Earnings Call: Q2 2019

Aug 8, 2019

Good morning, and welcome to the CEVA Inc. 2nd Quarter 2019 Earnings Conference Call. All participants will be in listen only mode. After today's presentation there will be an opportunity Please note this event is being recorded. I would now like to turn the conference over to Richard Kingston, Vice President of Market Intelligence And Investor Relations. Please go ahead, sir. Thank you. Good morning, everyone, and welcome to CEVA's 2nd Quarter 2019 Earnings Conference Call. I'm joined today by Gideon Wertheizer, Chief Executive Officer of CEVA and Yaniv Arieli, Chief Financial Officer of CEVA. Gideon will cover the business aspects and the highlights from the second quarter 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 the rest of 20 18. I will start with the forward looking statements. Please note that today's discussions contain forward looking statements that involve risks and uncertainties as well as assumptions that if they materialize or prove incorrect could cause the results of CEVA to differ materially from those expressed or implied by such forward looking statements and assumptions. Forward looking statements include our financial qualitative data for the third quarter and remainder of 2019, including royalty revenues and the mobile market stabilization optimism about CEVA doubling its 2018 royalty revenue by 2022 ability to capitalize on a healthy design environment to sign licensing agreements and maintain a robust licensing pipeline optimism about synergies associated with the acquisition of the Hillcrest Labs business and the license arrangement with Immersion, including leveraging Hillcrest Labs customer base and revenue contribution relating to the Crest Labs business in the second half of the year and full year expense levels. For information on the factors that could cause a difference in our results, please refer to our filings with the Securities And Exchange Commission. These include the ability of CEVA's IP for smarter connected devices to continue to be strong growth drivers for us? Our ability to realize the benefits from the acquisition of certain assets of Hillcrest Labs and license arrangement with Immervision our success in penetrating new markets and maintaining acceptance and offset the maturity of the handset market, the speed and extent of the expansion 4g LTE and 5g Networks and wireless connectivity, AI LTE IoT and the IoT space generally. Our ability to execute more non handset baseband license agreements, the effect of trade tariffs and political tensions the effect of intense industry competition and consolidation, including the effect of Apple's announced acquisition of the majority of Intel's smartphone modem business, and global chip market trends. CEVA assumes no obligation to update any forward looking statements or information which speak as of their respective dates. In addition to the financial results prepared in accordance with Generally Accepted Accounting Principles or GAAP, We will also present certain non GAAP financial measures today. CEVA's management believes that in addition to using GAAP results in evaluating our business, it can be useful ciliation of non GAAP financial measures with their most direct comparable GAAP financial results, which can be found in the earnings press release issued today. A copy of today's press release for the quarter ended June 30, 2019, and the related financial tables and management commentary which were included in our current report on Form Eight K filed today, also can be found on the Investor Relations portion of our website after this call. With that said, I will now turn the call over to Gideon. Thank you, Richard. Welcome, everyone, and thank you for joining us today. We delivered a robust financial performance in the second quarter driven by excellent execution in licensing and noticeable upfront in royalties. We also expanded our market reach and product portfolio by acquiring U. S.-based filter slabs specializing in the sense of fusion software technologies and formed a strategic partnership with Immersion a Canadian based company with advanced digital imaging software technologies. Total revenue for the second quarter was $18,400,000, up 5% on a year over year basis. License revenue was $10,800,000, up 8% year over year. Whilst the revenue was $7,600,000, up 2% on a year over year. ROCE revenue grew 27 percent sequentially as the handset inventory level normalized which benefit 1 of our customers applying cellular basement to U. S.-based Premium smartphone OEM and one of our large China base baseband customer. On the licensing front, We continued the fast pace of customer design wins with 9 new agreements of which 6 are for our connectivity product and 3 for our smart sensing product. 4 of the agreements are with first time customers. Our 2nd quarter licensing are targeting a diverse range of end markets and application, among which our cellular IoT wireless earbud, AI and computer vision for consumer and surveillance product and Wi Fi access points. The wireless earbuds or true wireless stereo design win is particularly notable as we provide both the sound and the Bluetooth technologies for this target market. With the acquired HiggsertLab technology base, we can further extend our offering for this market with sense of fusion software. In the 1st 6 months of 2019, we signed a total of 17 deals. Better accomplishments bring the total number of deals to more than 100 60 licensing agreements since the beginning of 2016. Is accumulated licenses and ongoing cheap and software design of the foundation for royalty generation powered our strategic goal of doubling our 2019 royalty level by 2022. Overall, we are capitalizing on healthy design environment, in particular in China, Japan and the U. S, and our technology excellence in wireless connectivity and smart sensing to sign lucrative licensing agreement and maintain a robust licensing pipeline. On royalties, our 2nd quarter royalty revenue reflect sabilization in the basement space following an inventory clean up at the large U. S.-based premium handset supplier, a new production ramps and design win by our China based customer in the low and mid tier LTE smartphone market. We believe these positive trends will accelerate as we head into the high season in this space. In the base station market, we are particularly encouraged by the recent progress with our key customers, in 5G base station, we recently publicly commented that it was it has secured more than 25 commercial 5G network contracts today. ZTE is capitalizing on its first mover advantage, a lot of which relay to our advanced DSP platform to gain market share in the expedited 5G deployment in China following the government grant of commercial 5G licenses to telecom operator and cable network operator. Overall, royalty from non handset customer continued to show solid growth, up 50% 52% in revenue versus the second quarter of 2018. Now on the strategic transaction we have concluded recently. In July, we acquired the HEETS Lab business from interdigital for $11,000,000 in cash. Viraslav is a global supplier of software IP, complementary services and component that process data from sensors. Victor Slab's advanced motion engine algorithm and software platform fuse data capture from a diverse range of sensors, such as accelerometer, gyro, magnetometer, barometer and other to reflect the accurate orientation and the heading of a device in the 3 d domain. Sensor fusion is broadly used in smartphone laptops, public wireless earbuds, remote controls of smart TV and set top boxes, drones, automotive AR and VR robots and numerous other devices. HagerSlass Technology companies, competencies and customer base add new revenue sources and market opportunities to our smart sensing portfolio that currently include vision, sound and AI products. EkraClap's software product has shipped in more than 100,000,000 devices to date and a mortgage customer, our Hisense, edgeelectronic Samsung and some of the leading robotics companies. Its revenue for the 1st 6 months of the year was approximately $3,000,000, of which 80% were With Hillcrest with HEKA Technologies on board, we plan to offer comprehensive and integrated software stack that will combine filters of motion sensing with sound and vision to address multiple market opportunity. We expect to couple this motion sensing technology with our broad portfolio of DSP based wireless and cellular connectivity IP. We also anticipate to capitalize on Halester's lab mature software, say, ag and experience to engage and license directly to OEMs to benefit from shorter time to royalties and adopt royalty payment scheme based on device rather than chips. I'd like to take this opportunity to welcome the Higgs Labs team to the CEVA family and to thank they introduced digital install their support during the acquisition process. Another transaction that we executed a few days ago is a $10,000,000 investment and strategic partnership within our vision a Canada based private and government fund and technology company. In a vision offer a very promising software technologies relating to wide angle camera. Wide angle camera offer field of view of between 80 degrees to 2 60 degrees and is commonly used in the surveillance market and recently expanded to smartphone ADAS and robots. All primary markets for CEVA. With that said, wide angle lens suffer from inherent distortion in the image quality, particularly at the edge of the frame. Advanced imaging algorithms and in-depth know how of lens optics, innovation is able to correct the distortion and provide smooth and clean 360 degrees views by still Under this partnership agreement, CEVA will have an exclusive license, right, to all in a region, image and answer software portfolio. We expect to offer the software as a royalty bearing value added to our customer base or independently to OEMs. So in summary, I'm very pleased with the performance in the second quarter. We continue to expand our license fee base and to diversify our royalties, our revenue sources. The weakness in demand our mobile customer faced last year shows good sign of stabilization, and we expect a strong second half in royalty revenue. Last, our recent cash investment in acquiring certain assets of filter slabs, and for licensing right of the imaging software from Immersion are in line with our strategy to go up in the value change, creating tighter relationship with our customer and incremental royalty sources from Semiconductor Companies and OEMs. With that said, I'll now turn the call over to Yaniv, who will outline our financials and guidance. Thank you, Dylan. I'll start by reviewing the results of our operations for the second quarter of 2018. Revenue for the second quarter was $18,400,000, up 5% as compared to $17,500,000 for the same quarter last year. Revenue breakdown is as follows. Licensing and related revenue was approximately 10,800,000 reflecting 59% of our total revenue, 8% higher as compared to the second quarter of 2018. Realty revenue was $7,600,000, reflecting 41% of our total revenues, up 2% from $7,500,000 for the same the non GAAP basis as projected. Non GAAP quarterly gross margin excluded approximately 0 based compensation expenses and $100,000 of impacted amortization that they acquired intangibles for our investment in the narrowband IoT Technologies. Our total operating expenses for the 2nd quarter came in at the mid range of our guidance at $18,100,000. OpEx also included aggregate based compensation expenses of approximately $2,500,000 $200,000 for the amortization of acquired intangibles of Riviera wins. Total operating expenses for the second quarter, excluding these items, were $15,400,000, also a significant point of our guidance. U. S. GAAP net loss for the 2nd quarter decreased by 28% $1,500,000 and diluted net income per share decreased 22 percent to 0 point 0 7 dollars compared to a net loss of $2,100,000 $0.09 for the second quarter of 2018. Non GAAP net income and diluted EPS for the second quarter of 2019 were up 42% 25 percent to $1,200,000 and $0.05, respectively, of net income and diluted EPS for the second quarter of 2018 of $2,900,000.04. Other related data, shipped units by CEVA's licensees during the second quarter of 2019 were 217,000,000 units, up 24% sequentially and down 2% year over year from second quarter of 2018 reported shipments. Of the $217,000,000 units shipped $122,000,000 or 56 percent of our handset based benches. This reflects an increase of 37 percent sequentially from 89,000,000 units shipped in the first quarter of 2019. And a 26% decrease from 165,000,000 units shipped a year ago. In the non baseband, volume shipments were up 11% sequentially and 8% on a year over year basis. It's for our balance sheet. As of the end of June, see that cash, cash equivalent balances, marketable securities and bank deposits were $166,000,000. We continued our write back repurchasing program and purchased approximately 103,000 shares during the second quarter for approximately 2.3 $1,000,000. A year ago, our Board of Directors approved the expansion of the existing buyback plan And as of the end of June, this year, we had a total of 161,000 shares available under this repurchase program. Our DSOs for the second quarter was 52 days, during the quarter, we generated a negative of $3,800,000 of cash from operations, depreciation was $700,000 and purchase of fixed assets were $700,000 as well. At the end of the quarter, our headcount was 3 58 people, of which 294 were engineers. These numbers did not include yet 22 people from Hillcrest Labs, which were added in July. Yearly guidance. As Gideon pointed out, we are experiencing an overall healthy environment, both in licensing and world defense. We also expect the Hillcrest business to continue to contribute to revenue in the second half of this year. Therefore, you are now anticipating that our annual revenue will be in the range of $3,000,000 to $4,000,000 higher than the current speed estimate. On the operating side, we continue to be cautious and disciplined in our expense control As a result, including the addition of HillcrestLab, we expect to remain or to record a slight increase in the annual non GAAP operating expense level that we guided earlier in the year. For 2019. Cumulated data specifically for the third quarter of 2019. We expect a substantial increase in royalties in the second half of the year. Starting with more than 60% sequential increase for the third quarter. This concludes the initial contribution from Hillcrest Labs, and should account for 1 of the highest royalty revenue quarters in the company's history. Gross margin is expected to be approximately 88% on GAAP basis and 89% of non GAAP basis. Overall OpEx is expected to be in the range of $19,700,000 to $20,700,000, after adding in new Hillcrest business, excluding deal cost and new amortization, but including approximately $300,000 of deal related write offs. The anticipated total operating expenses for the third quarter, $2,900,000 is expected to be attributed to equity based compensation expenses, $200,000 of amortization that they acquired intangibles, not including Hillcrest, and Immersion, another $300,000 for deal related write offs. Our total non GAAP OpEx is expected to be in the range of $16,400,000 Net interest income is expected to be approximately $750,000 for the quarter, up for the quarter, approximately $300,000 of GAAP basis and $500,000 on non GAAP basis. And our share count for the 3rd quarter is expected to be approximately 22,900,000 ships. With that, we could open the Q And A session. Questions. And our first question today comes from Peter Zdebski with Barclays. Please go ahead. Hi, good morning. This is Peter on for Tavy Roger from Barclays. So you mentioned the inventory normalization in smartphone, was that specific to the U. S. Customers, or is that for based geographically. Evan, I have a follow-up. Hi, this is Gideon. We don't know we don't prefer to the overall industry. We just focus on what we know about our customers. Okay, thank you. And then in terms of inventory levels going into the fall, we understand shipments for your units for your large U. S. Premium smartphone customer have been a bit above seasonal in the second quarter. So going into the fall, do you see inventory levels just maybe back down to closer to historical or are they even maybe below historical? And maybe is, how's that factor into your royalty guidance for the third quarter? So you need to remember that there is seasonality that's playing in our favor in all the markets, whether it's consumer or handset, and this is not only CEVA, usually in the 3rd fourth quarter, stronger than the 1st 2 quarters of the year. I think that's what the first we are referring to on top of that. And that we saw by the way last year as well. In our business. It has changed from prior years. And on top of that, you need to fine tune as Gideon said to our specific customers and different markets and different regions and we have high end devices as well as low end devices. And we have baked into the best of our knowledge, all of that data. First, when we get the Q3 royalty reports and we'll report it in early November, then we'll have the real numbers and we'll have a better picture to provide. Got it. Yeah, no, I just, I was just trying to get a bit of picture of, of why of seasonality looks like it might be a bit stronger this year than last year, based on your Well, it's very similar. It's very similar. We have seen improvements with the Chinese or Chinese customer, we have talked about that in the prepared remarks. We've seen more design wins. You could look on the web and find this much more announcements of new chips rolling out of new phones. So that's encouraging. And with that said, we on top of that, of last year, we also have the initial contribution from Hillcrest. So together, these are maybe higher sequential increases than last year, but the concept is quite similar. Got it. Thank you very much. Thank you. And our next question comes from Suji Desilva with Roth Capital. Please go ahead. Getting how you need congratulations on the improving results here. So, third quarter 2019, you guided very strong royalties. Can you give us some sense of what are the drivers beyond Hillcrest, just to understand, which segments of the business are improving the most here? You mean for the second half of this year? Yes. 3rd quarter, second half, yes. So it's what we came out after analyzing the 2nd quarter royalty report is that the inventory was a stumbling issue in the first quarter and as a concern to us, is kind of normalize. And we are going to a regular, on the handset side, regular or typical, up season where we have new models and new designs. New design comings to the market. So overall, if you look on our guidance, it's composed of the seasonal uptrend, both in the mobile, in the non handset, keep in mind, in the non handset in general that we have new models coming. So there is a contribution, from that, for that to the strength. Then Hicris and the, and of course, the base stations, we mentioned ZTE, they are doing well. So all in all, these are the all, these are the cylinders that are firing in the second half. With that said, there is this, you know, global macro that is around us, which we keep close eye, and that's the reason that we are also carefully with the expenses. So overall, we baked whatever we can do, we can think in this, that can come out with this year. And we are generally optimistic. Okay. And then specifically on wireless infrastructure, can you talk about the shape of the ramp here? Is it steady or will there be an inflection quarter ahead Is, what's the run rate you'll expect in the next 6 to 12 months from the current levels? So that's a difficult answer, difficult question and an answer to the Here you're going in this space, you see all the global dispute there whether VTE, how far ZTE can go to outside of China, what about the other customers that we have, these are kind of things that we don't know where we are today. Our guidance is a few kind of growth. I think we see really the 5G coming out and people are starting to build the base station or upgrading the base station. So things are, it looks positive in terms of this one. It's not how to stick them for now. Okay. That's helpful. And then last question, one of your customers until their assets were acquired most recently. Any insight to the 5G plan or opportunity, how to model that for us? Any color you have would be helpful. Thank you. You'll see, we heard about this acquisition of the intel team like anybody else. It's they have to conclude all the implication of these bids. I don't know when they I think generally it's good for the for the industry that OEMs are taking the lead in doing their own chips. We I believe there will be other. We said that in the past, we believe that people OEM big OEMs wants to have a control on 5G modem, and they will do step. And you can see that CEVA has so much substance in this space that any newcomer or incumbents that wants to go to the put step into the modem business We'll find the technology CVR appealing to them in different flavors. So that's what we know now, but we know that we have what we can offer a lot of things to newcomers. Okay. Thank you, Gideon. And thanks guys. Congratulations again. And this will conclude our question and answer session. I'd like to turn the conference back over to Richard Kingston for any closing remarks. Thank you. Thank you everybody for joining us today and for your continued interest in and support of 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 the Investors section of our website at investors. Cevadsp.com. With regards to upcoming events we will be attending, These include the Jefferies 2019 Semiconductor Hardware And Communications Infrastructure Summit, August 27 to 28 in Chicago, the Citi 2019 Global Technology Conference September 4th through 6th in New York. And the Deutsche Bank Technology Conference, September 10th 11th in Las Vegas. Please visit the Investors section of our website for further information on these events The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time and have a wonderful day.