CEVA (CEVA) Q1 2022 Earnings Call Transcript

CEVA (CEVA 0.36%)
Q1 2022 Earnings Call
May 10, 2022, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the CEVA, Inc. first quarter 2022 earnings conference call. [Operator instructions] Please note, this event is being recorded. I would now like to turn the conference over to Richard Kingston, vice president of market intelligence, investor and public relations.

Please go ahead.

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

Thank you, Betsy, and good morning, everyone. Welcome to CEVA's first quarter 2022 earnings conference call. I'm joined today by Gideon Wertheizer, chief executive officer; and Yaniv Arieli, chief financial officer of CEVA. Gideon will cover the business aspects and the highlights from the first quarter and provide general qualitative data.

Yaniv will then cover the financial results for the first quarter and also provide guidance for the second quarter and full year 2022. I'll 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 statements regarding our market position and strategy, including efforts with respect to 5G and edge AI innovation, demand for and benefits of our technologies expectations regarding market dynamics and expectations and financial guidance regarding future performance, including for the full year and the second quarter of 2022.

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 scope and duration of the pandemic, including continued restrictions in China, the extent and length of the restrictions associated with the pandemic and the impact on customers, consumer demand and the global economy generally; the ability of CEVA's 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; the speed and extent of the expansion of the 5G and IoT markets, our ability to execute more base station and IoT license agreements; the effect of intense industry competition and consolidation; global chip market trends, including supply chain issues as a result of COVID-19 and other factors and our ability to successfully integrate Intrinsix into our business. CEVA assumes no obligation to update any forward-looking statements or information, which speak as of their respective dates. With that said, I'll now hand the call over to Gideon.

Gideon Wertheizer -- Chief Executive Officer

Thank you, Richard. Good morning, everyone, and thank you for joining us today. We delivered a strong start for 2022 with a record high revenue of $34.4 million, up 35% on a year-over-year basis, driven by better-than-expected smartphone shipment and strong licensing execution. The licensing and the NRE environments continue to be strong.

delivering $22.4 million in quarterly revenue, up 56% year over year with 14 new agreements, of which three were with first-time customers. We continue to bolster our relationship with key customers sign comprehensive agreement for a new generation of new DSP, CEVA -XC DSP technology with a top-tier base station OEM and with a lead customer for NeuPro-M Edge AI platform targeting the brief automotive market in China. We continue to experience strong demand for our wireless and Edge AI platform technologies by customers targeting a broad range of markets and applications, among which our smartphone, smart home PC, ADAS, 5G IoT and Low Earth Orbit, LEO, Satellite communication. Royalty revenue came in at $12 million, up 9% year over year with a record of 531 million CEVA-powered shipments, up 56% versus last year.

In the smartphone space, we experienced better-than-expected shipment as a key customer of ours is gaining share with top tier OEMs. Royalties from base station and IoT product category were impacted by our customers' ability to ship product to OEM sodium in China, resulting from the lockdown there and due to supply chain constraints that our 5G base station RAN customers are facing. Despite these headwinds, the base station and IoT category was up 24% in revenue versus the respective quarter last year. Let me take the next few minutes to add more perspective on our market position and strategy.

Wireless connectivity is vital to drive IoT proliferation. It is a fast-growing market that is forecasted to reach to 15 billion units annually by 2026. In the last few years, CEVA has emerged as a prime wireless IP vendor with the position and market dominance as Arm Ltd. is for CPU IP.

Our indisputable ability to offer comprehensive wireless solutions for the most advanced and complex wireless protocol for 5G, Wi-Fi, Bluetooth and UWB lowers the entry barriers for a growing numbers of OEMs and semiconductor companies to incorporate wireless technologies for the sizable markets of smart home wearables and hearables, automotive, metaverse, industrial and more. Under by this powerful foundation we have been we are intensifying our 5G innovation and looking to realize the full potential of 5G New Radio in enabling new industries and attributes such as broadband satellite communications, Sidelink to support pedestrian safety through direct cellular connection of smartphone and wearables to vehicles, Redcap to enable energy constraints, medical wearables and industrial IoT and more. At the recent Mobile World Congress event we announced the PentaG2, our second generation 5G baseband processor platform PentaG2 is a comprehensive 5G architecture that integrates multiple CEVA DSPs, highly efficient hardware and AI coprocessor, along with the associated software. PentaG2 streamlined the complexity of developing and integrating 5G modems into the new class of 5G cellular IoT devices across its two main segments: broadband IoT and massive IoT.

An additional 5G space where we are looking to capitalize demand is 5G Radio Access Network or RAN. The latest generation of 5G base station architecture are virtualized with disaggregation of the RAN workloads between the Distributed Unit or DU and the Radio Unit or the RU. Both are highly demanding and accustomed to DSP processing and effectively more than double CEVA's addressable market versus traditional LTE base station architecture. As I noted earlier, we have concluded in the first quarter, a sizable and strategic agreement with top-tier OEM for a new class of DSP architecture that we will announce in the coming months.

This new DSP architecture will set the stage for the proliferation of virtualized RAN and Open RAN and will be our underlying technology for our next generation cellular solutions. We also made noteworthy progress this past quarter in the Edge AI space. In our prior earnings call, we outlined our AI strategy, which focuses on AI at the edge, a fast-growing market, forecasted by ABI Research to surpass 1.3 billion units by 2026. To capitalize on this sizable opportunity, we unveiled a new Edge AI processor architecture, the NeuPro-M, with scalable performance starting from 20 Tera Operation Per Second or TOPS and going up to 1,200 TOPS.

NeuPro-M addresses the AI requirements of broad markets and applications, among which are smartphones, autonomous cars, mixed reality, 5G and more. As noted earlier, we signed a lead customer license agreement with a semiconductor company that targets the ADAS and the intelligent cockpits market in China. It is our first entry to the vibrant automotive market in China that leads the transformation of cars in the form of software-defined architectures and electrification. In summary, CEVA continued to execute well in the first quarter with a strong performance and financials, even in the face of challenging macro events.

We have the vision, the market reach and the execution capability to monetize our technology innovation. While the lockdown in China has impacted our customer there, the end market demand for our product continues to show strength which position us to continue to outperform through 2022. With that said, let me hand over the call to Yaniv for the financials.

Yaniv Arieli -- Chief Financial Officer

Thank you, Gideon. I'll start by further reviewing our results of operations for the first quarter of 2022. Revenue for the first quarter was a record high $34.4 million, up 35% compared to $25.4 million for the same quarter last year. Revenue breakdown is as follows: Licensing, NRE and related revenue was a record high, $22.4 million, reflecting 65% of our total revenues, up 56% as compared to $14.4 million for the first quarter of 2021.

Royalty revenue was $12 million, reflecting 35% of our total revenues, up 9% from $11 million in the first quarter of 2021. Base station and IoT royalty revenue contributed $7.1 million in the quarter, up 24% year over year despite a headwind from supply chain constraints in the 5G base station RAN space, and the impact of the lockdown in China on some of our Chinese customers. Quarterly gross margin was 81% on GAAP basis and 84% on a non-GAAP basis, both better than expected. Non-GAAP quarterly gross margin excluded approximately $0.3 million of equity-based compensation expenses and $0.5 million of amortization of other assets associated with the Intrinsix acquisition and Immervision investment.

Total operating expenses for the first quarter were $27.5 million, at the higher-end of our guidance, due to lower allocation of Intrinsix's NRE costs from R&D into cost of revenue per our prior quarter's guidance. Such shifts between these two expense line items may occur from time to time and are tied to the actual chip design work performed in the quarter. Opex also included aggregated equity-based compensation expense of approximately $3.1 million, amortization of acquired intangible assets associated with the Hillcrest Labs business and investments in NB-IoT of $1.1 million and $0.3 million of costs associated with the Intrinsix acquisition. Total operating expenses for the first quarter, excluding equity-based compensation expenses, amortization of intangible assets and Intrinsix deal related costs were $23.4 million, over the high-end of our guidance, due to the same reasons I just stated for GAAP.

On the tax front, there were a few developments in the quarter. We have implemented a new tax regulation in France named IP box tax regime, enabling our corporate tax rate to be lower than the statutory 25% on specific types of revenues. This was offset with higher withholding tax is associated with our future utilization in our Israeli subsidiary. GAAP other income included a $1.1 million loss, from the reevaluation of our investment in Cipia, formerly Eyesight Technologies, a leading provider of in-cabin sensing solutions for the automotive industry, that went public in the fourth quarter of 2021.

As we explained last quarter, we will continue to adjust our investment quarterly up and down, based on the market valuation of the shares. GAAP net loss for the quarter was $1.7 million and diluted loss per share was $0.07, compared to a net loss of $3.6 million and diluted loss per share of $0.16 for the first quarter last year. Non-GAAP operating income more than doubled to $5.5 million from $2.6 million reported in the first quarter of 2021. Our non-GAAP net income and diluted EPS for the first quarter of 2022 was $4.2 million and $0.18, respectively.

And net income and diluted EPS for the first quarter of 2021 was $0.3 million and $0.01, respectively. Other related data. Shipped units by CEVA licensees during the first quarter of 2022 were a record 531 million units, up 21% sequentially and 56% for the first quarter of 2021. Of the 531 million units shipped, $100 million, or 19% were for handset baseband chips, reflecting a sequential increase of 20% from 83 million units of handset baseband chips shipped in the fourth quarter of '21 and a 22% decrease from 129 million units shipped a year ago.

Our base station IoT product shipments were $431 million units in the quarter, up 21% sequentially and 104% year over year. Of note, Bluetooth was a record 333 million units in the quarter, an all-time record high with sensor fusion, Wi-Fi and cellular IoT also delivering strong contributions. As for the balance sheet items. At the end of March 2022, our cash, cash equivalents, balances, marketable securities and bank deposits were $162 million.

Our DSO for the first quarter of 2022 continue to be lower than the norm at 32 days, compared to the first quarter of 39 days. During the first quarter, we generated $9.8 million of cash from operations. Our depreciation and amortization was $1.9 million and the purchase of fixed assets was $0.9 million. At the end of the first quarter, our headcount was 476 employees, of which 391 are engineers, slightly lower than the total of 475 employees at the end of December '21.

On our yearly guidance, as Gideon explained, the fundamentals of our business are strong, which is implemented by record revenue in the first quarter. We continue to dominate the wireless IT space, stepping up our relationship with top-tier customers and are encouraged by the share gains by our key handset customer, the Tier 1 smartphone OEMs. We, therefore, are raising our annual revenue guidance to a range of $142 million to $146 million versus $122.9 million for 2021. This guidance contemplates consistent recovery in China as the restrictions there are gradually lifted throughout the year.

Specifically for the second quarter of 2022, gross margin is expected to be approximately 78% on GAAP and 82% on a non-GAAP basis, excluding aggregate of $0.3 million of equity-based compensation and $0.5 million for amortization. Opex for the second quarter is forecasted to be similar to the first quarter of 2022. GAAP-based opex is expected to be in the range of $27.1 million to $28.1 million. And of our total operating expenses for the second quarter, $3.3 million is expected to be attributed to equity-based compensation, $0.8 million for amortization and $0.3 million for the cost associated with the Intrinsix acquisition.

Our non-GAAP opex, excluding all these items, is expected to be in the range of $23 million to $24 million. Net interest income is expected to be approximately $0.4 million. And taxes for the second quarter are expected to be similar to the first quarter. Taxes generated from the new 10% significantly lower tax rate on specific revenue sources for our French activity, offset by tax expenses associated with holding taxes and their future utilization in our Israeli subsidiary.

Share count for the second quarter is expected to be 24 million shares on a non-GAAP EPS calculation basis. Betsy, you could now open the Q&A session.

Questions & Answers:

Operator

[Operator instructions] The first question today comes from Kevin Cassidy with Rosenblatt Securities.

Kevin Cassidy -- Rosenblatt Securities -- Analyst

Congratulations on a great quarter. Just maybe on the topic of the earnings season has been China and all the shutdowns, but you're expecting a gradual improvement. I guess are you getting that from your customers that are saying that they see this change in their government policy?

Gideon Wertheizer -- Chief Executive Officer

Kevin, thank you for what you said. Government policy is not something that our customer can control. The lockdown in the Shanghai area is still in place. There are few areas that you see releases.

When it comes to our customers, as we pointed in the prepared remarks, kind of things that happen when people cannot go to work and manufacturing line up basically almost shut down. So there is no point to assemble products and get the chip for that. Nobody is there. So we don't -- we -- the indication that we are getting from there is that they don't see a decline in demand.

The demand is there. Keep in mind that our technology goes to all sort of new applications in the IoT area, in the industrial areas. Things that are wireless driven, and that's in high demand. So we believe that once they get back to work, things will recover as they can.

Kevin Cassidy -- Rosenblatt Securities -- Analyst

OK. Great. So yes, no demand destruction. And maybe I think your acquisition of Intrinsix was extremely important and has great opportunities.

Can you talk a little bit about the -- your funnel of opportunities that you're working on, what might have changed during the quarter?

Gideon Wertheizer -- Chief Executive Officer

Yes. I think there are two aspects of the activities or the dynamics that we see with Intrinsix. Number 1 is there is a very solid position in the defense market. And you see it from the U.S., the ambitions and the need to ramp up the investment, both in the defense side, at the back of what is happening in Europe as well as overall building a semiconductor infrastructure.

So we see this implied to Intrinsix in terms of engagement. The other thing that we are now under the umbrella of CEVA doing is to promote or propose to customer a new business model that we call integrated IP solutions. So basically, we take the CEVA IP and the Intrinsix capability to design, chip design, pretty complicated one, combination of RF, mixed-signal, digital processors. And we basically elevate our proposition to customers and say, let's just not just the -- take the component, the core, but rather we'll build you the design of the SoC.

What as a result we are getting in particular in the U.S., we see a lot of interest from OEMs and also semiconductors that lack both the IP and the resources because there is a scarce resources about engineers. And we are getting good feedback, and we see some movement in this respect. So overall, the Intrinsix acquisition takes CEVA to the next level of more of a trusted partnership with customers and not just a supplier customer relationship.

Operator

The next question comes from Suji Desilva with ROTH Capital.

Suji Desilva -- ROTH Capital Partners -- Analyst

Congratulations as well. So maybe following up on Kevin's question, the Intrinsix efforts here, are you seeing the business model kind of, I guess, extension or shift to maybe more licensing upfront. Is that starting to take hold? Or will that take some quarters to kick in?

Gideon Wertheizer -- Chief Executive Officer

I mean it's ongoing. We believe that as time goes by when you see the integrated IP solution, which are largest -- larger deal size overall, both in the upfront side and the royalties, you see more -- higher components of IP in the Intrinsix deal, which you're going to see it in the cost side of our business. But it is process that we gradually want to promote it and focus on large customers because it's a different relationship.

Yaniv Arieli -- Chief Financial Officer

By the way, to remind you, Suji, that the first deal that we signed of integrated IP last quarter in Q4 of last year, that was the first deal. The project should end now in the second quarter. And then eventually, we should see a flow of royalties down the road as soon as that chip goes into production. So that's first part of being able to design the IP with the surrounding and the rework is something that we have already started.

And I think from every once in a while or every quarter, so we will be able to talk about a new deal. That's the goal.

Suji Desilva -- ROTH Capital Partners -- Analyst

OK. Great. That's very helpful. Of the areas in auto IoT that are positioned to grow, sensor fusion, Wi-Fi, cellular IoT, can you talk about which ones maybe have the most opportunity in the second half of this year that I know they're all growing.

Just curious, is any of them starting to inflect at all? Or are they all steady growers?

Gideon Wertheizer -- Chief Executive Officer

Yes. Suji, I would say that wireless and Edge AI are the two hot spots. And I'm saying wireless, it's all over the place. We have to offer unique technologies, 5G -- to offer 5G, Wi-Fi, UWB and Bluetooth.

And in 5G, the interest that we see is in the IoT side, cellular IoT. The late -- the upcoming standard in 5G Release 17 and Release 18 will open up a lot of new use cases. Some of them I mentioned in the call, RedCap, which will displace the narrowband IoT usage model. And there is a side link, which is basically think about putting these kinds of cellular block for every smartphone and wearable device so you can communicate with a vehicle and get additional safety.

So these are -- in the 5G, we see a lot of customers are interested. Wi-Fi, we see it in China, all over the place for smart home, access point, and also industrial. And UWB is upcoming standard that you'll see be key for automotive. And people even talk about audio over UWB as the de facto standard for Metrogas.

So in terms of interest and potential wireless all over the place, and I said in the prepared remarks, we are in a position that is dominant in this wireless IP space as Arm is the CPU IP. We are the go-to guy when people want to do because the comprehensiveness and the proven success stories that we have. The other area that I mentioned is Edge AI, we believe that going forward, every SoC will have an Edge AI processor in different form factors. And we built this new product and the new product that we announced baking for years, in light of something more generic than the previous generation Edge AI, which was more camera related.

And that's what we see now people are coming to us with the requirement to do. And the challenge with Edge AI, and we are addressing it not just in the hardware but the software as well is to make it simple for people to develop these applications. And that's make a strong -- the way we look holistically on these problems and not just the technology itself.

Operator

The next question comes from Chris Reimer with Barclays.

Chris Reimer -- Barclays -- Analyst

Congratulations on good quarter. You mentioned some of the problems with China and the COVID restrictions. Can you give a little more color on how that is impacting the business in terms of getting things out or you mentioned shipping? And then just on a follow-up, the guidance for revenues, I believe that's an increase. Can you give sort of some of the maybe the things going into that, that may be more confident about raising the guidance?

Yaniv Arieli -- Chief Financial Officer

Sure. Let me try to help out, Chris. So on our -- first, on the guidance perspective, we took it up, you're right. from the beginning of the year and obviously, much higher than last year.

Last year, we closed the '21 at $122.9 million the new guidance is $142 million to $146 million, so a notch higher than what we had in mind at the beginning of the year due to a strong start for Q1. China, I think what Gideon talked about earlier, I would look at it from two perspectives. From a licensing perspective, we have all been doing business with COVID alongside for the last two years, two-plus years. So on the licensing front of licensing new technologies, nothing has changed in China, nor in the rest of the world.

The companies in the technology sector, are continuing to license new technologies, over Zoom and teams and on the virtual capabilities without less travel from country to country, but when there are no lockdowns, of course, there are internal teams or local teams that needs -- each country does go from a customer to customer and to face-to-face meeting. So you saw that in the licensing, record licensing in the quarter, a lot of deals in China, five deals out of the 14 are China, business as usual. Unfortunately, they are under lockdown. So part of that design work is done from home and remote but not from their own offices and facilities.

That's one side of China that really hasn't changed. In the contrary, there's still good demand, and we saw that in licensing, both last year and this year and the numbers continue to be quite strong there, same as the interest. So now we're moving to the royalty front. And on the royalty front, we also came up with a better quarter compared to last year.

China is a big factor in our revenues and our customers. But we have seen that in specific markets like the base station market, our customers didn't probably get the full access of supply to build the base stations. It's not CEVA-only related. It's an industry related.

This has a lot to do with the lockdowns that has been happening for the last month and a half or so in China. And I think that's what we referred to that in some segments of our business, the royalty reports were lower than we had in mind for the first quarter. But we believe that will catch up because the demand is there and 5G base stations are in record demand around the world. And even the consumer devices that some of our customers were down maybe in 20% or 30% from what we anticipated, the overall scheme of things you saw that our royalties were up year over year from $11 million to $12 million.

So I think that the problem is really having some of these facility being closed for such a long time. As soon as it reopens, we may see that correction quite fast. We saw two years ago when China was locked down in the first quarter and the second quarter was robust around -- in China because everybody was picking up the pace. So we don't have that crystal ball of the exact timing.

But as Gideon said earlier, the demand for all these products that we are in, both whether consumer or electronics or the digital era still is around us, and we probably could have had a better set of numbers without the pandemic right now in China. But with that said, they are recognized. So I think that's what we're trying to convey. That's still business is strong there, although they are facing some difficulties.

Chris Reimer -- Barclays -- Analyst

And just one more, if I could. How do you -- how are you looking at the M&A pipeline? Has anything changed?

Gideon Wertheizer -- Chief Executive Officer

We are -- when it comes to M&A, it's a valid strategy for us. We are looking on different options. We don't we don't see any change in terms of reluctance to sell company or ambitious to by company, we do it one by one, different aspects in order to find the right fit for us. We did in the last, I would say, acquisitions, and all of them are extremely successful in growing our business.

Operator

The next question comes from Matt Ramsay with Cowen.

Sean OLoughlin -- Cowen and Company -- Analyst

This is Sean O'Loughlin on for Matt. I wanted to talk about ASPs quickly. And I think if you look at the license ASP in the quarter, it seems strong, but no, I know that there's probably more NRE there in the past than in the past from the Intrinsix. So maybe you could speak to the split between license versus NRE in that line? And then just on the royalty side, Bluetooth as you called out record shipments.

Is that what's driving the -- maybe a little lower ASP there? Or is there something else in the baseband mix?

Yaniv Arieli -- Chief Financial Officer

Sure. Good question. On licensing, we've always said for years that it doesn't make too much sense. You come up with a number, but there's not too much logic behind it.

If you take the licensing number and divide it by 14 deals. Some deals that are service-oriented, you don't recognize that amount upfront. So one of those 14 deals or a few of those 14 deals that you divided by are not really relevant to the revenue because they are not in the revenue line, sometimes because of the accounting rules or start-ups, you don't deliver before the customer actually pays you. So again, the same result that you get a number, but it's not -- doesn't necessarily reflect if it's a single use, if it's a larger, a multimillion dollar deal for a wider range of products.

I think that over the years, we've managed to come up with a nice portfolio of different technologies, now services as well. The pipeline is strong and then the numbers are going up. So that $22.4 million, I think, is a combination of all these different factors. What we could say maybe in the wireless side, and obviously, like 5G type deals are more expensive and lucrative than 4G deals a few years ago and same applies for Wi-Fi.

Wi-Fi 6 and now we talked last quarter about Wi-Fi 7, leading-edge technology are, of course, being higher priced than a Bluetooth type of device. So that's on the licensing front to give you a little bit more color. And the more type of technologies we come up with like Gideon talked about the nicer offering and the higher ASPs we have for these types of deals. It's really technology-driven and the newer technology that comes out, we also charge more than the technology that's two or three years old.

On the royalty front, Bluetooth, surprisingly, the ASPs are not even going down, but not just flat, but slightly even higher the retailing is that we have more and more customers, new customers that are joining in. And the ASPs usually in a newer customer with the royalty scheme is higher than the existing customer with a very large volume. So that's the end that's keeping the ASPs even better than flat on the Bluetooth side. And no doubt that you said that 333 million units in the quarter that does move the needle with royalties.

So the royalties overall for us, for Bluetooth and overall IoT and base station group is higher due to that. A nice factor. And I think maybe we were asked earlier about this is how do you see the rest of the year or some of the exciting things. One of the exciting add-ons to Bluetooth is Wi-Fi.

And we see much more demand for combo chips today. And if you -- we start -- we will start seeing more Bluetooth and Wi-Fi devices in the market, the ASP, there's not necessarily one and one is two, but that one-on-one type of technologies could be even equal to three because the ASPs of Wi-Fi chip is more expensive than Bluetooth. So from our perspective, a percent of that composite can be a nice contributor. And if part of our customers powering 300 million devices the quarter start adding Bluetooth and Wi-Fi to it.

That's a winning factor on the royalties side. So that's something to take into account from the ASP perspective. And these are the two biggest factors right now that probably worthwhile mentioning from an ASP perspective. I hope I covered it?

Sean OLoughlin -- Cowen and Company -- Analyst

No. That's helpful. And maybe segueing off of that, you talked about Wi-Fi flowing potentially into the royalties. Maybe bigger picture, if you could just talk about licenses that you've signed in 2021, how you're thinking about the time line of those flowing into the royalties? I mean, it was a pretty solid year for you last year, continued into this quarter.

And obviously, it depends on the end market. Auto is going to be longer. But how are you thinking about that? Are you starting to see royalties already from 2021 licenses? Or is that a '22 or '23, '24 type of thing?

Gideon Wertheizer -- Chief Executive Officer

In general, the connectivity, which we are Wi-Fi, Bluetooth, UWB, this -- the design cycle is much shorter, let's say than 5G. 5G, is very much bigger than some see. There is more stringent certification with operators, and that take between 18 to 24 months. I believe that we're going to see deals to sign in, let's say, in the first -- late first half of last year, we'll see it in early 2023 in mass production because -- the whole process of certifying the chip is much shorter and most important the proposition that we have for connectivity is much more integrated.

We will not just provide the hardware, but also the software. So the cycle is something between 12 to 15 months for mass production.

Operator

The next question comes from Martin Yang with Oppenheimer.

Martin Yang -- Oppenheimer and Company

Looking to the Bluetooth strength in the first quarter, can you maybe talk about where did that trend come from? How sustainable that is and whether or not that's associated with any inventory replenishment activities by our customers?

Gideon Wertheizer -- Chief Executive Officer

Well, Bluetooth is a very powerful standard in terms of the diversity of application. What we are seeing now in terms of customer shipments, it relates to TWS, the market, that's a growing market. That's close to 1 billion units in the next year also. And this market is now getting into different headsets space, whether it's for VR, Metaverse and in gaming, in general, to do it.

So to your question, it's extremely sustainable and growing. The Bluetooth standard is working on next-generation technologies that will provide to add the customer beyond the audio that we all now use Bluetooth for that purpose about locations. So think about the different tracks that's going to be all over the place. that's going to be even bigger market than the audio.

So overall, you're talking about Bluetooth of 4 billion units a year annually and is expected to go up.

Martin Yang -- Oppenheimer and Company

Understood. My next question is on your Edge AI comments. So are you implying that most of the Edge AI implementations you have are mostly for camera-related applications. And for this newer generation, where do you think or what market segment do you think will get first adopted besides camera applications.

Gideon Wertheizer -- Chief Executive Officer

That's a good question. When people talk about Edge AI or AI, the Edge AI terms, just in the last two years, people start using it to distinct it between the AI activity that happens in the data center. Edge AI, the initial use was related to camera. So when people talk about ADAS, so it's a camera that you make -- you put -- you use AI to detect pedestrian, they take traffic light or things like this or surveillance camera, you need to detect strange behavior.

As time goes by, people got more familiar of how you use AI in other applications. So in 5G, you can use it for optimizing the network performance. So when it comes to smartphone, in general, you can use AI to optimize the power metrics by collecting data and knowing how people specifically use natural language processing, voice recognition. We are seeing a lot of customers using AI for things that in the past, they wrote software.

And that's what drove us to come out with new program and to say, this is not just AI for camera. This is AI for sensing in general. This AI is for any workloads that you need to do. It's -- think about CPU for AI, the same thing.

CPU don't -- customers are not trying to use it for certain tasks. They just use it for everything that they need. Same goes for the new people we use people will use this platform for any workload, any application that relates to AI .

Yaniv Arieli -- Chief Financial Officer

Martin, I'll add one more thing to your prior question, and Gideon talked about the size of the Bluetooth market. Don't forget that last year, and this is part of the excitement for us in the connectivity and the wireless space. Last year, we talked about two design wins that we add into the cellular space with Bluetooth or Wi-Fi that connectivity. One is the semiconductor company and one was an OEM, and actual Chinese OEM doing handset, and we are going -- they're going to do their own ship with our with our connectivity technology, replacing an incumbent supplier that is there today.

So that's part of the growth and part of the opportunity that we have in Bluetooth, not just the IoT devices, but also back in handsets with more technology than just the modems that we have done for many years.

Operator

Next question comes from Gus Richard with Northland.

Gus Richard -- Northland Securities -- Analyst

Yes. I apologize in advance for having to ask this. In the old days, you used to recognize revenue for royalties 1 quarter in arrears. And then when FASB 606 came along, you had to recognize revenue in the current period, but I don't think you get all of your royalty reports by the time you put your numbers together.

And I'm just wondering, has that changed and your customers get the royalty reports to you? Or -- and if not, how do you estimate royalties in a period without all the reporting? Any color there would be helpful.

Yaniv Arieli -- Chief Financial Officer

Yes. Excellent question, Gus. I mean the first thing, you're most welcome to write to the SEC and request to change the rules. It will make all of our lives much easier.

And it is more complex. There's no doubt that we don't get all the scores, especially this quarter, when the companies in China were -- specifically were shut down and people can't come to work and close the numbers and use the system. So we did call up all our customers. We did try to get as much insight as we can for their business.

Some gave us a viable estimate. Some gave us an assumption of where they think they are compared to the prior quarter. The estimates for the best to translate it into royalties. That's the best we could do with companies that did not report to us.

And a big portion didn't report on time and still manage whether it's a draft or a final report, but to those that were not around their offices, that was the theme that we did for this quorum, a bit more challenging than the quarters when business is as usual and people are in the office.

Gus Richard -- Northland Securities -- Analyst

Got it. And when do you just true up any interaccuracies from Q1 and Q2 earnings?

Yaniv Arieli -- Chief Financial Officer

Yes. Always that's always the case. The next quarter, we always update it and true it up to the final report. Usually, we know these customers for many years.

The ones that are in production. So -- there are no big surprises. And if they are, they will trade up in the following quarter.

Operator

This concludes 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, Investor and Public Relations

Thank you, and thank you all for joining us today and for your continued interest in CEVA. As a reminder, the prepared remarks for this conference call are filed as an exhibit to the current report on Form 8-K and accessible through the Investors section of our website. With regards to upcoming events, we will be participating in the following investor conferences: the Oppenheimer 23rd Annual Israeli Conference May 22 to 24 in Telaviv; Cowen's 50th Annual TMT Conference, June 1 and 2 in New York; and Rosen Black Securities Technology Summit Age of AI Conference, June 9 and 10. For further information on these events and all events, we will be participating in, can be found on the Investors section of our website.

Thank you, and goodbye.

Operator

[Operator signoff]

Duration: 56 minutes

Call participants:

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

Gideon Wertheizer -- Chief Executive Officer

Yaniv Arieli -- Chief Financial Officer

Kevin Cassidy -- Rosenblatt Securities -- Analyst

Suji Desilva -- ROTH Capital Partners -- Analyst

Chris Reimer -- Barclays -- Analyst

Sean OLoughlin -- Cowen and Company -- Analyst

Martin Yang -- Oppenheimer and Company

Gus Richard -- Northland Securities -- Analyst

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