CEVA, Inc.

Good day and welcome to the SEVA, Inc. first quarter 2020 earnings conference call. All participants will be in this mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, you will have an opportunity to ask questions. To ask a question, you will press star then one on a touch-tone. To withdraw your question, please press star then two. Please note, this event is being recorded. and now I'd 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, and good morning, everyone. Welcome to FIVA's first quarter 2020 earnings conference call. I'm joined today by Gideon Wertheiser, Chief Executive Officer, and Yaniv Arieli, Chief Financial Officer of FIVA. Gideon will cover the business aspects and highlights from the first quarter and provide general qualitative data and Yaniv will then cover the financial results for the first quarter and also provide qualitative guidance and data for the second quarter and full year 2020. 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 SEVA to differ materially from those expressed or implied by such forward-looking statements and assumptions. Forward-looking statements include guidance for the second quarter of 2020, our anticipated pillars of growth, including 5G RAN and Wi-Fi 6, and optimism about achieving such growth objectives, optimism about certain of our customers gaining market share in 5G, our ability to manage our non-GAAP expense levels to mitigate the adverse impact of the pandemic in the coming months, and market data by Cisco and ABI Research. 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 duration of the COVID-19 pandemic, the extent and length of the shelter-in-place and other restrictions associated with the COVID-19 pandemic, and the impact on customers' demand and the global economy generally, the ability of SEVA's IP 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 Wi-Fi and IoT markets, our ability to execute more non-handset baseband license agreements, the effect of intense industry competition and consolidation, and Global Chip Market Trends. SEVA assumes no obligation to update any forward-looking statements or information which speak as of their respective date. With that said, I'll now turn the call over to Gideon.

Thank you, Richard. Good morning, everyone, and thank you for joining us today. Firstly, our heartfelt sympathies are with those around the world that have lost their loved ones or their jobs due to the COVID-19 pandemic. We are all hopeful that the measures taken by governments around the world will lead to a sustainable recovery. At CIVA, we are taking proactive steps to protect all our employees' health and adjust our operations to work from home. Our IT infrastructure is advanced and scalable, which allowed a seamless migration from office to work from home. Our ongoing R&D development remains at a high level of productivity, and our interactions with customers for sales and support activities are smooth. We continue to monitor government instructions country by country and are taking careful steps to enable our employees to return to our offices. Against this backdrop, we have an excellent quarter with revenue of $23.6 million, up 39% year-over-year. The licensing environments continue to be robust, and we recorded $14.5 million in licensing revenue, up 32% year-over-year. We signed 13 new agreements, of which 10 were for connectivity and three were for smart sensing. Three out of the 13 deals were with first-time customers. Clouded applications for technologies include 5G for base station run, 5G fixed wireless access, 5G backhaul, Wi-Fi 6 for IoT devices, full wireless earbuds, vision and AI for drones, and voice assistance for a range of smartphone and IoT devices. Royalty revenue came in at $9.1 million, up 53% year-over-year. Above seasonal weakness in the Chinese handset market resulting from the COVID-19 lockdown in China was more than offset by solid IoT-based product shipments and the introduction of new low-cost models from a leading smartphone company. Let me take the next few minutes to provide you with additional perspective on two growth vectors that are central in our strategy, 5G run and Wi-Fi 6. These spaces represent secular trends and are expected to come increasingly into focus on the back of COVID-19 as they are key to enabling better work from home practices and support the proliferation of the use of robots, remote medical diagnosis and treatments in the future. On 5G-1, Our largest 5G OEM customer extended the use of our technologies and signed new licensing agreements during the quarter for development of next-generation 5G chipsets to address the 5G Phase II network services. The services include ultra-reliable low-latency communication, UR-LLC, targeting robotics, smart manufacturing, automotive, medical, and massive machine-type communication, MMTC, that enables billions of low-powered sensors to be connected to the cloud for aggregation and AI services. LLC and MMTC will drive the upcoming capital investment in 5G and are the focus of our customers with their new run design. In this context, a few weeks ago, we unveiled our latest generation DSP, the SIVA XC16. This is the most advanced and powerful DSP platform available today, offering unprecedented performance and State of the Art Architecture, Innovation in Operating Speed, Parallel Processing and Multi-Threading. We are also encouraged by the recent traction our customer, VP, has had in 5G. Today it has 45 commercial contracts and most recently won 29% share of a $5.2 billion contract to deploy 5G base station for China Mobile, a substantially bigger share than it had in prior engagement for China Mobile. On Wi-Fi 6, we are experiencing good momentum and customer interest with two new agreements signed during the quarter, targeting a variety of IoT devices, ranging from BTV, smart set of boxes, smart speaker, to smart door locks. Wi-Fi 6 is the latest Wi-Fi standard, also referred to as A2211AX. According to Cisco forecast, nearly 60% of mobile data traffic worldwide will be offloaded to Wi-Fi network by 2022. According to recent study from ADI research, the Wi-Fi 6 market is forecasted to reach 2.2 billion units by 2024, as compared to less than 300 million in 2019. The recent FCC approval to free up additional spectrum at the 6 GHz band will enable compliant Wi-Fi 6E devices to achieve speeds comparable to 5G mobile networks, support low latencies required for applications like virtual and augmentation reality, and Mobile Gaming and is also expected to boost the industry 4.0 update for smart manufacturing. So in summary, our thoughts are with those people suffering from the impact of COVID-19. While the situation is still dynamic, we are encouraged by the persistent design activities of our customers and interest in our products. We are laser-focused to continue to expand our business to capitalize on the momentum we gained last year. We are closely monitoring the dynamics and developments concerning our customer shipment and will take prudent steps until COVID-19 impact is contained and supply and demand resume some normalcy. We hope you are all safe and look forward to meeting you face-to-face again in the near future at conferences and workshops. With that said, I'll hand over the call to Yaniv for financials and guidance. Yaniv Arieli Thank you, Guido, and good morning. I'll start by reviewing the results of our operations for the first quarter of 2020. Revenue for the first quarter was up 39% to $23.6 million, as compared to $17 million for the same quarter last year. The revenue breakdown is as follows. Licensing and related revenue was approximately $14.5 million, reflecting 61% of our total revenue, 32% higher than $11 million for the first quarter of 2019. Multi-revenue was $9.1 million, reflecting 39% of public revenue, 53% higher than $6 million from the same quarter last year. Quarterly gross margin was 88% on gap basis and 90% on non-gap basis, slightly better on non-gap than we originally forecast. Non-GAAP quarterly gross margin excluded approximately $0.2 million of equity-based compensation expense and $0.2 million of the impact of amortization of required intangibles. Total GAAP operating expense for the first quarter was at the higher end of our guidance at $22.5 million. Topics also included an aggregate equity-based compensation expense of approximately $2.9 million, higher than forecasted due to the accounting associated with the February 2020 CSU grants to manage it. OPEX also included $0.6 million for the amortization of acquired intangibles and $0.9 million Allowance for doubtful debt provision associated with liquidity difficulties for one of our customers in the U.S. Total operating expense for the first quarter, excluding equity-based compensation expenses and amortizations of intangibles, were $19 million, also at the higher end of our guidance. U.S. GAAP net loss for the quarter was $1.2 million and diluted loss per share was $0.05 for the first quarter of 2020, as compared to a net loss of $2.3 million and diluted loss per share of $0.10 for the first quarter of 2019. Our non-GAAP income and diluted EPS for the first quarter increased by 9.5-fold and 11-fold, respectively, to $12.6 million and 11 cents. Other related data. Shipped units by SEVA's licensees during the first quarter of 2020 were 261 million units, down 27% sequentially, but up 50% from the first quarter of 2019 reported shipping. Of the 265 million units shipped, 111 million units, or 43%, were for handset baseband ships, reflecting a sequential decrease of 43% from 196 million units of handset baseband ships shipped during the fourth quarter of 2019. but a 25% increase from 89 million units shipped a year ago. Our base station and IOT product shipments were 150 million units, down only 9% sequentially and up 76% year-over-year. We've now categorized all of our non-enhanced baseband ships under the umbrella of BaseStation and IoT products. As for the balance sheet, as of March 31, 2020, SEVA's cash, cash equivalent balances, marketable securities, and bank deposits were $151 million. We continued our buyback plan this quarter, repurchasing approximately 202,000 shares for approximately $4.8 million. In February, our board of directors approved the new expansion of the buyback plan by a total of 700,000 shares available for repurchase. As of today, 498,000 shares are available for repurchase. Our adjusted AST 606 DSOs for the first quarter of 2020 were 63 days. During the first quarter, we generated $6.4 million in net cash from operations. Our depreciation and amortizations were $1.5 million, and the purchase of fixed assets were $0.8 million. At the end of the first quarter, our headcount was 391 people, of which 324 were engineers. up from a total of 382 people at the end of 2019. Now for the guidance. As mentioned by Gideon, we continue to execute well in our business strategy during the first quarter and have had an excellent first quarter in licensing and royalty revenue despite the disruption caused by COVID-19. Although we continue to work diligently towards our goals of meeting annual revenue guidance given on the last earnings call, the spread of COVID-19 around the world and the extent of this disruption it exposes on the supply chain and on consumer demand cannot be fully assessed at this point. Given this uncertainty, As a matter of prudency, we have decided to withdraw our annual royalty revenue guidance at this stage. On the other hand, our licensing and related revenue business remains robust, and we're maintaining our annual forecast of growth of $2 million to $4 million over 2019 record annual results. We will also continue to monitor closely our non-GAAP expense levels to mitigate any adverse impact of the pandemic in the coming months. This will not affect our research and development plans, technology roadmap, or customer support, as we are firmly committed to those areas and believe those technology investments will pay dividends in the future. As we have seen from prior cycles, IP companies play a crucial role in expediting the semiconductor market recovery and with closing technology gaps that such slowdowns can create. Specifically, for the second quarter of 2021, gross margin is expected to be approximately 86% on gap and 88% on non-GAAP basis, including aggregates of $0.2 million of equity-based compensation expenses and $0.2 million of amortization of other assets associated with the EmerVision investment. OPEX for the next three quarters of 2020 should be lower than the first quarter. For the second quarter, GAAP-based OPEX is expected to be in the range of $21.2 to $22.2 million. Over anticipated total operating expenses for the second quarter, $3.7 million is expected to be attributed to its equity-based compensation expense. Such expenses are higher than originally forecasted due to the accounting treatment of our February 2020 PSU grants to management. And $0.6 million will be attributed to amortization of acquired intangibles. Therefore, our non-GAAP office is expected to be in the range of $17 to $18 million. An interest income is expected to be approximately $0.75 million. Taxes for the second quarter are expected to be approximately $0.3 million on both GAAP and non-GAAP basis. Share count for the second quarter is expected to be at 23.2 million shares. And, Rocco, you can now open the Q&A session for us.