CEVA, Inc.

Good day and welcome to the SEVA, Inc. Second Quarter 2020 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touch-tone phone. To withdraw your question, please press star then two. Please note, today's event is being recorded. I would now like to turn the conference over to Richard Kingston, Vice President of Market Intelligence, Investor and Public Relations. Please go ahead, sir.

Thank you, Rocco. Good morning, everyone, and welcome to SEVA's second quarter 2020 earnings conference call. I'm joined today by Gideon Wertheiser, Chief Executive Officer, and Yaniv Arieli, Chief Financial Officer of SEVA. Gideon will cover the business aspects and the 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 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. These forward-looking statements include guidance for the third quarter 2020 and qualitative data for the remainder of 2020, optimism about 5G opportunities, including expectation of royalty revenue increase in the third quarter associated with 5G base station RAM in China, optimism associated with the SIVA XC DSP portfolio and PentaG 5G modem platform, Seva's ability to play a pivotal role in the ORAN space, Seva's ability to leverage opportunities that may arise from the pandemic and the US-China trade tensions, and positive market data by GSMA Intelligence and Forrester Research. For more information on the factors that could cause a difference in our results, please refer to our filings with the SEC. These include The scope and the duration of the pandemic The extent and the length of the shelter in place and other restrictions associated with the pandemic and the impact on customers, consumer demand and the global economy generally The ability of SIVA'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, O-RAN, 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 SIVA assumes no obligation to update any forward-looking statements or information which speak as of their respective dates. With that said, I'd now like to turn the call over to Gideon.

Thank you, Richard. Good morning, everyone, and thank you for joining us today. We are living in unprecedented times where we all continue to adapt to the implications of the COVID-19 pandemic. First and foremost, we continue to look out for the health and safety of our employees, customers, and partners worldwide. Our employees have stepped up to ensure we meet our customers' milestones and maintain the development schedule of our new products. I would like to take this opportunity to thank our employees for their hard work under these difficult circumstances. Second, we are closely monitoring the impact of the measure to control the spread of the coronavirus on our ongoing business and also the strategic opportunities the pandemic uncovers. I will allude to this later in the course. Despite this lingering uncertainty, we had a very good second quarter with revenue of $23.6 million, up 28% year-over-year, the highest second quarter revenue we ever recorded. The licensing environment continues to be healthy with $13.5 million in licensing revenue, up 25% year-over-year, We signed eight new license agreements, of which three were for smart sensing and five were for connectivity products. One out of the eight deals was with first-time customers. Target applications of our customers include automotive powertrain, a new growth opportunity for us in the automotive space. and a range of IoT devices. Reality revenue came in ahead of expectations at $10.1 million, up 10% sequentially and 33% year-over-year, driven by strength in the base stations and IoT product line, formally referred to as non-handset projects. This product line posted 70-70% year-over-year revenue growth to $4.3 million, comparable to our all-time record high, and driven by record high Bluetooth and Wi-Fi royalties, resulting for many new IoT production reps. In this product line, we expect a step up in our royalty revenues in the third quarter, associated with the fast deployment and share gain of 5G base station Rai in China. The handset product line also showed growth where solid demand for new low-cost smartphone from a U.S.-based customer more than offset weakness in the low-tier LTE shipments into emerging markets. India, which is currently the second largest handset market by volume, experienced a 48% year-over-year decline, according to Canalys report, due to supply and demand constraint as a result of the Indian government measure to control the spread of the virus. Let me take the next few minutes to walk you through our perspective on COVID-19 and the geopolitical tension between U.S. and China. On COVID-19, recent market data from research firm GSMA Intelligence predicted that IoT Net Edition for this year are expected to be down 45% on a yearly basis due to the pandemic. GSMA Intelligence is, however, maintaining its forecast for 2025 of 24 billion devices, doubling 2019 levels because it expects strong post-pandemic activities to offset the current decline. With that said, the social distancing measures have uncovered new services for mobile technology. The latest UNESCO figures claim that nearly 1.4 billion students around the world have shifted to remote study via mobile technology, in particular in emerging markets where wired broadband is not available. Furthermore, and Forrester Research predict that more than one billion virtual care visits are expected within the DOS this year. The magnitude and the pace of adoption of these new services call for the persistent and expedited deployment of 5G networks where we believe there will be attractive opportunities for a strong technology portfolio. As I commented earlier, based on discussions with our customers, we expect to see a sizable production ramp and noticeable step-up in loyalty revenue for 5G base station run in the third quarter. Furthermore, COVID-19 brings forward new usage models for 5G, including fixed wireless access, 5G-enabled PC, and B2S. With our latest CYCDSP portfolio and our Pentagy 5G modern platform, we are well equipped and positioned to address this new usage model for incumbents and newcomers. On to the geopolitical tension between China and the U.S. Existing export control rules do not directly apply to our current technology developed in Israel and Europe. We continuously monitor development on this front and are prepared to adapt our business as required. A byproduct of the trade tension, the U.S. government is looking to stimulate the use of Open RAN, or ORAN, technologies for 5G mobile networks. ORAN enables mobile operators to mix and match hardware and software components from different suppliers rather than use vertical solution for a few T1 OEMs. Orange dramatically reduced the entry barrier for software and hardware companies, the majority of which are U.S.-based, such as Intel, Facebook, Cisco, Microsoft, as well as new startups like AltioStar, Marvenir, and Parallel Wireless. TIVA is aiming to play a pivotal role in the orange space using The power efficiency of our DSP platform for the stringent runtime and low latency requirement associated with baseband processing. We have gained a lot of experience and pedigree in the run space to be able to proliferate the supplier base. On the China front, The central government came out in March with a new ambitious plan called New Infrastructure. The plan highlights investment in seven areas, of which 40% to 50% of the investment are associated with 5G, AI, and IoT. These are areas in which SIVA already has strong presence and deployment in China. We are continuously discussing with our major Chinese customers and how we can expand our presence in China based on this plan. So in closing, our business in the first half of the year was robust, despite the volatility and uncertainty brought about by COVID-19. This affirms the strength of our company's vision and business model. Furthermore, the current situation poses new opportunities for us to expand in Iran and China's new infrastructure plan. While I am satisfied with our first-half performance and opportunities ahead, the recovery from the pandemic is slower than was anticipated earlier in the year, and the U.S.-China trade tension poses additional uncertainty. We are therefore laser-focused. Thank you, Guido. I'll start by reviewing the results of our operations for the second quarter of 2020. Revenue for the second quarter was up 28% to $23.6 million as compared to $18.4 million for the same quarter last year. It was the highest second quarter revenue we ever recorded. The revenue breakdown is as follows. Licensing and related revenue was approximately $13.5 million reflecting 57% of our total revenue, 25% higher than $10.8 million for the second quarter of 2019. Royalty revenue was $10.1 million, reflecting 43% of our total revenue, 33% higher than $7.6 million for the same quarter last year. The OT revenue from our base station and IoT product line in the quarter was $4.3 million. This is comparable to the all-time record high we reached in the fourth quarter of 2019. For the gross margin was 87% on GAAP and 89% on non-GAAP basis, both slightly better than what we projected. Non-GAAP quarterly gross margin excluded approximately $0.2 million of equity-based compensation expenses and $0.2 million for the impact of the amortization of acquired intangibles. Our GAAP operating expenses for the second quarter was just below the high end of our guidance at $22.1 million. also included aggregate-based compensation expenses of approximately $3.3 million and $0.6 million for the amortization of acquired intangibles. Total operating expenses for the second quarter excluding these two items were $18.3 million, just above the high end of our diet. U.S. GAAP net loss for the quarter was $1.1 million, and diluted loss per share was $0.05. This compares to a net loss of $1.5 million and diluted loss per share of $0.07 for the second quarter of 2019. Our non-GAAP net income and diluted EPS for the second quarter of 2020 increased by 130% and 140% respectively. to $2.9 million and 12 cents. Non-GAAP met income in the alluded EPS for the second quarter of 2019 for $1.2 million and 5 cents respectively. Other related data. Shipped units by SEVA's licensees during the second quarter of 2020 were 231 million units. Down 11% sequentially and up 6% from the second quarter of 2019 reported shifts. Of the 231 million units shipped, 99 million units, or 43%, were for handset-based ventures, reflecting a sequential decrease of 11% from 111 million units during the first quarter of 2020, and a 19% decrease from 122 million units shipped a year ago. Our base station and IoT product shipments were 132 million units, down 12% sequentially, and up 37% year over year. As a reminder, we have categorized all our non-handset basement chips under the umbrella of base station and ILP products since the beginning of this year. This product line hosted 77% year-over-year growth and 17% sequential revenue growth to reach $4.3 million. And for the balance sheet items. As of June 30, 2020, SEBA's cash and cash equivalent balances, marketable securities, and bank deposits were $157 million. We did not repurchase any shares this quarter under the terms of our 10b-5 plan. We only have approximately half a million shares available for repurchase. Our DSOs for the second quarter of 2020 was 27 days, significantly lower than the 63 days we recorded for the first quarter of this year. During the second quarter, we generated $6.2 million of net cash from operations. Our depreciation and amortizations were $1.5 million, and purchase of fixed assets was $0.6 million. At the end of the second quarter, our headcount was 401 people, of which 333 were engineers, up from a total of 390 people at the end of March 2020. Now for the data. As demonstrated by our results for the first half of this year, SEVA's product and Customer Diversity enabled us to migrate the economic challenges the pandemic presented. We remain focused on our near-term objectives and continue to invest in future growth. As for the second half outlook, prolonged measures to contain the spread of the coronavirus posed economic uncertainty, partially in emerging markets, particularly in emerging markets, where our primary exposure is for low-tier handsets. On the other hand, we are encouraged by the indicators we have noted in recent customer reports reflecting to the base station and IoT product line. And as Gideon just alerted to, we expect a step up in the 5G base station royalty revenue in the third quarter royalty reports. So with that said, we believe the second half royalty revenues will be higher than the first based on the assumption of the gradual recovery in economic activities. The current restrictions are listed. Licensing, we maintain the licensing target we have focused on earlier this year. of up $2 million to $4 million over the 2019 record annual licensing revenues, specifically for the third quarter of this year. Gross margin is expected to be approximately 88% on GAAP bases and 89% on non-GAAP bases, excluding an aggregate $0.2 million for both equity-based compensation expenses and the amortization of other assets associated with our immune vision and distance. OpEx for the third quarter is forecasted to be slightly lower than the first two quarters of 2020. Gap-based OpEx is expected to be in the range of $21.5 to $22.5 million. Of our anticipated total OpEx for the third quarter, $3.4 million is expected to be attributed to equity-based compensation expenses and $0.6 million to the amortization of acquired intangibles. Our non-GAAP OPEX is expected to be in the range of $17.5 to $18.5 million. Then interest income is expected to be approximately $0.7 million Taxes for the third quarter expected to be approximately half a million dollars on both GAAP and non-GAAP basis. And our share count for the third quarter is expected to be approximately 23.1 million shares. Rocco, you could now open the Q&A session, please. Thank you.