Good day, and welcome to the CEVA Inc. Q1 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 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 of Market Intelligence and Investor and Public Relations. Please go ahead, sir.
Thank you, Rocco. Good morning, everyone, and welcome to CEVA's first quarter 2018 earnings conference call. I'm joined today by Gideon Wertheizer, Chief Executive Officer of CEVA, and Yaniv Arieli, Chief Financial Officer of CEVA. Gideon will cover the business aspects and highlights from the first quarter and provide general qualitative data. Yaniv will then cover the financial results for the first quarter and 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 financial guidance for the second quarter and reaffirmation of the guidance for the full year 2018, optimism about the LTE smartphone demand, and a gradual return to normal inventory levels during the second quarter and thereafter. Optimism about our licensing prospects associated with 5G, cellular IoT, AI, and Bluetooth products, as well as market acceptance of our PentaG, ClearVox, and NeuPro products, and projected customer ramp-up schedules. 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 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 LTE and 5G networks, AI, LTE IoT, and the IoT space generally. Our ability to execute more broad portfolio license agreements and customer 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 measures, which can be found in the earnings press release issued today. A copy of today's press release for the quarter ended March 31st, 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 after this call. 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.
Under the new standard, our royalty revenue represents what our customers shipped during the first quarter of 2018 or our best estimates for such shipments. The numbers stated on this call for the first quarter are based on ASC 606 unless otherwise stated. As our Q1 2018 financial results are not directly comparable to our Q1 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 Q1 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. I will now hand the call over to Gideon.
Thank you, Richard, welcome everyone. The results of the first quarter of the year reflect continued strength in our licensing business and a stronger than anticipated seasonal decline in royalty revenue, which is attributable to access channel inventory in the low-end smartphone and feature phone segment. Total revenue came in at $17.6 million, 17% lower on a year-over-year basis. License revenue came in at $10.1 million based on 14 agreements signed during the quarter, eight of which were for DSP and AI products and six for connectivity IPs. Three of the agreements were with first-time customers, and the rest were with existing customers that are expanding their existing business or upgrading to newer products.
In particular, we are proud to reveal that we signed two lead customers for our new CEVA NeuPro AI processor line. Two customers for our new CEVA ClearVox noise suppression and beamforming software technology. Customers' target application include ADAS equipment in two areas: smart camera and vehicle-to-vehicle communication, cellular IoT, surveillance camera, voice-enabled wireless headset, car infotainment, and advanced consumer cameras. Royalty revenue under ASC 606 came in at $7.5 million. Yaniv will elaborate on the comparable metrics under ASC 606 and ASC 605 later during the financial section of this call. Baseband shipments were below our expectations, primarily due to excess general inventory in the low-tier smartphone and feature phone market.
However, we believe there is a secular demand for low-cost LTE smartphone and feature phone in highly populated geographies like India and Africa, which will likely drive return to normal inventory levels and gradual shipment increase starting from the second quarter of 2018. Non-handset shipments in Q1 continued to expand nicely, with approximately 58% unit growth and 39% revenue growth over Q1 2017 actual shipment. Also, during Q1, Nokia, a tier 1 OEM in base station RAN market, announced its new ReefShark chipset that incorporates CEVA DSPs. This chipset is planned to go into production in the second half of the year. Let me take the next few minutes to elaborate on the underlying dynamics for three of our products, for which we see good licensing momentum in the short term and substantial royalty revenue potential as those licensees enter into production. The first of these is voice-enabled Bluetooth headphones.
Last quarter, we signed four agreements with customers targeting this space. Apparently, the success of Apple AirPods headphones has paved the way for broad use of wireless headphones, not just for music streaming or voice call, but also for a seamless communication with voice assistant services such as Alexa and Siri. The Bluetooth headphone space is a new multi-billion-unit opportunity for CEVA that we can address with both our reputable Bluetooth technology and with our voice DSP, combined with the ClearVox noise suppression software technology. CEVA is one of the very few companies, and the only IP company, that has expertise and is a one-stop shop for low-power Bluetooth connectivity and voice hardware and algorithms, which apply to multitude of emerging voice-enabled devices such as headphones, headsets, hearing aids, smart speakers, and smart home devices.
The second is the growing cellular IoT market, where we continue the recent licensing momentum with two new agreements for our vertically integrated CEVA Dragonfly and the IoT platform. The deployment of NB-IoT services by network operators continues worldwide. Verizon confirmed its plans to build nationwide NB-IoT network covering 2.6 million square miles by the end of this year. China Mobile reported at MWC that it has launched a NB-IoT network in 346 cities. Cellular IoT is expected to be the world's fastest-growing connectivity technology through 2025, supporting 4 billion devices by then, according to analysis from ABI Research. We already have eight active customers developing product in this space, five of which licensed the Dragonfly platform in the last two quarters.
In addition, earlier in the year, a well-known market leader in the wireless market announced that it is expanding to cellular IoT with a module that is powered by our DSP technology. As a result of this recent success and our market prospects ahead, we stepped up our investment in the space by acquiring core technologies and licensing the right from our partner, ASTRI of Hong Kong. By owning these technologies, we can enhance our cellular IoT value proposition for customers looking to expedite their entry into this burgeoning market. The third product relates to AI at the edge. At the CES event earlier this year, we unveiled our new product line for AI processing dubbed NeuPro. It is our first non-DSP product line targeting general AI application in the edge. In devices such as smartphones, surveillance camera, autonomous car, and a variety of other device.
NeuPro is a highly optimized processor that supports a wide range of neural network algorithms used for vision, voice assistant, and data analytics. The NeuPro hardware is accompanied by a reputable CDNN compiler technology, which optimizes neural networks for processing in low power and compact edge devices. I am extremely pleased and appreciative of our team who managed to commercialize the product and conclude two agreements in Q1 2018 with customers targeting surveillance camera and ADAS applications. We are in discussion with many other customers on the NeuPro product line and are very optimistic about the opportunities for this exciting new demand. Before handing the call over to Yaniv, let me update you on our strategy and achievement in cellular 5G. The 5G usage model extends beyond smartphones and includes fixed wireless as an alternative to costlier fiber optic solutions. This solution is currently being promoted by Verizon.
It is also a key enabler for robot-based manufacturing, self-driving cars, and edge computing. The 5G service rollout continues to expand with announcements of launch plans and commercial offerings as early as next year from T-Mobile and Sprint, who are joining AT&T and Verizon. CCS Insight forecasts show 2.5 billion subscribers by 2024. Against that backdrop, we came out at MWC with new 5G products aimed to solidify our position and prospects in the 5G UE space. CEVA PentaG is a full reference design for 5G modem that capitalizes on our long and in-depth experience in cellular baseband with more than 8 billion CEVA-enabled phones shipped to date. It accelerates 5G new radio design by offering a complete hardware and software modem solution supporting up to 10 gigabit per second download speed and is software configurable to the next 5G NR upgrade Release 16.
One of PentaG's unique features is an AI processor that addresses the increase in complexity and variability of the 5G communication channel in a highly efficient manner. The PentaG architecture is modular, providing customers with a choice to adopt either the complete hardware and software solution or certain processing engines that can be integrated with its internal modem design. It therefore extends our serviceable market to large companies that use in-house cores or other incumbent feed, but still want to benefit from the advancements that PentaG offers in terms of software-defined radio, AI, and more. A second 5G announcement we made at MWC was the deployment of our CEVA-XC DSP technologies within Nokia's latest baseband chipset called ReefShark. The ReefShark baseband unit is 64% lower power consumption compared to the similar unit used today in Nokia base stations.
Nokia stated that it actively embedded ReefShark within networks of 30 operators around the world and expects ramp-up field deployment during the third quarter of this year. This announcement affirms our statement in prior calls for an upcoming production run by a tier-1 player in the RAN space. To summarize, we continue to experience a healthy licensing environment, the key ingredient for our future royalty growth, in particular for our cellular IoT, AI, and Bluetooth products. We are happy with the market acceptance of our latest products, PentaG, ClearVox, and NeuPro. These products apply to many new industries and extend dramatically our prospects for growth. On royalties, while we remain conservative about the handset space in general, we believe the first quarter softness is primarily an inventory adjustment in preparation for newer models ramp-up during the later part of this year.
With that said, let me turn the call over to Yaniv to discuss 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 2018. Revenue for the first quarter, based on ASC 606, was $17.6 million. The revenue breakdown is as follows: Licensing and related revenue was $10.1 million, reflecting 57% of our total revenue, 6% higher as compared to the first quarter of 2017. Royalty revenue was $7.5 million, reflecting 43% of our total revenue, a decrease of 27% on a year-over-year basis compared to $10.2 million for Q1 2017, based on actual shipments that were reported in the second quarter of 2017 following the revenue rules under 606. Quarterly gross margin was 89% on GAAP basis and 90% on non-GAAP basis. Our non-GAAP quarterly gross margin excluded approximately $156,000 of equity-based compensation expenses.
Total operating expenses for the quarter was just below the high end of our guidance at $18.5 million. OpEx included an aggregated equity-based compensation of approximately $2.8 million and $2.4 million for the amortization of acquired intangibles of RivieraWaves and our investment in the Narrowband IoT technology. Our total operating expenses for the first quarter, excluding the two items, was $15.5 million, also below the high end of our guidance. U.S. GAAP loss and diluted loss per share for the first quarter was $2.2 million and $0.10 respectively. Our non-GAAP net income and diluted EPS for the first quarter was $0.9 million and $0.04 respectively.
Our first quarter 2018 financial results under 605, the old rules, for direct comparison to our Q1 2017 financial results, were as follows: Total revenue was $19.5 million, U.S. GAAP loss and loss per share was $0.5 million and $0.02, and our non-GAAP net income and EPS for the first quarter of 2018 under the old 605 reporting standard was $2.5 million and $0.11 respectively. Other related data. Shipped units by CEVA licensees during the first quarter of 2018 were approximately 196 million, down 26% sequentially based on Q4 2017 shipments under 605, and down 27% from Q1 2017 actual shipments reported in the second quarter of 2017. Of the approximately 196 million units shipped, 122 million units or 62% were for handset baseband shipped, reflecting a 35% sequential decline and a 45% decline on a year-over-year basis.
In non-baseband, volume shipment reached 74 million units, down only 5% sequentially and up 58% on a year-over-year basis based on the ASC 605 rules. The Bluetooth shipments continued to be strong. As for our balance sheet, at the end of March 2018, our cash equivalent balances, marketable securities, and bank deposits were approximately $183 million. During the first quarter, we paid ASTRI its first payment installment of $0.9 million for the new Narrowband IoT technology, as Gideon discussed earlier. We started to become active again on our buyback plan. We purchased approximately 41,000 shares during the quarter, an average price of $35 per share for approximately $1.5 million. We currently have 270,000 shares that remain authorized for repurchase under the existing plan.
Due to the new rule, ASC 606, we also need to record quarterly accrued revenue for the full first quarter royalty report that were not received or billed during the quarter, and we'll obviously exclude those from our DSO calculation. Our DSOs for the first quarter were 62 days, down from 70 days in the prior quarter. During the first quarter, we generated $1.8 million of net cash from operation. Our depreciation was $0.6 million and purchase of fixed assets was $0.5 million. At the end of March, our head count was 319 people, of which 255 are engineers. As for the guidance, on licensing and related revenue, we continue to experience healthy demand across the entire range of products we offer. Therefore, we maintain our yearly guidance of approximately $43 million.
On royalty, as Gideon explained, we believe the softness we experienced in the first quarter in the low-tier smartphone and feature phone segments was related to access channel inventory rather than demand issues. As such, we expect a gradual improvement starting this quarter, with stronger impact in the second half of the year. We're also closely monitoring the implications of the U.S. Department of Commerce ban on component sales to ZTE, which incorporates our DSP platforms. At this stage, we lack the visibility into the ongoing discussions between the parties, nor do we have the visibility into ZTE's existing inventory levels and production plans for this quarter. Yet, for prudency, we have modified our royalty expectation for the second quarter in this regard. We will update investors on upcoming earnings calls for any developments on this front or divergence from the annual guidance which we provided earlier in the year.
Nevertheless, we currently maintain our annual guidance for royalty and forecast that 60%-70% of our annual royalty revenue included in our guidance will be reported in the second half of 2018. This is based on anticipated base station product schedule, holiday season-related shipments, and return to normal inventory levels in the low-tier handset segment, coupled with all the risks and the moving parts we discussed today. Specifically for the second quarter for this year, gross margin is expected to be approximately 91% on both GAAP and non-GAAP basis, excluding an aggregated $0.2 million of equity-based compensation expenses for non-GAAP. Overall, OpEx is expected to be in the range of $17.9 million-$18.9 million. Of that GAAP number, $2.9 million is expected to be attributed to equity-based compensation expenses and $0.4 million attributed to amortization of acquired intangibles.
Our non-GAAP OpEx is expected to be in the range of $14.7 million to $15.7 million. Net interest income expected to be about $800,000. Tax rate for the second quarter, 19% on GAAP, 13% on non-GAAP. Share count for the second quarter is expected to be approximately 23.2 million shares. With that said, Rocco, you could open the Q&A session, please.
Thank you.
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 you please pick up your handset before pressing the keys. To withdraw your question, please press star then two. Today's first question comes from Gary Mobley of Benchmark. Please go ahead.
Hi, guys. Thanks for taking my question. I want to start out with a question about your royalty guide for fiscal year 2018. Just to be clear, you're maintaining the assumption that royalty revenue in total grows 10% this year?
Yep, that's correct. Good morning, Gary.
Just to be clear as well, you're taking ZTE out of your forecast, and you still get the 10% growth, and that obviously puts a heavy weight on the second half of the year. How much of that strength in the second half of the year do you expect to be fueled by mobile handsets, and how much do you expect to be fueled by base station licensees like Nokia?
One correction with regard to ZTE. ZTE, we're taking the number out only for the second quarter. As we said, we will monitor the development of the different discussions going on between the U.S. and China, and they're all trying to resolve this. If this continues, we may need to update our annual guidance. For now, we're only taking the hit in the second quarter, maybe a limited hit, we don't know yet, but we have taken that out from our expectations only for the second quarter. Gary.
Hi.
Yeah, please go ahead.
No, I'm sorry. Go ahead, Gideon.
I want to expand on the cellular thing because this came below our expectation. I should say that we thought that, at least internally, we came out short in Q1, and keep in mind that Q1 is the low season, according to the new rules that we report. We came out short of about between $1.2 million-$1.5 million, and this is attributed to the cellular. I mean, all other parts of the business went very well, revenue on a yearly basis, and barely a seasonal decline on the non-handset side. In the non-handset side
The historical seasonal decline in this space was between 10%-15%. We had it then in Q2 2016, was about 25%. This quarter, the seasonal decline, and it relates to inventory that was built up in the high season, industry-wise, it was 30% seasonal decline. We came out with, in the smartphone space, about 32%, and the feature phone about 40%. When you are in the low tier side, you have an overshoot, a big overshoot than the industry in general. We are hearing different sources that inventory now getting to a normal level, so now they are in Q2, it's going to be a kind of a set up, preparation for the high season, and Q3, Q4 should be relatively good quarters.
Last question I have relates again to ZTE. Can you share with us approximately how much you were hoping to get from ZTE in royalty revenue or the base station SoC market in general, if you don't want to be too specific? Your assumption that ZTE may rebound in the second half of the year, is that predicated on the definition of who your licensee is and whether it's U.S.-based, or is it predicated on the appeal that ZTE has filed with the U.S. Department of Commerce and the political ramifications?
Yeah. Let me start with the later part. The ban here is associated with components made in the U.S. sold to ZTE. It's not necessarily only our chips, or the chips that are embed our technology, but different components that go into a base station that ZTE had many U.S. vendors, many chip vendors supply to them. If they don't have the full amount of chips, if they cannot build base stations, they are not going to ship them, even though maybe they have less of a problem with one chip that is not U.S.-based or is U.S.-based. They will halt every shipment of base station until this gets resolved, and they have all the right components to make the design work.
Our problem is mainly with other vendors in the space, that if you don't have enough components to build a car, you cannot sell a car without the motor or without the wheels, and you're just stuck, and you're not going to get royalties on those amount of cars that are sold. That's where we put ourselves. Some of the chip vendors incorporating our technology into ZTE are U.S.-based, and that's a direct problem. The bigger problem is that if they don't have all the ingredients, then they are in a halt position. As we said, we don't exactly know the inventory levels that they had going into the second quarter. That's the second part of the question. The first part of the question is, as you know, the base station market is a very large royalty contributor to us going forward.
I would say the first parts that we are building with ZTE, for example, can be in a handful of millions of dollars for this year. That's the magnitude, more or less, maybe $1 million for the second quarter. This is what we are trying to be prudent with, and for now, we've taken out of our guidance, and we haven't taken more of it for the rest of the year with hope that this gets resolved over time.
Very good. Thank you, guys.
Sure. Thank you.
Our next question today comes from Mike Walkley of Canaccord. Please go ahead.
Great. Thanks. With success in your 5G base station licensing, do you believe you can add another top five OEM that's currently developing it in-house? Then also just switching gears to the 5G smartphone baseband licensing opportunity, how should we think about your strategy there with different processor engines? Does this open opportunities to new CEVA customers that currently don't use your baseband technology today? Thank you.
Yeah. The answer to your question are both yes. When it comes to base station in 5G, it is because it's a disruptive technology, and people cannot rely on incumbency there. We have a very big shot there to expand our presence in this market to companies that didn't use merchant chip or develop things in-house. We are in active discussion there and progressing. Eventually, these are very strategic agreements, and one size does not fit all, so it takes time, but I'm optimistic about progress in this respect. When it comes to handset, and also in my prepared remarks, I mentioned other use case like fixed wireless and autonomous driving.
Here, the way we build the PentaG modem technology is that we build it in a modular way that even to people that use DSPs in-house or has other incumbency, they can take advantage of portion of this technology. This technology offers several new ways and attractive methodologies to implement. I mentioned AI. Also, we have the software-defined radio. I think we are the only company in the industry, both in the semi side and definitely IP side, that offer software-defined radio platform that are efficient enough that people can take advantage of it. When it comes to 5G handsets and user equipment, we see some people will adopt not the whole platform, but a portion of it, and we are fine with it.
Okay. Thank you. Just nice to see the reiteration of the 10% year-over-year royalty revenue. Can you maybe break it down for us a little bit? You seem to be getting success in the non-handset market. Do you see non-handset market up much more than that in the handset market down year-over-year? Can you maybe give us some rough parameters, how you see non-handset related basebands versus handset related basebands royalty revenue for 2018? Thank you.
Sure. Morning. I think it's a bit early and premature to build a model. Of course, we have our expectations, but there's so many moving parts as we learned about the ZTE ban, which our estimates a few weeks ago are now maybe different than what they were. As Gideon said, we're still waiting for the first launch of the Nokia ReefShark chips in the third quarter, and we need to see the magnitude and their design cycles, although they're quite optimistic about the efforts with T-Mobile and 30 other design wins that they have going on for them around that deployment. There's so many moving pieces. The inventory issues that many of the semiconductor and component players in the wireless handset talked about and reported in the last couple of weeks in earnings season was not something that was built in the models earlier in the year.
I think we'll just take it step by step. If we take the old rules, for example, the old accounting rules, and look at our revenue there at $10 million, which is the Q4 shipment, and compare it to last year, we're only down 15% on an apples-to-apples basis. From there, that's our starting point into the year with all these, the rest of the moving parts. We're happy to add more color as we need, as we go along, but there are some very basic data points, like the recovery, like the base station, and other non-handset products that we want to see ramping up. We will share the breakdown and the information around it. Let me just add, maybe this explain why we are not changing our annual guidance at this stage.
The reason that we are not changing is because the fundamental or the underlying assumptions that we had at the beginning of the year did not change. I'm putting aside the ZTE, because if that's continuing this prolong, we will have to change. Right now, it's one quarter. We see all sort of, we heard lot of progress that was made, appeal and stuff like this. Maybe things will go in the right direction sooner. If you take the non-handset space, when you look just year-over-year, or you look even on the transition for high season, which is the fourth quarter and the first one, and the first quarter is supposed to be the post-Christmas season. There was barely a seasonal decline, one of the reasons that our new shippers coming into the market starting from this year.
The beginning of the year, we didn't speak about Nokia. Now it's public, they by themselves, including the CEO, is extremely positive about the second half of the year. We were initially conservative about this space. The inventory, it's an issue that usually go back because the demand is there. When you look on the fundamental versus our underlying assumption, there are no changes. Again, assuming that ZTE will be resolved shortly.
Great. Thank you. Last question from me, I'll pass on, is as you look at some of the catalysts for the royalty growth in the second half of the year, what are some of the more important factors? Is it ZTE getting settled? Is it the Nokia timing of their ramp? Is it maybe Intel share gains in new iPhone platforms? Can you maybe just help us think about some of the areas you see as the bigger drivers for second half improvement over first half, besides seasonal aspects? Thank you.
It's all of the above. The base station, it's a key ingredient, and I think it's the first time that we get into production with this customer. ZTE, of course, If it's there, we know more or less what we expect because this customer is shipping already. Smartphones, you more or less mentioned what are the things, and the rest. We have plenty of non-handset baseband products starting from Bluetooth, vision, different market, and all of them are showing the progress. We are monitoring the customer progress. We are monitoring the pattern of the shipments, and at this stage, things are in the right direction. I also refer to the product brochure that Richard distributed earlier today. It has a lot of new products, drones, and the like that Gideon mentioned.
You could see some of these examples that are ramping up because they are in production now early in the year. If we have them on a full year basis, that's our new contribution to our non-baseband royalties.
Thank you.
Thank you.
Our next question today comes from Joseph Wolf of Barclays. Please go ahead.
Thank you. I was hoping to get a little bit more color, I guess, on the seasonality of the handset market and expecting that to come back. The feature phone market fell significantly, compared to where we thought it was going to fall, and I'm just wondering, as you think about the recovery, what kind of mix do you expect in the handset market? As it transitions in the lower cost markets to better handsets, are we calling them feature phones? Are we calling them smartphones? What kind of ASPs are we looking for as you think about that second half recovery?
Yeah. Hi, Joseph. Let's start with the feature phone. In feature phone, we're all asking ourselves, how long could this market continue to generate hundreds of millions of new phones a year? The last couple of years, we were surprised how resistant it is and how long it's still around. Maybe this is the first change, because this is a dramatic decrease, as Gideon said, sequentially, like 40%. We have not seen that magnitude before. We are not 100% sure if this is a demand issue or more of an inventory issue because of the high end. Maybe you have here a deck of cards that everybody was assuming that Apple will have different results than they actually had.
From there on, the lower smartphones were prudent, and the very low-end feature phones also even took a more aggressive approach, as Gideon mentioned earlier, and this is how we got to the level. About a year ago, I think we introduced something that we saw in the emerging economies, something called an LTE feature phone. It's still a very simple phone. It's still very inexpensive, but it starts to use the LTE networks, and of course, our ASPs are twice or three times an LTE device than a feature phone device. It did pick up for a while. There were some sockets. There were some of the carriers reduced prices or gave different discounts, just for people to use them. A year after, we haven't seen that as a key driver, as a new market evolving from those feature phones.
The next step up, this is something we've been saying for a couple of years, if the price is right, if the low-cost smartphone pricing is right, I'm not sure what it is. It could be $40, it could be $30, maybe it needs to be mid-20 type of phone or have significant subsidies from the operators. That could then jump from those feature phones that we lost in Q1 directly into these low-cost smartphones. Hard to predict. We are seeing a lot of these models out there today. We have seen them a year, two years ago as well, but again, not in the right price point.
We just need to monitor and see if that inventory correction finds itself finally from a feature phone to an LTE smartphone, because we have seen operators in India, for example, sign up, just in Q1, more LTE subscribers than they ever had. The fundamentals are still there for the emerging markets. We need to see now that the inventory correction drives those into that direction. The high end, I think we mentioned, we cannot talk more about this, about different vendors to other high-end devices. It's a lot of moving parts. I'm not sure if we have the crystal ball for it. The more smartphones and the more LTE, the better off we are with ASPs. At the end of the day, we haven't seen an ASP erosion in any of the segments, at least any severe one, in the last couple of years.
I think it's a lot of more volume, timing of SKUs, or introduction of SKUs, inventory issues that we have now or didn't have with the high end, everybody was expecting to have, a lot of moving pieces. We are just trying to monitor and put it all together, I think that's what we want to see or things that will happen, starting from the second quarter, but much stronger in the later part of the year, in the second half.
Okay. That's helpful.
I touched on that. Yeah.
If you think about the baseband opportunity, specifically the ReefShark product, I know it's too early to tell exactly what's going on, but can you remind us if we are to hear about certain roll-outs in certain geographies? How does that flow through? Is it per base station? How many DSPs are there? What's the ASP content? What can we be thinking about there in terms of that? Then I'm assuming you're going to account for that in non-handset revenue. How should we be thinking about that?
Yeah, let me start, Gideon will help me throughout here. Yeah. For sure, it's a non-handset component in our business. Every once in a while, we break out and we've seen the 10-Qs. We have the vision, we have connectivity. As soon as this becomes a big enough contributor for us, we may open up in a different line item. Right now, it's other baseband devices. It's an expensive chip. When you put one of these very sophisticated chips in a base station, this could be a $100-$150 device. In general, without being too specific on one customer or another, if you look at the market size or the number of chips that are deployed in that market, I think [Arm], and they are still public, news, there is more than $3 billion of semiconductor content in these markets.
If we get our 1% or so, we are talking about a pretty significant ASP per chip for us, of course, a very sizable opportunity in royalties from the overall market having today maybe 50% market share design-wise. As you mentioned, Gideon mentioned earlier to a different question, maybe we could win more of that market as time goes by. I think these are some of the parameters that I would look at the size and the opportunity. As we mentioned, we have some royalties from VP already, Nokia, we're just around the corner, hopefully the second half of this year starts soon, hopefully where we see the first royalty reports.
Okay. Just finally, one more granular question about the mix. You mentioned the voice-enabled Bluetooth as a big opportunity. I am just wondering within the units that you talked about for the non-handset opportunity, which I think was 74 million. Bluetooth grew in a non-seasonal way. Is it any of the new Bluetooth? I guess by my math, I still assume that the baseband or the handset product is still 65%-70% of the royalty revenue. If the second half develops the way you think, is it fair to think about that mix as closer to 60-40 or even 55-45 by the end of the year with some sort of reasonable mix of non-handset? Or maybe I am starting the year wrong.
No, you maybe are running a bit fast. If I look back a year or two years ago, for many years, the non-handset was 10%. Last year, for the first time, we went from 9%, 10% to 18%, just shy of 20. Eventually, when these things kick in, it should help us get to 40% and 60%. I am not sure yet to tell you if it is this year or next year when we have for the full year basis, two or three customers shipping base station. Again, a lot of moving parts, but there is no doubt that we are seeing this. Q1 is an unknowable season, a quarter for us because of the seasonality, and we had 62% handset in volume, and the rest went to non-handset. We are almost there with 40%, but this quarter is not a typical quarter.
I think it will go back anywhere between 20-something percent. The more non-handset, the bigger percentage of the contribution we could get from the new market in segments. Bluetooth was up, by the way, units, 61% year-over-year. We are seeing more headsets, we are seeing more connected devices, we are seeing more bracelets and weights and hearing aids and headsets, a bunch of different Bluetooth devices. As you remember, it is maybe lower ASPs, but the volume opportunity is quite big. One last thing, and we could move on. Just in last quarter, we signed four deals of the Bluetooth audio type of applications, just in Q1. It is a very interesting and hot market for us.
Perfect. Thank you.
Our next question.
Sure. Thank you.
Our next question today comes from Suji Desilva of Roth Capital. Please go ahead.
Hi, guys. First question on the smartphone markets. Just on the high end, are customers awaiting new models, and do you still break out LTE units, or is LTE really kind of the bulk of the units now and not worth breaking out?
No, we are happy to break it out. We had 57 million units shipped in Q1 versus 71 a year ago, on a real year-over-year basis.
The high-end markets, do you think we see customers waiting for new models? I know the low end just sounds like inventory correction, but any color there would be helpful.
The high-end.
Market.
Smartphone. Not sure. I mean, timing, every OEM comes with different timing these days. The known ones in September and early in the year.
Those are the high end. I think the volume ones, just every couple of months you could find. The question is more not the timing, but how successful they are and if we are in or if other vendors are in there instead of us. I think those are the moving parts.
Yeah. The way it works in mainstream, Q2 is basically a kind of a setup quarter. They build the inventory, build the channel to go in Q3, Q4 are the ones that you're going to see the high volume. As I said, the inventory, we don't know exactly how low is the inventory, but we understood that it's a healthy level, and they need to rebuild it, because there is no change in the demand, in a structural way. Q4 was a bit slow, high season, and they have to go through the adjustment. They are starting the year with new hopes, and there are new models, and all those things that we have are still in place.
Okay, another quick housekeeping question. Did you give the Bluetooth unit numbers in the quarter?
Bluetooth was 50. Just give me one second. The Bluetooth number, 57 million this quarter.
$57 million. Great. Okay, thanks. What are the royalty rates we should expect for some of the newer products like the NB-IoT, ClearVox, NeuPro, Energy? Just understand the magnitude of the ASP there versus the traditional royalty unit.
It's interesting to see, the ClearVox, the royalty that we are getting is between two to three times of the hardware itself.
This is the first time-
Add-on. It's add-on. Yes. Let me explain it. This is the first time we're actually giving software, which is a bit moving higher on the food chain than just the pure IP or the percentage of the chip. These are add-ons that OEMs usually pay a lot, after they have already the chip, in order to get it to work and have access to that technology. We're trying to bypass that and be the provider for that technology. Again, when this goes in production, we could give a bit more color and show you those devices. The ASP of the add-on is on top of the DSP core that's in the chip itself.
Then lastly, can we talk about the imaging products and the voice products? What kind of year-over-year we've seen in those non-baseband sub-segments?
I'm not sure if I have here the breakdown of the different markets. For sure, we are seeing more vision devices than we've seen a year or two years ago. If you remember last year, in 2017, on an annual basis, not on a quarterly basis, we powered for the first time from zero to seven million units of vision-related products in 2017. Our hopes and goal for this year is to have a 2-digit number and hopefully few 2 digits of millions of units. We are just starting. I don't remember whether it is in Q1, but from zero, we moved to seven and plan to take it much further up higher.
Okay, great. Thanks, guys.
Thank you.
Our final question today comes from David O'Connor of Exane. Please go ahead.
Good morning, gentlemen. Thanks for taking my question. Maybe, Gideon, firstly, can you talk about the competitive dynamics around the AI processor IP in smartphones? I see Huawei and also MediaTek are using competitor IP for the neural engine. Just wondering how we should think about your ability to capture some of this neural engine market in smartphone. That's my first question. Then a follow-up on Nokia. Just to understand a bit better, how aggressive a ramp-up are you assuming for Nokia, in the second half with the rollout of ReefShark? Is that based on Nokia inputs or is it more based on the RAN market forecast? Thanks.
Okay. Starting with the AI, we have a few competitors. By the way, you mentioned Huawei. Cambricon is kind of a hybrid company. They are a semiconductor company a lot, and IP, pure IP company, but opportunistically they do it. Our advantages are in two respects. One is the performance. We show the highest performance, and there are reports from Microprocessor Report that formally stated. The other advantage that we have is our software. Because we started earlier, our software, what we call CDNN, is the only, and this is important to note, the only software that show maturity and features, to what NVIDIA is showing with their software that is called TensorRT. These are two relatively high entry barrier for people to compete with us in this space.
When it comes to Nokia, of course, we cannot discuss our discussion with Nokia, but our assumption is a combination of parameters. We'll have to see, because the pace of the ramp-up is something that I'm not so sure that Nokia knows at this stage.
That's helpful. Thanks, guys.
Thank you.
This concludes our question and answer session. I'd like to turn the conference back over to Richard Kingston for any closing remarks.
Thank you, everyone, for joining us today and for your continued interest and support of CEVA. We will be attending the following upcoming events and invite you to meet us there. The CEVA Annual Stockholders Meeting will be held next week, and we encourage all shareholders to participate through casting their proxy votes or attending the event. We will also be attending the Oppenheimer 19th Annual Israeli Conference in Tel Aviv on May 13th, the Cowen 46th Annual Technology, Media & Telecom Conference in New York on May 30th, Jefferies Israel Tech Trek in Tel Aviv, Israel on June 5th, the Stifel 2018 Cross Sector Insight Conference in Boston on June 13th, the 10th Annual Credit Suisse Semiconductor Supply Chain Conference in Boston on June 14th, and the Roth London Conference in London on June 18th through 20th.
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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