Good morning, and welcome to the CEVA Inc. First Quarter 2019 Earnings Conference Call. All participants will be in listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you will press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note, today's event is being recorded. I would now like to turn the conference over to Richard Kingston, Vice President, Market Intelligence, Investor and Public Relations. Please go ahead, sir.
Thank you, Rocco. Good morning, everyone, welcome to CEVA's First Quarter 2019 Earnings Conference Call. I'm joined today by Yaniv Arieli, Chief Financial Officer of CEVA, and Gideon Wertheizer, Chief Executive Officer of CEVA. Gideon will cover the business aspects and highlights from the first quarter and provide general qualitative data. Yaniv will cover the financial results for the first quarter and provide qualitative data for the second quarter and the rest of 2019. I'll start with the forward-looking statement. 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.
These forward-looking statements include our financial qualitative data for the second quarter and the remainder of 2019, including reaffirmation of CEVA's full year 2019 guidance, optimism about CEVA doubling its annual royalty revenue in 2022, optimism about CEVA's new NeuPro technology and the ability of this technology to leverage new market segments, anticipation that Intel's departure from the 5G smartphone modem market would not have any short-term impact, optimism about CEVA's ability to capitalize on 5G, and optimism about sustained growth in non-handset baseband product lines. For information on the factors that could cause a difference in our results, please refer to our filings with the SEC, Securities and Exchange Commission.
These include the ability of the CEVA signal processing 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 and offset the maturity of the handset market, the speed and extent of the expansion of the 5G network and wireless connectivity, AI, LTE, IoT, and the IoT space generally, our ability to execute more non-handset baseband license agreements, and customers' ramp-up schedules and the impact on royalty revenues. 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 also be useful to review results using certain non-GAAP financial measures. Investors and potential investors are encouraged to review the reconciliation 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 March 31st, 2019, and the related financial tables and management commentary, which were included in our current report on Form 8-K filed today, also can be found on the investor relations portion of our website. With that said, I will now turn the call over to Gideon.
Thank you, Richard. Welcome everyone, thank you for joining us today. Our first quarter results reflect strong licensing performance along with substantial headwinds in handset-related royalties. Total royalty for the first quarter was $17 million, down 3% on a year-over-year basis. License revenue was $11 million, up 9% year-over-year. Royalty revenue was $6 million, down 20% on a year-over-year basis. Our continued focus on bringing leading-edge products to our targeted markets and the determination of our team to promote and license this product broadly is clearly paying off. Our first quarter licensing performance further underscores the merit of our growth and diversification strategy beyond handsets as we work on reaching our strategic growth goals of doubling our royalty revenue by calendar year 2022.
We concluded eight license agreements during the quarter, of which three were for our smart sensing product and five were for our connectivity product. Four out of the eight deals were with first-time customers. To better reflect our growth vector and customer expansion in the smart and connected world, we have updated the classification of how we report the deal count composition each quarter. The smart sensing category includes our technologies and products for AI, computer vision, and sound. The connectivity category includes our wireless technologies and products for 4G and 5G, cellular IoT, Bluetooth, and Wi-Fi. Customer-targeted products are AI processor for autonomous cars, 5G for base station RAN, millimeter wave, small cells, V2X, wireless earbuds, smart speaker, and connectivity for IoT devices. I would like to take the next few minutes to recap on numbers of deals that we have concluded in the quarter due to their strategic importance.
The first is an AI agreement for autonomous cars with a major automotive OEM. It is a comprehensive agreement for our NeuPro AI processor technology that substantially extends the scope of an earlier evaluation agreement, which we signed in late 2017. This new design win for the first time associates CEVA product with a launched program at the OEM targeting the start of car production, or SOP, by 2024. We regard this formal engagement as a huge acknowledgement by one of the largest automotive OEMs in the world of the superiority and the maturity of our NeuPro technology for the very high entry barrier automotive market. The structure of the agreement will eventually lead to a downstream adoption and pool of our NeuPro AI technology by automotive tier 1s and semi-incumbents who will be selected to supply modules and system to the OEM.
Our NeuPro technology is the most comprehensive and solid software and hardware technology in the IP space for AI inferencing on low-power devices. It delivers the highest performance per single core, and the onboard DSP provides added value of future upgradability and reusability. Another good development in the quarter was in regard to 5G, where we signed three licensing agreements for our high-performance CEVA-XC architecture for multiple 5G market segments, spanning base station RAN, millimeter wave, small cell, and cellular V2X. 5G made substantial progress in 2018, shifting from long-term vision to realization of practical use cases that will drive 5G at its initial deployment. This is being reflected in customer engagement that we started to experience late last year and largely in the first quarter. 5G brings key benefits versus 4G, in particular 10x faster speed and sub-millisecond latency.
Operators and hyperscale IT companies will capitalize on these capabilities for services such as 4K video streaming, fixed wireless access to displace the more expensive fiber to the home, and V2X communication, which allows exchange of location information between cars with short latency, thereby adding further reliability for autonomous driving cars. 5G and AI are the two key components for the emerging edge compute industry, where servers already placed at the base station for routing of data traffic can be further scaled to offer cloud-based computing services for applications such as mobile gaming, augmentation reality, and mission-critical for autonomous cars. CEVA is well positioned with an incumbent customer base and technologies for 5G and AI that can serve this sizable market space. On royalties, the first quarter revenue was $6 million, a 20% year-over-year decline.
Our handset unit decline was more pronounced than we anticipated, down 27% year-over-year. This decline is primarily attributed to excess inventory levels. Our non-handset royalties, however, continue to show excellent progress. Total non-handset units were up 16% year-over-year to 86 million units, and royalty revenue for the non-handset segment were up 22% year-over-year, including a strong contribution from large base station customers. In regard to the recent announcement from Intel of its intention to exit the 5G smartphone modem business, obviously, we do not have much insight on the short-term impact of this event. Our assumption is that this will have no impact on this year's shipments, and as such, we maintain our yearly royalty guidance in anticipation of stronger second half in cellular.
Before wrapping up and handing the call over to Yaniv for financials, I would like to welcome Michael Boukaya, who was recently appointed as Chief Operating Officer of CEVA, reporting to me. Michael has been with CEVA for more than 20 years and served in multiple R&D and business management roles. In his recent position as the VP and GM of our wireless business unit, Michael was instrumental in forming strategic engagement with premier customers among which are ZTE, Nokia, Intel, and Unisoc. In his role as COO, Michael will oversee all the business operation and R&D of our cellular, AI, vision, Wi-Fi, and Bluetooth technology. I will devote more of my time to developing new growth engines for CEVA and forming strategic relationships with key customers.
In summary, the headwinds in the handset space due to high inventory levels from last year, had a notable impact on our royalty revenue for the quarter. However, we expect this decline to ease with the pickup in demand as we progress through the remainder of the year. Our licensing performance on the other end was robust and transformational with regard to our expansion in automotive space, which position us at the forefront of level 3 and above autonomous driving. We also continue to expand our licensee base to gain stronger foothold in 5G across existing and upcoming new use cases and product categories. We are relentlessly focused on successful execution of the things within our control and strive to expand our customer base and expedite their production ramps. With that said, I'll now turn the call over to Yaniv, who will outline our financials and guidance.
Thank you, Gideon. Good morning, everyone. I'll start by reviewing the results of our operations for the first quarter of 2019. Revenue for the first quarter was $17 million as compared to $17.6 million from the same quarter last year. Revenue breakdown is as follows: licensing and related revenue was approximately $11 million, reflecting 65% of our total revenue, 9% higher as compared to the first quarter of 2018. Royalty revenue was $6 million, reflecting 35% of our total revenue, down from $7.5 million for the same quarter last year. Gross margins were 88% on GAAP basis and 89% on non-GAAP basis, slightly better than we projected. Total operating expenses for the first quarter came at the mid-range of our guidance at $17.9 million. OpEx also included an aggregated base compensation expense of approximately $2.3 million and $0.2 million for the amortization of acquired intangibles of the DOA.
Our total operating expenses for the first quarter, excluding these two items, were $16.4 million, just below the midpoint of our guidance. U.S. GAAP net loss for the quarter increased by 5% and diluted loss per share was $0.10 on both first quarters of 2019 and 2018. Non-GAAP net income and diluted EPS for the first quarter of 2019 were $0.3 million and $0.01, respectively. Other related data. Shipped units by CEVA licensees during the first quarter of 2019 were 175 million, down 30% sequentially and down 11% from the first quarter of 2018 reported shipments. Of the 175 million units shipped, 89 million units or 51% were for handset baseband ships, reflecting a sequential decrease of 34% from 134 million units of baseband shipped in the fourth quarter of 2018 and 27% decrease from 122 million units shipped on a year-over-year basis.
In non-handset baseband, volume shipments were down 25% sequentially due to lower post-holiday consumer shipments, but continued to increase on a year-over-year basis by 16%. As for the balance sheet. As of the end of March 31st, 2019, CEVA's cash equivalent balances, marketable securities, and bank deposits were $171 million. We continued our buyback plan, repurchasing approximately 91,000 shares during the quarter for approximately $2.5 million. A year ago, our board of directors approved the expansion of the existing buyback plan, and as of the end of the quarter, we have a total of 264,000 shares available for repurchase. Our days sold for the first quarter were 59 days. During the first quarter, we generated $4.8 million net in cash from operation, depreciation of $0.7 million, and purchase of fixed assets were $0.6 million.
At the end of the quarter, our headcount was 353 people, of which 290 are engineers. Yearly guidance. While the first quarter handset contribution came in below our expectation, we expect demand to resume as the access inventory is consumed, therefore leading to gradual growth during the rest of the year. Also, as Gideon discussed, we will assume a high attach rate in this year's upcoming premium smartphone launch with a well-known OEM. Our non-handset product growth also continues to progress nicely. The licensing environment continues to be healthy, and we therefore maintain our annual guidance for the full year. To our notated data, specifically for the second quarter of this year. Gross margin is expected to be at similar level as the first quarter, approximately 87% on GAAP and 88% on non-GAAP, excluding aggregate expenses of $0.2 million associated with equity-based compensation and $0.1 million of amortization of intangibles.
Our overall OpEx is expected to be in the range of $17.6 million-$18.6 million. Of the anticipated total operating expenses for the second quarter, two and a half million is expected to be attributed to the equity-based compensation expense and $0-$0.2 million for the amortization of acquired intangibles. Our non-GAAP OpEx is expected to be in a similar level as the first quarter. Overall, second quarter non-GAAP OpEx is expected to be in the range of $14.9 million-$15.9 million. Net interest income is expected to be approximately $0.9 million. Taxes for the second quarter, $0.2 million on GAAP basis and $0.3 million on non-GAAP basis. Our share count for the second quarter is expected to be at a similar level of 22.8 million shares. Operator, you could now open the Q&A session, please.
Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, we ask that you please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. Today's first question comes from Matthew Ramsay of Cowen. Please go ahead.
Thank you very much. Good morning. Good afternoon, guys. I guess, we'll just go ahead and ask it and get the elephant in the room out of the way. Gideon, you guys had talked about maintaining the 2022 outlook to double the royalties of the company in light of Intel's bowing out of the 5G smartphone space. Maybe you could give a little bit of context as to how you're thinking about that. If you look about backwards, maybe over the last trailing 12 months, if there's any kind of ballpark as to percentage of revenue that Intel's business with Apple gave you, just so we can ballpark that would be really helpful. Thank you.
Hi, Matt. When it comes to 2022, in the context of the exit of Intel, there are still a lot of moving parts. This market swings between ups and downs very fast. Specifically about the cellular, it's yet to be seen how It's at 2.7 billion units overall. How the share between the three merchant chips, Qualcomm, Spreadtrum, and MediaTek, how they will divide the wealth there, what the ASP looks like, what will be the attach rate of 5G back then. These are things that it's too early for us to comment.
Also, keep in mind that by 2022, CEVA will be, because of our play in the non-handset, in particular the 5G and the base stations and the small cell, will be much more resilient to all those ups and downs in the mobile, and it will be more an ASP play than a volume play like we have today. That's in regard to 2022. We don't see right now a major change that will make us to change our estimation. There are still a lot of things that we can be independent of this event. Now, that's one thing. The other thing, before that, for 2019, we don't change our guidance. We believe, as we said, if we tell you now that we have this high attach rate at this large customer.
For 2020, again, it's too early, and in the mobile space, specifically, the swings are very fast. You can win design today, which we don't know what customer you can get design win, and next year will be with tens of millions in units shipping. It's too early for us to say. The only thing that I can tell you about the mobile in general, the winner does not take all.
The additional color there. As an unrelated follow-up, congratulations to the team on the automotive progress. With the large automaker, Gideon, any additional color you could give about what type of applications, what type of potential royalties per car, any kind of context around I know it's a few years out before revenue is going to really start to ramp there, but any kind of context, just so we can understand where that business potentially is going with that customer and others would be helpful. Thank you.
As we said, for us, it's a transformative and a dramatic agreement because it put us for the first time in a production plan. That's one thing. The other thing is that we eventually will see, because this is OEM, and OEM does not develop the chip. We're going to see downstream adoption. The other incumbents in the automotive will eventually come to us to license the technology. From them, we'll get the royalties on the shipment. I don't want to get to the numbers, but as I said, going forward, 2021, 2022, CEVA is going to look more as an ASP play than a volume play. It's a long-term engagement. It's a sticky engagement, and we are moving fast out this direction.
Thank you. I'll get back in the queue. Appreciate it.
Thank you.
Our next question today comes from Mike Walkley of Canaccord Genuity. Please go ahead.
Great. Thank you. Just following up on Matt's questions, just on the handset market, can you talk about your Chinese customer and inventory levels and just overall confidence that you're seeing the inventory clear and market uptick throughout the year? Thank you.
When it comes to the Chinese customer, the way I see it is this Chinese customer suffered, as well as others in the inventory, and that was built up in end of last year and now had to replenish because usually those guys, our customer focus on the OEM side. Not this Vivo and OPPO that is more high-end. The ODM side are more sensitive to volume buildup because they are much faster in the cycles. Eventually, they have to take a more aggressive stand in replenishing their inventory. Going forward, for the next year, our assumption that we're going to build, resume shipments and growth, unless there are earthquake there. It's not a non-typical behavior. If you look backward in the year, it was more aggressive swing.
Okay.
Again, with that, if you look at last year's handset, we had a similar, not just CEVA, but the whole handset market had a weaker first half, and then the second half, we saw Q3 going sequentially more than 50% from very similar reasons, but a different year. We are seeing, or at least thinking this is the model that we'll see for 2019 as well. Now projecting the growth from the second to the third quarter should be as big percentage-wise as last year.
Great. Thanks. My follow-up question, just on the wireless infrastructure market, can you update us on trends you're seeing in that market with some of your new OEMs coming in the model on the royalty side? Given the success for 5G base station licensing, do you believe you can maybe add another top five OEM to your business? Thank you.
First of all, when it come to the 5G in general, we see good dynamics there in terms of building up the infrastructure. As I said in the prepared, it's not anymore a vision and want to be like things, but more a pragmatic approaches of installing those base stations. By the way, another use case that we see a lot of interest is V2X, which hook us also from another angle into the autonomous driving car market. In terms of our existing customer, I cannot be specific about how they do, but the only thing that I can say that they are very determined and doing the right things in going into and gaining share in the 5G.
In terms of adoption of other player OEMs in the market, listen, when you want to do something in the right thing in building your chip. For base station macro, it's widely known in the industry that CEVA is the only viable option. Of course, we speak with everybody, but without going into the detailed process, the only thing that I can say that we are now in the fourth generation of base station ahead of anybody else today in terms of DSP technology.
Thank you. I'll jump back in the queue.
Thank you.
Ladies and gentlemen, as a reminder, if you would like to ask a question, please press star then one at this time. Today's next question comes from Suji Desilva of Roth Capital. Please go ahead.
Hi, Gideon. Hi, Yaniv. Just a housekeeping question first. How many Bluetooth units were there in the quarter?
We had one Bluetooth deal, I believe.
Oh, no, the royalty units rather, Yaniv.
Sorry. The units from Bluetooth. I don't recall that on top of my head. I'll get to it in a second.
That's fine. I'll go to my next question. On the licensing side, the number of deals was pretty consistent, but the number of deals was lower, so I imputed a higher per license revenue this quarter. Was there one particularly large deal, or are the deal sizes growing? I know this connectivity was pretty similar, so curious on the trend there, if that is one of the trends you're seeing.
The deals count doesn't necessarily mean that much. We count and look on a quarterly basis. We had few very nice sizable deals in $ millions, and if you recall, we also had some backlog from a big 5G deal that we had in Q4, and we are recognizing over time. It was a combination of more larger deals this quarter than smaller deals. I think that the present of our offerings in some of the markets we talked about, whether it's base station or automotive, are the more lucrative licensing deals that we have. A bit less on the consumer side maybe. Bluetooth was 67 million units, by the way.
Thank you.
A solid number. Yeah, I think that's what I have to add on the licensing front, the deal front.
Okay.
One thing, Suji.
Yeah.
One thing keep in mind about the units, because, and maybe in the future we'll consider it differently, but because we have a mixture of very high ASP, like base station and unit play like Bluetooth, just by looking on the units and try to infer for it to the royalty revenue, it's a bit tricky. We have a different mix of ASPs though.
Yes, that makes sense.
That's the reason that the royalty revenue for non-handset go up 22% and the unit just 16%. It's because of the ASP.
That helps. Then one last question, if you don't mind. Appointing Michael as COO, congratulations to Michael on that. Gideon, it frees you up to, you said, quote-unquote, "Pursue new growth engines." You already have put a lot of products out in the last two, three years. I'm wondering, are there other areas you can possibly target, or is this more digging deeper into the products you've already put in the marketplace?
It's all of the above, meaning we have different growth opportunities, that we can explore. One is in terms of content. What we doing in sound, where we're going up in the value chain and offering software, that's one example. We can do a lot of things on the AI side, and we do too. The other approach is, of course, M&A, and these are things that I'm going to look actively, and there are few possibilities and approaches that can give us additional vectors. Last M&A we did back in 2014, it turned out to be successful. I hope we don't fuck up this time.
Great. Thank you, guys.
Thank you, Suji.
Our next question comes from Peter Zdebski of Barclays. Please go ahead.
Hi, this is Peter on for Tavy. Back on ASPs on the handset side, could you give us any color on how those held up, versus last quarter, given the inventory concerns?
No, there's no changes there. When you talk about the prices on inventory or cleaning up inventory, that's more on the semiconductor side or front. We don't necessarily see that when we get the royalty reports, whether because it's fixed cents or it's predefined deals that don't change on a quarterly basis based on volume or a specific issue with a specific customer. No change whatsoever in the ASP. It's just the volume that was much lower this quarter from all the different reasons, the known reasons that we saw many companies in this space take a hit in Q1 because of the inventory and the saturation in the market. We believe, as we said, that that will clear out during the year with no ASP issues, but more of the volume that was missing from our model.
Okay. Thank you.
Great. Thank you.
Ladies and gentlemen, this concludes your question-and-answer session. I'd like to turn the conference back over to the management team for any final remarks.
Okay. Thank you all for joining us today and your continued interest 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 through the investor section of our website at investors.ceva-dsp.com. With regards to upcoming events we will be attending, these include CEVA's Annual Meeting of Stockholders on May 20th in New York, the Cowen 47th Annual Technology, Media and Telecom Conference, May 29 and 30th in New York, Jefferies Annual Israel Tech Trek June 4th in Herzliya, Israel, the Stifel 2019 Cross Sector Insight Conference June 11th in Boston, and the Roth London Conference on June 19th in London, England. Please visit the investor section of our website for further information on these events and other events we will be attending. Thank you and goodbye.
Thank you, sir. Today's conference has now concluded. We thank you all for attending today's presentation. You may now disconnect your lines. Have a wonderful day.