Earnings Call: Q1 2019

May 6, 2019

Good morning, and welcome to the CEVA Inc. 1st Quarter 2019 Earnings Conference Call. All participants will be 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, and welcome to CEVA's first quarter 2019 earnings conference call. I'm joined today by Yaniv Ariali, Chief Financial Officer, Siva and Gideon Wertheizer, Chief Executive Officer, Siva. Gideon will cover the business aspects and highlights from the first quarter and provide general qualitative data. And he will then 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 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. 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 neopro 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 5 g 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, Security 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 operating 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. Eva assumes no obligation to update any forward looking statements or information which speak as of their respective dates. 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. Steve'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 31, 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, and 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 $17,000,000, down 3% on a year over year basis. License revenue was $11,000,000, up 9% year over year. Royalty revenue was $6,000,000, down 20% on a year over year basis. Our continued focus on building leading edge products to our targeted market 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 handset. As we work on reaching our strategic gross goals of doubling our royalty revenue by calendar year 2022. We concluded 8 license agreements during the quarter, of which 3 were for smart sensing product, and 5 well for our connectivity products. 4 out of the 8 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 small sensing category include our technologies and products for AI, computer vision and sound. The connectivity category includes our wireless technologies and product for 4g5g cellular IoT, Bluetooth and Wi Fi. Customer targeted products, our AI processor for autonomous cars, 5G for base station LAN, 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 car with a major automotive OEM. It is a comprehensive agreement for our new AI processor technology that substantially extends the scope of an earlier evaluation agreement, which we signed in late 2017. This new design wins for the first time associate CEVA product with a launch program at the OEM targeting the start of car production or SOAP by 2024. We regard this formal engagement as a huge acknowledgement by 1 of the largest automotive OEMs in the world of the superiority and the maturity of our Newport 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 neutral AI technology by Automotive Tier 1s and semi incumbents who will be selected to supply models and system to the OEM. Our Newport 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 BSP provides added value of future upgradability and reusability. Another good development in the quarter was in regard to 5G, where we signed 3 licensing agreements for our high performance CEVA XC architecture for multiple 5G market segment, segment spanning base station runmillimeterwave small cells 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 5G in particular 10x faster speed and submillimeter millisecond latency. Operators and hyperscale IT companies will capitalize on these capabilities for services such as 4K video streaming, fixed wireless access to display the more to displace the more expensive fiber to the home and V2X communication, which allows exchange of location information between car with short latency thereby adding further reliability for autonomous driving cars. Furthermore, 5G and AI are the 2 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 a cloud based computing services for applications such as mobile gaming, augmentation reality, and mission critical for autonomous car. CEVA is well positioned with an incumbent customer base and technologies for 5G and I that can serve this sizable market space. On royalties, the first quarter revenue was $6,000,000 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 access inventory levels. Our non handset royalties, however, continued to show excellent progress. Total non handset units were up 16% year over year to 86,000,000 units and royalty revenue for non handset segment were up 22% year over year including a strong contribution from large base station customer. 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 February. Before wrapping up and handing the call over to Yaniv for financials, I would like to welcome Michael Buchaya, 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 the multi R and D and business management role. In his recent position as the VP and GM of our wireless business unit Michael was instrumental in forming strategic engagement with premier customer 1, which are ZTE, Nokia, Intel, and Unisoc. In his role as COO, Michael will oversee all the business operation and R and 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 relationship with key customers. Turn summary, the headwinds in the handset space due to high inventory level 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 reminder of the year. Our licensing performance on the other hand was robust and transformational with regard to our expansion in automotive space, which position us at the 4 fronts of Level 3 and above autonomous driving. We also continue to expand our licensing base to gain stronger foothold in 5G across existing and upcoming new use cases and product categories. We are 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 P and A 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 $17,000,000, as compared to $17,600,000 from the same quarter last year. Revenue breakdown in as follows. Licensing and related revenue was approximately $11,000,000, reflecting 65 percent of our total revenue, 9% higher as compared to the 1st quarter of 2018. Royalty revenue was $6,000,000, reflecting 35% of our total revenue down from $7,500,000 for the same quarter last year. Gross margins 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 $17,900,000. OpEx also included an aggregated based compensation expense of approximately $2,300,000 $200,000 for the amortization of acquired intangibles every POA. Our total operating expenses for the first quarter, excluding these two items, or $16,400,000, just below the midpoint of our guidance. U. S. GAAP net loss for the linked quarter increased by 5% and diluted loss per share was $0.10 on both first quarters of 2019 2018. Non GAAP net income and diluted EPS for the first quarter of 19 were $300,000 $0.01 respectively. Other related data. Shift units, my SEMA licensees during the first quarter of 2019 were 170 $5,000,000, down 30% sequentially and down 11% from the first quarter of 2018 reported shipments. Of the 175,000,000 units shipped, 89,000,000 units or 51% drove for handset base ship baseband chip. Reflecting a sequential decrease of 34 percent from 134,000,000 units of baseband shipped shipped in the fourth quarter of 2017, and 27% decrease from 122,000,000 units shift 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%. It's through the balance sheet. At the end of March, 31, 2019 CEVA's cash, cash equivalent balances, marketable securities and bank deposits were $171,000,000. We continued our buyback plan repurchasing approximately 91,000 shares during the quarter for approximately $2,500,000. A year ago, our Board of Directors approved a expansion of the existing buyback plan. And as of the end of the quarter, we have a total of 264,000 shares available for repurchases. Our DSOs for the first quarter were 59 days, during the first quarter, generated $4,800,000 net from cash from operation, Depreciation was $700,000 and purchase of fixed assets were $600,000. 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, The expense 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 than the first as the first quarter, approximately 87% on GAAP and 88% on non GAAP, excluding aggregate expenses of $200,000 associated with equity based compensation and $100,000 of amortization of intangibles. Our overall OpEx is expected to be in the range of 17,600,000 Of the anticipated total operating expenses for the second quarter, $2,500,000 is expected to be attributed to to the equity based compensation expense and $2,200,000 for the amortization of acquired intangibles. Our non GAAP OpEx is expected to be the similar level of the first quarter. Overall, 2nd quarter non GAAP OpEx is expected to be in the range of $14,900,000 to $15,900,000. Net interest income is expected to be approximately quarter $200,000 on GAAP basis and $300,000 on non GAAP basis. Our share count for the second quarter is expected to be at a similar level of 22,800,000 shares. Operator, you could now open the Q and Today's first question comes from Matt Ramsay of Cowen. Please go ahead. Thank you very much. Good morning. Good afternoon guys. I guess just go ahead and ask it and get the elephant in the room out of the way. Two outlook to double the royalties of the company in light of Intel's fowing out of the 5G smartphone space. Maybe you could give bit of context as to how you're thinking about that. And if you look about backwards, maybe over the last trailing 12 months, if there's any kind of ball park as a percentage of revenue that Intel's business, with Apple gave you, just so we can ballpark that. That would be really helpful. Thank you. I'm at, when it comes to the 2022, at the context of the exit of intel, you know, there's still a lot of, moving parts. This market swings between ups and downs very fast. So it's specifically about the cellular. It's yet to be seen how, you know, it's a 2,700,000,000 units overall. So how the share between the 3 merchant chiefs Qualcomm Spreaddom And, MediaTech, how they will, divide the wells there, what the ASP looks like, what will be the touch rate of 5G back then? So these are things that it's too early for us to comment. Also keep in mind that by 2022, SEMA will be because of our play in the non handset, in particular, the 5G and the base stations and the small will be much less revealing, much more resilient, all those ups and downs in the mobile And we'll have it will be more an ASP play than a volume play like we, you know, has to be. So that's in regard to 2022. So we don't see right now a major change that we, we, you know, make us to change our estimation. Still a lot of things that we, we can be independent of this event. Now that's one thing. The other thing before that. So for 2019, we are we don't change our guidance. We believe, as we said in the prepared remarks, that we have this high attach rate this allowed customer. So 2020, again, it's too early. And in the mobile space, specifically, the swings are very fast. So you can win design today, which we don't know what customer you can get designed with. And next year will be with tens of 1,000,000 in units shipping. So we, it's too early for us to say. And the only thing that can tell you about the mobile in general, the winner does not take all. Thank you, Gideon. I appreciate additional color there. As an unrelated follow-up, congratulations to the team on the automotive progress with the large automaker, given any additional color you could give about what type of applications, what type of royalties per car? Any kind of context around I mean, 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 took us for the first time in a production plan. And that's one thing. The other thing is that we Eventually, we'll see because beef is OEM and OEM does not develop the chip. We're going to see down in downstream adoption. So the other incumbents in the automotive will eventually come to us to license the technology. And from then, we'll get the royalties on the shipment. And I don't want to get to the numbers, but as I said, going forward 2021, 2021, 2022, CEVA is going to look more as an ASR deeply than, you know, volume play. And that's make us, it's a long term engagement. It's sticky engagement, and we are moving fast out this direction. Thank you. I'll get back in the queue. Appreciate it. Thanks, Phil. And 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 market uptick throughout the year? So when it comes to the Chinese customer, the way I see it is this Chinese customer suffer as well as other in the inventory and that was built up in, end of last year. I now have to replenish, discuss, you know, usually those guys our customer focus on the OEM or the end side. So not this diva and Oppo that is more high, mid, high end, the ODM side are more sensitive to, volume buildup because they are, much faster in the cycle. So eventually, they have to take a more aggressive stance and replenishing the inventory. Going forward, for the next feel our assumption that we're going to, build, resume shipments and goals. Unless there are earthquake there, but it's not a non typical behavior if you look backward in the year, it was more aggressive in swing. Okay. With that, if you look at last year's the handset, we had a similar not just CEVA, but the whole handset market had a weaker first half. And then in the second half, we saw Q3 going sequentially more than 50%. From very similar reasons, but a different year, we are seeing at least thinking this is the model that we'll see for 2019 as well. So now projecting the growth, from the second to third quarter, of course, to be big, percentage wide of last year. Great, thanks. My follow-up question just on the wireless infrastructure market. Can you update us on your trends you're seeing in that market with some of your new OEMs coming in the model on the royalty side? And given the 6 for 5G base station licensing. Do you believe you can maybe add another top 5 OEMs to your business? Thank you. So there are, 1st of all, when it come, to the fact in general, we see, good dynamics there in terms of building up the the infrastructure. It's not anymore, as I said, in the prepared remarks, not anymore, a vision, and when it be like things, but more a pragmatic departure of installing those base stations. And, small cell, 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. So 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, in, in the, in going into, in gaining share in the 5G. To do. In terms of adoption of other player OEMs in the market, Listen, the when you want to do something in the writing, in building your chip, for base station, macro, It's widely known in the industry that CEVA is the only viable option. So without, of we speak with everybody, but resulting, going into the detailed process, the only thing that I can say that, we are now at the 4th generation of base station ahead of anybody else today in terms of DSP Technology. Thank you. Today's next question comes from Suji Desilva of ROTH Capital. Please go ahead. Hi, Gideon. Hi, Andy. Just a housekeeping question first. How many Bluetooth units were there in the quarter? We had one Bluetooth deal, I believe. Ah, sorry. The unit from Bluetooth. I'm going to call that on top of my head. I'll get to it in a second. That's fine. Okay. I'll go to my next question then. Maybe On the licensing side, the number of deals was pretty the revenue rather was pretty consistent, but the number of deals was lower. So I imputed 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? Yes, the do tell it doesn't necessarily mean that much. We help them look on a quarterly basis. We had few very nice sizable deals and 1,000,000 of dollars. And if you recall, we also have some backlog from a big 5G deal that we had in Q4 and we are recognizing over time. So it was a combination of more larger deals this quarter than in smaller deals. I think that the present offerings in some of the markets we talked about whether it's base station or automotive or the more lucrative licensing deals that we have, a bit less on the consumer side maybe. Dupus was 67,000,000 units, by the way. Thank you. Yes, a solid number. And Yes, I think that's what I have to add on the licensing front, the deal front. One thing to keep in mind is 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 the unit play like Bluetooth. So just by looking on the units, it's, and then try to infer for it to the royalty revenue, it's a bit tricky. So the, we have a different mix of ASPs though. Yes. Exactly. And that's the reason that the in the royalty revenue for non handset grew up 22% and the unit is just 16%. So that's because of the ASP. That helps. And then one last question, if you don't mind. I'm appointing Michael as COO. Congratulations for Michael on that. Gideon, it frees you up to, you said pursue new growth engines. You already have put a lot of products out in the last 2, 3 years. So I'm wondering, are there other areas you can possibly target? Or is this more digging deeper into the air products you've already put in the marketplace? It's all of the same. It's all of the above meaning we we have different, goals, opportunities, that we, we can explore. 1 is in terms of content, So what we, what we're 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, on the AI side, and we do So the other approach is of course M And A, and these are things that I'm going to look actively and how few, possibilities and, approaches that, can give us additional us. We did last M and A. We did in back in 2014. It was to turn out to be successful. I hope we don't fuck up this time. All right. Great. Thank you, guys. Thank you, Susie. And our next question comes from Peter Zadebski 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? Or? No, there's no, there's no changes when you talk about 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 it's because of $0.06 or it's pre defined deals that don't change on a quarterly basis based on volume or a specification with a specific customer. So no, no change whatsoever in ASP. It's just the volume that was much lower this quarter from all the different reasons, known reasons that we saw many companies in the space take hit in Q1 because of inventory in the situation in the market. And we believe that we said that that will clear out during the year with no ASP as but more of the volume that was missing from our model. Ladies and gentlemen, this concludes our 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 Investors section of our website at investors. Xiva.com. With regards to upcoming events, we'll be 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 30th in New York. Jeffrey's annual Israel Tech Trek, June 4th in Herzliya, Israel, The Stifel 2019 Cross Sector Insight Conference, June 11th in Boston, and the Roth London on June 19th in London, England. Please visit the Investors 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 and we thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.