CEVA, Inc. (CEVA) Q2 2019 Earnings Call Transcript

CEVA, Inc. (CEVA 2.54%)
Q2 2019 Earnings Call
Aug. 8, 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. second quarter 2019 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing * followed by 0. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press *1 on your telephone keypad. To withdraw your question, please press *2. Please note, this event is being recorded. I would now like to turn the conference over to Richard Kingston, Vice President of Market Intelligence and Investor Relations. Please go ahead, sir.

Richard Kingston -- Vice President of Market Intelligence and Investor Relations

Thank you. Good morning everyone, and welcome to CEVA's second quarter 2019 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 the highlights from the second quarter and provide general qualitative data. Yaniv will then cover the financial results for the second quarter and also provide qualitative data for the third quarter and the rest of 2019.

I will start with the forward-looking statements. Please note that today's discussions contain forward-looking statements that involve risks and uncertainties as well as assumptions that, if they materialize or prove incorrect, could cause the results of CEVA to differ materially from those expressed or implied by such forward-looking statements and assumptions. Forward-looking statements include our financial qualitative data for the third quarter and remainder of 2019, including royalty revenues and the mobile market stabilization, optimism about CEVA doubling its 2018 royalty revenue by 2022, ability to capitalize on a healthy design environment to sign licensing agreements and retain a robust licensing pipeline, optimism about synergies associated with the acquisition of the Hillcrest Labs business and the license arrangement with Immervision, including leveraging Hillcrest Labs customer base and revenue contribution relating to the Hillcrest Labs business in the second half of the year, and full-year expense levels.

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 IP for smarter connected devices to continue to be strong growth drivers for us, our ability to realize the benefits from the acquisition of certain assets at Hillcrest Labs, and license arrangement with Immervision, 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 markets, the speed and extent of the expansion of the 4G LTE and 5G networks and wireless connectivity, AI, LTE IOT, and the IOT space generally, our ability to execute more non-handset baseband license agreements, the effect of trade tariffs and political tensions, the effect of intense industry competition and consolidation, including the effect of Apple's announced acquisition of a majority of Intel smartphone modem business, and global chip market trends.

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 be useful to review results using certain non-GAAP financial measures. Investors and potential investors are encouraged to review the reconciliation of non-GAAP financial measures with their most direct comparable GAAP financial results, which can be found in the earnings press release issued today. A copy of today's press release for the quarter ended June 30, 2019, and the related financial tables and management commentary, which were included in our current report on form 8-K filed today, also can be found on the investor relations portion of our website after this call. 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. We delivered a robust financial performance in the second quarter driven by excellent execution in licensing and a noticeable uptrend in royalties. We also expanded our market reach and product portfolio by acquiring US-based Hillcrest Labs specializing in central fusion software technologies and forming a strategic partnership with ImmerVision, a Canadian-based company with advanced digital imaging software technologies. Total revenue for the second quarter was $18.4 million, up 5% on a year-over-year basis. License revenue was $10.8 million, up 8% year-over-year. While the revenue was $7.6 million, up 2% on a year-over-year. License revenue grew 27% sequentially and the handset inventory level normalized, which benefited one of our customers supplying cellular baseband to US-based premium smartphone OEM, and one of our large China-based baseband customers.

On the licensing front, we continued the fast pace of customer design winds with nine new agreements of which six of our connectivity products and three for our smart-sensing product. Four of the wind are these first-time customers. Our second quarter licensees are targeting a diverse range of end markets and application, among which our cellular IUP wireless earbud, AI and computer vision for consumer and civilian's product, and Wi-Fi access point. The wireless earbud or two wireless stereo design wind is particularly notable as we provide both the sound and Bluetooth technologies for this large market. With the acquired Hillcrest Labs technology base, we can further extend our off-link for this market with central fusion software.

In the first six months of 2019, we signed a total of 17 deals. That accomplishment brings the total number of bids to more than 160 licensing agreements since the beginning of 2016. This accumulated license trends and ongoing cheaper software design are the foundation for all of the generation powered our strategic goal of doubling our 2019 was delivered by 2022. Overall, we are capitalizing on healthy design environment, in particularly China, Japan, and the US. And our technology excellence in wireless connectivity and smart sensing to sign lucrative licensing agreement and then paying a robust licensing pipeline.

On royalties, our second quarter royalty revenue reflects capitalization in the baseband space following an inventory clean up that allowed US-based headset supplier a new production rent and designing by our China-based customer in the low and mid LTE's cellphone market. We believe these positive trends will accelerate as we head into the high season in this space. In the base station market, we are particularly encouraged by the recent progress result key customer with ZTE in 5G based station. We recently publicly commented that it has secured more than 25 commercial 5G network contracts to date. ZTE is capitalizing on its first mobile advantage, a note with which relate to our advanced DSP platform. Then market in the expedited 5G deployment in China following the government brunt of commercial 5G licenses to telecom operators and cable network operators.

Overall, royalties from our non-handset customer continue to show solid growth up 52% in revenue versus the second quarter of 2018. Now, on the strategic transaction we have concluded recently. In July, we acquired the Hillcrest Labs business from InterDigital for $11 million. Hillcrest Labs is a global supplier of software IP, complimentary services and component that process data from sensors. Hillcrest Labs' advanced motion engine algorithm and software platform through based a caption from a diverse range of sensors, such as accelerometer, gyro, magnetometer, barometer, and other, reflect the accurate orientation and the heading of a device in this domain. Sensor fusion is broadly used in smartphones, laptops, tablets, wireless earbuds, remote controls of smartTV and set top boxes, drones, automative, AR and VR robots and numerous other devices.

Hillcrest Labs' technology, competencies, and customer base add new revenue sources and market opportunities for our smart-sensing portfolio that currently include vision, sound, and AI products. Hillcrest Labs software products have shipped in more than 100 million devices today, and the market's customer high-sense LG electronics smartphone. And some of the leading were by these companies. Its revenue for the first six months of the years was approximately $3 million of which 80% were royalties. With Hillcrest Labs technologies on board, we plan to offer a comprehensive and integrated software state that will combine Hillcrest Labs motion sensing with sound and vision to advance multiple opportunities. We expect to couple this motion sensing technology with our board portfolio of DSP date wireless and cellular connectivity IP. We also anticipate to capitalize on Hillcrest Labs mature software stack and experience to engage and license directly to OEMs to benefit from shorter time to royalties and adopt a royalty payment scheme based on device rather than chips.

I'd like to take this opportunity to welcome the Hillcrest Labs into the CEVA family and to thank the InterDigital team for their support during the acquisition process. Another production that we executed a few days ago is a $10 million investment and strategic partnership with ImmerVision, a Canadian-based private and government funded technology company. ImmerVision offers very promising software technology relating to wide-angle camera. Wide-angle camera offers a field of view between 80 degrees to 250 degrees and is commonly used in the surveillance market, and recently expanded to smartphone, ADAS, and robots, all primary markets for CEVA. With that said, wide angle lens suffers from inherent distortion in the image quality, particularly at the edge of the frame. Through advanced imagining algorithms and index know-how of lens optics, ImmerVision is able to correct the distortion and provide smooth and clean 360-degree views by stitching the snaps of multiple wide-angle cameras.

Under this partnership agreement, CEVA will have an exclusive license right to all ImmerVision software portfolio. We expect to offer the software as a royalty bearing value-add to our customer base or independently to OEMs. So in summary, I'm very pleased with the performance in the second quarter. We continue to extend our licensee base and to diversify our revenue sources. The weakness in demand our mobile customers faced last year shows good signs of stabilization and we expect the strong second half in run to revenue. Last, our recent cash investment in acquiring certain efforts of Hillcrest Labs and for licensing right of the imaging software from ImmerVision are in line with our strategy to go up in the value chain, creating tighter relationship with our customer and incremental royalty software from semi-conductor companies and OEMs. With that said, I'll now turn the call over to Yaniv who will outline our financial guidance.

Yaniv Arieli -- Chief Financial Officer

Thank you, Gideon. I'll start by reviewing the results of operations for the second quarter of 2019. Revenue for the second quarter was $18.4 million, up 5% as compared to $17.5 million for the same quarter last year. The revenue breakdown is as follows. Licensing and related revenue was approximately $10.8 million, reflecting 59% of our total revenue, 8% higher as compared to the second quarter of '18. Royalty revenue was $7.6 million, reflecting 41% of our total revenue, up 2% from $7.5 million for the same quarter last year. Total gross margins of 86% on GAAP basis and 88% of non-GAAP basis as projected. Non-GAAP total gross margin excluded approximately $0.1 million of equity-based compensation expenses and $0.1 million of impacted amortization of acquired intangibles of our investment in the NB-IoT technologies.

Our total operating expenses from the second quarter came in at the mid-range of our guidance, $18.1 million. OpEx also included aggregate-based compensation expenses of perhaps similarly good $0.5 million. And $0.2 million for the amortization of acquired intangibles of RivieraWaves. Total operating expenses for the second quarter excluding these items were $15.4 million, also at the mid-point of our guidance. US GAAP net loss for the second quarter decreased by 28% to $1.5 million and diluted net income per share decreased 22% to $0.07 compared to a net loss of $2.1 million and $0.09 for the second quarter of 2018. Non-GAAP net income and diluted EPS for the second quarter of 2019 were up 42% and 25% to $1.2 million and $0.05 respectively. A net income and diluted EPS for the second quarter of 2018 of $2.9 million and $0.04. Other related data. Shipped units by CEVA's licensees during the second quarter of 2019 were 217 million units, up 24% sequentially, and down 2% year-over-year from the second quarter of 2018. Of the 217 million units shipped, 122 million, or 56%, were for handset baseband chips. This reflects an increase of 37% sequentially from 89 million units shipped in the first quarter of 2019. And a 26% decrease of 165 million units shipped a year ago. In the non-baseband, volume shipments were up 11% sequentially and 8% on a year-over-year basis.

As for our balance sheet, as of the end of June, fee-based cash, cash equivalent balances, marketable securities and bank deposits were $166 million. We continued our buyback repurchasing program and purchased approximately 103,000 shares during the second quarter to approximately $2.3 million. A year ago, our board of directors approved the expansion of the existing buyback plan and as of the end of June, we have a total of 161,000 shares available under this repurchasing program. The results for the second quarter of 52 days during the quarter we generated a negative of $3.8 million of cash from operations. Depreciation was $0.7 million, and budget of fixed asset was $0.7 million as well. At the end of the quarter, our headcount was 358 people of which 294 were engineers. These numbers do not include yet 22 people from Hillcrest Labs, which were added in July.

Turning to guidance. As Gideon pointed out, we are experiencing an overall healthy environment both on the licensing and royalty fronts. We also expect the Hillcrest business to contribute to revenue in the second half of this year. Therefore, we are now anticipating that our annual revenue will be in the range of $3-4 million higher than the current estimates. On the operating side, we continue to be cautious and discipline in our expense control. As a result, including the addition of Hillcrest Labs, we expect to remain or to record a slight increase in annual non-GAAP operating expense level that we guided earlier in the year for 2019. Accumulated data, specifically for the third quarter of 2019. We expect a substantial increase in royalties in the second half of the year. Starting with more than 60% sequential increase for the third quarter. This includes the initial contribution from Hillcrest Labs and should account for one of the highest royalty revenue quarters in the company's history.

Gross margin is expected to be approximately 88% on a GAAP basis and 89% on the non-GAAP basis. Overall OpEx is expected to be in the range of $19.7 million to $20.7 million after adding in new Hillcrest business excluding deal cost and amortization. And including approximately $0.3 million of deal-related write-offs. The anticipated total operating expenses for the third quarter, $2.9 million is expected to be attributed to equity-based compensation expenses, $0.2 million of amortization for the acquired intangibles, not including Hillcrest and ImmerVision. Another $0.3 million for deal-related write-offs. Our total non-GAAP OpEx is expected to be in the range of $16.4-17.4 million. Net interest income is expected to be approximately $750,000 for the quarter. Taxes for the quarter approximately $0.3 million on GAAP-basis, and $0.5 million on non-GAAP basis. And our share count for the third quarter is expected to be approximately 22.9 million shares. With that, we could open the Q&A session.

Questions and Answers:

Operator

We will now begin the question and answer session. To ask a question, you may press *1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press *2. At this time, we will pause momentarily to assemble the roster.

And our first question today comes from Peter Zdebski with Barclays. Please go ahead.

Peter Zdebski -- Barclays -- Analyst

Good morning, guys, this is Peter on for Tavy Rosner from Barclays. So you mentioned the inventory normalization in smartphone, was that specific to the US customers? Or is that broad-based geographically? And then I have a follow-up.

Gideon Wertheizer -- Chief Executive Officer

Hi, this is Gideon. We don't know -- we don't defer the overall industry without focusing on what we know about our customers.

Peter Zdebski -- Barclays -- Analyst

Thank you. And then, in terms of inventory levels going into the fall, we understand shipments for your units for your large US premium smartphone customer have been a bit above seasonal in the second quarter. So going into the fall, do you see inventory levels just maybe back down to closer to historical or are they even maybe below historical? And maybe how does that factor into your royalty guidance for the third quarter?

Yaniv Arieli -- Chief Financial Officer

Peter, so you need to remember that there is an analysis that's playing in our Facebook in all the markets, whether it's consumer or handset, and this is not only seasonal. Usually in the third and fourth quarter are stronger than the first two quarters of the year. I think that's what the first we are referring to. On top of that -- and actually we saw that way last year as well. In our business, it hasn't changed from five years. And on top of that, you need to fine tune it. As Gideon said, to our specific customers in different markets in different regions, we have high-end devices as well as low-end devices. It's baked into the best of our knowledge, all of that data. Of course, when we get the Q3 roll to report then we'll report it early November. Then we'll have the real numbers and we'll have a better picture to provide.

Peter Zdebski -- Barclays -- Analyst

Got it. I just -- I was just trying to get a better picture of what seasonality looks like, it might be a bit stronger this year than last year based on your guide.

Yaniv Arieli -- Chief Financial Officer

It's very similar. It's very similar. We have seen improvement with the Chinese customer. We've talked about that in the prepared remarks. We've seen more design winds and you could look on the web and find it. Much more announcements of new chips rolling out. New phones. So that's encouraging. And with that said, on top of that, we also have the initial contribution from Hillcrest. So together, these are making higher sequential increases than last year. The concept is quite similar.

Peter Zdebski -- Barclays -- Analyst

Got it. I thank you very much.

Operator

And our next question comes from Suji Desilva with Roth Capital. Please go ahead.

Suji Desilva -- Roth Capital -- Analyst

Hi, Gideon. Hi, Yaniv. Congratulations on the improving results here. So for the third quarter '19, you guided very strong royalties. Can you give us some sense of what are the drivers beyond Hillcrest, just to understand which segments of the business are improving the most here?

Gideon Wertheizer -- Chief Executive Officer

You mean for the second half of this year?

Suji Desilva -- Roth Capital -- Analyst

Yeah, sure. Third quarter, second half, yes.

Gideon Wertheizer -- Chief Executive Officer

So what we can now capture analyzing the second quarter once we report, is that the inventory -- which, with the stumbling issue in the first quarter is a concern to us. This time of normalizing, we are going to a regular on the handset side, regular, typical up season where you have your models and your design coming to the market. So overall, if you look on our guidance sheet, composed of the seasonal uptrend bolts in the mobile, in the non-handset, keep in mind that the non-handset in general, we have new models coming. So there is a contribution from that for that with a strength.

Then Hillcrest, and of course the base stations, we mention GP, they are doing well. So all in all, these are the cylinders that are firing in the second half. With that said, there is this global market that is around us, which we keep close eye, and that's the reason that we are also careful with the expenses. So overall, we bake whatever we can do, which you can treat in this that can become out of this, but we are generally optimistic.

Suji Desilva -- Roth Capital -- Analyst

Okay. And then specifically on wireless infrastructure. Can you talk about the shape of the ramp here that's steady, or will there be an inflection quarter ahead? What's the run rate you'll expect in the next 6-12 months from the current levels?

Gideon Wertheizer -- Chief Executive Officer

That's a difficult question and an answer to this. Here you are going in this space you see all of the global dispute, how fast that this can go to outside of China, what about other customers that we have? These are the kind of things that we don't know where we are today. Our guidance is [inaudible] really the 5G coming out and people are starting building the base station or upgrading the base station. So things look positive in terms of this [inaudible] for now.

Suji Desilva -- Roth Capital -- Analyst

Okay. That's helpful. And then last question. One of your customers, Intel, their assets were acquired most recently. Any insight into the 5G plan or opportunity, how to model that for us? Any color you have will be helpful. Thank you.

Gideon Wertheizer -- Chief Executive Officer

You see, we heard about this acquisition of Intel like anybody else. They have to conclude all of the implication of this deal. I don't know when they -- I think generally it's good for the industry that -- Intel taking the lead in their own chips. I believe that in the other, we showed up in the past, we believed that people -- we go, everyone wants to have a control on 5G modem and they will do a step and here comes [inaudible] so much substance in this space that any newcomer or incumbents that wants to go to the step into the modem business will find that the cloud you see right into them in different flavors. So that's what we know now about the -- we know that we have model, we can also a lot of things to newcomers.

Suji Desilva -- Roth Capital -- Analyst

Okay. Thank you, Gideon. Thanks, guys, and congratulations again.

Operator

And once again, if you'd like to ask a question, please press *1. Once again, that is *1 to ask a question. And this will conclude our question and answer session. I would like to turn the conference back over to Richard Kingston for any closing remarks.

Richard Kingston -- Vice President of Market Intelligence and Investor Relations

Thank you. Thank you everybody for joining us today and for your continued interest in and support of CEVA. As a reminder, the prepared remarks for this conference call are filed as an exhibit to the current report on form 8-K and accessible through the investor section of our website at investors.ceva-dsp.com. With regards to upcoming events we will be attending, these include the Jefferies 2019 Semiconductor, Hardware and Communications infrastructure summit, August 27-28 in Chicago. The Citi 2019 Global Technology Conference, September 4-6 in New York. And the Deutsche Bank Technology Conference, September 10th and 11th in Las Vegas. Please visit the investors section of our website for further information on these events and other events that we will be attending. Thank you and goodbye.

Operator

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time and have a wonderful day.

Duration: 36 minutes

Call participants:

Richard Kingston -- Vice President of Market Intelligence and Investor Relations

Gideon Wertheizer -- Chief Executive Officer

Yaniv Arieli -- Chief Financial Officer

Peter Zdebski -- Barclays -- Analyst

Suji Desilva -- Roth Capital -- Analyst

 

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