CEVA, Inc. (CEVA) Q1 2019 Earnings Call Transcript

CEVA, Inc. (CEVA 2.12%)
Q1 2019 Earnings Call
May 6, 2019, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning and welcome to the CEVA, Inc. First Quarter 2019 Earnings Conference Call. All participants will be in listen only mode. Should you need assistance, please signal a conference specialist by pressing the * key followed by zero. After today's presentation, there will be an opportunity ask questions. To ask a question, you may press * and then 1 on your telephone keypad. To withdraw your question, please press * then 2. Please note today's event is being recorded. I would now like to turn the conference over to Richard Kington, Vice President of Market Intelligence, Investor in Public Relations. Please go ahead, sir.

Richard Kingston -- Vice President Market Intelligence, Investor & Public Relations

Thank you, Rocko. Good morning, everyone, and welcome to CEVA's First Quarter 2019 Earnings Conference Call. I'm joined today by Yaniv Arieli, Chief Financial Officer of CEVA, and Gideon Wertheizer, Chief Executive Officer of CEVA.

Gideon will cover the business aspects and highlights from the first quarter and provide general qualitive data and he will then cover the financial results for the first quarter and provide qualitive data for the second quarter and the rest of 2019. I'll start with the forward-looking statement.

Please note that today's discussions contain forward-looking statements that involve risk and uncertainties, as well as assumptions, that if they materialize or prove incorrect, could cause the result 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 NeuPro technology and the ability of this technology to leverage new market segments, anticipation that Intel's departure from the 5G smartphone modem market would not have any short-term impact, optimism about CEVA's ability to capitalize on 5G, and optimism about sustained growth in non-handset-based product lines.

For information on the factors that could cause a different in our results, please refer to our filing with the SEC, Securities and Exchange Commission. These include the ability of the CEVA signal processing IP 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 all set to the maturity of the handset market, the speed and extent of the expansion of the 5G network and wireless connectivity, AI, LTE/IoT, and the IoT space, generally, our ability to execute more non-handset-based license agreements, and customers ramp up schedules and the impact on royalty revenues.

CEVA assumes no obligation to update any forward-looking statements or information which speak as of their respective dates. In addition to the financial results prepared in accordance with generally accepted accounting principles, or GAAP, we will also present certain non-GAAP financial measures today. CEVA 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 and powerful GAAP financial results, which can be found in the earnings press release issued today.

A copy of today's press release for the quarter ended March 31st, 2019, and the related financial tables and management commentary, which were included in our current report on Form 8K 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.

Gideon Wertheizer -- Chief Executive Officer

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 royalty. The royalty for the first quarter was $17 million, down 3% on a year-over-year basis. Licensed revenue was $11 million, up 9% year-over-year. Royalty revenue was $6 million, down 20% on a year-over-year basis.

Our continued focus on bringing leading-edge products to our targeted 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 goals and diversification strategy beyond handsets. As we work at reaching our strategy gross goals of doubling our royalty revenue by calendar-year 2022. We concluded eight license agreements during the quarter, of which three were for smart sensing product and five were for our connectivity product. Four out of the eight were with first-time customers.

To better reflect our goals, like customer expansion in the smart and connected world, we have abated the classification of how we record the [inaudible]. This smart sensing category includes our technology center for AI, computer vision, and sound. The connectivity category includes our wireless technologies and products for 4G and 5G, standard IoT, Bluetooth, and Wi-Fi.

Customer-targeted products are AI processors for autonomous cars, 5G for base station RAN, mmWave small cells, V2X, wireless earbuds, small 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 NeuPro AI processor technology that substantially extends the scope of an earlier evaluation examine with design in late 2017.

This new design will, for the first time, associate CEVA product with a launched program at the OEM, targeting the start of car production also by 2024. We regard this formal engagement as a huge acknowledgment by one of the largest automotive OEMs in the world, of the superiority and the maturity of our NeuPro technology for the very high entry-barrier automotive market.

The structure of the agreement will eventually lead to a downstream adoption in full of our NeuPro AI technology by automotive tier-1s and semi and condensed will be selected to supply mobiles and system to the OEM. Our NeuPro technology is the most comprehensive and solid software and hardware technology in the IT space for AI interfacing on low-power devices. It delivers the highest performance per single core and the onboard DSP provides added value of future upgradability and reusability.

Another good development in the quarter was in regard to 5G, where we signed relicensing agreement for our high-performance CEVA-XC architecture for multiple 5G market segments spanning base station RAN, mmWave small cell, and cellular V2X.

5G made substantial progress in 2018, shifting from long-term vision to where elevation of practical use cases that will drive 5G in its initial deployment. This is being reflected in customer engagement, but we started to experience late last year and largely in the first quarter. 5G brings key benefit versus 5G, in particular, faster speed in sub-millimeter [inaudible] and latency.

Operators and hyperscale IT companies will capitalize on these capabilities for services such as 4K video streaming, fixed wireless access to displace the more expensive fiber to the home, and V2X communication, which allows exchange of location information between cars with short-length latency by adding further availability for autonomous driving cars.

Furthermore, 5G and AI are the two key components to the emerging edge compute industry, who will sell this over the place, as the base stations providing of data classes can be furthered scaled to offer 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 AI, that can still be sizable market space.

On royalties, the first quarter revenue was $6 million, a 20% year-over-year decline. Our handset decline was more pronounced than we anticipated, down 27% year-over-year. This decline is primarily attributed to excess inventory level.

Our non-handset royalties, however, continue to show excellent progress. Both our known handset units were up 16% year-over-year to 86 million units and royalty revenue for a known 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 shipment and as such we maintain our yearly royalty guidance in anticipation of stronger second half, et cetera.

Before wrapping up and handing the call over to Yaniv for financials, I would like to welcome Mike Boukaya, who was recently appointed as Chief Operating Officer of CEVA, reporting to me. Michael has been with CEVA for more than 20 years and served in multiple R&D and business management roles.

In his recent position as the VP and GM of our wireless business unit, Michael was instrumental in forming strategic engagements with premiere customers like ZTE, Nokia, Intel, and Unisoc. In his role as COO, Michael will oversee all the business operation and R&D of our cellular, AI, vision, WiFi, and Bluetooth technology. I will devote more of my time to developing new growth engines for CEVA and forming strategic relationship with key customers.

So, 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 to the remainder of the year.

Our licensing performance on the other end was robust and transformational, with regard to our expansion in automotive space, which positioned us at the forefront of level 3 and above autonomous driving. We also continue to expand our licensee base to gain stronger foothold in 5G because existing and upcoming new use cases and further category.

We are relentlessly focused on successful execution of the things within our control and strive to expand our customer base and expedite their production. With that said, I'll now turn the call over to Yaniv, who will outline our financials and guidance.

Yaniv Arieli -- Chief Financial Officer

Thank you, Gideon. Good morning, everyone. I'll start by reviewing the results of our operations for the first quarter of 2019. Revenue for the first quarter was $17 million, as compared to $17.6 million from the same quarter last year.

Revenue breakdown is as follows: Licensing and related revenue was approximately $11 million, reflecting 65% of our total revenue, 9% higher as compared to the first quarter of 2018. Relative revenue was $6 million, reflecting 35% of our total revenue, down from $7.5 million for the same quarter last year.

Gross margins were 88% of GAAP basis and 89% of non-GAAP basis, slightly better than we projected.

Total operating expenses for the first quarter came at the midrange of our guidance at $17.9 million. Opex also included an aggregated-base compensation expense of approximately $2.3 million and $0.2 million for the amortization of acquired intangibles of the DOA. Our total operating expenses for the first quarter, excluding these two items, are $15.4 million, just below the midpoint of our guidance.

With GAAP, net loss for the quarter increased by 5% and diluted loss per share was $0.10 from both first quarters of 2019 and '18. Non-GAAP net income and diluted EPS for the first quarter of '19 was $0.3 million and $0.01, respectively.

[Audio cuts out]. Shipped units by CEVA licensees during the first quarter of 2019 were $175 million, down 30% sequentially and down 11% from the first quarter of '18, [inaudible]. Of the 175 million units shipped, 89 million units, or 51%, were for handset base station, reflecting a sequential decrease of 34% from 134 million units of base stations shipped in the first quarter of 2018 and 27% decrease from 122 million units shipped from a year-over-year basis.

Non-handset base spend volume shipments were down 25% sequentially due to lower post-holiday consumership, but continue to increase on a year-over-year basis by 16%.

As for the balance sheet, at the end of March 31st, 2019, CEVA's cash and cash equivalent balances, marketable securities, and bank deposits were $171 million. We continued our buyback plan to purchasing approximately 91,000 shares during the quarter for approximately $2.5 million. A year ago, our board of directors approved the expansion of the existing buyback plan and as the end of the quarter, we have a total of 264,000 shares available for repurchase.

Our DSOs for the first quarter were 59 days. During the first quarter we generated $4.8 million net. From cash from operations, depreciation of $0.7 million in purchase of fixed assets was $0.6 million.

End of the quarter, our headcount was 353 people, of which 290 are engineers.

Yearly guidance. While the first quarter handset contribution came in below our expectation, we expect demand to resume and the excess inventory is consumed, therefore leaving the 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.

Qualitative data specifically for the second quarter of this year. Gross margin is expected to be a similar level as the first quarter, approximately 87% of GAAP and 88% of non-GAAP, excluding aggregate expenses of 0.2 associated with the base compensation and $0.1 million of amortization of intangibles.

Our overall opex is expected to be in the range of $17.6 million to $18.6 million. Of the anticipated total operating expenses for the second quarter, $2.5 million is expected to be attributed to equity-based compensation expense and $0.2 million for the amortization of acquired intangible.

Our non-GAAP opex is expected to be a similar level as the first quarter. Overall, second quarter non-GAAP opex is expected to be in the range of $14.9 million to $15.9 million. Net interest income is expected to be approximately $0.9 million. Taxes for the second quarter, $0.2 million on GAAP basis and $0.3 million on non-GAAP basis.

Our share count for the second quarter is expected to be at a similar level of 22.8 million shares.

Operator, you can now open the Q & A session, please.

Questions and Answers:

Operator

Thank you. We will now begin the question and answer session. To ask a question, you may press * then 1 on your telephone keypad. If you are using a speakerphone, we ask that you please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press * and then 2.

Today's first question comes from Matt Ramsay of Cowen. Please, go ahead.

Matthew D. Ramsay -- Cowen -- Analyst

Thank you very much. Good morning, good afternoon, guys. I guess we'll just go ahead and ask it and get the elephant in the room out of the way. Gideon, you guys had talked about maintaining the 2022 outlook to double the royalties of the company in light of Intel's bowing out of the 5G smartphone space. Maybe you could give a little bit of context as to how you're thinking about that. And if you look backwards maybe over the last trailing 12 months, if there's any kind of ballpark as the percentage of revenue that Intel's business with Apple gave you, just so we can ballpark that. That would be really helpful. Thank you.

Gideon Wertheizer -- Chief Executive Officer

You know when it comes to the 2022 and the context of the exit of Intel, you know there are still a lot of moving parts. This market swings between ups and downs very fast. So, specifically about the cellular, it's yet to be seen how -- you know it's a 2.7 billion units overall, so how the share between the three emerging chips, Qualcomm, Spreadtrum, and MediaTek, how they will divide the wealth there, what the ASP looks like, what will be the attachment rate of 5G maybe then?

So, these are things that it's too early for us to comment. Also, keep in mind by 2022, CEVA will be, because of our play in the non-handset, in particular, the 5G and the base stations, we'll be much more resilient for those ups and downs in the mobile and it will be more a speed play than a volume play, like we have to be. So, that's in regard to 2022. So, we don't see right now a major change that we make us to change our estimation. There are still a lot of things that we can be independent of this event.

Now, that's one thing. Another 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'll have the high attachment rate of this customer. For 2022, again, it's still early in the mobile space, specifically, the swings are very far, so you can win design today, which we don't know what customer you can get design win and next year it'll be with tens of million in units shipping. So, we -- it's too early for us to say. And the only thing that I can tell you about the mobile, in general, is the winner does not take all.

Matthew D. Ramsay -- Cowen -- Analyst

Thank you, Gideon, I appreciate the additional color there. As an unrelated follow-up, congratulations to the team on the automotive progress. With the large automaker, Gideon, any additional color you could give about what type of applications, what type of potential royalties for a car, any kind of context around -- I know it's a few years out before revenue is gonna 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.

Gideon Wertheizer -- Chief Executive Officer

So, as we said, for us, it is transformative and a dramatic agreement because it took us, for the first time, in a production plant. And that's one thing. The other thing is that we -- eventually we'll see because this is OEM and OEM does not develop the chip. We're going to down-sell adoption to the other incumbents in automotive will eventually come to us as the licensed technology. And from then, we'll get the royalties on the -- on the shipment. And I don't want to get to the numbers, but as I said, going forward, '21, 2021, 2022, CEVA is going to look more a speed play than a volume play.

And that makes us -- it's a long-term engagement. It's a sticky engagement and we are moving fast to follow this direction.

Matthew D. Ramsay -- Cowen -- Analyst

Thank you. I'll get back in the queue. Appreciate it.

Gideon Wertheizer -- Chief Executive Officer

Thank you, sir.

Operator

And our next question today comes from Mike Walkley of Canaccord Genuity. Please go ahead.

Michael Walkley -- Canaccord Genuity -- Analyst

All right, thank you. Just following up on math 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 on market uptick throughout the year? Thank you.

Gideon Wertheizer -- Chief Executive Officer

So, when it comes to the Chinese customer, the way I see it is this Chinese customer is software as well as hardware in the inventory and it will beef up in end of last year and now it will replenish. You know usually those guys, our customers, focus on the OEM side. So, not this [inaudible] that is more high-end. The OEM side are more sensitive to volume buildup because they are much faster in their cycle. So, eventually they'll have to take a more aggressive standing in replenishing the inventory.

And going forward for the next year, our assumption that we're going to build -- resume shipments and goals unless there are earthquakes there. But it's not the non-typical behavior. If you look backward in the year, it was more of a earthquake than a swing.

Michael Walkley -- Canaccord Genuity -- Analyst

Okay, thank you.

Yaniv Arieli -- Chief Financial Officer

So, with that, if you look at last year's handset, you know we had a similar -- not just CEVA, but the whole handset market had a weaker first half and then the second half we started Q3 going sequentially more than 50% from very similar reasons, but a different year. We are seeing or at least thinking this is the model that we will see for 2019 as well. So, now projecting the growth from the second to the third quarter, of course, could be as big percentage-wise as last year.

Michael Walkley -- Canaccord Genuity -- Analyst

Right, thanks. And my follow-up question just on the wireless infrastructure market. Can you update us on trends you're seeing in that market with some of your new OEMs coming in the model on the royalty side? And given the success for 5G base station licensing, do you believe you can maybe add another Top 5 OEM to your business? Thank you.

Gideon Wertheizer -- Chief Executive Officer

So, first of all, when it come to the 5G in general, we see good dynamics there in terms of building up their infrastructure. It's not anymore, as I said in the prepared marks, not anymore with vision and wanting to be like things, but more pragmatic approaches for controlling those base stations.

And it's mostly, by the way, another use case that we see a lot of interest is V2X, which took us also from another end 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 going into -- and gaining share in the 5G to do intensive adoption of other player OEMs in the market.

Listen, when you want to do something in the writing in a [inaudible] chip for base station, Michael, it's widely known in the industry that CEVA is the only viability. So, without -- of course, we speak with everybody, but without going into detail process, the only thing that I can say is we are now in the fourth generation of base station and ahead of anybody else today in terms of this, the technology.

Michael Walkley -- Canaccord Genuity -- Analyst

Thank you. I'll jump back in the queue.

Gideon Wertheizer -- Chief Executive Officer

Thank you.

Operator

And ladies and gentlemen, as a reminder, if you would like to ask a question, please press * then 1 at this time. Today's next question comes from Suji Desilva of Roth Capital. Please, go ahead.

Suji Desilva -- Roth Capital -- Analyst

Hi, Gideon, hi Yaniv. Just a housekeeping question first. How many Bluetooth units were there in the quarter?

Gideon Wertheizer -- Chief Executive Officer

We had one Bluetooth deal; I believe.

Suji Desilva -- Roth Capital -- Analyst

Oh, no, it'd be royalty units, rather.

Gideon Wertheizer -- Chief Executive Officer

Ah, sorry. The units from Bluetooth and -- I don't recall it off the top of my head. I'll get to it in a second.

Suji Desilva -- Roth Capital -- Analyst

That's fine. Okay, I'll go to my next question then maybe. On the licensing side, you know the number of deals was very -- the revenue, rather, was pretty consistent, but the number of deals was lower, so I inputted a higher per license revenue this quarter. Was there particularly one large deal or are the deal sizes growing? I know this connectivity was pretty similar, so I'm curious on the trend there, if that is one of the trends you're seeing.

Gideon Wertheizer -- Chief Executive Officer

Yeah, you know the deal count that doesn't necessarily mean that much. We count them on a quarterly basis. We had a few very nice sizable deals and millions 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 a more larger deal this quarter than smaller deals. I think that the present our offerings in some of the markets we talked about, whether it's base station or automotive, are the more lucrative licensing deals that we have, a bit less on the consumer side, maybe? I believe it was 67 million units, by the way, a solid number. Yeah, I think that's what I have to add on the licensing front, the deal front.

Yeah, one thing to keep in mind about the units, because and maybe in the future we'll consider it differently, but because we have a very high ASP, like base station and a unit play like Bluetooth, so just by looking on the units and then try to infer for ways to the royalty revenue, it's a bit tricky. So, you know, we have a different mix of ASP still. And that's the reason that the royalty revenue for non-handset goes up 22% and the units are 16%. So, it's because of ASP.

Suji Desilva -- Roth Capital -- Analyst

That helps. And then one last question, if you don't mind. You know appointing Michael as COO, congratulations to 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 two, three years, so I'm wondering are there other areas you can possibly target or is this more digging deeper into the products you've already put in the market place?

Gideon Wertheizer -- Chief Executive Officer

So, it's all of the above, meaning we have different goals, opportunities, that we can explore. One is in terms of content. So, what we're doing in sound, where we're going up in the value chain and also in software, that's one example. We can do a lot of things on the AI side. So, the other approach is, of course, M&A. These are things that I'm going to look actively and out to new possibilities and approaches that can give us additional vectors. The last M&A we did back in 2014. It turned out to be successful. I hope we don't fuck up this time.

Suji Desilva -- Roth Capital -- Analyst

All right, great, thank you guys.

Gideon Wertheizer -- Chief Executive Officer

Thank you, Suji.

Operator

And our next question comes from Peter Zdebski of Barclays. Please, go ahead.

Peter Zdebski -- Barclays -- Analyst

Hi, this is Peter on for Tavi. 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?

Gideon Wertheizer -- Chief Executive Officer

No, there's no changes when you talk about the prices on the inventory or freeing up inventory, that's more on the semiconductor side or front. We don't necessarily see that when we did the royalty reports, whether it was because of fixed expense or it's the predefined deals that don't change on the quarterly basis, based on volume, or a specific issue with a specific customer.

So, no, no change whatsoever in the ASP. It's just the volume that was much lower this quarter, from all the different reasons -- the known reasons that we saw many companies in this space take a hit in Q1 because of the inventory and the situation in the market. And we believe, as we said, that that will clear out during the year with no ASP issues, but more of the volume that was missing from our model.

Peter Zdebski -- Barclays -- Analyst

Okay, thank you.

Gideon Wertheizer -- Chief Executive Officer

Thank you.

Operator

And 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.

Richard Kingston -- Vice President Market Intelligence, Investor & Public Relations

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 8K and accessible through the Investor Section of our website at Investors.CEVA-DSP.com.

With regards to upcoming events we will be attending, these include CEVA's annual meeting of stockholders on May 20th in New York, the Town 47th Annual Media and Telecom Conference, May 29 and 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 Conference on June 19th in London, England. Please visit the investor section of our website for further information on these events and other events we will be attending.

Thank you and goodbye.

Operator

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.

Duration: 39 minutes

Call participants:

Richard Kingston -- Vice President Market Intelligence, Investor & Public Relations

Gideon Wertheizer -- Chief Executive Officer

Yaniv Arieli -- Chief Financial Officer

Matthew D. Ramsay -- Cowen -- Analyst

Suji Desilva -- Roth Capital -- Analyst

Peter Zdebski -- Barclays -- Analyst

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