CEVA, Inc. (CEVA) on Q3 2021 Results - Earnings Call Transcript
Operator: 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.
Richard Kingston: 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 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. Without that said, I would now like to hand the call over to Gideon.
Gideon Wertheizer: Thank you, Richard. It is an exciting time for CEVA. The need for and the deployment of our technologies for the digital transformation era never been more evident. Wireless solutions that we muster are the catalyst for the emergence of new smart devices, among which are teaser videos , earbuds and hearing aids, AR glasses, smart watches, smart home product, industry 4.0 factory automation , telemedicine and more. Our innovation, innovative solutions market range and strong execution of the drivers for another outstanding quarter of new licensing agreement and royalty progress. On the revenue for the third quarter of 2021 was record-high of $32.8 million, up 31% year-over-year. The licensing and environment continues to be robust and came in at $21.6 million, up 74% year-over-year. Our global products 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 product 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 NRA agreement of which Philippines were first-time customers. Royalty revenue came at $11.2 million in the quarter, down 11% year-over-year. The warranty contribution from our base station and IoT product category was 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 experiences longer lead time view supply chain constraint. In total, royalty unit achievement of CEVA-based station in IoT-enabled products were 405 million units in the quarter, up from 200 million units in the third quarter last year. this quarter include the milestone of the first 5G smartphone report we have received of just shy of three million units. This growth driver were muted by larger-than-expected declining 5G royalty revenue. We do not see this decline as a market indicator as this Fuji market is still sizable in developing countries and we have experienced this pattern over the years from time to time in 5G . Let me now make 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 quarter. The complexity of Wi-Fi technology rises dramatically when moving to a new generation of the standard. This possess technology challenges that deterred a growing number of incumbents on new entrants from developing technology in-house and instead we seek out technology or solidify their time to market. The recent Wi-Fi 6 and Wi-Fi 6E standard of being rapidly adapted in the latest smartphone and router in our expanding to XR headset, such as the recent Metaverse initiative by Mehta formerly Facebook, and as well as security camera. Wi-Fi 6 is also expected to have a fundamental role in autonomous car where it will be used to upload the terabytes of data collected every day to the cloud, where it will be useful AI-based optimizations. CEVA is benefiting from a unique position as the only viable IP supplier that enable semiconductor companies and REMs to address the diverse and large market that require Wi-Fi 6 or 6E and upcoming Wi-Fi 7 standard. We have now more than 20 Wi-Fi 6 customers in our licensing revenue from this space go 149% compared to the first nine months last year. We are also seeing good progress in shipped CEVA-based Wi-Fi product, which grew 200 million and focusing to more than 111 million units versus the first nine months of last year. Second, our customer of activities has stepped up as we continue to integrate Intrinsix into CEVA. As we noted in prior calls, our growth strategies driven: one, Intrinsix's experience in 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 combines the CEVA-IP portfolio and Intrinsix should chip design competencies to broaden our impact and to grow our revenue base with strategic customer design. The third quarter was extremely successful in concluding sizable agreements in the defense and medical space. We booked an important and sizable agreements with Lockheed Martin for DARPA's SSITH program. SSITH stands for System Security Interface Through Hardware and firmware and aims to revolutionize the way electronic systems are protected, gave different means of exploitation. It's 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 insurance IP offering, bringing new levels of protections to connected cars' wireless communication and other industrial market. Another project that Intrinsix team concluding 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 dyes or chiplets into one small chip package and by such, gain time to market and no entry barrier to key markets. Chiplets technology is already deploying cloud chips by Intel Broadcom, AMD and Marvell. The Intrinsix team with the financial backing of and its ecosystem partner is aiming to drive chiplets to the defense market and to proliferate them for commercial applications. And lastly, regarding our activities and market dynamic in federal IoT, cellular IoT model is used in a wide variety of verticals, among which are logistic, asset tracking industrial agriculture monitoring, parking, payment system, automotive connectivity and more. It is a high volume and fast growing in market forecasted by ABI to reach to 920 million models by 2026, growing at 29% compound annual growth rate. A main segment in the cellular IOT space is NB-IoT, capturing approximately 40% of the volume and growing for default of CAGR between 2019 and 2026. CEVA has strong traction in the and NB-IoT spaces, the two standards which dominates the deployments today. During the third quarter, we continue to see strong growth in volume, up 356% compared to the third quarter of last year and received report for the first time from a new cellular IoT customers, one of the world's top 10 ranked IC design houses. Europe also prioritize 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 no , CEVA for NB-IoT with dozens of customer. The second Sequant is using our sensor G platform for 5G's 5G Cellular IoT with number of high profile design win. The third is an unnamed leading semiconductor, who is developing cellular IoT chips targeting its large industrial and smart meter customer base. So in summary, CEVA is transforming from speciality in these e-core technology to a trusted technology house with the 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 rest designs into holistic solution 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 broadening the range of industries. Finally, we continue to monitor any possible implication of the ongoing supply chain constraint. It's commonly acknowledged the semiconductor supply chain challenge is in fact, our broad industries in different manner, which may translate to low visibility. With that said, we are on track to meet our target and we'll continue to work with our customer and partners to mitigate negative impacts. With that said, let me hand over the call to Yaniv for the financials.
Yaniv Arieli: Thank you, Gideon. I'll start reviewing our operation into the third quarter of 2021. Revenue for the third quarter was up 31% of $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 related revenue is approximately $21.6 million, an all new 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 full first 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, respecting 34% of our total revenue, compared to $12.5 million for the same quarter last year. Gideon noted our consistent growth in base station in IoT and the penetration to 5G smartphone is muted by larger than expected decline in 2G royalty revenue. Quarterly gross margin came in better than expected, due to lower allocation of Intrinsix NRE cost cost from the R&D expense line, to the cost of goods expense line. Gross margin was 85% on GAAP basis and 87% of non-GAAP basis as compared to our 81% to 82% . 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 was over the high-end of our guidance at $26.3 million, due to lower allocation of Intrinsix's NRE cost from R&D to the cost of good and from our prior quarter's . Such shift between these two may happen from time to time and are tied with the actual design services performed in the quarter. OpEx also included an aggregate equity-based compensation expenses of $3.2 million and $1.2 million for the different amortizations. Our total non-GAAP OpEx for the third quarter excluded these items were $21.9 million over the high-end of our guidance due to the same reasons I just stated with regards to the . 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 was approximately $1.8 million, a bit higher than forecasted with strong revenue mix in interest for connectivity products originating in France, which have 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 in 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 respective. Non-GAAP net income and diluted EPS for the third quarter of 2020 was $3.6 million and $0.16 cents respective. With respect to other related data. Shipped units by CEVA licensee during the third quarter of 2021 was 438 million units, up 26% from the third quarter of 2021 shipments. Of the 438 million units reported, 33 million units or 8% are for handset baseband chips. Our base station in IoT product shipments were in a record 405 million units, up 29% sequentially and 103% year-over-year. Of note, bluetooth was at new record of 291 million units for the quarter and cellular IoT also reached the new record-high of 26 million units. As for the balance sheet items. As of the end of September 2021, seamless cash, cash equivalent and balances marketable securities and bank deposits were $145 million. Our DSOs for the third quarter were 43 days, a bit higher than prior quarter but at our norm 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. The end of the third quarter, our headcount including the Intrinsix team was 485 people, for 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 a 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 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 and such growth in the fourth quarter 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 GAAP basis and 84% on 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. On the anticipated operating expense for the fourth quarter of $3.2 million is expected to be attributed to equity-based compensation to $1.2 million to the different amortizations. Therefore, our non-GAAP OpEx is expected to be in the range of was $21.1 million to $22.1 million. Net interest income is expected to be approximately $0.3 million. Access 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 ships. And Rocco, we can now open the Q&A session. Thank you.
Operator: Thank you. Today's first question comes from Matt Ramsay at Cowen. Please, go ahead.
Matt Ramsay: 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 base band 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 reclassification 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.
Gideon Wertheizer: Hi, Matt. Good morning. Let me go first on the composition of the royalty. So, we discussed the base station in IoT category is flourishing. And we have almost all the products there are going real significantly computer vision blog posts. Several IoT sensor fusion. That's what we plan and aims and now it's kicking. Base station in IoT, last year we had a very strong quarter and everybody went out of the lockdown so there were the first full quarter of coming out the lockdown, so it's a comparison. But overall, it's moving. We could see it also in the design wins, that they are getting China Mobile. For example, VP got the big China deal. Mobile, when you look is I would say generally is trending the way we expected with CMD going, the 5G is . 4G is something that we had in the past. There could be different reasons. I don't think it's it's a little thing. Or you don't have inventory in these days, it's more like prioritization.
Operator: 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.
Richard Kingston: 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.
Operator: 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.
