is Peter Zdebski on for Tavy. Congratulations on the quarter. Regarding the continued strength in licensing, I was 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 bit bigger deal size? 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.
Okay. It's [ Zdebski] , right?
Yes.
As you know. Let me take first the licensing. The way we see it is the momentum continues. Don't look, the fact that you have eight or 10 or 11 does not mean licensing, it's a lumpy business. You have peaks and valleys. You have to look things in perspective. The pipeline looks solid. We managed to continue those deals. 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 sign a very important agreement in the powertrain in cars. This space by itself is going to grow 30%. It's part of the electrification of cars. This space is going to grow by 30% CAGR between 2020 and 2030. I mean, we don't see any weakness. Again, this is licensing. It's timing of closing deals.
We want to do the complete evaluation discussion, do the legal negotiation properly, commercial negotiation properly, but we are on a solid ground there. Regarding integration of Sensor Fusion and Imaging. The Sensor Fusion, it's part of CEVA already. It's strong contributor. Yaniv mentioned vacuum cleaner, part by product of the pandemic. We start seeing significant increase in royalties there. With our [heater scheme], we are at the PC space. With the [industry] , we are much stronger on the HDTV space. We do cross sales between the CEVA products like Voice and Sensor Fusion. It was a smooth integration. Like what CEVA is doing. When we acquire a company, we look on the history, we look that this team know what they do, and then based on this, we make a decision. Did you ask another question?
I'll add one more thing that we said earlier, that on the licensing front overall, not on a per quarter basis, we're still reiterating our guidance from earlier this year, which is like $2 million- $4 million on top of the $48 million, which was all-time record high last year. This means that we're looking to cross the $50 million level for the first time, and this is for 2020. With all that said, this is still our plan. We kept it last quarter. We are still very confident with it 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.
Hi, Gideon. Hi, Yaniv. Congratulations on the momentum here. The second half guidance for an improvement, can you talk about what you're assuming there in the consumer exposed non-smartphone markets, the volume markets? Are you expecting a seasonality recovery or kind of still muted demand? A lot of the other areas you had comments on, but I'm curious just the broader consumer non-smartphone.
This ties a bit to what we tried to convey a bit earlier. It's an excellent question. 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 beginning of the year and picked up in the second quarter. Demand, as people start going back to normal or sort of normal alongside COVID-19 and they continue work, it should, historically at least, it did pick up. Q2 was down in volume in a lot of these IoT devices, although we saw new product ramps of new devices for the first time. 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 earbud or vacuum cleaner TV or all of these other devices that we are powering, is a lot of moving pieces and from lots of different segments. 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 the easiest guess for us if people don't start taking a bit more vacations and going out to the outdoors. Even that's 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. These are the moving parts that you want to see.
I appreciate the color there, Yaniv. It sounds very optimistic in a challenging environment there. The automotive market, you started talking about it, Gideon, but can you talk about how many wins you have now? You had one you talked about in the press release, and what the timing of potential revenue contribution there is, maybe the content per car, things like that.
As you know, in automotive, you need to take a deep breath until you go to production. We have activities ongoing with that customer and other customer for all the product. I think in late 2021, we will see initial product on automotive that will be significant specifically for this product. If all goes well, that is 2023 mass production.
Okay, great. Thanks, guys.
Thank you. Good luck.
Ladies and gentlemen, this concludes the question and answer session. I'd like to turn the conference back over to the management team for any final remarks.
Thanks, Rocco. Thank you all for joining us today and for your continued interest in CEVA. As a reminder, the prepared remarks for this conference call are filed as an exhibit to the current report on Form 8-K and accessible through the investors section of our website at investors.ceva-ip.com. With regards to upcoming events we will be participating in, these are the following virtual events that we'll attend in August and September, starting with Oppenheimer's 23rd Annual Technology, Internet and Communications Conference, August 12th. Jefferies Semiconductor, IT, Hardware and Communication Infrastructure Summit, September 1st and 2nd. Citi's 2020 Global Technology Conference, September 8th, 9th and 10th. 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.