CEVA, Inc.

Good day and welcome to the SEVA, Inc., fourth quarter and full year 2020 earnings conference call. All participants will be in a 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. Please note that this 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.

Thank you, Cole. Good morning, everyone, and welcome to SEVA's fourth quarter and full year 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 fourth quarter and provide general qualitative data Yaniv will then cover the financial results for the fourth quarter and also provide qualitative data for the first quarter and the 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 SEVA to differ materially from those expressed or implied by such forward-looking statements and assumptions. Forward-looking statements include guidance and qualitative data for the first quarter and full year 2021, optimism about 5G base station RAN deployment in China and relationship with ZTE and the opportunities presented thereby, optimism about the continued momentum in our connectivity sensing and AI technologies, ramp up from existing Wi-Fi 4 and 5 customers, Optimism that our Bluetooth technologies will allow us to penetrate the high volume smartphone market. Our belief for strong licensing revenue in 2021 and potential new licensing engagements. And our belief that our royalty growth drivers will more than offset the decline in royalties from the 5G smartphone supplier switch. For information on the factors that could cause a difference in our results, Please refer to our filings with the Security 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 SEVA'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 non-handset baseband license agreements The effect of intense industry competition and consolidation And global chip market trends DIVA assumes no obligation to update any forward-looking statements or information which speak as of their respective dates And with that said, I would now like to hand the call over to Gideon.

Thank you, Richard. Good morning, everyone, and thank you for joining us today. 2020 was an extraordinary year with the COVID-19 pandemic accelerating the adoption of new technologies and usage models while presenting uncertainties and enormous operational challenges worldwide. Notwithstanding the circumstances, SIVA has an exceptional year with all-time high revenue in both licensing and royalties, and substantial market expansion in the 5G1, Wi-Fi 6, and automotive spaces. I will allude to these developments in more detail later in the course. First quarter was another excellent quarter with revenue and EPS significantly ahead of our expectations. But our revenue for the first quarter of 2020 came in at $28.1 million, our second highest quarterly revenue on record. The licensing environment continued to be healthy at $12.1 million for the quarter, with a good demand for our Wi-Fi, Bluetooth, and audio DSP products. We signed a record, equally, 21 new agreements, of which 16 were for connectivity and five were for smart sensing. Seven of those agreements were with first-time customers. Target products for our technology include 5G smartphones, TWS Earbuds, cellular IoT for asset tracking, and a wide variety of other IoT devices. Late in the quarter, we signed a comprehensive and sizable license agreement for our connectivity portfolio with a key OEM in the mobile space that internalizes the development of Wi-Fi and Bluetooth technologies and intend to deploy our connectivity portfolio across all of its 5G smartphones, TWS earbuds and other smartphone-related products. This agreement, along with others that we have in our pipeline, reinforce our belief for a stronger and another record year in licensing revenue for 2021. Royalty revenue came in at all-time record high, $16.1 million, up 19% year-over-year. Seasonal strengths that caused our IoT market and strong shipments of 4G smartphones were the key drivers to this exciting record. For the second quarter in succession, we reported all-time high royalty revenue from our Bluetooth, Wi-Fi, and sensor fusion product line. For the full year 2020, revenue came in a record setting of $100.3 million, up 15% from 2019. This marks the first time that FIBA has crossed the $100 million annual revenue threshold, a year ahead of our expectations. Licensing and related revenue had a record year with $52.5 million, up 10% from last year. We continue to expand our customer base with a record of 55 license agreement signed, of which 17 were first-time customers. Annual royalty revenue came in at a whole-time high, $47.8 million, up 22% as compared to 2019. Royalty revenue from our base station and IoT product category grew 72% year-over-year to $22.3 million as the momentum for our large and diverse customer base across multiple end markets continues. Royalty revenue from handset declined slightly year-over-year, down 3%. to $25.5 million. Unit shipment of SIVA-based products grew 27% year-over-year to more than 1.3 billion units, with a record 750 million units from our base station and IoT customers. In perspective, 2020 was a landmark year for both SIVA and its industry. The global pandemic highlighted the impact connectivity has on our lives and acted as a catalyst for rapid change toward digital transformation. It presents a unique set of opportunities for cyber-differentiated technologies and operational agility, in particular in four key markets, 5G run, Wi-Fi, TWS Earbuds and Automotive. Let me take the next few minutes to elaborate on these gross drivers and the anchors FIBA has already in place in these local markets. 5G Run. 5G offers data rate and ubiquitous connectivity. The fast rollout of 5G networks today is predominantly aimed at smartphones. According to Ericsson's most recent mobility report, by the end of 2020, over 1 billion of 15% of the world population live in 5G coverage area. China, in particular, is very advanced with 70% of the global 5G connection, according to GSM Association. Beyond smartphones, 5G offer new growth opportunities in regards to URLLC and IoT applications. This application will be the center of next-generation technology deployment in industrial, robotics, AR, and autonomous cars. The digital transformation and the new application 5G enables presents sizable opportunities for civil 5G-run technologies Beyond our existing incumbency in baseband. This specifically applies to the growing use of active antenna and new antenna technology that combines arrays of antennas with DSP to process complex algorithms such as massive MIMO and beamforming for more precise steering of the antenna signal, which gains substantial boost in capacity and energy efficiency. The emergence of O-RAN and V-RAN, which aims to transform the telecom industry from relying on proprietary platform from limited number of OEMs to disaggregate network with open interfaces and multitude of merchant chips from incumbents and new suppliers. We think research is expecting open run to account for 58% of the overall run capex spending by 2026. With our second-to-none competitive edge in DSP processors, we are able to empower our existing and upcoming customers to innovate and quickly expand their market reach to the remote radio unit and address new opportunities in the run space like private networks, small cells, wireless access, and all that. We are encouraged by the progress ZTE has made in the 5G RAN space, growing its share in the global RAN market from 8% to 11% on a year-over-year basis, according to the law, and we expect other customers of ours to go into production in 2021. Wi-Fi. Wi-Fi is deployed in over 5 billion smartphones and more than 300 million hotspots today. Cisco estimates that more than 50% of the global mobile traffic is offloaded to Wi-Fi, and this is set to grow to over 70%. AT&T noted that it's Network experienced 90% Wi-Fi data growth during the pandemic. The new Wi-Fi standard, Wi-Fi 6 and Wi-Fi 6E, provide substantially higher data rate up to 9.6 gigabits per second versus 1.3 gigabits per second in prior generation Wi-Fi 5. Wi-Fi 6 also presents sizable opportunity beyond smartphone and PC through proliferation of connected IOT devices such as smart home appliance, smart TV, smart speaker, connected cars, and wheel beds. Our reverse Wi-Fi 6 IP is at the forefront of the Wi-Fi 6 upgrade cycle and the only IP with successive record of accomplishment. We have signed to date more than ten Wi-Fi 6 customers, and our existing Wi-Fi 4 and Wi-Fi 5 customer shipments grew more than six-fold in 2020, the start of significant expected ramp-up. In addition, as I noted earlier, Wi-Fi 6 alone without Bluetooth technologies bring us opportunities to front-penetrate the high-volume market of smartphones, as more OEMs are looking to internalize wireless connectivity technologies, as well as semis that look to take advantage of our leadership in the Wi-Fi 6 and Bluetooth domains. TWS Earbuds. The TWS Earbuds market presents a lucrative opportunity for SIVA due to its size and roadmap. At IDC by 2020, the TWS segment reached 234 million sets and projected to reach to 400 million sets by 2024, representing a CAGR of 14%. The pandemic has expedited the proliferation of PWAs as more people have to work or study from home and require high-quality earbuds to ensure good experience. Additionally, large handset OEMs have recently decided to remove complementary earbuds from new phone packages, paving the way for a large merchant market for PWAs earbuds. CIMA already has a strong presence in TWS earbud space with our Riviera-Wage Bluetooth IP. Overall, our Bluetooth technology has been adopted by more than 80 semis in OEM today and empowered more than 520 million devices in 2020, up 44% year-over-year. Furthermore, the future TWS IRBA design will progressively seek to add more functionalities while dealing with the challenges of finite space and battery life. Among these both functionalities are noise cancellation for adverse environmental conditions, voice recognition, AI, and sensors for activity and health tracking. of which relates to technology that CIVA owns. In the coming weeks, we will officially announce the world's first comprehensive and open platform for TWAs built by NHERABED that we license. We have already started to introduce this high-value differentiated AP to lead customers and expect to conclude the first license agreement shortly. Promoted. The automotive market represents 9% of the global semiconductor consumption, or $41 billion in sales. Yes, selling into the states requires overcoming large entry barriers, and it commonly takes between three to five years for semiconductor vendors using new technology to qualify a design, a Tier 1 OEM, before going into production. With that said, as soon as production starts, the product lifecycle automotive is longer than most other markets, ensuring stable source of revenue and profit, and plays well for SIVA R&D investment strategy. In recent years, automotive industry has undergone a massive technology transformation, driven by adoption of ADA and electrification. It has applications such as lane departure warning, emergency braking, parking assistance, driving monitoring system requiring high-performance DSP to process the sensory data captured by cameras, radar, LIDARs, and other sensors surrounding the vehicle. Automotive electrification is gaining momentum as a result of increased emphasis of government to lower CO2 emissions as threat of climate change produce more harsh air storms, wildfire, and flooding. Battery management system plays a key role in electrical powertrain in charge of keeping high efficiency and longer life of the battery set. Powertrain vendors and OEMs have recently started to use DSPs along with AI to boost the performance of the battery systems for longer drives per charge in diverse environments and use conditions. Leading T1s and OEMs are increasingly receptive to new DSP advancement and the collaborative business model that CIVA proposes in the areas of ADAS and PowerTrain. Our latest CENSPORT2 DSP architecture, work for most DSPs for sensor processing, provide unified architecture for real-time monitoring and AI processing of sensory data extracted from radar, camera, LIDAR, cellular V2X, and variety of environmental sensors. Our CDNN AI toolkit is able to quantize, prune, and optimize neural networks and speed up neural network inference processing A crucial requirement for fast response time of the vehicle. E-Score Technologies and Competency were the drivers for two key agreements we signed during 2020 with two of the largest automotive semis that plan to use our technology for powertrain and level 2 plus ADA. We will continue in the coming year to strengthen our relationship with our two key customers and seek to engage with other stakeholders, capitalizing on core technologies and our growing reputation in automotive. It also aligns with SIVA's strong focus and commitment to environment improvement technologies and products. Before my closing remarks, we would like to express our concern and sympathies for those affected by our global pandemic. The ongoing situation presents us with numerous challenges, and we continue to focus on the safety of our employees, customers, and suppliers. Our record-setting results for the year demonstrate the breadth of our technology portfolio, its resiliency to global events and primarily our employees' focus and devotion to maintain and even exceed aggressive targets that we set for ourselves. As we enter 2021, we look to continue to be at the forefront of the digital transformation and capitalize on our core technologies and customer diversity to grow our market share and maximize our return from growing industries In particular, 5G-run Wi-Fi, TWS, earbuds, and automotive that I discussed earlier. These industries present multi-year growth opportunities for connectivity, sensing, and AI technology, and we are well positioned to take advantage of it. Finally, I would like to take this opportunity to thank all of our employees for their hard work, innovation, and fantastic execution. I would like to extend my thanks to our partner suppliers, and last but not least, our investors for their confidence and support. We wish you all a healthy, happy, and prosperous year, and please stay safe. With that said, I now turn the call over to Yaniv, who will outline our financials and guidance. Thank you, Guido. Good morning, everyone. I'll start by reviewing the results of our operations for the fourth quarter of 2020. Revenue for the fourth quarter was $28.1 million, down slightly as compared to $28.3 million in the same quarter last year. The revenue breakdown is as follows. I think in the related revenue was approximately $12.1 million, reflecting 43% of total revenue, and Yaron Galitzky. Our total revenue was a record $16.1 million, reflecting 57% of our total revenue, up 19% from $13.5 million for the same quarter last year and up 28% sequentially. PayStation and IoT royalty revenues contributed $6.4 million in the quarter, up 50% year-over-year, with an all-time record royalty contribution from our Bluetooth, Wi-Fi, and sensor fusion product lines. Quarterly gross margin was 91% on GAAP and 92% on non-GAAP bases, both higher than expected. Non-GAAP quarterly gross margin excluded approximately $0.2 million of equity-based compensation expenses and $0.2 million for the amortization of other assets associated with annual vision investment. Our total OPEX for the fourth quarter was $23.2 million, just over the high end of our guidance, mainly due to accrued compensation-related benefits and commission associated with the higher 2020 revenues. Topics also included an aggregated equity-based compensation expense of approximately $3.4 million, amortization of acquired intangible assets associated with the acquisition of Hillcrest, and supervision of $0.6 million. Our total optics for the fourth quarter, excluding these items, were $19.3 million, about half a million dollars above the high end of our dive-in. These are the same figures I just highlighted. U.S. GAAP net income for this quarter was $0.6 million, and diluted earnings per share was $0.03 compared to net income of $3.1 million and $0.14 for the fourth quarter of 2019. Non-GAAP net income and diluted EPS for the fourth quarter were $4.7 million and $0.20, respectively, significantly higher than our internal estimates. Of note, the fourth quarter of 2020 financials include a $2 million tax expense due to withholding taxes which cannot be utilized in future years. Other related data. Shift units by SEVA's licensees during the fourth quarter of 2020 were a record 484 million units. up 39% sequentially and 35% for the fourth quarter of 2019 reported chips. Of the 484 million unit chips, 217 million units, or 45%, were for handset baseband chips, reflecting a sequential increase of 45% from 149 million units of handset baseband chips during the third quarter of last year. and 11% increase from 196 million units shipped a year ago. Our base station IoT product shipment reached a second sequential all-time record high of 268 million units, up 34% sequentially and up 63% year-over-year. Of the 268 million units, was 187 million units and new all-time quarterly record high. As for the year, our total shipments increased 27% year-over-year to over 1.3 billion units, an all-time record high which equates to approximately 42 SIVA power devices sold every second in 2020. Annual shipments of handsets were flappish year over year at around 575 million devices. After a slow start of the year, handset shipments from a large China-based customer grew significantly in the second half of the year. Base Station IoT product royalty revenue continued to grow and reached a new record high of $22.3 million, up from $13 million in 2019 and $8.9 million in 2018. In terms of units, base station and IoT product shipments were up 60% year-over-year to 750 million devices. Overall, we surpassed the $100 million total revenue milestone for our very first stock. This is a significant accomplishment that was achieved as a result of an all-time high in licensing and royalty revenues that we are proud of. As for the balance sheets, as of December 31, 2020, Steve's cash, cash equivalent balances, marketable securities, and bank deposits were $160 million. We did not repurchase any shares in Q4 and have approximately 498,000 shares available for repurchase. Our DSOs for the fourth quarter was 48 days. During the fourth quarter, we generated $6.8 million cash from operations. Our depreciation and amortization were $1.5 million, and purchase of fixed assets was $0.49. At the end of the year, our headcount was 404 people, of which 335 were engineers, slightly higher than a total of 398 people at the end of September. and 22 people higher, over 382 people at the end of 2019. Now for the guidance. We expect 2021 to be another growth year for SEVA as the momentum for our business continues. We are forecasting total revenue to be just over $106 million, 106, for 2021, with growth in both royalties and licenses. Specifically, in regards to royalty revenue forecasts, we are taking a wait-and-see approach, as the semiconductor industry is experiencing extended lead time for chip orders and lean inventories, which we expect to last through the first half of the year. Our licensing business continues to be solid, with growing opportunities in 5G, Wi-Fi 6, TWS earbuds, and automotive, as Gideon elaborated earlier. We're targeting another record year for licensing, which will set the stage for additional new streams of royalties in years to come. And the loyalty factor. We're expecting a decline in low heat from a leading smartphone OEM who has switched to another baseband supplier for its recent launched 5G smartphone line. With that said, we do maintain our presence in its 4G smartphones and are still expected to shape volumes this year. We also see continued progress for our China-based customer, who has recently regained good momentum in low-cost smartphones for emerging markets. And it also recently launched its first FEMA-powered 5G chip in China. In our base station, there are a few product categories we expect to continue to outgrow the markets we are targeting. We believe that new royalty growth drivers will be more than offset the decline in royalties from the 5G supplier switch. On the expense side, we forecast approximately $3 million additional expenses in 2021 versus 2020 that relates to the devaluation of the U.S. dollar compared to other currencies we use. mainly the shekels and the euros. On the cost of goods, we expect higher non-GAAP expenses of approximately half a million dollars due to more sensor fusion chip sales and other project expenses. In optics, with a strong licensing execution in 2020 and even stronger expectations for 2021, We will continue to support these new customers and reinforce our leadership with disciplined investments in R&D. Our overall non-GAAP office increase will be approximately $6 million. Half of it, $3 million, is attributed to the FX I just stated. Equity-based compensation is forecasted to be approximately the same as 2020, around $13.3 million. Annual gross margins are forecasted to be similar to 2020 in the region of 89% on gap basis and 91% on non-gap basis. Interest income is forced to be slightly lower than 2020 due to the lower interest rate environment at around $600,000 per quarter. Tax rate is expected to be higher on an annual basis due to higher taxes in France for our Riviera Wave business, Bluetooth and Wi-Fi. Approximately 22% of pre-tax income on a non-GAAP basis compared to 2020 levels, excluding $3 million of expenses due to withholding taxes which could not be utilized in future years. Last, share count for 2021 is expected to be approximately 23.5 million shares. For the first quarter of 2021, gross margin is expected to be approximately 89% in GAAP and 91% in non-GAAP basis. Topics for the first quarter is expected to be slightly higher than the fourth quarter of 2020. Non-GAAP OPEX is expected to be in the range of $23.2 to $24.2 million. Of our participating total operating expenses for the first quarter, $3.1 million is expected to be attributed to equity-based compensation expenses and $0.6 to amortizations. In fact, our non-GAAP OPEX For the first quarter, it's forecasted to be in the range of $19.6 to $20.6 million. Very interesting, but it's expected to be about $600,000. Taxes for the first quarter, a bit higher than I explained, half a million dollars on both GAAP and non-GAAP basis. And share count for the first quarter is expected to be around 23.3 million shares. Nicole could now open the Q&A session for us.