Good day, and welcome to the CEVA Inc. Third Quarter 2021 Earnings Conference Call. All participants will be in a listen-only mode. After today's presentation there will be an opportunity to ask questions. 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. Good morning, everyone, and welcome to CEVA's Third 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 for the third quarter and provide general qualitative data. Yaniv will then cover the financial results for the third quarter and also provide qualitative data for the fourth quarter and full year 2021. 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 demand for and benefits of our technologies; expectations regarding market dynamics including anticipated growth in the cellular IoT markets; beliefs regarding benefits and impacts of the Intrinsix acquisition including expansion into the aerospace and defense market and ability to offer integrated IP solutions and enrich security and assurance products; and guidance and qualitative data for the fourth 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 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 date. With that said, I would now like to hand the call over to Gideon.

Thank you, Richard. It is an exciting time for CEVA. The need for and the deployment of our technologies for the digital transformation era have never been more evident. Wireless solutions that we muster are the catalyst for the emergence of new smart devices, among which are wearable devices, earbuds and hearing aids, AR glasses, smart watches, smart home products, Industry 4.0 factory automation, telemedicine and more. Our innovative solutions, market reach and strong execution were drivers for another outstanding quarter of new licensing agreements and royalty progress. For the third quarter of 2021 our revenue was a record-high of $32.8 million, up 31% year-over-year. The licensing environment continues to be robust and came in at $21.6 million, up 74% year-over-year. Our product portfolio targeted for TWS earbud, AR glasses and smart watch markets and our Wi-Fi solutions, which are ubiquitous across many IoT devices and access point products, were key contributors. Also in the quarter, our Intrinsix team executed very well, signing important design agreements with Lockheed Martin, with a major industrial company in the defense space and with an innovative wearable device company in the medical space. In total, we signed 25 IP licensing and NRE agreements, of which Philips was a first-time customer. Royalty revenue came in at $11.2 million in the quarter, down 11% year-over-year. The contribution from our base station and IoT product category was an all-time high driven by secular growth in Bluetooth, computer vision, sensor fusion and cellular IoT markets. 5G base station visibility was lower than normal as the space experienced longer lead times due to supply chain constraints. In total, royalty unit shipment of CEVA-based units in IoT-enabled products was 405 million units in the quarter, up from 200 million units in the third quarter last year. Handset baseband royalty this quarter included the milestone of the first 5G smartphone report we have received of just shy of three million units. This growth driver was muted by larger-than-expected declining 2G royalty revenue. We do not see this decline as a market indicator; this 2G market is still sizable in developing countries and we have experienced this pattern from time to time in the past. Let me now make a few remarks on our business in the third quarter. The first is our Wi-Fi product line, which has become a strong driver for us in recent quarters. The complexity of Wi-Fi technology rises dramatically when moving to a new generation of the standard. This poses technology challenges that deter a growing number of incumbents and new entrants from developing the technology in-house; instead they seek out technology suppliers to solidify their time to market. The recent Wi-Fi 6 and Wi-Fi 6E standards are being rapidly adopted in the latest laptops, smartphones and routers and are expanding to XR headsets, such as the recent Metaverse initiatives by Meta formerly Facebook, as well as security cameras. Wi-Fi 6 is also expected to have a fundamental role in autonomous cars where it will be used to upload the terabytes of data collected every day to the cloud, which will be useful for AI-based optimizations. CEVA is benefiting from a unique position as the only viable IP supplier that enables semiconductor companies and OEMs to address the diverse and large market that require Wi-Fi 6 or 6E and the upcoming Wi-Fi 7 standard. We have now more than 20 Wi-Fi 6 customers. Licensing revenue from this space grew 149% compared to the first nine months last year. We are also seeing good progress in shipped CEVA-based Wi-Fi products, which grew by 200% and shipments increased to more than 111 million units versus the first nine months of last year. Second, our customer activities have stepped up as we continue to integrate Intrinsix into CEVA. As we noted in prior calls, our growth strategy is driven by: one, Intrinsix's experience and customer base in the aerospace and defense market, which we believe will enable us to expand into this lucrative space; and two, our capabilities to offer integrated IP solutions, which combine the CEVA IP portfolio and Intrinsix's chip design competencies to broaden our impact and grow our revenue base with strategic customer designs. The third quarter was extremely successful in concluding sizable agreements in the defense and medical space. We booked an important and sizable agreement with Lockheed Martin for DARPA's SSITH program. SSITH stands for System Security Integrated Through Hardware and firmware and aims to revolutionize the way electronic systems are protected against different means of exploitation. As part of the SSITH program, CEVA, through our subsidiary Intrinsix, is involved in the development of new hardware security architecture and related design tools to protect against entire classes of vulnerabilities exploited through software and not just specific vulnerability instances. The methodologies being developed as part of this program will enrich our security and assurance IP offering, bringing new levels of protection to connected cars' wireless communication and other industrial markets. Another project that the Intrinsix team concluded during the quarter is with a major U.S.-based defense company for advanced node chiplet design. Chiplet technology is a new way in semiconductor integration with the goal to cost-effectively assemble multiple dies or chiplets into one small chip package and by such gain time to market and lower entry barriers to key markets. Chiplet technology is already being deployed in cloud chips by Intel, Broadcom, AMD and Marvell. The Intrinsix team, with the financial backing of Delphi and its ecosystem partners, is aiming to drive chiplets to the defense market and help proliferate them for commercial applications. And lastly, regarding our activities and market dynamics in cellular IoT: cellular IoT modules are used in a wide variety of verticals, among which are logistics, asset tracking, industrial agriculture monitoring, parking, payment systems, automotive connectivity and more. It is a high-volume and fast-growing market forecast by ABI Research to reach 920 million modules by 2026, growing at a 29% compound annual growth rate. A main segment in the cellular IoT space is NB-IoT, capturing approximately 40% of the volume and growing at a forecasted CAGR between 2019 and 2026. CEVA has strong traction in the CAT-1 and NB-IoT spaces, the two standards which dominate deployments today. During the third quarter, we continued to see strong growth in volume, up 356% compared to the third quarter of last year, and received royalty reports for the first time from a new cellular IoT customer, one of the world's top 10 ranked IC design houses. Europe is also a priority in cellular IoT at the back of its cloud manufacturing base. We have three widely known European customers that have designed CEVA technology. The first is Nordic Semiconductor; we are engaged with them for NB-IoT with dozens of customers. The second, Sequans, is using our sensor platform for cellular IoT with a number of high-profile design wins. The third is an unnamed leading semiconductor, which is developing cellular IoT chips targeting its large industrial and smart meter customer base. So in summary, CEVA is transforming from a specialty in core DSP technology to a trusted technology house with a pivotal role in enabling new industries to become connected and smart. Our success is underpinned by our unique strengths to combine DSP, AI, software, analog and reference designs into holistic solutions for customer and industry needs. We believe we are at an inflection point to scale our business and strengthen our collaborations with key players across a broadening range of industries. Finally, we continue to monitor any possible implications of the ongoing supply chain constraints. It's commonly acknowledged the semiconductor supply chain challenge affects our broad industries in different manner, which may translate to low visibility. With that said, we are on track to meet our targets and we'll continue to work with our customers and partners to mitigate negative impacts. With that said, let me hand over the call to Yaniv for the financials.

Thank you, Gideon. I'll start reviewing our operations for the third quarter of 2021. Revenue for the third quarter was up 31% to $32.8 million, our second sequential all-time high, as compared to $25 million for the same quarter last year. Revenue breakdown is as follows. Licensing, NRE and related revenue is approximately $21.6 million, an all-time high, reflecting 66% of our total revenue, 74% growth from $12.4 million for the third quarter of 2020 and 39% sequential growth. It is the first full quarter that we recognized NRE revenues which resulted from our acquisition of Intrinsix back in June. Royalty revenue was down 11% to $11.2 million, representing 34% of our total revenue, compared to $12.5 million for the same quarter last year. Gideon noted our consistent growth in base station and IoT and the penetration to 5G smartphones was muted by a larger-than-expected decline in 2G royalty revenue. Quarterly gross margin came in better than expected, due to lower allocation of Intrinsix NRE cost from the R&D expense line to the cost of goods sold line. Gross margin was 85% on a GAAP basis and 87% on a non-GAAP basis as compared to our 81% to 82% guidance. Non-GAAP quarterly gross margin excluded approximately $0.2 million of equity-based compensation expense and $0.2 million from the impact of amortization. Total GAAP operating expenses for the third quarter were over the high end of our guidance at $26.3 million, due to lower allocation of Intrinsix's NRE cost from R&D to cost of goods sold versus our prior quarter's basis. Such shifts between these two expense lines may happen from time to time and are tied to the actual design services performed in the quarter. OpEx also included aggregate equity-based compensation expense of $3.2 million and $1.2 million for various amortizations. Our total non-GAAP OpEx for the third quarter, which excludes these items, was $21.9 million, over the high end of our guidance due to the same reasons I just stated with regards to the GAAP numbers. GAAP operating profit for the third quarter was $1.7 million, up from $2,000 in the same quarter a year ago. Non-GAAP operating profit was $6.5 million, up 51% from the third quarter of 2020. For the first nine months of 2021, non-GAAP operating profit was up 69% year-over-year to $15.5 million, illustrating the growing operating leverage we are achieving while we scale the business. Tax expenses for the third quarter were approximately $1.8 million, a bit higher than forecasted with a strong revenue mix in licensing for connectivity products originating in France, which have a higher corporate tax rate. U.S. GAAP net loss for the quarter was $0.2 million and diluted loss per share was $0.01 for the third quarter of 2021, as compared to a net loss of $0.7 million and diluted loss per share of $0.03 for the third quarter of 2020. Non-GAAP net income and diluted EPS for the third quarter of 2021 were $4.7 million and $0.20, up 29% and 25% year-over-year, respectively. Non-GAAP net income and diluted EPS for the third quarter of 2020 were $3.6 million and $0.16, respectively. With respect to other related data, shipped units by CEVA licensees during the third quarter of 2021 were 438 million units, up 26% from third quarter 2020 shipments. Of the 438 million units reported, 33 million units, or 8%, are for handset baseband chips. Our base station and IoT product shipments were a record 405 million units, up 29% sequentially and 103% year-over-year. Of note, Bluetooth was at a new record of 291 million units for the quarter and cellular IoT also reached a new record-high of 26 million units. As for the balance sheet items, as of the end of September 2021, cash, cash equivalents, marketable securities and bank deposits were $145 million. Our DSOs for the third quarter were 43 days, a bit higher than the prior quarter but at our normal level. During the third quarter, we generated $6.4 million from operating activities; depreciation and amortization was $1.7 million, and the purchase of fixed assets was $0.2 million. At the end of the third quarter, our headcount including the Intrinsix team was 485 people, of which 403 are engineers. Now for the guidance. Our strong top-line performance in the first nine months of 2021 was outstanding and provides us with strong confidence in our business and strategy going forward. We therefore are raising our annual revenue guidance up to a new range of $120 million to $122 million. In the licensing business, our market reach is expanding with good backlog and pipeline for the upcoming quarter. We believe the growth trend in the base station and IoT category, LTE and 5G will persist into the fourth quarter, with the extent of such growth being subject to any near-term supply chain constraints. Specifically for the fourth quarter of 2021, gross margin is expected to be approximately 82% on a GAAP basis and 84% on a non-GAAP basis, excluding an aggregate $0.3 million for equity-based compensation expense and $0.2 million of amortization. OpEx for the fourth quarter should be slightly lower than the third quarter. For the fourth quarter, GAAP-based OpEx is expected to be in the range of $25.5 million to $26.5 million. Of the anticipated total operating expense for the fourth quarter, $3.2 million is expected to be attributed to equity-based compensation and $1.2 million to various amortizations. Therefore, our non-GAAP OpEx is expected to be in the range of $21.1 million to $22.1 million. Net interest income is expected to be approximately $0.3 million. The tax rate for the fourth quarter is expected to be approximately 25% on a non-GAAP basis. And share count for the fourth quarter is expected to be around 23.8 million shares. And Rocco, we can now open the Q&A session. Thank you.

Thank you. The operator will now provide instructions. Today's first question comes from Matt Ramsay at Cowen. Please, go ahead.

Thank you very much. Good afternoon and good morning, everybody. I guess to start off with, congratulations on all the progress in the business and the raising of the guidance and all. I just wanted to understand a bit about what happened in the mobile, I guess baseband or handset units dropping off in such a big way and the results. Gideon, if you could just walk me through the market dynamics, or are there a particular licensee situation that went on? Or were there some reclassifications of numbers as you guys refocus the company on new growth areas? I'm just trying to get my mind around that one a little bit. Thank you.

Hi, Matt. Good morning. Let me go first on the composition of the royalty. As we discussed, the base station and IoT category is flourishing and we have almost all the products growing. If you look, there is significant growth in computer vision, Bluetooth and several IoT sensor fusion areas. That's what we planned and now it's kicking in. Base station and IoT last year had a very strong quarter as everybody came out of lockdown, so there was a tough year-over-year comparison. But overall it's moving in the right direction. We can also see it in the design wins that are getting China Mobile, for example. Mobile, when you look, is generally trending the way we expected with CAT-1 growing and 5G activity broadening. The 2G decline is something we had in the past and there could be different reasons. I don't think it's structural. Inventory dynamics and allocation play a role; many chip companies give priority to top-tier high-end phones for the limited allocation they receive. From time to time revenue recognition shifts between quarters; last quarter was a significant one, so we have movement between quarters. Regarding 2G, I don't view it as a market structural issue. We expect a comeback next quarter. That's the reason we did not change our guidance as a result. So it's nothing to do with the general trend in mobile which is as we expected. The good thing is that we are in 5G. When you look at the nine-month perspective, smartphones are up year-over-year for us in volume and the 2G impact looks better on a nine-month comparison. It is still lower than prior years, but this was due to the Q3 dynamics and we think it could pick up next quarter.

Got it. Thank you for that, guys. Just one quick little follow up to that and then one more question. I guess the follow up is, should I take it from the fact that the mobile rate came down as much as it is that the headwind from the Intel modem transition in Cupertino is kind of fully behind you guys in the run right now? And then my other question is completely unrelated, but on gross margin, you guys came in well above and OpEx was higher, too. I just wonder, you guys brought in Intrinsix and I think some of the folks there might have been categorized in cost of goods versus OpEx. That would have been in your old core business. Working with the auditors and whatever, is there any kind of change in the allocation there? And how should we think about gross margin going forward? Thanks.

Sure. Let's start with the first one. Apple is still selling iPhone 11 and that's the lower-cost type of phone and it's still out there. We don't know how long it will remain in the market. But our royalty reports for Q3 were stronger than Q2, for example. It's still contributing; much lower than in the past, but still a positive contribution for us. Apple's situation is not tied to a design loss to Qualcomm in our reports. On cost of goods, you are right: for the service business, when you have projects and recognize revenues, those expenses are recorded in cost of goods sold. What happened in the last quarter was that not all the Intrinsix engineers were utilized for services revenue recognized in that quarter. We were still doing R&D for Intrinsix and not services, and therefore more costs remained in R&D than we originally forecasted. This can shift between quarters and is tied to the timing of closing deals and the actual start of design services by engineers. As soon as the services are performed and billed, those costs are recorded in cost of goods sold. We had about a $1 million shift relative to our expectations in the third quarter. We think that in the fourth quarter there will be more NRE revenue and therefore higher cost of goods sold and a little bit lower R&D expense. This is the shape that could happen from time to time.

Got it. Just to be clear there, Yaniv, so this is just to set the expectation for investors that this could bounce around a little bit on a quarter-by-quarter basis, but it's not really indicative that anything is changing in the business or the accounting? It's just kind of the way that this business works as you fold in Intrinsix over time? Thank you for taking my questions, guys.

Yes, that's exactly the case, Matt. Nothing to do with accounting, just the ramp-up of the projects. I'm sure that when we are fully ramped up and have many more customers and prospects, we may have less of that effect, because most people will be involved directly with customers.

Thank you. And our next question today comes from Tavy Rosner with Barclays. Please, go ahead.

Hi. Good afternoon. Thanks for taking my questions. Did you break out what the Intrinsix revenue contribution was this quarter? Just like to get a sense of what organic growth was.

You asked about Intrinsix. Right now we're looking at it as one business model. We started off last quarter with just one month of ownership after closing the acquisition, so it's early. We previously indicated an approximate $21 million run rate for the combined business; those are annual run rate expectations. The idea for us is not just to look at the services revenue from Intrinsix, but also the combination of IP and integrated IP solutions. Those are the initiatives we are working on and we hope that the run rate could increase when we offer more IPs to their existing and new customers in the future. I hope that answered your question.

Yes, no, definitely. And just following up on that, were you able to quantify the opportunity within aerospace and defense?

This is roughly a several-billion-dollar market in chip shipments and tens of billions of dollars in R&D projects, depending on segmentation. The idea for us is not just to continue to get larger share in services projects, but more to embed our IP. By combining IP and services, we can offer integrated IP solutions which become more typical to our licensing model. The benefit for this approach is higher overall deal sizes and value, and that's exactly what we are pursuing.

I appreciate the color. Great. I'll go back to the queue. Thank you.

Thank you, Tavy.

Our next question today comes from Suji DeSilva at ROTH Capital. Please go ahead.

Hello, good evening. Congrats on the progress here and the diversification, certainly. A couple of questions about the base station / IoT bucket. Now that Bluetooth is strong, I was curious about the non-Bluetooth part of base station and IoT. Gideon, what do you think are the best growth opportunities over the next several quarters in that because I think it's going to be an increasingly important segment to talk about the non-Bluetooth base station and IoT segment?

Okay. In terms of shipments, there are several trends we can expand on. Wi-Fi is growing significantly in units, and cellular IoT is another strong area. Europe is prioritizing cellular IoT with a strong manufacturing base and we have three customers there. Computer vision, which comes together with AI, is another active area and a driver for growth. We have excellent product for the TWS market and we are seeing several licenses in a short period; that should broaden further into the second half of next year.

Okay. Thanks, Gideon. And then on Bluetooth, it's just a large part of your units at this point. Is the ASP there relatively static or is there an opportunity to uplift the ASP through products as you go forward?

Excellent question, Suji. The Bluetooth market itself is pretty stable and is largely volume-driven at this point because of the low price points required to serve such a huge market across consumer, industrial and gaming. Wi-Fi has higher ASPs than Bluetooth and offers advantages in bandwidth; ASPs for Wi-Fi are higher, and we are also seeing combo chips that include Bluetooth and Wi-Fi together. On top of that, TWS is adding audio, sensor fusion and other features, which allows for higher ASPs for CEVA-related IP. We have enjoyed multiple configurations: standalone Bluetooth, Bluetooth plus Wi-Fi, and other new technologies. We saw two new TWS deals in the last quarter, and the market looks very promising. To give you scale, Bluetooth in the world is about 12 billion units a year and roughly 1.4 billion units are audio Bluetooth; so TWS is exactly where we want to go because we have a unique position and can drive higher value.

If I can take just one last question: is licensing at this new run rate sustainable or how should we think about that?

No, licensing revenues have increased for these product lines and it's a new mix for us; these are not just DSP license transactions or Bluetooth alone. We're licensing higher-value solutions, where we can charge a premium. It also saves money for OEMs or chip vendors because they don't need to manage multiple suppliers; they can integrate functionality into one IC. It's a win-win and licensing activity has been very active. As Gideon noted, we are now north of $21 million in licensing per quarter for the combined business; these are numbers we had not seen before CEVA combined with Intrinsix. Part of it is Intrinsix and part of it is new CEVA products and new markets.

And another benefit of this licensing mix is R&D leverage. As Yaniv mentioned, non-GAAP operating profit for the nine months was up 69% year-over-year, showing significant operating leverage as we scale the business.

Okay. Thanks, everybody.

Thank you, Suji.

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

Hi, good afternoon. Thanks for taking my question. First, I wanted to ask about your traction with customers on Wi-Fi 6. Can you maybe give us more details on how the customers are using Wi-Fi 6 and what are the high-growth end-market applications you're seeing for Wi-Fi 6?

Hi Martin. The way we see it today, Wi-Fi 6 is mainly being adopted in Smart Home devices. Many products could be TVs, smart speakers, security cameras; these are the main drivers of Wi-Fi 6. We are starting to see automotive and industrial use cases, and smartphones are also a big driver. The high-growth end markets include XR headsets, smart home, security cameras, and increasingly automotive and industrial applications where high bandwidth and low latency are important.

Got it, thanks. My second question is traction with smartphone OEMs that are developing their in-house chips. Any updates there and how have they impacted you? Do you think they might be developing their own connectivity chips in the current environment?

The landscape in smartphones is similar to before: a few OEMs internalize more design and some do their own in-house chips. We are engaged with several OEMs for connectivity IP even if they develop other components internally. Connectivity is required in all smartphones, so we are getting into smartphones through our Wi-Fi and Bluetooth technology. For CEVA it is largely indifferent whether the OEM does baseband or connectivity in-house; we can be part of the connectivity stack. Another approach is cellular IoT, which relates to 5G but is not handsets: smoke meters, fixed wireless access, cellular V2X in automotive — these are big markets and more fragmented, where our holistic platform solutions and services add high value. We are seeing opportunities and have multiple customers in these segments.

Thank you.

Our next question comes from Kevin Cassidy at Rosenblatt Securities. Please go ahead.

Thank you and congratulations on the strong results. I'm wondering if you have conversations with your customers about the supply tightness for next year. What kind of increase in unit shipments have they given you, if any?

Hi Kevin. This is kind of a million-dollar question. Customers are split about the severity and duration of the supply crisis; many simply don't know. For example, in the third quarter some allocations for certain chips were set aside for iPhone manufacturers and priorities were given. The situation differs across markets and companies. We don't have a single definitive view; our customers have different opinions. We need to take it step-by-step, quarter-by-quarter, and monitor whether conditions improve. But demand is there, design wins are there, and we need to help our customers as much as we can and hope for the best.

Okay, thanks. And how about visibility into 5G base station deployments? Do you see many of those coming in 2022?

Let me say that broadly the demand is there; operators are waiting for chips and systems. Base station deployments involve many different chips, antennas and subsystems, so the supply chain is complicated. Some of our customers have publicly said the environment is challenging, but they also say they are on track. It goes back to the prior point: we need to manage quarter-by-quarter and continue to support our customers.

We are largely reading the public data you have access to. We don't have any special or unique information yet about 2022 for many of our base station or handset customers beyond what's publicly available.

Okay. Thank you very much.

Thank you.

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

Thanks, Rocco, and thank you, everybody, 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 Investor Section of our website. With regard to upcoming events, we will be participating in the following investor events: The 10th Annual ROTH Technology Event, November 17 and 18; The Fifth Annual Wells Fargo TMT Summit, November 30 through December 2; and the Barclays Global Technology, Media & Telecommunications Conference, December 7 and 8. For further information on these events and on all events we will be participating in, it can be found on the Investor Section of our website. Thank you, and goodbye.

Ladies and gentlemen, 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.