This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk05: and welcome to the SEVA Inc. First Quarter 2021 Earnings Conference Call. All participants will be in listen-only mode. If 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.
spk02: Thank you, Rocco. Good morning, everyone, and welcome to SEVA's first quarter 2021 earnings conference call. I'm joined today by Gideon Wertheiser, Chief Executive Officer, and Yaniv Ariely, Chief Financial Officer of SEVA. Gideon will cover the business aspects and the highlights from the first quarter and provide general qualitative data, Yaniv will then cover the financial results for the first quarter and also provide qualitative data for the second quarter and full year 2021. 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 statements regarding demand for and benefits of our technologies, including 5G technologies and our Bluebud platform IP and related deal flow. Expectations regarding market trends, including growth in shipments of ultra-wideband devices and true wireless earbuds and secular growth in the IoT space. Release regarding benefits of the intrinsic acquisition, as well as the closing of the acquisition. our ability to help customers mitigate risks associated with supply constraints, and guidance and qualitative data for the first 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 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 and IoT networks, our ability to execute more base station and IoT license agreements, the effect of intense industry competition and consolidation, and global chip market trends, including supply chain issues as a result of COVID-19 and other factors. Viva assumes no obligation to update any forward-looking statements or information which speak as of their respective dates. And with that said, I'll now hand the call over to Gideon.
spk04: Thank you, Richard. Good morning, everyone, and thank you for joining us today. 2021 is off to a robust start with strong licensing execution and royalties exceeding our expectations. During the quarter, we unveiled BlueBud, a first-of-its-kind IP platform for the booming market of the true wireless TWS earbuds, smartwatches, gaming headsets, and other wearables. Today, we are announcing the acquisition of Intrinsics, a Melbourne, Massachusetts-based leading chip design and secure processor IT company with an extensive experience and solid business in the aerospace and defense market. I will elaborate shortly on these strategic initiatives. Total revenue for the first quarter of 2021 was $24.4 million, up 8% year over year. The licensing environment continues to be healthy, with $14.4 million in licensing revenue, down 1% year over year. We signed 11 new agreements, of which two were with first-time customers. China continues to be a very strong market for wireless connectivity technologies, with high adoption rate both by strong incumbents and newcomers. We are experiencing increasing interest for our 5G technologies, specifically the new 5G provision known as Red Cup or Reduce capability, which is target for the proliferation of IoT devices such as wearable industrial wireless sensor, surveillance cameras, and more. Our Bluetooth and Wi-Fi technologies continues to be in high demand for a variety of IoT devices for smart home and mobile devices. We also sign up a lead customer for ultra-wideband UWB technology that we are currently developing. UWB is a short-range wireless communication that is able to precisely triangulate location of devices with high security. It is already widely used in the automotive industry And recently, Apple, Samsung, and Xiaomi have embedded UWB in their flagship models and are gradually embedded UWB in other high-volume devices, such as the recently announced Apple AirTag. According to ABI research, 285 million UWB devices are expected to be shipped this year and forecast to reach to 1 billion devices by 2025. Wealthy revenue reached $11 million, up 21% year-over-year, ahead of our expectations. This was driven by a robust demand for our consumer and IoT products and above seasonal demand in smartphones. We believe our customers are facing tight supply constraints, as is most of the industry, and are working hard to expedite shipments for high-demand products. Let me now go through the rationale for the acquisitions of Intrinsics, which we are announcing today. Intrinsic is a leading chip design and secure processor IP specialist, targeting the growing chip development program in the aerospace and defense market and a range of other IC designs for medical and industrial products. Intrinsic has successfully executed more than 1,500 complex chip design project in its 34 years history, and build a successful business that generates more than $20 million in annual revenue. Over the years, they have built strong relationships with bling chip semiconductor companies, NOEMs, among which are Intel, IBM, Leidos, Lockheed Martin, Honeywell, and many more. Their chip design skills and expertise are scarce and include proven competencies in RF, mixed signal, digital, software, security, and RISC-V processors. With the additions of Intrinsics, SIVA stands to benefit from three growth pillars. First, extending SIVA market reach into the sustainable and sizable aerospace and defense space, a market forecasted to reach $6 billion in annual semiconductor spending. Second, increasing our content in customer design and accordingly increasing license and royalty revenue opportunity, by offering 10 TIP platforms that combine SIVA connectivity and smart sensing IP with intrinsic chip design expertise and security and interface IPs. Third, extending SIVA IP portfolio with secure processor IP for IoT devices and heterogeneous SOC interface IP for the growing adoption of chiplets, which offer a faster and less expensive alternative to the high R&D cost and complexities associated with monolithic IC development. We welcome the intrinsic team to the SIVA family and look forward to the exciting opportunities ahead. We expect the closing of the agreements to take place during this quarter. Yaniv will discuss the financial aspect of this acquisition later on. Another important product we recently introduced is the BlueBot platform IP. The proliferation of true wireless earbuds is skyrocketing as millions of workers, students, doctors, and other professions are required to spend much more time in voice or video calls and need stable and high-quality audio experience from their wireless earbuds. According to recent data from CounterPoint Research and Strategy Analytics, the TWS market is expected to reach to 600 million units by 2022 and to see 70% CAGR over the next The underlying technology used for TWOS has broader uses and is carried forward to smartwatches, over-the-counter hearing aids, mobile gaming, AR headsets, home entertainment speakers, and smart home appliances. With the Bloomberg proposition, CIVA strives to become the de facto standard for wireless audio in the IT industry. Our unique technology competencies and holistic view allow us to address the substantial technology challenges derived from the need for extreme low power consumption and intelligible audio quality. BlueBot is a self-contained platform enabled by our high-runner FIBA BX1 DSP and incorporates all the software framework and hardware peripherals required for a wireless audio system. BlueBot also offers optional value-add SDK, including our WISPRO AI-based voice recognition software, ClearVox, our echo cancellation and noise suppression software, and Motion Engineer for IMU-based user control. I am pleased to share that we have already signed up a high-volume lead customer for BlueBuck at the beginning of the second quarter and are expecting more deals to follow as the product is released to the wider market. So in summary, we are very pleased with our solid performance in the first quarter. Our business fundamentals are strong, and with the acquisition of Intrinsics, we are expanding into the aerospace and defense market and enriching our value proposition and content by offering parent-key IP platform and new IP for security and HSOC interfaces. With our technology-based core competencies and customer relationship, we are well positioned to capitalize on secular growth in the IoT space. Lastly, we are monitoring closely the impact on the industry-wide supply constraint and will help our customers to mitigate their risk and challenges where we can as they become empowered. With that said, let me hand over the call to Yaniv for the financials. Thank you, Gideon. I'll start by reviewing the results of our operations for the first quarter of 2021. Revenue for the first quarter was up 8% to $25.4 million, as compared to $23.6 million for the same quarter last year. Revenue breakdown is as follows. Licensing-related revenue is approximately $14.4 million, reflecting 57% of our total revenue, just slightly lower than $14.5 million for the first quarter of 2020. Total revenue was up 21% to $11 million, reflecting 43% of our total revenue, compared to $9.1 million for the same quarter last year. Quarterly gross margins were 91% on the GAAP basis and 92% on non-GAAP basis, both better than what we projected. Non-GAAP quarterly gross margin excluded approximately $0.1 million for equity-based compensation and $0.2 million for the impact of the amortization of acquired intangibles. Total GAAP operating expenses for the first quarter were just over the high end of our guidance, $24.4 million. Our total operating expenses for the first quarter, excluding equity-based compensation expenses and amortization of intangibles, were $20.7 million, also just over the high end of our guidance. Tax expense for the first quarter came higher than expected due to an uncommon revenue mix in which the majority of our revenues recognized are associated with our connectivity products, Bluetooth and Wi-Fi, originating in France, which is a higher corporate tax rate of 26.5%. On an ongoing basis, our corporate tax rate should be lower and in line with our original expectations, but mainly prudent on the outcome of the revenue allocation rate. U.S. GAAP net loss for the quarter was $3.6 million, and diluted loss per share was $0.16 for the first quarter, as compared to a net loss of $1.2 million and $0.05 loss for the first quarter of 2020. Our non-GAAP net income and diluted EPS for the first quarter were $0.3 million and $0.01, respectively. as compared to the first quarter of 2020 with $3.2 million of net income and $0.11. With respect to other related data, shipped units by SEVA's licensees during the first quarter of 2021 were 341 million units, down 30% sequentially, and up 31% from the first quarter of 2020 reported shipments. The 341 million unit ship, 129 million, or 38%, were for handset baseband ships, reflecting a sequential decrease of 41% from 217 million units of handset baseband ships shipped during the fourth quarter of 2020. and a 16% increase from 111 million units shipped a year ago. Our base station and IoT product shipments were 212 million units, down 21% sequentially, and up 41% year over year. As for the balance sheet item, as of the end of March 31st, cash, cash equivalent balances, marketable securities, and bank deposits were $174 million. We did not exercise our buyback program this quarter as we focused on the intrinsic acquisition and the expansion in the business. Upon closing the deal, our cash balances will be reduced by approximately $33 million in acquisition consideration as well as deal costs. Our DSOs for the first quarter was 49 days, similar to the prior quarter. And during the quarter, we generated $15.2 million of net cash flow operation, depreciation expenses and amortizations of $1.5 million, and the purchase of fixed assets was 1.1 million. At the end of the first quarter, our headcount was 412 people, of which 346 were engineers, up from a total of 404 people at the end of 2020. Now for the guidance. We continue to experience a healthy licensing environment and pipeline is solid. In royalties, we believe our customers are still dealing with industry-wide supply constraints, which means prolonged for the remaining of the year. With that said, the demand for products based on our technology is strong, and our customers, with our support, are working furiously to fulfill their purchase orders. We announced earlier today we agreed to acquire Intrinsic and expect to close the deal later in the quarter. From a financial point of view, We expect intrinsics to contribute between $10 to $11 million to SEBA's top line in the second half of the year, and that this deal will be accretive as early as 2021 on a non-GAAP basis. We'll provide more information on the next earnings call. On the back of this, we forecast our new total revenues for 2021 to be between $116 million to $117 million, compared to about $100 million in 2020. This is subject to the intrinsic acquisition closing on the anticipated timeline. Specifically for the second quarter of 2021, gross margin is expected to be approximately 89% on GAAP bases and 91% on non-GAAP bases, excluding an aggregated $0.1 million of equity-based compensation and $0.2 million of amortization of other assets. Topics for the second quarter should be lower than the first quarter. For the second quarter, GAAP based OPEX is expected to be in the range of $22.9 to $23.9 million. Of our anticipated total operating expenses for the second quarter, $2.9 million is expected to be attributed to equity-based compensation and $0.6 to amortization of intangibles. So a non-GAAP OPEX is expected to be in the range of $19.5 to $20.5 million. Net interest income is expected to be approximately $0.45 million, and taxes for the second quarter are expected to be around $0.7 million on both GAAP and non-GAAP basis, in line with our prior expectations involved. Share count for the second quarter is expected to be approximately $23.5 million. Iroko, you could now open the Q&A session.
spk05: Thank you.
spk04: Thank you.
spk05: We will now begin the question and answer session. To ask a question, you may press star then one on your touch-tone phone. To withdraw your question, please press star then two. Today's first question comes from Matt Ramsey with Callen. Please go ahead.
spk01: Thank you very much. Good afternoon. Good morning, everybody. Congratulations on the acquisition, Gideon. Maybe you could Give us a little bit more background on Intrinsics, your relationship with them. Have you guys collaborated with them on other projects in the past? And if you could walk us through what are the particular pulls from the, I guess, the aerospace and defense and government sectors for technologies that are appropriate for SEVA's portfolio, which pieces you might have had in-house, which pieces you're acquiring. It looks like a good deal. It was just a little bit Anyway, we externally weren't familiar with the company. I imagine a lot of your investors weren't. So if you could give us a little background, that would be great. Thank you.
spk04: Good morning, Matt. Let me start by explaining about intrinsics and the rationale for us to do. So it's very hard to find such a skill set under one roof that they can do uh complex design involve different disciplines like rf mixed signal security which everybody has to do it in the in the iot and do it all the way from specification to a design and we we found this company and they they have a 35 or 36 years of track record of doing such projects. Now, with that in mind, we plan to take advantage of it in two growth pillars. One is security and aerospace and defense. This is a market that we were looking to expand into in conjunction of what you do in the consumer and the telecom market. It's a big market. It's a DSP-intensive because you do a lot on radar, GPS. You do a lot of DSP processing. And they have designs. They have a very solid business. In general, aerospace and defense, you have big spender system companies. It's a high-entry barrier to penetrate. But once you are there, it's for the long haul. So what we... we plan to do there is basically increase the content because we can bring in our DSP in conjunction of the design that they do and the customer that they have and with that in place get Exposure to a market that anyway we plan to do and much faster exposure and higher content with our IPs, all the portfolio that we're going to do. That's one pillar. The second pillar is what we call internally a turnkey IP or what we define a turnkey IP. You know, there are many system companies today that they want to build a chip to create a competitive edge. And those guys, they need to... Not all of them can build a team, a design team, because this is, again, a scarce, very hard to find, take a long time to build a cohesive design team. So those guys go either to AC company or other way, or ASSP company and want them to change. So what we plan to do is take our IP, and if you take PWS as one example, like BlueBot, and basically come to the customer with a proposition that not just will surround IP with other hardware and basically provide to the customer the design of the chip, but then they can go directly to the foundry. and manufacture the chip. And this is something that we see a lot of interest from customers coming and requiring such capabilities to do it. You can think it's a very equivalent to what AMD is doing in semi-custom, when AMD design chip for PlayStation or Xbox, they're bringing their IP and provide the design for Sony or Microsoft. Same thing in a different example, close to what the market that we are in is what led Marvel to acquire Avera, because Marvel had the IT, and Avera can do the tailor-made design for the customer. So we are not going to do cheap manufacturing. We will be an IT company. but we allow our customers to go directly to the front of it and not take any intermediary in between. So that's the second pillar. The third pillar is an IP that we didn't have, and this is the secure processor IP. This is something that you have to have in any IoT device, and IoT is our main market, and if you don't do it, you'll be hacked. And they have the technology, they deal with it for many years, starting from big DARPA projects. And the other IP that they bring in is what is called SoC, which is hybrid SoC, and this is basically chipless. Going back to those system companies, Very difficult, very complicated to do a monolithic SOC like what Apple is doing in their chips or many companies are doing. And the chiplet is basically you take a different guy and connect it under what is called interposer. You combine it into one chip. And Intrinsic has a strategic relationship with Intel that is a leader in this area and one of the anchors of their fund rate strategy, the new fund rate strategy. So we will be looking to capitalize on this. So that's all the... consideration that led us to this transaction. In fact, he's very familiar with DSP, very familiar with our technology. We didn't have projects in the past, but we already communicate and share with key customers this capability and got good feedback.
spk01: Great. Thanks, Gideon, for all the details there. Good luck with the deal. Yaniv, a couple of financial questions. One set is on the acquisition. I think you said on your script $10 million to $11 million for the back half of the year. If you could give us any sense of the rest of the P&L of the acquisition around margins, OPEX taxes, things like that. And I guess the second part of the question is on the core business, the tax rate, in the March quarter very different than any of us had modeled. And I get the mix of revenue between Europe and the U.S., et cetera, and Asia. But it sounds like something must have went differently in the quarter than you guys had forecast initially in terms of revenue mix. And if you could enlighten us on that, that would be great.
spk04: Thanks, guys. Let me answer Matt's second question about to give you a background for the revenue mix that we do. I mean, this revenue came with, I would say, unexpected surge in revenue. We start seeing things in the second half of last year where the demand of our connectivity product, we saw much stronger demand that we do. But what happened late in the year and in this quarter is that it comes with more comprehensive agreements with customers. They are looking for the portfolio for technology. They are looking for architecture. These are much more expensive product line. And in the Q1, we had kind of a concentration of at least two or three large agreements in the connectivity space that basically, you know, we didn't anticipate this demand, but on the other hand, it's good news because you talk about large customers that are willing to pay and appreciate our technology. So take that very strange mix that even for us was a, was a surprise, to give you an experience, a positive surprise. One of the deals are a million-dollar deal, many million-dollar deal with a lead-enhanced OEM. But it all happened in France. Tax rate is much higher, so the concentration was almost everything in France in the first quarter. On an annual basis, that will level out. I mean, it was more of a, we see it as a, It's just something very awkward, but they had a large payment to that top line. But when we add the next couple of quarters at the same run rate that we talked about last quarter, the annual guidance, we did give 22% and said that France has more business these days, not in the level of Q1 across the year, but if you go back to the normal mix of revenues between Israel, U.S., Ireland, not just France, We should be back in normal territory. We have never seen that type of concentration in France yet, and I don't see that repeating itself in the near future. It could happen, but it's very rare. It's very rare. So I think from a tax perspective, we will have a higher tax dollar rate for overall the year. The percentages in the next couple of quarters were not changed. We kept the model the same at 22% with a higher Q1. With that said, we see the standalone before intrinsics, we already added or adding about a million dollars to our prior guidance. So instead of the 106, we're looking more like a 107 million dollars for this year. This is SEVA standalone, higher taxes and a very solid entry into the second quarter. Gideon talked about the pipeline. I mentioned what we see both in royalties and in licensing. So we don't give quarterly revenue guidance, but we are looking and feeling very comfortable with at least the licensing environment that we have control over. So over the year, that by itself could close the gap or... start closing the gap versus the higher Q1 taxes. And if you add to that intrinsics, which you had a good question, top line, we're adding maybe $10 million of revenues in the second half. I would look at operating margins of about 10% for this type of business. And on that front, we should have a tax benefit in the U.S. when we combine that business with SEVA. So all in all, that... is going to be accretive based on the current model that we have today with actual Q1 and higher taxes. And that should be able to also offset the Q1 expenses. So all in all, better revenues for the year, specifically with intrinsic acquisition if all closes in on time. And some recovery, maybe even all of it, we just don't know and we don't die for EPS. We just get the trends in the business but we could see some corrections in those few cents that were lost in Q1, making it either from higher revenues or just more expense monitoring and things like that. And better normal tax rates for the rest of the year.
spk01: Thanks, guys, for all the details there. Really appreciate it. Thank you.
spk04: Sure.
spk05: Thank you, Dan. And our next question today comes from Suji DeSilvo with Ross Capital. Please go ahead.
spk03: Hi, Gideon. Hi, Eve. Congratulations on the Intrinsic acquisition. Based on your last acquisitions, I'd be expecting good things from this one as well. Can you talk about the competition for Intrinsic and also the Secure IP, the RISC-V IP? What opportunities there are to take that outside the air defense markets?
spk04: Hi, Suzy. Good morning. The only thing that I managed to capture is the question about security.
spk03: And the competition, Gideon. Yeah, Gideon, the competition.
spk04: The competition. Okay. So security is basically a complete solution based on risk factors. It's a hardware-based platform that was developed on a few projects for the DARPA, and it's The security or security is a very dynamic market because threats are being developed or innovated every day and you need to find a way to somehow detect and deal with it. And Intrinsic has this platform available. As a company, they didn't do IT business thus far because that's not the focus here. They couldn't afford doing both things. We have the platform. We have the sales channels to do it. In terms of competition, Rembus is a competitor. I think these are the main competitors. As time goes by, we look more closely on the competitive landscape and add our own flavor to make it an IP business. But for us, it's an easy licensing add-on because we come to the customer with a basket. We have the connectivity, we have the sensors, and now we are adding security into the mix.
spk03: Okay. Very helpful. Thanks. And then perhaps on the current royalty run rates, the wireless infrastructure market, 5G infrastructure, can you talk about how that's been trending this quarter, last quarter, this quarter, and then what the outlook for the rest of the year is, including perhaps new customers coming online as well?
spk04: The trend is positive, so we see the growth moving both on a year-over-year and also on a quarter-over-quarter. I would say that it's a bit slower than we thought about it, and we see it across the board because it's a matter of... the operator or capital spending on the next wave or the next services in 5G, which are small cells in the private network. But it's moving and no question about that it will come. In terms of customer, we have one customer, Another customer publicly said that it goes into production in this quarter. So we'll see. We're positive. Maybe I'll add some colors to you. If you look at some other factors of the base station IoT, Bluetooth was up 84% year-over-year. in royalties, and our sensor fusion was up 51% year-over-year. So these are pieces of IP that, like now with Intrinsics, we bought over the years. We invested there, and we see the fruits in recent years. Hopefully, that's what we'll see in a few years from Intrinsics as well. But the overall growth in the first quarter also positively surprised us. And for now, our customers are especially in the IoT space, consumer devices, TVs, robot cleaners were super strong in the first quarter, which is obviously an anomaly because they're usually the post-Christmas quarter, and that was not the case this year with COVID around.
spk03: Okay. Appreciate the color. Thanks, guys.
spk04: Thank you.
spk05: And our next question today comes from Tavi Rosner with Barclays. Please go ahead.
spk07: Hi, this is Peter Zdebski, on for Tavi. Thanks for taking my question. I wondered if you could comment on the type of growth that intrinsics has had historically, and maybe your going forward expectations, say, one or two years out, given some of these synergies and customer overlap that you discussed earlier.
spk04: Okay, so, hi, Tavi. The intrinsic as a standalone business is a growing business. We say, I mean, we We saw from their financial, it's a consistent growth starting from 2007, where they really turned the corner in the aerospace and demand. The aerospace and demand defense space is a growing space, more spending by the DOD in semiconductor. It has highest priority than 5G from DOD standpoint and also highest priority than AI. And Intrinsic is basically growing by taking more projects, more lucrative projects. That brings in an inertia. Now, what we are adding to this one is what we think is the IP. So when you go to the defense, we're going to present to the prospect, the customers, the IP that we have, and most of them, they need the DSP there or connectivity things that we have. And the other thing that we're going to go is to go to our A lot of them are now coming to us to purchase IT, and we come to them, why don't you take what we do for you, the whole design, including IT, because we are the experts in IT, and we can combine all the – we have the most experience and internet understanding on combining IT with the design around IT. So that's an initiative that we're going to take. And as I mentioned, they also bring in IP that we're going to add to our routine. Let me try to summarize. If we are looking at a half year for this year, we are looking at $10 million. Obviously, with simple math, you could double that for next year. On top of that is the pillars that Gideon talked about growth. We'll give more color after we close the deal and when we get closer to 2022. But there's no doubt that with CISA on board and bringing these together, that $20 million, we see it as a growth driver in the next couple of years, both organic and the non-organic is the combination of services and IP.
spk07: Okay, great. That's helpful, Kolar. Thank you. And then just wanted to ask about the licensing results, given that revenues were pretty strong sequentially, but the deal count was a bit lighter. Was that simply related to some of those deals last quarter that were signed but not yet recognized in revenues?
spk04: Yeah, this is a question we have always asked, and we said it's not that important to divide the dollars by the deal count. Some are not able, we are not able to recognize some specific, and this quarter is a very large deal that we talked about earlier with the OEM, handset OEM, which was a multi-million dollar deal. And at the end of the day, if you look at 14 and something million dollars, this is the first time ever that CIVA was recording at 14 million dollars and higher. It's history, it goes on in the last year, five quarters that it happened, as far as Q4. 19 for the very first time, and then again in Q1, and again now. So this is just to show that this combination of new markets and new technologies worked out well, and the pipeline for us and the backlog for us for the second quarter is strong.
spk07: Great. Thanks again, and congrats on the quarter. Thank you.
spk05: And our next question today comes from Mark Yang at Oppenheimer. Please go ahead.
spk06: Hi, again, Yaniv. Thanks for taking my question. First, I want to ask about the turnkey IP business model, and can you comment on how long are the design cycles, and does that usually involve just one-time fees from customers or maybe higher royalties as they choose to go with turnkey IP products?
spk04: Yeah, the timeline or the cycle, the design cycle depends on the complexity of the project. And it could range between six months to one year. This is the magnitude of the project. In terms of payment, it will be the component that we are familiar, a license fee for the IP, MRE for the development, and all this will be higher because we combine both for the combination of the design and the IP.
spk06: Great, thanks. Can you also comment on the development of Bluetooth new LE audio? Now it's been announced for over years now. How are the adoption rate in the market? And do you see that as a meaningful driver for your Bluetooth products?
spk04: Yes, it does carry a big potential. The platform that we announced, the BlueBud, supports both the BLE audio and the classical Bluetooth. The BLE audio is not yet deployed in the mass market. because we have a lot of legacy to support. So the BlueBot supports the dual mode, which is a combination of the BLE and the classical Bluetooth. But the benefit of BLE audio is substantially higher than the classical Bluetooth. It's a more modern one. And we expect this to be mainstream, but it's going to take a few years.
spk06: Next, I have no more questions.
spk04: Thank you.
spk05: And our next question today comes from David O'Connor. It's actually in BNP Paribas. Please go ahead.
spk08: Great. Good morning. Thanks for taking my question. Maybe, Gideon, just going back to the intrinsic deal, just to clarify, was the business entirely designed services as it exists today? So imagine they get paid per NRE per design and is the plan to transform that existing business of theirs into more classic Sable licensing and royalties and where you get paid per shipment versus just NRE on a design. And also then on that NRE side of things, I mean, how scalable is that? Because I mean, it's all relative to the number of engineers that you have and the ability to kind of rapidly grow that part of the business. That's my first question. And then a follow-up on the Ultra Wideband. Can you just give us a quick overview of the Ultra Wideband, how many customers you have today? Is this your first customer in Ultra Wideband? What the pipeline looks like and what is the end application for this customer in terms of end market? Thank you.
spk04: Hi, David. So let me start with intrinsic. Indeed, the intrinsic model is, you know, an NRE basis. They get paid for the resources that they put in this project. The model under FIRA will be a hybrid of both tools because they will continue in their primary market into this model and add licensing or IP, which is just a license fee and royalties. But when it comes to what we call the turnkey IP, here it's more of a back and payment, meaning higher royalties that It's more close, as you pointed out, to what we do in the IP model. We'll get NRE for the project. And think about the same thing that what people in the semiconductor are doing. They take some burden of the cost. So the cost could be the payment will be higher than the cost. But on the back end, you get higher OLPs. So that's in terms of intrinsic. Now, ultra-wideband is a very promising space that we decided to do. We have a lead customer. We didn't finish the design. It will take us a few more months to finish the design. In terms of go-to-the-market strategy, that's another entry point to the mobile market. We have what we have in the handset space in terms of baseband. And last quarter, we signed another big deal of connectivity. Many people are using our technology, not for the baseband, but also for the connectivity side, Wi-Fi and Bluetooth. And this was an agreement that some of it... came into revenue this quarter. This was a very big agreement. And that's a way to get into the mobile ecosystem or mobile customer base through the connectivity. Ultra Wideband will be a third entry point into the market. I believe that most of the flagship model will include Ultra Wideband because people are would like to see the benefit of location, precise location, and the air tech of Apple is just one example to do it. I believe that going forward, they'll put it in PWS and watches because you tend to forget those all over the place. So it's a technology that we decided to develop with We have the resources working. We have a lead customer that affirms the direction that we do. And it's a big market. I put the numbers in the one billion, as far as I recall, by 2025. Very helpful.
spk08: Thanks, Gideon. And if I could just squeeze one in for Yaniv. Yaniv, maybe I missed it, but the gross margin for Q1 that you mentioned, I think it was better. than expected. What was it within the mix there that drove that better than expected gross margin?
spk04: Thanks, guys. Sure. So two things. One, sometimes we do some type of customization or changes to our customers when we license in some projects. In Q1, because most of the deals were Bluetooth and Wi-Fi, and that's a standard, almost off the shelf, we had less of a mix of R&D costs that we needed to bring up to the cost of goods. So that was one reason, and that's why we had more mature deals coming out of France, because that's usually 100% recognizable with no additional work. The second, because the DSP also was lower than the normal mix, we had less payments to the chief, to the Israeli innovation authorities than the normal course. These are the two elements that brought up slightly, but nicely, the margins.
spk08: Understood. Thanks, guys.
spk04: Thank you.
spk05: And, ladies and gentlemen, this concludes the question and answer session. I'd like to turn the call back over to the management team for your final remarks.
spk02: Thank you, Rocco. Thank you all for joining us today and for your continued interest in SEVA. As a reminder, the prepared remarks for this conference call are filed as an exhibit to the current report on Form 8K and accessible through the investor section of our website. With regards to upcoming conferences and events we will be attending, we will be attending the Needham Virtual Technology and Media Conference, May 17th. Oppenheimer's 22nd Annual Israeli Conference on May 23rd, the COUN 49th Annual Technology, Media, and Telecom Conference on June 1st, and the Baird's 2021 Global Consumer Technology and Services Conference June 8th through 10th. All of these conferences we will be attending virtually, and for further information on all these events we will be participating in can be found on the Investor section of our website. Thank you and goodbye.
spk05: 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 word.
Disclaimer