Ceva Inc Q2 FY2021 Earnings Call

Good day, and welcome to the CEVA, Inc. Second Quarter 2021 Earnings Conference 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'd now like to turn the conference over to Richard Kingston, Vice President, Market Intelligence, Investor and Public Relations. Please go ahead, sir.

Thank you, Rocco, and good morning, everyone. Welcome to CEVA's second 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 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 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 and related deal flow, including increased revenues from our Chinese wireless customer; expectations regarding market dynamics, including growth in the 4G and 5G handset space and True Wireless Stereo earbuds space; beliefs regarding benefits and impacts of the Intrinsix acquisition; and guidance and qualitative data for the third 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 markets; our ability to execute more base station & 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. Now, with that said, I would like to now hand the call over to Gideon.

Thank you, Richard. Our second quarter results were exceptional and demonstrate the momentum in our business. Our customers place high value on our products in conjunction with their 5G and IoT roadmaps, and we’re continually experiencing successful rollouts of new CEVA-enabled products. Our revenue and earnings came in significantly ahead of our expectations on the back of a solid overall business environment despite industry-wide challenges with respect to the semiconductor supply. Revenue in this quarter also incorporates a royalty payment owed to us after we constructively resolved a disagreement on royalty rates with a customer on past shipments. Late in the quarter, we concluded the acquisition of Intrinsix, a leading chip design specialist and security IP, which expands our market reach to the large aerospace and defense space and enable us to offer a compelling proposition of optimized IP solutions to our customers. Total revenue for the second quarter of 2021 was an all-time record high $30.5 million, up 29% year-over-year. The licensing environment continues to be strong with good diversity of IP adoptions and targeted markets. Licensing revenue came at $15.5 million, up 15% year-over-year and included for the first time non-recurring engineering or NRE revenue from the Intrinsix business after we finalized the acquisition late last quarter. We signed 17 new agreements, of which 6 were with first-time customers. Customer targeted markets reflect a brisk design activity in the True Wireless Stereo or TWS earbuds space, the growing adoption of Wi-Fi 6 and 5G in telecom, enterprise and industrial markets and a range of applications for IoT, consumer and medical. In addition, we signed a SensPro2 computer vision and AI DSP license agreement with a key customer that recently won designs with one of the largest China-based surveillance camera OEMs, displacing Huawei HiSilicon with a CEVA-based solution. Also, at the beginning of the third quarter, we signed a comprehensive and sizable portfolio agreement with a key semiconductor player in the mobile market in China. The agreement extends our footprint and provides us with additive royalty opportunities on LTE and 5G handset shipments derived from our connectivity IPs. Based on a recent report from CINNO Research in China, this customer managed to penetrate the top five list of smartphone chip suppliers in China in May for the first time, as its latest chips are adopted by top tier OEMs such as Honor and Realme. Royalty revenue came at $14.9 million in the quarter, up 48% year-over-year. Royalty unit shipments were 451 million on the back of strong demand for CEVA-powered Bluetooth, Wi-Fi and cellular IoT devices. Base station 5G RAN royalties grew substantially on a quarterly basis, reflecting share gains and the resumption of capital investment in 5G networks by Chinese operators. In handsets, our Chinese semiconductor customer continues to expand in the 4G and 5G market as it successfully penetrates top tier Chinese OEMs. This growth was offset by slightly lower than expected shipments by our Tier 1 U.S.-based OEM, which we believe is largely attributed to supply constraints and softness in India due to the pandemic. As noted earlier, the royalty revenue for the second quarter incorporates approximately $3.3 million due to us following our resolution of a disagreement on royalty rates. Let me now provide some details on the market dynamics we are experiencing in one our main markets, namely TWS earbuds. TWS earbuds are expected to be the second largest category after smartphones in terms of unit volume. Its mass adoption has driven down the prices, making TWS earbuds affordable even in developing countries such as India. The technology is systematically progressing toward becoming an AI-based smart voice assistant like a smart speaker, and a health monitoring device to measure things like PPG, ECG, temperature, glucose level and fitness. The recent executive order by President Biden to allow Americans to buy hearing aids over the counter serves to diversify and expand the use of TWS into this very large and lucrative space. Our recently announced Bluebud platform is a key enabler for the smartification and diversification of TWS usages. It offers a comprehensive integration of the most prominent common denominators in all TWS earbuds, these being wireless connectivity, audio and sensor processing. Our RivieraWaves Bluetooth 5.2 controller and the CEVA BX1 DSP are two widely used and reputable technologies that successfully address the inherent challenges of low power, audio performance and cost. Furthermore, the Bluebud platform is enriched with a range of key software technologies from CEVA among which are SensLinQ, a software framework to seamlessly integrate the software and AI applications of different sensors, our ClearVox and Whispro technologies, for AI-based voice assistant capabilities and our MotionEngine for a range of UI and fitness applications. Bluebud’s unique proposition puts CEVA in position to become the de facto standard in transforming earbuds from an audio-only device to a smart wireless device empowering advanced services such as AI-based virtual assistant and health-related features. On the Intrinsix front, the integration is underway and progressing smoothly. We are getting constructive feedback from customers in the defense and industrial spaces and have already started to reach out additional customers with our combined proposition. Intrinsix’s chip design and IP capabilities have a pivotal role to play in the expansion of CEVA’s business from licensing standardized IP toward the licensing of highly integrated IP-based solutions powered by our portfolio of DSPs, connectivity, security, RF and mixed-signal IP. In capitalizing on Intrinsix’s technologies and expertise, CEVA is in an excellent position to move up in the value chain to address the needs of system and semiconductor companies for an optimized and differentiated chip designs that take advantage of CEVA’s high valued IP. This proposition in turn creates stronger ties with customers and larger revenue opportunities. So, in summary, we continue to leverage our diverse and high-valued technology portfolio to deepen engagements with customers and to capture the exploding demand for smart and connected devices. We are encouraged by our penetration in the 5G handset space, where we can address in addition to baseband processing additional business vectors such as wireless connectivity and audio. The TWS space and its evolution towards smart wearable devices present a huge market opportunity where we can capitalize on our unique excellence to combine audio and wireless connectivity. Last but not least, with the Intrinsix team on board, we are in the early stages of a secular growth trajectory where our enriched proposition provides us with access to new markets and lucrative customers engagements. On the supply shortage, we are working hard, shoulder to shoulder with our customers and suppliers to meet the outstanding demand for chips enabled by our IP. We hope supply constraints will not last much longer. With that said, let me handover the call to Yaniv for the financials.

Thank you, Gideon. I’ll start by reviewing the results of our operations for the second quarter of 2021. Revenue for the second quarter was up 29% to $30.5 million, a new all-time high, as compared to $23.6 million for the same quarter last year. The revenue breakdown is as follows. Licensing, NRE and related revenue was approximately $15.5 million, reflecting 51% of our total revenues, 15% growth from $13.5 million for the second quarter of 2020. This is the first quarter we recorded NRE revenues, which resulted from the acquisition of Intrinsix in June. NRE revenues totaled approximately $1.2 million for the second quarter. Royalty revenue was up 48% to $14.9 million, reflecting 49% of our total revenues, compared to $10.1 million for the same quarter last year. Second quarter 2021 royalties included a royalty payment owed to us of approximately $3.3 million after we constructively settled a dispute on royalty rates with a customer. Quarterly gross margin was 88% on a GAAP basis and 89% on a non-GAAP basis, both slightly lower than what we projected, as we integrated Intrinsix’s NRE costs into the cost of revenue. Non-GAAP quarterly gross margin excluded approximately $0.1 million of equity-based compensation expenses and $0.2 million of the impact of the amortization of acquired intangibles. Total GAAP operating expenses for the second quarter was over the higher-end of our guidance at $25.2 million, due to the integration of the Intrinsix’s expenses for the month of June, ahead of our expectations and prior quarter’s guidance, as well as $0.9 million associated with Intrinsix’s deal costs. OPEX also included an aggregate equity-based compensation expense of approximately $2.8 million, and $0.8 million for the amortization of acquired intangibles, including Intrinsix’s. Our Non-GAAP operating expenses for the second quarter, excluding equity-based compensation expenses and amortization of intangibles and deal costs, were $20.7 million, just over the high-end of our guidance, due to the integration of the Intrinsix’s expenses for the month of June, ahead of our expectations and prior quarter’s guidance. Tax expense for the second quarter came in as expected, still with strong revenue mix and interest for our connectivity products originating in France, which has a high corporate tax rate of 26.5%. U.S. GAAP net income for the quarter was $0.3 million and diluted net income per share was $0.01 for the second quarter of 2021, as compared to net loss of $1.1 million and diluted loss per share of $0.05 for the second quarter of 2020. Last, non-GAAP net income and diluted EPS for the second quarter of 2021 were $5.1 million and $0.22, up 77% and 83% year-over-year, respectively. Non-GAAP net income and diluted EPS for the second quarter were $2.9 million for 2020 and $0.12, respectively. Second quarter 2021 figures exclude equity-based compensation expenses, net of taxes, of $2.9 million, the impact of the amortization of acquired intangibles in the amount of $1 million and $0.9 million of costs associated with the Intrinsix acquisition. With respect to other related data. Shipped units by CEVA licensees during the second quarter of 2021 were 451 million units, up 32% sequentially and up 95% from the second quarter 2020 reported shipments. Of the 451 million units shipped, 138 million, or 31%, were for handset baseband chips, reflecting a sequential increase of 7% from 129 million units of handset baseband chips shipped during the first quarter of 2021 and a 39% increase from 99 million units shipped year-over-year. Our base station and IoT product shipments were a record 313 million units, up 48% sequentially and up 137% year-over-year. Of note, Bluetooth was a record 189 million units shipped this quarter, Wi-Fi and cellular IoT units also reached record highs. 5G RAN base station shipments and revenues were stronger than in the last few quarters due to a customer in China delivering equipment for the continued 5G network rollout in China. As for the balance sheet items. As of June 30, 2021, CEVA’s cash and cash equivalent balances, marketable securities and bank deposits were $137 million. We did not exercise our buyback plan this quarter, as we focused on the Intrinsix acquisition and expansion of our business. Our DSOs for the second quarter of 2021 were 31 days, lower than to the prior quarter and lower than our norm. During the second quarter, cash used in operating activities was $6.8 million, depreciations and amortizations were $1.6 million, and purchase of fixed assets was $0.2 million. At the end of the second quarter, our headcount included the Intrinsix team for the first time and was 468 people, of which 387 were engineers. This is up from a total of 412 people at the end of the first quarter of 2021, due to adding the Intrinsix employees. Now for the guidance. Given our strong top line performance during the first half of 2021 and the opportunities ahead, we are raising our annual revenue guidance to a $119 million to $121 million range, up approximately 20% versus our 2020 revenue. As Gideon alluded to earlier, we are experiencing a healthy licensing environment and the pipeline is solid. We also are expanding into new markets and can offer enriched value to our customers as a result of the integration with Intrinsix. On royalties, our base station and IoT category continues to expand, as illustrated by record shipments this quarter, and the return to growth for our Chinese 5G RAN customer and a new 5G RAN customer ramping production. In mobile, our key Chinese wireless customer is expanding into top tier Chinese OEMs which will add to the royalty mix. We expect all these growth engines to offset the expected decline of royalties from the U.S.-based OEM that recently moved to Qualcomm-based 5G modems. Specifically for the third quarter of 2021. Gross margin is expected to be approximately 81% on GAAP and 82% on non-GAAP basis, excluding an aggregate of $0.1 million of equity-based compensation and $0.2 of amortization of other assets associated with the Immervision investment. Both include a full quarter Intrinsix engineering COGS allocations for NRE projects. OpEx for the third quarter of 2021 should be similar to slightly lower than the second quarter. For the third quarter, GAAP-based OPEX is expected to be in the range of $24.4 million to $25.4 million. Of the anticipated total operating expenses for the second quarter, $3.1 million is expected to be attributable to equity-based compensation, $0.9 million to amortization of acquired intangibles, and $0.3 million for Intrinsix holdback related expenses that will be recorded for the next two years on a quarterly basis. Non-GAAP OpEx is expected to be in the range of $20.1 million to $21.1 million. Net interest income is expected to be approximately $0.4 million. Taxes for the third quarter are expected to be approximately 22% to 24% on non-GAAP basis. Last, share count for the third quarter is expected to be approximately 23.6 million shares. Rocco, we can now open the Q&A session. Thank you.

Thank you, sir. Today's first question comes from Matt Ramsay at Cowen.

Yes. Thank you very much. Good morning, good afternoon, everybody. I guess, my first question, Gideon, it's taken the industry a little bit of time to adjust to the fact that HiSilicon from Huawei has been unable to make chips at TSM because of some of the political situations. And no doubt, many of HiSilicon's customers had built up quite a bit of inventory, and we've taken a few quarters to work through that. But my observation from your prepared comments is the new equilibrium with HiSilicon out of the market has provided quite a bit of momentum for your customers. Any color on that would be really helpful. Thank you.

HiSilicon is a semiconductor company that people think is linked to Huawei, but as a standalone company they are extremely powerful in different verticals in China and all over the place. What you say is what we are seeing: more and more OEMs that used HiSilicon in the past understand that they cannot be served to the same extent and are turning to other suppliers. In specific, what we refer to in the prepared remark is surveillance markets. The surveillance market is a huge market. It's about 400 million units a year, very advanced. We have, in the last few years, prepared with a few customers of ours to approach this market. We are happy that this quarter, it becomes clear—we are already collecting royalties from a few models. This quarter, we signed a more comprehensive and more future licensing agreement that hopefully will take us to higher presence with this key customer in this space.

Got it. Thank you. I guess, as a follow-up question, real quick in China. We've been watching from afar as, I guess, the Tsinghua Unigroup has been a bit teetering towards bankruptcy in China, and I know they're the owner of Spreadtrum and of RDA in the wireless space in China. I wonder, Gideon, if you're confident that that situation, however it resolves itself, is not going to have any impact on your royalty business? Thank you. And I have one follow-up.

Yes. So Matt, we did ask the same question to the customer. We don't see any fingerprints of this bailout. Unisoc is doing very well recently, as we alluded in the call. I read somewhere that they are now becoming the real number three after MediaTek and Qualcomm. That's a new era. They also take advantage of the fact that HiSilicon is not pushing any more. They have 5G and they are shipping 5G technologies. So this company is doing well at least from what we see from their reports and their business.

I would add one more thing that even if you look at our DSO for the quarter, which is one of the lowest we ever had and the AR balance, we haven't seen in recent months any change or negative change in the payment schedules or any liquidity issues that we encountered. So far, it's a very positive sign.

Thank you, Yaniv. Just real quick follow-up for you. Could you just go through the gross margin guidance again? And if there was any change because of the Intrinsix acquisition that we should expect on a more sustained basis? Thank you.

Sure. So, historically, the IP licensing and royalty business was around the low-90s percent gross margin on GAAP for a long time. When you're adding the Intrinsix capabilities and design and IPs, we're starting off with design services, which their cost is not located in the R&D line, but in cost of goods. So all these costs that they are doing, the design work that they are doing for their customers are allocated to cost of goods. We talked about being in the low-80s percent gross margins for the time being, 81 on GAAP, 82 on non-GAAP. As Gideon explained, the business model and the trends with them mean we are looking to add much more IP offerings. As soon as that happens and that kicks in — first in licensing, later on in royalties potentially — then those margins will probably crawl up to the mid-80s as we add more. Every quarter it may shift a bit anywhere from the low-80s to the mid-80s based on the revenue mix of services versus IPs that we are able to add to their business and CEVA's overall numbers.

And our next question today comes from Kevin Cassidy of Rosenblatt Securities. Please go ahead.

Thank you for taking my question, and congratulations on the results. Can you say a little more detail on where your first-time customers, where are they located geography wise?

Hi Kevin, it's Gideon. The diversity of the application and the geographies that we are experiencing is very wide. But in general, China is very strong, in particular in wireless. We're seeing a boom in TWS. We have a substantial amount of agreements in this space. This is not just the TWS as I referred in the prepared remarks; it is not going to be just an audio device. It's going to be an AI device, it's going to be medical, it's going to be hearing aids. Wi-Fi 6 is extremely strong all over the place. There are other IoT devices in the consumer space and customers who don't want to talk about the application because they have something unique that they want to surprise everybody with. To answer your question, the applications, spend and the geography are all over the place. Specifically to wireless, a lot of it relates to China.

By the way, the count is one in the U.S. and five in China from all these different markets that Gideon explained.

Okay. Thank you for that. And on the Intrinsix, you had given a forecast for the end of the year. Has there been any change to that now that you have taken ownership?

No, not yet. The acquisition is very new and just happened a month or so ago. We are still looking at $10 million to $11 million coming from Intrinsix for the year. On top of that, a very strong first half enabled us to raise our guidance to $119 million to $121 million for 2021.

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

Congrats on the progress here. Maybe you can talk about the wireless infrastructure market a little bit. And obviously, the dynamics maybe with CT and Huawei in place, but just the overall underlying demand, whether that looks like it's sustained recovery in China spending there. And the customers you're ramping now, how many customers are you ramping, so we understand the opportunity there?

So, I'll try to give you a wide perspective of the 5G RAN, radio access network, and the infrastructure. What we saw in the second quarter is a step up in the royalty compared to Q4 and Q1. That relates to two factors. One is market share: our customer is getting now a much larger share of the tenders; where they used to get about 9% to 10% of the overall tender budget, now they are more in the 30% range. The second factor is the investment in 5G. The investment is not just in macro base stations; it includes industrial private networks and small cells for millimeter wave. It will be gradual and steady rather than a consumer-type spike, but there is consistent demand driven by market share capture and new use cases. We have another customer ramping production; we see those movements. There are a bunch of companies doing similar approaches, including Qualcomm and some Chinese companies, offering standard products for small cells and millimeter wave. You will see ASSP chips going into base station RANs more into compact solutions rather than macros.

Okay. That's very encouraging. Gideon, thanks for that color. And then, on the TWS market, you said that would be as meaningful as smartphones over time. What's the time frame for that to be a meaningful set of units? And then, how is the non-AirPods market developing to your opportunity and the mix of low-end versus edge AI TWS? Those dynamics would be helpful to understand.

First, TWS is going to reshape and become much more than an audio device. You can see from the reduction of market share of AirPods that the market is growing and competition is increasing because many companies are getting into the market. All the smartphone OEMs have their own branded TWS and many other audio companies and white-box manufacturers are growing into the market. We are already seeing substantial shipments into TWS. I think the broader impact will be seen sometime next year when the deals we have signed start ramping, because this quarter we had eight out of the 17 agreements related to ear technologies, which could be hearing aids, TWS, or medical approaches. You will see these companies getting to mass market in new form factors, and we'll see more of the benefits from our technologies as they do.

For us, TWS royalties also include the DSP and not just the Bluetooth, as we have seen in the prior model. We are tracking meaningful adjacent markets such as Bluetooth, Wi-Fi, and others. As soon as any of these adjacent markets are meaningful enough, we'll break them out further. It's a trend that we have talked about as being strong for us, and the full solution of adding DSPs has started in the last year with newer licenses, so the royalties for them will become more meaningful over time.

Our next question comes from Martin Yang at Oppenheimer. Please go ahead.

I have a follow-up from previous analyst’s question. Can you give us an ASP implication for the TWS customers when you compare winning just the Bluetooth versus having additional features such as DSP or other sensor features?

Yes, sure. Part of our business model is either a percentage of a chip price or cents-per-chip based on volumes. When you add more functionality, our customer is able to charge more for the chip, usually improves the margin, and we enjoy that as well. It could be 2x or 3x compared to standalone Bluetooth because we're adding more content and more technology. The chip price is also more expensive because it replaces another component on a system-on-chip. That's part of the big benefits of being an IP company and adding more offerings, and that's what we are going to see in ASPs and deal sizes as well.

I would add that our Bluebud platform uniquely combines audio, connectivity and sensor processing in hardware and software. The ASP that we can charge when licensing the combined solution is higher than licensing components separately. Moreover, Bluebud enables many companies, such as medical device firms, to enter the market more easily because they can integrate their sensor into the platform without handling the complexity of audio and connectivity. That incremental value is substantial for those companies.

Got it. Thanks for the insight. And on the overall market, I know you don't break out Bluetooth from the others yet. Do you plan to do that? And is there any way to provide us with more context on how big TWS as a percentage of your total revenues or shipments? Any context would be helpful. Thank you.

We don't have a specific breakdown within base station and IoT today. The first one we broke out was Bluetooth because it became meaningful. Next may be Wi-Fi going forward — we had record volumes there with tens of millions of units for the first time, which is significant. As soon as any of these adjacent markets become meaningful in our reporting, we'll open them up. The trend is that Bluetooth and Wi-Fi are growing strongly and the full solution of adding DSPs began in the last year with newer licensing, so royalties will become more meaningful over time.

Martin, just to add one more element here. Not all of our customers break out which Bluetooth chips are shipping for which applications. But we do have customers, for instance, Best Techniques in China who previously we've seen had about 30% of the non-Apple earbud market. With companies like Best Techniques and Beacon, we have some very strong prominent players in the business. But in some cases they ship many different types of chips for different end applications and they don't break that out. So while those customers are very good indicators of our presence in the market, it's not possible to precisely break out units sold just to TWS versus other applications in all cases.

And our next question today comes from Tavy Rosner at Barclays. Please go ahead.

Most of my questions have been asked. So maybe just on Intrinsix. I got disconnected for a second. So, were there any revenue contributions in the second quarter? And I guess, looking through the remainder of the year, if you can go over the strategy — you mentioned last quarter the cross-selling opportunity for the existing customer base and perhaps bringing some of Intrinsix technologies to your current customers. Has the view extended a little bit since you guys talked about it last quarter?

With Intrinsix, we gained a very experienced and hard-to-find design team with capabilities in RF, mixed-signal, security and IP — these are things our customers are looking for. With Intrinsix competencies we get two primary advantages. First, exposure to the lucrative aerospace and defense market, which we were not addressing as a standalone company. The U.S. is investing more in semiconductors and you see new start-ups developing creative teams. Access to the aerospace and defense market is incremental to our business. Second, we can offer integrated IP solutions to customers: we can provide the IP and do the full design to create an optimized SoC tailored to customer needs. We are going up in the value chain to offer differentiated chip designs that take advantage of CEVA’s IP. We are not going to manufacture chips or compete with our customers in supply chain — we will do the design steps to create differentiated solutions for customers. We have already reached out to customers with this proposition and the idea sounds promising to them.

Yes. And just to add color, we had recorded $1.2 million in the quarter — this is the first time we recorded NRE in the licensing, NRE and related revenue line from Intrinsix. Next quarter will be a full quarter so that number will be higher. We continue to expect Intrinsix to contribute approximately $10 million to $11 million for the year as we integrate the team and their projects.

Thank you for the color. And congrats on the strong results.

And our next question comes from Gus Richard with Northland. Please go ahead.

Just on a follow-up on Intrinsix. It sounds like you're going to move into an ASIC business model, but leave the production of the units to the customer, or is it going to be more of taking Intrinsix capability and creating standardized IP? A little bit more color there would be very helpful.

Gus, that's a very good question. The idea with integrated IP solutions is that we come to the customer and create an optimized solution around our IP. It's not going to be standardized IP; we will take our IP, understand the customer's performance and power needs, and build an optimized differentiated solution. We are not going to manufacture chips or go to the foundry. We will do the design work to create differentiated solutions for the customer's SoC. Think of it like AMD's semi-custom model — we are doing similar work but focused on IP and custom integration rather than full manufacturing.

Got it. And then, you talked about getting the blended gross margin up to the mid-80s. Is this part of that, or is this mix? Can you sort out how much of an improvement of Intrinsix gross margin profile you're going to get out of this new strategy?

This is an important question. Right now, Intrinsix is doing design services as a standalone operation. With the integrated IP solutions we plan to provide, deals will be based more on our IP and optimization around it, which should reduce the services-heavy mix over time. That will help margins because IP licensing and royalties are higher margin than pure design services. The evolution to higher margins will happen over time as we add more IP licensing and royalty streams on top of Intrinsix services.

One more color: this is not for the next quarter or two; we are just starting to integrate the team and build the roadmap. The improvement is a multi-quarter to multi-year plan. This year we expect gross margins in the low-80s, and over time as we add more IP content, the blended margin should move toward the mid-80s. But this will evolve over the next two to three years and is not an overnight change.

Our next question today comes from David O'Connor at Exane PNB Paribas. Please go ahead.

Maybe just one or two follow-ups to previous questions on my side. Maybe Yaniv, going back to the base station and IoT unit shipment, 313 million in the quarter, very strong. You called out Bluetooth as 189. I'm just wondering about the incremental 120 million in there. It seems like a big jump up, well, certainly from our model. So just help us to get there. Maybe you could rank the other shipments across Wi-Fi, cellular IoT, and other to help us model that? That's my first question. Second question is anything on seasonality on Intrinsix that's worth calling out? And third, on the RAN side of things, in the 2021 guide, does it assume both big RAN customers shipping volume in the second half?

Sure. From the volumes perspective, after Bluetooth, the next biggest contributor was Wi-Fi. This was a new level for Wi-Fi with tens of millions of units and explains a large portion of the delta. Cellular IoT also ramped nicely and was another significant contributor. Sensor fusion and other smaller categories filled out the remainder. So, Wi-Fi and cellular IoT were the main drivers behind the incremental volume. On Intrinsix seasonality, these are primarily chip design services, and aerospace and defense work can have longer cycles due to government approvals, program timing, and multiple parallel projects. Revenues from these design services will be recognized based on time and materials and project milestones, so timing can vary quarter to quarter. And for your third question, on the 2021 guide, yes, we are assuming contributions from the RAN customers that we referenced; we see public announcements and activity from both customers that support our guidance assumptions.

Thanks for the color.

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

Thank you, Rocco, and thanking all of you for joining us today and for your continued interest in CEVA. As a reminder, the prepared remarks from 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 conferences: the Oppenheimer 24th Annual Technology Internet and Communications Conference, August 11; the Rosenblatt Securities Technology Summit, the Edge of AI from August 24 to August 26; Jefferies 2021 Semiconductor IT Hardware and Communications Conference from August 31st and September 1st. Full 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.

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.