Good morning. Welcome to the CEVA, Inc. second quarter 2018 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 may press star, then one on your touch-tone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Richard Kingston, VP of Market Intelligence, Investor, and Public Relations.
Thanks, Brandon. Good morning, everyone. Welcome to CEVA's second quarter 2018 earnings conference call. I am 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 and provide general qualitative data. Yaniv will cover the financial results for the second quarter and will also provide qualitative data for 2018. 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.
Forward-looking statements include our revised financial guidance for full year 2018 revenues, third quarter and annual royalty revenues, optimism about a healthy licensing environment and demand for CEVA's products, optimism about the distinguishing features of CEVA's AI Edge technology, positive forecasts from Tractica forecasts and Bluetooth SIG forecast, and optimism about CEVA's technologies being adopted by ZTE at a later time. 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 signal processing IPs for smarter connected devices to continue to be strong growth drivers for us, the traction with Edge technology for AI, 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 LTE and 5G networks, AI, LTE IoT, and IoT space generally, our ability to execute more broad portfolio 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 date. In addition to the financial results prepared in accordance with the 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 ending June 30th, 2018, and the related financial tables and management commentary, which were included in our current report on Form 8-K filed today, can also be found on the investor relations portion of our website. Before handing the call over to Gideon, I would like to remind you that CEVA adopted the new revenue accounting standard known as ASC 606 as of January 1st, 2018.
As our Q2 2018 financial results are not directly comparable to our Q2 2017 financial results, which were reported under the old revenue accounting standard known as ASC 605, we will also provide you on today's call our Q2 2018 financial results as reported under ASC 605 to allow for an apples-to-apples comparison on a year-over-year basis. We will have this dual reporting approach throughout 2018 as required by the Financial Accounting Standards Board. With all of that said, I will now hand the call over to Gideon.
Thank you, Richard, and welcome everyone. Our second quarter revenue came in at $17.5 million. Licensing and related revenue was $10 million, similar to last year and a quarter ago, reflecting a healthy environment for our AI, computer vision, and Bluetooth technologies. Royalty revenue under ASC 606 came in at $7.5 million, similar to last quarter, but below our expectation attributable to continued unexpected weakness of one of our large Chinese handset-based end customer, which I will elaborate on later in the call. We did, however, experience seasonal unit growth in both handset and consumer products, with non-handset baseband shipment reaching new record level of 88 million units in the quarter. During the second quarter, we concluded nine deals, of which three were for our DSP cores and platforms, one for our NeuPro AI platform, and five for our connectivity IPs.
Three of the agreement were with first time customer and the rest were with existing customer that are expanding their existing businesses or upgrading to a newer product. Customers target application include advanced camera, drones, smart speaker, smartphone, wireless earphones, and IoT verticals. We continue to experience good interest in our AI and Bluetooth product with five of our deals in the second quarter being for those two product categories. Let me take the next few minutes to highlight the success factors that distinguish CEVA in the crowded landscape of AI processor and in the cost-driven Bluetooth market. On AI, while most of the AI application are currently cloud-based, there is widespread acknowledgment that AI workload are distinct to move to the devices themselves or what is referred to as the edge.
AI at the edge ensures faster response time and greater privacy by keeping the intelligence processing on the device rather than in the public cloud. Market research firm Tractica forecast that the market for deep learning chipsets will increase from $1.6 billion in 2017 to $66 million by 2025. Edge devices are expected to represent more than three quarters of the total market opportunity, with the remainder being the cloud. Smartphones, automotive, surveillance camera, and robots are prominent edge categories. Apparently, the growth opportunity and the market size the AI space presents attracts companies both from the semiconductor and the semiconductor IP industries to offer variety of AI solution to support the burgeoning need for performance. Against this crowded backdrop, CEVA proposition distinguishes itself in three main areas. First is performance.
CEVA NeuPro 4000 processor offer the highest AI operations capacity per core among all IP and semiconductor vendors in our targeted market, according to a recent study by The Linley Group Microprocessor Report. Second, NeuPro is a unified platform that can combine processing of AI, computer vision, and general DSP algorithm. It allows our customer to reuse the same platform for a variety of use cases and to complement AI with front-end and back-end computer vision and image enhancement applications. Third, and a key success factor, is our deep neural network compiler technology known as CDNN. CDNN is an incredibly complex software technology that automatically optimizes many different types of neural network to process efficiently in power and size constraint edge devices that are enabled by our NeuPro hardware. An equivalent technology called TensorRT offered by Nvidia, yet its primary use is in the cloud.
CEVA is the only company that offers similar features and robustness targeted for edge devices. We have already signed up three leading customers for NeuPro, who provide us with valued feedback on this unique offering. We are experiencing interest from a pipeline of reputable companies, which we will further engage in as the technology become available for general licensing by the end of this month. On Bluetooth, according to the recent Bluetooth SIG report, in 2018, nearly 4 billion devices will ship with Bluetooth technology. It is expected to grow to over 5 billion units in 2022. The growth will be driven by the latest standard Bluetooth 5 and a recent major addition to the standard, the mesh topology.
CEVA is the incumbent Bluetooth IP supplier for dozens of customers and clear leader in the Bluetooth dual mode that combine the benefit of Bluetooth Low Energy with audio capabilities. According to SIG forecast, 65% of all Bluetooth shipments by 2022 will be dual mode due to the proliferation of smart speaker, Bluetooth audio speaker, earphones, hearing aids, and voice-enabled TV remote control. Our newest voice software technology, ClearVox, offers value add and higher royalty level opportunity in conjunction of the Bluetooth and DSP cores We continue to grow our shipments in the Bluetooth space with an all-time high 71 million units shipped in the second quarter, up 57% versus Q2 actual shipments last year. Let me now provide you with update on our base station RAN customers. Nokia continues to grow the footprint of its AirScale baseband and radio technology enabled by CEVA IPs.
Last week, Nokia announced that it has signed a $3.5 billion deal with T-Mobile to supply equipment for its 5G network, the world largest 5G deals announced today. Nokia has also won design for 5G at Verizon, AT&T, and NTT Docomo of Japan, and recently signed an important agreement with China Mobile. In its recent earnings call, the CEO of Nokia reiterated his confidence for upcoming 5G ramp-up in the third quarter, with acceleration in the fourth quarter, but was also prudent about large-scale deployment that is difficult to predict due to the timing of deployment completions. On ZTE, we are encouraged by the recent lifting of the ban on the sales of U.S.-manufactured component to ZTE and the resumptions of their base station operation, which contributes royalties to us. ZTE is a strong contender in the pre-5G and 5G network infrastructure and is determined to resume this position.
With that said, we assume it will take a few months for ZTE to rebuild the supply chain and to get back to full productions and shipments. Also, licensing discussion for our more advanced platform, which were put on hold during the ban, will resume shortly, but the timing of licensing closure has been affected by the ban. As for the handset baseband, in the second quarter, we started to see preparation for a sizable ramp-up by one of our customers, who will supply baseband processor to a premier smartphone OEM for a flagship launch. In this upcoming product cycle, we are set to benefit from higher ASP due to an increased content. On the other hand, the weakness we experienced in the first quarter in the low tier of the smartphone space with large Chinese-based customer of ours continued unexpectedly into the second quarter.
We believe this can be attributed to a share shift at one of large OEMs, in which the volume this year will now be split between another customer of ours and a supplier that does not use our technology. We now expect this weakness to continue the rest of the year. Net-net, on an annual basis, the expected growth in volume and content associated with the premier smartphone will partially offset the weakness of our Chinese-based customer. Yaniv will later discuss the financials implication on our 2018 guidance, which reflect both ZTE and the handset development. In summary, we continue to progress with our licensing business, driven by healthy demand for our AI, computer vision, and connectivity product. We continue to strengthen and broaden our technology base and are confident about our strategy and our ability to add more content and value to our customers.
On royalties, we are capitalizing on new royalty growth engines, notably in premium smartphone and the continued expansion in non-handset segment that will drive substantial sequential royalty revenue growth in the second half of the year and beyond. With that said, let me turn the call over to Yaniv to discuss our financials and guidance.
Thank you, Gideon. I'll review the operations for the second quarter of 2018. Revenue for the second quarter based on ASC 606 was $17.5 million. The revenue breakdown is as follows: licensing and related revenue was $10 million, reflecting 57% of our total revenue, only 3% lower as compared to the second quarter of 2017. Royalty revenue was $7.5 million, reflecting 43% of our total revenue, a decrease of 26% year-over-year basis compared to $10 million for the second quarter actual shipments that were reported in the third quarter of 2017, following the new rules under ASC 606. Quarterly gross margin was 89% in U.S. GAAP basis and 91% on non-GAAP basis. Non-GAAP quarterly gross margin excluded approximately $167,000 for equity-based compensation expenses and $183,000 for the impact of amortization of the acquired intangibles of our investment in a Narrowband IoT technologies last quarter.
Total operating expenses for the quarter were just below the mid-range of our guidance at $18.2 million. OpEx included an aggregated equity-based compensation expense of approximately $2.7 million and $0.1 million for the amortization of acquired intangibles of RivieraWaves. Our total operating expenses for the second quarter, excluding these two items, were $15.4 million, slightly above the mid-range of our guidance. U.S. GAAP loss and diluted loss per share were $2.1 million and $0.09 respectively. Our non-GAAP net income and diluted EPS for the second quarter of 2018 were $0.9 million and $0.04 respectively. These figures exclude equity-based compensation expenses in the amount of $2.8 million and the impact of amortization in the amount of $2.3 million. Our second quarter 2018 financial results under the old ASC 605 rules compared to the second quarter of 2017 were as follows.
Total revenue was $16.6 million, U.S. GAAP lost $3 million and $0.13 loss per share, and the non-GAAP net income and EPS for the second quarter were zero and cents and dollars respective. Other related data. Shipped units by CEVA's licensee during the second quarter of 2018 were approximately 222 million, up 13% sequentially and down 11% for Q2 actual shipments reported in the third quarter of 2017. Of the approximately 222 million units shipped, 134 million or 60% were for handset baseband chips, reflecting a 10% sequential increase and a 29% decline on a year-over-year basis. In non-baseband handset baseband volume, shipments reached a record high of 88 million units, up 19% sequential and 44% on a year-over-year basis. Bluetooth shipments continue to be strong.
As for our balance sheets, as of June 30th, 2018, CEVA's cash equivalent balances, marketable securities, and bank deposits were approximately $173 million. During the second quarter, we paid ASTRI two more payment milestones of just less than a million dollars for the new Narrowband IoT technologies, as we discussed on our prior earnings call. We continue to be active in our buyback program, repurchasing approximately 270,000 shares during the second quarter and an average price of $33 per share for approximately $9 million. During the second quarter, our board of directors approved the expansion of the existing buyback plan, and at the end of last quarter, we have a total of 700,000 shares available for repurchase. Looking back, in the last 10 years of our buyback activities, we repurchased 6 million shares for almost $100 million.
Our adjusted ASC 606 DSOs for the second quarter of this year were 48 days, down from the prior quarter of 62 days. During the second quarter, we generated $2 million from net cash from operations. Our depreciation was $0.6 million, and repurchase of fixed assets was $1.8 million, higher than the norm due to additional new EDA tools for our R&D design teams. At the end of June, our headcount was 325 people, of which 261 are engineers. For the guidance for the rest of the year. On royalties, we are lowering our 2018 annual royalty guidance to a 10% decrease from the 2017 level. With that said, we expect a substantial increase in royalties in the second half of the year, with more than 50% sequential increase for the third quarter. Moreover, royalties are expected to turn to year-over-year growth in the second half of 2018.
On licensing and related revenue, we continue to experience healthy demand for our products, but it slightly reduced our expectation for the year due to the ZTE deal push-out, which Gideon elaborated on. Our revised revenue for the year is expected to be in the region of $80 million, split fairly evenly between licensing and royalties, plus or minus a few percentage points either way. Specifically for the third quarter of 2018, gross margin is expected to be approximately 91% on GAAP and 92% on non-GAAP basis. Our overall OpEx is expected to be slightly lower than the second quarter OpEx, in the range of $17.5 million-$18.5 million. Of the anticipated overall OpEx for the third quarter, $2.4 million is expected to be attributed to equity-based compensation expenses and $0.2 million for the amortization of acquired intangibles.
Non-GAAP OpEx is also expected to be similar to the second quarter level in the range of $14.8 million-$15.8 million. Net interest income is expected to be approximately $800,000. Tax rate for the third quarter, 17% on GAAP and 11% on non-GAAP basis. Last, our share count for the third quarter is expected to be approximately 23 million shares. Brandon, you could now open the floor to 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 touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from Gary Mobley with Benchmark. Please go ahead.
Good morning, gentlemen, or good afternoon. Not sure what it is for you guys. With respect to the 5G infrastructure royalty opportunity based on your existing licensees, Nokia and ZTE, can you give us an update as to your expectations once those guys are up at a full run rate and as well, what your outlook for 2019 may look like, whether it be on an absolute basis or on a delta compared to 2018?
Hi, Gary, it's Gideon. Let me speak in general about it. When it comes to Nokia, we can only echo what they are saying, and they are speaking about Q3 and Q4 deployment, starting Q3 with larger extent in Q4. I believe it's going to be on the T-Mobile network. We'll have to see how this looks like. From our standpoint, it's just wait and see. When it comes to ZTE, I elaborated. They are coming out of the ban. I mean, the ban does not cause just shutting down their operation. Basically, their supplier stopped manufacturing chips and in some cases, even the people will move to other projects. This takes time to rebuild. We are thinking about Q4 to start seeing a nice recovery, and we bake some amount into the Q4 hold. We are waiting.
I think when it comes to see a substantial, we need to speak about 2019, when ZTE will be behind it, and they will be behind it, and Nokia start leveraging on all the wins that they had.
Okay. Based on the size of the market and your share, which I believe is 50%, what do you think the full run rate royalty revenue can be?
Hi, Gary. I don't think we changed our longer-term forecast. I think we still believe that this is a significant royalty opportunity, and based on all the data that you just said, the market size and the number of chips in its base station, it could be north of $20 million. We just want to see those first royalty reports. As you know, we did get one or two from ZTE, and then the ban kicked in, so we want to see that get back, and the opportunity could be way over $20 million if they do it right, and both of these customers are in full production in the first quarter of 2019.
Okay. As a follow-up question, focusing specifically on the mobile handset baseband processing side, it sounds like your royalty rate per unit may increase at the tier-one smartphone OEM that's based in the U.S. as you gain share there in the next product cycle. First of all, can you confirm that your 4G royalty rate, as a result of that, might increase in the second half of the year? With respect to overall handset market share, just given the moving pieces, do you think your market share will shrink in 2018, and based on your share gains at the tier 1, do you think your share can increase in 2019?
Yes. Let's start with the share. The first two quarters of the year, we were 23%, and that reflected first, very soft Chinese market overall in the first quarter, if you remember. That caught not just us, but the whole semiconductor market by surprise. What was unexpected for us was that one of our key customers in that space continued that weakness into the second quarter and didn't show any seasonal increase like we have seen with other customers in the handset space. We were stuck in the second quarter with the same 23% market share.
The second half of the year should look different, and right now, we have not baked in growth for that Chinese player for the second half, or at least not a significant one, because we want to see how they deal with the problems, and hopefully they could get over them and win some new sockets. With that said, when we take the premium handset that should be launched in the third quarter, we will see those two elements that you mentioned. One is the higher ASP for overall the smartphone space for us, because of that ramp. Second, an improvement in the overall market share that we'll have. It won't go back to 40%, but it should be better than our 23% with higher dollar content.
The way we are seeing the models for the second half of the year, that with the softness with the Chinese, and the strong volume and ASP increase from the other handset base band player that is ramping up, we hit our numbers with only maybe $2 million net. That's part of the reason for reducing our annual royalties, but the net effect is not as bad, and hopefully we could see some better moving pieces from our Chinese large customer.
Okay. I'll let others ask questions. Thank you.
Thanks, Gary.
Our next question comes from Mike Walkley with Canaccord Genuity. Please go ahead.
Great, thanks. Just building on that question, can you maybe just walk us through with your lower royalty guidance through the year, just how much would that related maybe to ZTE, how much to the weaker smartphone market, how much to the Chinese OEM weaker than you expected? Thank you.
Sure. Hi, good morning. Let's start and look how we started the year and what we wanted to reach. We were talking about $92 million with licensing revenue flattish at the 43 and about 10% growth in royalties. The first half, we were down from those expectations just in royalties by about $5.5 million. $1 million was the ZTE ban in Q2, which we shared with you, and the rest of the first half, $4.5 million, were equally distributed between a very soft Chinese market overall, not just for our customers, but for everybody, including Qualcomm in China in Q1. Another half of that four and a half, about 2.5 million was associated with the softness with our specific Chinese vendor in the second quarter. Overall, that's 5.5 that's behind us.
This is the first half of the year, there's not much we could do about it. ZTE, we're happy that the ban has been lifted. It took a while. It took close to four months. If it would be quicker, a few weeks, they would be back in production much earlier. When we start Q3, we are taking into account maybe about a million and a half dollars associated with that, and partially into Q4 as well. We think that by the end of Q4, maybe the last month of Q4, they'll be back in production, and we'll see some royalties coming from Q4. That by itself, just from the ZTE ban in the second half, you're probably looking at $2 million. If we talk about ZTE, Gideon mentioned that they were also evaluating some of our newer technologies for next generation chip design with us.
We're taking offers about $2.5 million on the licensing side and trying to build a $40 million, $40 million to $41 million type of base. ZTE overall, in the second half of the year, I would say almost half-half between royalties and licensing, taking overall about $4.5 million. 5.5 from the first half of the year and 4.5 brings us to 10. The last $2 million is what I just answered earlier, that that's the net effect of the weaker Chinese customer versus a very strong offset, but not complete offset of the new smartphone vendor, the premier smartphone vendor that is going to use us with more content and a higher volume this year versus last year. We've almost been able to offset that handset space, but we are off about $2 million as we see it right now for the second half.
There are moving pieces like other non-handset baseband growth that we have seen in the first half of the year, and that should continue in the second half. Nokia, of course, as Gideon said, Nokia is still, and has been throughout the year, sort of a moving target for us. We don't know specifically how big that could be in the near term, which is Q3 and Q4. We have baked something in, but far less than what we believe could be the full extent of Nokia ramp-ups with all these design wins that they're talking about, NTT Docomo-
China Mobile, T-Mobile, which is just around the corner, we just need to follow these guys and see how fast they can get deployed and in what cities. If you see any deployments around your city, give us a call and we will monitor the royalty reports for the upcoming quarter.
Great. Thanks. My follow-up question, just on licensing deals, absent ZTE, is everything kind of tracking as progressed? Maybe could you highlight some of the growth opportunities you're seeing in licensing both the rest of this year and into next year, including any update on automotive opportunities? Thank you.
Yeah. Hi, it's Gideon. The two high runner product in term of licensing today, as you see it, is AI. Keep in mind that when it comes to AI, we are not in full scale in going out to customers until the end of this month. We set a target for the AI to sign up one or two lead customer that help us to polish the product before going out to the market. We were lucky to get three. This is very helpful for us. By the end of the month, we're going to be there with a production-worthy technology, I believe we see more customer that are more risk-averse. That's AI. The other thing is extremely successful is the connectivity in general, Bluetooth right now, we see Wi-Fi coming in the same context. Every connected device needs a Bluetooth and Wi-Fi.
Bluetooth, huge volume. It's a 4 billion unit this year. Lower ASP, royalty ASP, and license fee. Wi-Fi, it's also a very big market, and here we get higher license fee. It could be two times, two and a half times of Bluetooth, and of course, higher royalty. These are the two high-runner product for this year. For next year, the way I see it is that we're going to see more 5G coming, both in base station RAN. There are a few customer that we would like them to join us. We want to be a monopoly there. We want to dominate the space, and we are not far apart for that. We see 5G handset maker. Right now, all the 5G designs are more show, kind of a concept-level design. It's not mass production.
In such case, we don't usually participate, but when people go to mass production and wants to get the power metrics and the capability that we are offering in terms of software programmability, then they call us. 5G both in base station, I think we're going to see more and more in 2019.
Great. Thanks for taking my questions. Look forward to seeing you at our conference this week.
Thanks, Mike. One more thing I forgot to mention that when we jumped from this very low or relatively low first half of the year to Q3, I mentioned that we're going to see 50% growth, sequential growth in royalties. We're picking up, of course, from a low level that we didn't want to be there, but it seems that we're back on track to almost the same expectations that we had for the second half of the year. Hopefully, some of these things that we talked about with base stations and even hopefully the Chinese baseband player could do a bit better than we are planning for the second half.
Great. Thank you.
Thanks.
Our next question comes from Joseph Wolf with Barclays. Please go ahead.
Thank you. What's in the other right now in terms of what is exactly, what is shipping that's not Bluetooth that's given that 17 million unit number? I was hoping you could give a little bit more detail on the units of the non-baseband, 88 million in the quarter, 160 or so for the first half. Where does that go in the second half of the year, just in terms of number of units that you guys are in? Is there another big pickup, 25% in Bluetooth?
It's a collection of product. We will not see or we'll see minor contribution for the base station, that in unit terms, the contribution is minor, but the dollar terms are high. When it comes to other that are non-Bluetooth, it's a collection of different chips, different markets. It could be computer vision, could be audio, could be Narrowband IoT, could be industrial application. It's just a portfolio of things and many customers, some of them are new, and once we start seeing them coming out, we'll analyze more and project the next level. For now, we want them to go out of the door, go to production, ship units And then help them to get to masses as well.
Joseph, good morning, the first success is really the Bluetooth that started off maybe four years ago with us. If you remember from zero royalties when we got into the space, we are in a run rate of $71 million a quarter, just Bluetooth devices all over the place, from hearing aids to speakers to [wire] to sport wristbands to camera and functionalities and then lots of other things. I hope that we'll have, this is the plan, as Gideon said, to have others like in vision, like in the audio follow-up with much higher volumes. The opportunity is there, and the design wins are there. For now, the quickest ramp-ups after so many designs that we have in the connectivity side, we also already see two new customers in Bluetooth and Wi-Fi for the second half of this year.
The volumes absolutely should continue to go up, first from seasonality, pre-Christmas point of view, and second, from the number of customers that are finally getting into production, and we have been waiting for a while, and the Bluetooth and Wi-Fi working very nice within three years, maybe after the design starts, sometimes a bit earlier, we're seeing them deployed into different end markets.
Joseph, just one more thing that I want to shed light on Bluetooth. Bluetooth is a huge market. I mentioned in my prepared remarks, four billion units just this year. I suggest to watch how Nordic and Dialog are doing. They all make their money out of Bluetooth, and they are speaking about, in the chip side, high tens of % of growth year-over-year in unit terms and revenue. It's a very big space, and if you do it right, you can flourish there.
Okay, that's helpful. There was one handset-related license award that you guys did in the quarter. Is that a 5G-related license, and is there any reason to believe that the 2019 licensing revenue will see a lot of or new kinds of designs for handsets coming back?
Designs for handsets could come from two angles. One is incumbents, there are people that use us and will continue to use us, there are people that don't use us, we believe we have a proposition for 5G, an entry point for them, I wouldn't exclude any incumbent in the cellular market today, in the handset market, saying, "No, this guy is NIH, and he has everything." The other part, there are newcomers that are into the space. There is one in China. I don't want to mention the name because I'm not sure that we already announced it, could be a strong contender in this market. We see a few others that are looking into the space, not necessarily because of handsets, because 5G span is beyond this, automotive and IoT in general, that's also a big market.
In terms of licensing 5G, we are speaking now in a bigger term in terms of available licenses.
Okay. Just finally, with all the buyback, can you just give an update on whether that means that you're seeing fewer M&A opportunities, or there's no appetite, or you've got the right strategy and aren't looking around that much right now?
Let me respond on the M&A strategy, Yaniv can refer to the buyback per se. When it comes to M&A, we are prudent. It's not that there are hundreds of companies that we can buy. We did one very successful acquisition, we want to continue using it. Right now, we don't have something specific that we have in our radar, we are not rushing to do it. We have an organic strategy that has enough engines to flourish. Yaniv.
Yeah, nothing really to add. The buyback is here to support the stock and our belief in the longer term, which is not too long. It's now the second half of the year, which is much better than the first one and much better than any second half we had so far. It's just for the time being, it's a good use of the cash. An IP model should generate cash overall. This is just something that we're doing in the meanwhile until we find the right M&A target or the right technology that we want to have. I don't think those two contradict. We're not talking about a $100 million buyback program, but a smaller one as we go along.
Okay. Thank you.
Thanks, Joseph.
Our next question comes from Matt Ramsey with Cowen. Please go ahead.
Hey, guys. Thank you very much. I guess my first question is on the base station market. Gideon, you made mention in your comments just now that you guys are looking for eventual full coverage of the base station space with your technology. Obviously, you've announced a couple of big OEMs. Maybe you could just give us an update on where you stand with sort of the other big three. Obviously, Ericsson and Samsung are things that maybe you've hinted at before, that there's some dialogue, the folks at Huawei do their own DSPs typically.
Maybe you could give us a little of update on just generally where discussions are with the rest of the market, if there were some royalty deals to get signed or some licenses to get signed, rather, how long should we think about the timeline for royalties coming out of the rest of the base station players? Thanks.
Out of the three names that you mentioned, one is already working with us, one is in discussion, one, there is no discussion. I'm sorry, I cannot elaborate more, but we have a big shot there because we are the only guy in town that can provide such complicated technology for 5G. Now, beyond that, people are speaking about base station and think about the incumbent there, but there are all those small cells and fixed wireless. We add into this one all the enterprise, all the Wi-Fi access point. For us, it's the same technology base. Then you start speaking about different names, you speak about networking guys. Here the opportunity is huge, and we are here doing real steps and progress with few of the large guys there.
No, thanks for that. I appreciate the sensitivity around some of the ongoing discussions. I guess as my follow-up question, I had two questions or topics I wanted to sort of ask about in the smartphone space. I guess, on the more challenging side, obviously, there's some things going on with Spreadtrum here. I guess my question around that is, what was new and different for this quarter's update than maybe you had updated us on three months ago? I think it was fairly well known in the industry that MediaTek was being pulled into Samsung at the low end, that was going to be a challenge. I guess maybe, Gideon, first of all, what's new and different that's happened with that particular customer? Second, on the positive side, Qualcomm's all but admitted that Intel is going to be 100% share of the flagship iPhone going forward.
Maybe you guys could talk about what your share has been or what you estimated to have been within the iPhone on the modem side in this last cycle, and what kind of an uptake we could look at. Particularly, sounds like you mentioned that ASPs or royalties per unit could be a bit higher with that customer going forward. Any commentary on just magnitude of what we should think about from a royalty shift would be really helpful. Thank you.
Without going to the specific details that you would like to see, I'll give you just the envelope of that. When it comes to the Chinese customers, the first quarter was all around weakness in the market. There are different segments, feature phone and 3G and LTE, and all of them were ugly. It was correlated to what's going on on the market overall. What I refer in my prepared remark is specific OEM, large OEMs, that Chinese customer had a certain share and a very large share. Now it's being split between another customer of ours. With this specific OEM, we are not completely out. We are left with substantial share, but not the same share that we do, and that's the source of the revised update in the guidance that we do.
With that said, cellular market is a very dynamic market, and this may answer your second question. It works on a one-year cadence. If you lose a socket, a big socket or small socket, usually it takes you're out of it for the whole year, you have another chance to get the next year. Specifically, this Chinese customer, we see some signs of, not regaining share, but gaining share with other OEM on the account of the incumbents there. It's a big fight, and we need to take it year over year. It is what it is, but this Chinese company was a competent company and will be a competent company, and they have a lot of support there in China not to drag into the.
Fix the problem.
to fix the problem. You lost the design, then you give another shot, then you do it. It is what it is. That's how this market works.
Got it. Thank you. Any update on sort of the big baseband customer in the U.S. would be really helpful going into 2019. Thank you.
We are waiting for the same data. I think the public information about the ramp-up with T-Mobile is there. We need to either see the signs that it's happening on the streets or get the royalty report and then figure out the volume, the magnitude. This is something that we have been following and updating, that we don't have any special insights other than the public announcements that these guys are talking, and they have been talking a lot, on the base station side in the U.S. The handset side in the U.S., I think we mentioned, higher ASP, higher volume, higher share in that socket from the third quarter, which all are benefiting factors to offsetting almost completely, but other than $2 million for the second half for this year.
Thanks, guys. Appreciate it.
Thank you.
Our next question comes from Suji Desilva with Roth Capital Partners. Please go ahead.
Hi, Gideon. How are you, Yaniv? For the smartphone baseband, the folks that typically haven't used CEVA, looking ahead to 5G, what's the likelihood that some of those baseband vendors would consider using CEVA? If they were to, would it be a mix, some platforms being CEVA, some non-CEVA? I want to understand the handicap there.
If you ask us about OEMs, because when it comes to our relationship with the baseband semis, this is our ongoing relationship, our strategy there is to convince them to upgrade to a newer technology, we do have a lot to offer them. When it comes to our customer relationship with OEM, that's what I tell Matt in the other question, it's really very dynamic, you have to take it on a yearly basis. In any year, one of your large customer can win a socket, like it happened today, this year with Premier Cycle, you can lose in another large OEMs to do. It's a big market. Today, it's more fragmented.
It's not just Apple and Samsung, then you have Oppo and Vivo and Xiaomi and ZTE, and all of them can create tens of millions or get even to hundreds of million units a year. If you lose one customer, you can win another customer. By the way, that's what happens to the Chinese customer. We are seeing them winning sockets in other customers. It will come into play in 2019 when this customer will refresh their product. Other than this, we don't have what to say other than this specific Chinese customer is a viable player and continue to be a viable player, and what he lost today, he will win somewhere else.
Okay. Then a question on the wireless infrastructure side, a lot has been asked, but in terms of Nokia ramping up here, as you come closer to the second half here and seeing some visibility, is the linearity playing out as you expected? Is there any difference from what you expected and how it's playing out? Are the units for the second half 2018 coming in as expected, above or below what you had forecast?
No, below for sure. Below because as we mentioned, we still don't have the visibility for those ramp-ups that Nokia just a week ago talked about in Q3 and Q4 deployment in T-Mobile. As soon as we have that data, we'll update. We thought it could be a bit earlier. In the beginning of the year, we didn't know anything about the ZTE ban. From both base station customers, it's been taking a bit longer, but I think all the obstacles are off and out of the way, and ZTE can now go and continue their manufacture, and they already was a royalty contributor. Nokia is just about to start, we hope it's a good start for them, and we wish them enough luck because that's what they're saying, that from Q3, they're starting to deploy it in different networks.
Okay, great. Then my last question. It sounds like the AI opportunity is starting to come in from the license side, at least. Can you remind us what the royalty opportunity in AI is, when it kicks in, what the ranges of potential royalty there is?
Yeah, it could be quite significant. It depends really what type of AI. It's a long discussion. I think our time is out, but AI could go into so many different elements. We talked in the past about seeing them with vision next to audio products. In the automotive, we are talking with few vendors, so it could be anywhere from a vision type of process to up to a $1 type of ASP. It depends really on the end market. It's a very lucrative product line for us, both licensing and the royalty potential from it.
Okay, thanks for the answers, guys. Thanks.
Thank you.
This concludes our question and answer session. I would like to turn the conference back over to Richard Kingston for any closing remarks.
Thanks, Brandon, and thank you everyone for joining us today and your continued interest and support of CEVA. We will be attending the following upcoming events and invite you to meet us there. Tomorrow, we'll be at the Oppenheimer 21st Annual Technology, Internet, and Communications Conference in Boston. On Thursday, we'll be at the Canaccord Genuity 38th Annual Growth Conference in Boston. We'll be on September 5th at the Roth Internet of Things Corporate Access Day in San Francisco. Also on September 5th, we'll be at the Citi 2018 Global Technology Conference in New York, and on September 12th, we'll be at the Deutsche Bank Technology Conference in Las Vegas. 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.
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