Ceva Inc Q1 FY2021 Earnings Call

Good day and welcome to the CEVA, Inc. First Quarter 2021 Earnings Office Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note, today's event is being recorded. I would now like to turn the conference over to Richard Kingston, Vice President of Market Intelligence, Investor and Public Relations. Please go ahead, sir.

Thank you, Rocco. Good morning, everyone and welcome to CEVA's first quarter 2021 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 qualitative data for the second quarter and full year 2021. I will start with the forward-looking statements. Please note that today's discussion contains forward-looking statements that involve risks and uncertainties as well as assumptions that if they materialize or prove incorrect, could cause the results of CEVA to differ materially from those expressed or implied by such forward-looking statements and assumptions. Forward-looking statements include statements regarding demand for and benefits of our technologies, including 5G technologies and our BlueBud platform IP, and related deal flow. Expectations regarding market trends, including growth in shipments of Ultra Wide Band devices, and True Wireless earbuds and secular growth in the IoT space, beliefs regarding benefits of the Intrinsix acquisition, as well as the closing of the acquisition, our ability to help customers mitigate risks associated with supply constraints, and guidance and qualitative data for the first quarter and full year 2021. 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, 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 networks, our ability to execute more base station and IoT license agreements, the effect of intense industry competition and consolidation and global chip market trends, including supply chain issues as a result of COVID-19 and other factors. CEVA assumes no obligation to update any forward-looking statements or information which speak as of their respective dates. And with that said, I'll now hand the call over to Gideon.

Thank you, Richard. Good morning, everyone. And thank you for joining us today. 2021 is off to a robust start with strong licensing execution and royalties exceeding our expectations. During the quarter, we unveiled BlueBud, a first-of-its-kind IP platform for the booming market of the True Wireless (TWS) earbuds, smartwatches, gaming headsets and other wearables. Today we are announcing the acquisition of Intrinsix, a Marlborough, Massachusetts based leading chip design and secure processor IP company with extensive experience and solid business in the Aerospace and Defense market. I will elaborate shortly on these strategic initiatives. Total revenue for the first quarter of 2021 was $25.4 million, up 8% year-over-year. The licensing environment continues to be healthy with $14.4 million in licensing revenue, down 1% year-over-year. We signed 11 new agreements, of which 2 were with first-time customers. China continues to be a very strong market for wireless connectivity technologies, with high adoption rate both by strong incumbents and newcomers. We are experiencing increasing interest for our 5G technologies, specifically, the new 5G provision known as RedCap or Reduced Capability, which is targeted for the proliferation of IoT devices such as wearables, industrial wireless sensors, surveillance cameras and more. Our Bluetooth and Wi-Fi technologies continue to be in high demand for a variety of IoT devices for smart home and mobile devices. We also signed up a lead customer for Ultra Wideband (UWB) technology that we are currently developing. UWB is a short-range wireless communication that is able to precisely triangulate location of devices, with high security. It is already widely used in the automobile industry and recently Apple, Samsung and Xiaomi have embedded UWB in their flagship models and are gradually embedding UWB in other high-volume devices such as the recently announced Apple AirTag. According to ABI Research, 285 million UWB devices are expected to be shipped this year and forecast to reach 1 billion devices by 2025. Royalty revenue reached $11 million, up 21% year-over-year, ahead of our expectations. This was driven by robust demand for our consumer and IoT products and above-seasonal demand in smartphones. We believe our customers are facing tight supply constraints, as is most of the industry, and are working hard to expedite shipments for high demand products. Let me now go through the rationale for the acquisition of Intrinsix, which we are announcing today. Intrinsix is a leading chip design and secure processor IP specialist targeting the growing chip development programs in the Aerospace and Defense market, and a range of other IC designs for medical and industrial products. Intrinsix has successfully executed more than 1,500 complex design projects in its 34-year history and built a successful business that generates more than $20 million in annual revenue. Over the years, they have built strong relationships with blue-chip semiconductor companies and OEMs among which are Intel, IBM, Leidos, Lockheed Martin, Honeywell and many more. Their chip design skills and expertise are scarce and include proven competencies in RF, mixed signal, digital, software security and RISC-V processors. With the addition of Intrinsix, CEVA stands to benefit from three growth pillars. First, extending CEVA's market reach into the sustainable and sizeable Aerospace and Defense space, a market forecasted to reach $6 billion in annual semiconductor spending. Second, increasing our content in customer design and accordingly increasing the license and royalty revenue opportunity by offering turnkey IP platforms that combine CEVA connectivity and smart sensing IP with Intrinsix chip design expertise and security and interface IP. Third, expanding CEVA IP portfolio with secure processor IP for IoT devices and Heterogeneous SoC (HSoC) interface IP for the growing adoption of chiplets, which offer a faster and less expensive alternative to the high R&D costs and complexities associated with monolithic IC developments. We welcome the Intrinsix team to the CEVA family and look forward to the exciting opportunities ahead. We expect the closing of the agreement to take place during this quarter. Yaniv will discuss the financial aspects of this acquisition later on. Another important product we recently introduced is the BlueBud platform IP. The proliferation of True Wireless earbuds is skyrocketing as millions of workers, students, doctors and other professions are required to spend much more time in voice or video calls and need a stable and high-quality audio experience from their wireless earbuds. According to recent data from Counterpoint Research and Strategy Analytics, the TWS market is expected to reach 600 million units by 2022 and to see 70% CAGR over the next three years. The underlying technology used for TWS has broader uses and can be carried forward to smartwatches, over-the-counter hearing aids, mobile gaming, AR headsets, home entertainment speakers and smart home appliances. With the BlueBud proposition, CEVA strives to become the de facto standard for wireless audio in the IP industry. Our unique technology competencies and holistic view allow us to address the substantial technology challenges derived from the need for extreme low power consumption and intelligible audio quality. BlueBud is a self-contained platform enabled by our high runner CEVA-BX1 DSP and incorporates all the software framework and hardware peripherals required for a wireless audio system. BlueBud also offers optional value-add SDKs including our WhisPro AI-based voice recognition software, ClearVox for echo cancellation and noise suppression software and MotionEngine Hear for IMU-based user control. I am pleased to share that we have already signed up a high-volume lead customer for BlueBud at the beginning of the second quarter and are expecting more deals to follow as the product is released to the wider market. So in summary, we are very pleased with our solid performance in the first quarter. Our business fundamentals are strong and with the acquisition of Intrinsix, we are expanding into the Aerospace and Defense market and enriching our value proposition and content by offering turnkey IP platforms and new IP for security and HSoC interface. With our technology base, core competencies and customer relationships we are well positioned to capitalize on secular growth in the IoT space. Lastly, we are monitoring closely the impact on the industry-wide supply constraint and will help our customers to mitigate their risks and challenges where we can as they become apparent. With that said, let me hand over the call to Yaniv for the financials.

Thank you, Gideon. I'll start by reviewing the result of our operations for the first quarter of 2021. Revenue for the first quarter was up 8% to $25.4 million, as compared to $23.6 million for the same quarter last year. The revenue breakdown is as follows. Licensing and related revenue was approximately $14.4 million, reflecting 57% of total revenues, just slightly lower than $14.5 million for the first quarter of 2020. Royalty revenue was up 21% to $11 million, reflecting 43% of total revenues, compared to $9.1 million for the same quarter last year. Quarterly gross margin was 91% on a GAAP basis and 92% on a non-GAAP basis, both better than what we projected. Non-GAAP quarterly gross margin excluded approximately $0.1 million of equity-based compensation expenses and $0.2 million of an impact of the amortization of acquired intangibles. GAAP operating expenses for the first quarter were just over the higher end of our guidance at $24.4 million. Our total operating expenses for the first quarter, excluding equity-based compensation expense and amortization of intangibles were $20.7 million, also just over the high end of our guidance. Tax expense for the first quarter came higher than expected due to an uncommon revenue mix in which the majority of revenues recognized are associated with our connectivity products, Bluetooth and Wi-Fi, originating in France, which has a high corporate tax rate of 26.5%. On an ongoing basis, our corporate tax rate should be lower and in line with our original expectations, but mainly prudent on the outcome of the revenue allocation mix. US GAAP net loss for the quarter was $3.6 million and diluted loss per share was $0.16 for the first quarter, as compared to a net loss of $1.2 million and $0.05 loss for the first quarter of 2020. Our non-GAAP net income and diluted EPS for the first quarter were $0.3 million and $0.01, respectively. This is compared to the first quarter of 2020 which had $2 million of net income and $0.11. With respect to other related data: shipped units by CEVA's licensees during the first quarter of 2021 were 341 million units, down 30% sequentially and up 31% from the first quarter 2020 reported shipments. Of the 341 million units shipped, 129 million or 38% were for handset baseband chips, reflecting a sequential decrease of 41% from 217 million units of handset baseband chips shipped during the fourth quarter of 2020 and a 16% increase from 111 million units shipped a year ago. Our base station and IoT product shipments were 212 million units, down 21% sequentially and up 41% year-over-year. As for the balance sheet items as of March 31st, CEVA's cash, cash equivalent balances, marketable securities and bank deposits were $174 million. We did not exercise our buyback program this quarter, as we focused on the Intrinsix acquisition and the expansion in the business. Upon closing the deal, our cash balances will be reduced by approximately $33 million in acquisition consideration as well as deal costs. Our DSO for the first quarter was 49 days, similar to the prior quarter. And during the quarter, we generated $15.2 million of net cash from operations. Depreciation expenses and amortizations were $1.5 million and the purchase of fixed assets was $1.1 million. At the end of the first quarter, our headcount was 412 people, of which 346 were engineers, up from a total of 404 people at the end of 2020. Now for the guidance. We continue to experience a healthy licensing environment and the pipeline is solid. Regarding royalties, we believe our customers are still dealing with industry-wide supply constraints, which may prolong for the remainder of the year. With that said, the demand for products based on our technology is strong and our customers with our support are working fiercely to fulfill their purchase orders. As we announced earlier today, we agreed to acquire Intrinsix and expect to close the deal later in the quarter. From a financial point of view, we expect Intrinsix to contribute between $10 million to $11 million to CEVA's top line in the second half of the year and that this deal will be accretive as early as 2021 on a non-GAAP basis. We'll provide more information on the next earnings call. On the back of this, we forecast our new total revenue for 2021 to be between $116 million to $117 million, compared to about $100 million in 2020. This is subject to the Intrinsix acquisition closing on the anticipated timeline. Specifically for the second quarter of 2021: gross margin is expected to be approximately 89% on a GAAP basis and 91% on a non-GAAP basis, excluding an aggregated $0.1 million of equity-based compensation and $0.2 million of amortization of other assets. OpEx for the second quarter should be lower than the first quarter. For the second quarter, GAAP-based OpEx is expected to be in the range of $22.9 million to $23.9 million. Of our anticipated total operating expenses for the second quarter, $2.9 million is expected to be attributed to equity-based compensation and $0.6 million to the amortization of intangibles. So the non-GAAP OpEx is expected to be in the range of $19.5 million to $20.5 million. Net interest income is expected to be approximately $0.45 million and taxes for the second quarter are expected to be around $0.7 million on both GAAP and non-GAAP basis, in line with our prior expectations. Share count for the second quarter is expected to be approximately 23.5 million shares. Rocco, you could now open the Q&A session. Thank you.

Thank you. We will now begin the question-and-answer session. Today's first question comes from Matt Ramsay with Cowen. Please go ahead.

Thank you very much. Good afternoon, good morning, everybody. Congratulations on the acquisition, Gideon. Maybe you could give us a little bit more background on Intrinsix, your relationship with them? Have you guys collaborated with them on other projects in the past? And if you could walk us through what are the particular pulls from, I guess the Aerospace and Defense and government sectors for technologies that are appropriate for CEVA's portfolio? Which pieces you might have had? And which pieces you're acquiring? Looks like a good deal. It was just a little bit. Anyway, we externally weren't familiar with the company. I imagine a lot of your investors weren't. So if you could give us a little background that would be great. Thank you.

Good morning, Matt. Let me start by explaining about Intrinsix and the rationale for us to do this. It's very hard to find such a skill set under one roof: they can do complex design involving different disciplines like RF, mixed signal and security, which everybody needs in IoT, and do it all the way from specification to a production-ready design. We found this company which has a 34-year track record of doing such projects. With that in mind, we plan to take advantage of it in two main growth pillars and one additional capability. One is security and the Aerospace and Defense market. This is a market that we were looking to expand into, similar in some ways to the consumer and telecom model. It's a big market and it's DSP-intensive, because you do a lot on radar, GPS, and various DSP processing. Intrinsix has designs and an established business in that market. Aerospace and defense has high entry barriers, but once you're in, it's for the long haul. What we plan to do there is increase content, because we can combine our DSP and connectivity IP with the designs they deliver to customers, and with that increase our exposure to the market. The second pillar is what we call turnkey IP. There are many system companies today that want to build a chip to create a competitive edge but cannot assemble a full design team; those teams are hard to hire and take a long time to build. Such companies typically go to design houses or buy off-the-shelf ASICs. What we plan to do is take our IP — BlueBud is one example — and come to the customer with a turnkey proposition: not just selling IP, but providing the chip design so the customer can go directly to a foundry and manufacture the chip. We will remain an IP company but enable customers to go directly to the foundry without intermediaries. This is similar in concept to what some larger semiconductor companies do when they provide design wins for customers. The third capability is secure processor IP. This is essential in IoT devices to protect against hacking, and Intrinsix brings a secure processor platform based on RISC-V. They also bring interface IP for heterogeneous SoCs and chiplets, which enables advanced packaging and connectivity between die. This helps customers who don't want the time or cost associated with monolithic SoC development. Intrinsix has strong customer relationships with blue-chip OEMs and defense primes, and we have already communicated these capabilities to key customers and received good feedback.

Great. Thanks, Gideon for all the details there. Good luck with the deal. Yaniv, a couple of financial questions. One set is on the acquisition: I think you said on your script $10 million to $11 million for the back half of the year — if you could give us any sense of the rest of the P&L of the acquisition around margins, OpEx, taxes, things like that. And I guess the second part of the question is on the core business: the tax rate in the March quarter was very different than any of us had modeled. I get the mix of revenue between Europe and the US, et cetera, and Asia. But it sounds like something must have gone differently in the quarter then you guys had forecast initially in terms of revenue mix. If you could enlighten us on that, that would be great. Thanks, guys.

Let me address the revenue-mix and the tax question first. The revenue mix in Q1 came from an unexpected surge in connectivity revenue, particularly from large, comprehensive agreements where customers wanted portfolio licenses and architecture-level licenses. In Q1 we had a concentration of two or three large agreements in the connectivity space that we did not anticipate, and one of those was a multi-million-dollar deal with a leading handset OEM. Much of that recognition was in France, which carries a higher corporate tax rate, hence the higher tax expense in the quarter. We view this as a positive development: strong demand and customers willing to pay for our technology. On an annual basis the mix should level out to more typical levels across Israel, the U.S., Ireland and France. We do not expect the Q1 concentration in France to be a regular occurrence. On the Intrinsix acquisition, standalone Intrinsix revenue contribution in the second half is expected to be $10–$11 million. For that business we would expect operating margins around 10% historically, and when combined with CEVA there should be U.S. tax benefits. Overall we expect the acquisition to be accretive on a non-GAAP basis in 2021, subject to closing on time. Considering Q1 and current trends, CEVA standalone is likely to add about $1 million to prior guidance, so instead of $106 million we are looking more like $107 million for this year, prior to Intrinsix. Adding Intrinsix and its expected contribution would bring total 2021 guidance to $116–$117 million as I mentioned. We will provide more detail when we close the acquisition and on the next earnings call.

Thanks, guys for all the details there. Really appreciated. Thank you.

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

Hi, Gideon. Hi, Yaniv. Congratulations on the Intrinsix acquisition — based on your last featured acquisitions I'd be expecting good things in this one as well. Can you talk about the competition for Intrinsix and also the secure IP, the RISC-V IP — what opportunities there are to take that outside of your defense market?

They only managed to capture the security question. The security capability is a complete secure solution based on RISC-V. It is an outward-facing secure platform developed on a few Department of Defense projects. Secure processor IP is a very dynamic market because threats evolve every day and you need to detect and mitigate them. Intrinsix has this platform available. Historically, they did not focus on an IP licensing business; their primary model was design services. We bring sales channels and an IP licensing model to monetize this platform more broadly. In terms of competition, Rambus is one competitor in certain areas of security IP, and there are others as well. Over time we will refine our competitive positioning and add CEVA's connectivity and sensing IP to create a more complete licensing offering. This will make it easier to present a combined proposition to customers: connectivity, sensing, security, and turnkey design.

Okay, very helpful. Thanks. And then perhaps on the current royalty rates for the wireless infrastructure market and 5G infrastructure: can you talk about how that's been trending last quarter and this quarter, and what the outlook is for the rest of the year including perhaps new customers coming online as well?

The trend is positive: growth is moving both year-over-year and sequentially. I would say it's a bit slower than we initially thought, and that's consistent across the board because operators' capital spending and timing on next-wave 5G deployments (including small cells and private networks) is staggered. It is moving, however. We also have at least one customer who publicly shared that it goes into production this quarter, which is positive.

Maybe I'll add some color, Suji. If you look at some pieces of our business, Bluetooth was up 84% year-over-year and royalties in our sensor fusion were up 51% year-over-year. These are IP areas where we invested, and we're seeing returns. There were also pockets of strength in consumer devices in Q1 — TVs, robot cleaners — which were unusually strong for the post-holiday quarter, likely related to COVID impacts. Overall, the first quarter surprised us positively in several areas.

Okay, appreciate the color. Thanks, guys.

And the next question today comes from Tavy Rosner with Barclays. Please go ahead.

Hi, this is Peter Zdebski on for Tavy. Thanks for taking my question. I wondered if you could comment on the type of growth that Intrinsix has had historically and maybe your going-forward expectations say one or two years out given some of these synergies and the customer overlap that you discussed earlier?

Hi. Intrinsix as a standalone business has been growing consistently. They've developed a track record and have taken more projects in aerospace and defense as that market has grown. Aerospace and defense is seeing higher semiconductor spending and remains DSP intensive, which aligns with CEVA's core expertise. What we add is IP — when we go to defense and other system companies we can present our connectivity and sensing IP combined with Intrinsix's design services to increase content and differentiation. We also plan to market turnkey IP solutions where we provide the design including IP, enabling customers to go to a foundry directly. That combined offering is where we expect to accelerate growth.

To summarize for planning purposes: for the half year we expect about $10 million from Intrinsix in the second half of this year. With simple math you could look at doubling that for next year, and with the synergies and combined offerings we see it as a growth driver over the next couple of years. We will provide more color as we close the deal and as we approach 2022.

Okay, great. That's helpful color. Thank you. And then just wanted to ask about the licensing results: given that revenues were pretty strong sequentially but the deal count was a bit lighter, was that simply related to some of those deals last quarter that were signed but not yet recognized in revenues?

We often say that deal count alone is not fully indicative. This quarter we had a very large agreement that drove a significant portion of licensing revenue. It's the concentration and size of a few large deals, rather than a broad number of small deals, that explains the revenue outcome. We recorded $14 million-plus in licensing, which is a strong outcome historically for us and reflects a healthy pipeline and backlog for Q2.

Great. Thanks again and congrats on the quarter.

Thank you.

And our next question today comes from Martin Yang with Oppenheimer. Please go ahead.

Hi, Gideon and Yaniv. Thanks for taking the question. First, I want to ask about the turnkey IP business model. Can you comment on how long the design cycles are? And does that usually involve just one-time fees for customers or maybe higher royalties as they choose to go with turnkey IP?

The timeline for design cycles depends on project complexity, typically ranging from six months to one year for the types of projects we expect. In terms of payment, the turnkey model is usually a hybrid: development fees (NRE) plus license fees and, for some offerings, higher royalties tied to shipment volumes. The overall payment structure will typically be higher than a simple IP license because it includes design services and integrated IP.

Great, thanks. Can you also comment on the development of Bluetooth LE Audio? It has been announced for over a year now — how is the adoption rate in the market? Do you see that as a meaningful driver for your Bluetooth products?

Bluetooth LE Audio has significant potential. BlueBud supports both LE Audio and Classic Bluetooth. LE Audio has much improved performance and power efficiency, but legacy support is also important, so BlueBud supports dual-mode operation. We expect LE Audio to become mainstream, but adoption will take a few years as the ecosystem transitions.

Thanks. I have no more questions.

And our next question today comes from David O'Connor at Exane BNP Paribas. Please go ahead.

Good morning, thanks for taking my question. Maybe, Gideon just going back to the Intrinsix deal: to clarify, was the business entirely design services as it exists today? I imagine they get paid for NRE per design, and is it the plan to transform that existing business into more classic, stabilizing royalties — i.e., being paid per shipment versus just NRE on a design? And on that NRE side of things, how scalable is that given it's relative to the number of engineers and the ability to rapidly grow that part of the business? That's my first question. And then a follow-up on Ultra Wideband: can you give an overview of UWB? How many customers do you have today? Is this your first UWB customer? What's the pipeline look like? And what's the end application for this customer in terms of end market? Thank you.

Hi, David. Intrinsix historically operates on an NRE / design services model and gets paid for the engineering resources it deploys on projects. Under CEVA, the model will be hybrid: we will continue design services but add IP licensing and royalty opportunities, especially when we provide turnkey IP solutions. For turnkey projects, customers will generally pay NRE plus license fees, and we can structure higher royalties tied to shipments. Regarding scalability, Intrinsix brings experienced design teams; we will combine CEVA's IP and sales channels to scale opportunities. For UWB: we have a lead customer for the UWB IP we are developing; we are still completing the design and expect additional customers in the pipeline. UWB will be used broadly — handset flagship models, precise location services like Apple AirTag use cases, and I expect adoption across earbuds, watches and other devices. Industry forecasts suggest substantial growth in UWB shipments by 2025.

Very helpful. Thanks, Gideon. And Yaniv, maybe I missed it, but the gross margin for Q1 you mentioned was better than expected. What within the mix drove that better-than-expected gross margin? Thanks, guys.

Two main factors. One, several license agreements recognized in Q1 were more standardized connectivity deals that required less customization, which reduces cost-to-revenue for those projects. Two, the mix had slightly less of lower-margin DSP-related recognition in the quarter and some timing effects on expected government or innovation authority payments. Those elements together improved gross margins in Q1.

Understood. Thanks, guys.

Ladies and gentlemen, this concludes the question-and-answer session. I'd like to turn the call back over to the management team for the final remarks.

Thank you, Rocco. 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 conferences and events we will be attending: the Needham Virtual Technology and Media Conference, May 17th; Oppenheimer's 22nd Annual Israeli Conference on May 23rd; the Cowen 49th Annual Technology Media and Telecom Conference on June 1st; and Baird's 2021 Global Consumer Technology and Services Conference, June 8th through 10th. All of these conferences we will be attending virtually. For further information on these events, please refer to the Investors section of our website. Thank you and goodbye.

Thank you, sir. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.