CEVA, Inc.

Good day and welcome to the SEVA Inc. Third Quarter 2021 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 on your touch-tone phone. To withdraw your question, please press star then two. Please note, today's event is being recorded. I'd now like to turn the conference over to Richard Kingston, Vice President, Market Intelligence, Investor, and Public Relations. Please go ahead, sir.

Thank you, Rocco. Good morning, everyone, and welcome to SEVA's third 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 for the third quarter and provide general qualitative data. INEE will then cover the financial results for the third quarter and also provide qualitative data for the fourth 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, expectations regarding market dynamics, including anticipated growth in the cellular IoT market, beliefs regarding benefits and impacts of the intrinsics acquisition, including expansion into the aerospace and defense market, an ability to offer integrated IP solutions and enrich security and assurance products, and guidance and qualitative data for the fourth quarter and full year 2021. For information on the factors that could cause a difference in our results, please refer to our filings with the Securities and Exchange Commission. These include the scope and duration of the pandemic, the extent and length of the restrictions associated with the pandemic and the impact on customers, consumer demand, and the global economy generally, The ability of 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 position in existing markets. The ability of new products incorporating our technologies to achieve market acceptance. The speed and extent of the expansion of the 5G and IoT markets. our ability to execute more base station and IoT license agreements, the effect of intense industry competition and consolidation, global chip market trends, including supply chain issues as a result of COVID-19 and other factors, and our ability to successfully integrate intrinsics into our business. EVA assumes no obligation to update any forward-looking statements or information which speak as of their respective dates. With that said, I would now like to hand the call over to Gideon.

Thank you, Richard. It is an exciting time for CIVA. The need for and the deployment of our technologies for the digital transformation era never been more evident. Wireless solutions that we master are the catalyst for the emergence of new smart devices among which are TWS earbuds and hearing aids, AR glasses, smart watches, smart home products, industry 4.0 factory automation, telemedicine, and more. Our innovative solutions, market reach, and strong execution are the drivers for another outstanding quarter of new licensing agreement and royalty progress. Total revenue for the third quarter of 2021 was record high of $32.8 million, up 31% year-over-year. The licensing environment continues to be robust and came in at $21.6 million, up 74% year-over-year. Our BlueBot product targeted for TWS earbuds, AR glasses, and smartwatch markets, and our Wi-Fi solutions, which are ubiquitous across many IoT devices and access point products, were key contributors. Also in the quarter, our intrinsic team executed very well, signing important design agreements with Lockheed Martin, with a major industrial company in the defense space and with an innovative wearable device company in the medical space. In total, we signed 25 IP licensing and NRA agreements, of which 13 were first-time customers. Royalty revenue came at $11.2 million in the quarter, down 11% over the year. The royalty contribution from our base station and IoT product category was all-time high, driven by secular growth in Bluetooth, computer vision, sensor fusion, and cellular IoT markets. 5G base station run visibility is lower than normal as the space experiences longer lead time due supply chain constraints. In total, royalty unit shipment of SIVA base station and IoT-enabled products were 405 million units in the quarter, up from 200 million units in the third quarter last year. Handset Baseline Royalty this quarter includes the milestone of the first 5G smartphone report we have received of just shy of 3 million units. These gross drivers were muted by larger than expected decline in 2G royalty revenue. We do not see this decline as a market indicator, as the 2G market is still sizable in developing countries and we have experienced this pattern over the years from time to time in Fujiro Eldest. Let me now make few remarks on our business in the third quarter. The first is our Wi-Fi product line, which has become a strong driver for us in recent quarter. The complexity of Wi-Fi technology rises dramatically, when moving to a new generation of the standard. These possess technology challenges that deter a growing number of incumbents or new entrants from developing technology in-house and instead to seek out technology to solidify their time to market. The recent Wi-Fi 6 and Wi-Fi 6E standards are being rapidly adopted in the latest laptops, smartphones, and routers and are expanding to XR headsets, such as the recent Metaverse initiative by Meta, formerly Facebook, and as well as security cameras. Wi-Fi 6 is also expected to have a fundamental role in autonomous car, where it will be used to upload the terabytes of data collected every day to the cloud, where it will be used for AI-based optimizations. CIVA is benefiting from a unique position as the only viable IT supplier that enables semiconductor companies and OEMs to address the diverse and large market that require Wi-Fi 6 or 6E and upcoming Wi-Fi 7 standards. We have now more than 20 Wi-Fi 6 customers and our licensing revenue from this space grew 149% compared to the first nine months last year. We are also seeing good progress in shipped SIVA-based Wi-Fi products, which grew 204% to more than 111 million units versus the first nine months of last year. Second, Our customers' activities have stepped up as we continue to integrate intrinsics into CIVA. As we noted in prior calls, our growth strategy is driven, one, intrinsics experience and customer base in the aerospace and defense market, which we believe will enable us to expand into this lucrative space. And two, our capabilities to offer integrated IT solutions, which combines the SIVA IT portfolio and intrinsic chip design competencies to broaden our impact and to grow our revenue base with strategic customer design. The third quarter was extremely successful in concluding sizable agreements in the defense and medical space. We booked an important and sizable agreement with Lockheed Martin for DARPA's SSITH program. SSITH stands for System Security Interface through Hardware and Firmware. and aims to revolutionize the way electronic systems are protected against different means of exploitation. As part of the SSITH program, CIVA, through our subsidiary Intrinsics, is involved in the development of new hardware security architecture and related design tools to protect against entire classes of vulnerabilities exploited through software and not just specific vulnerability instances. The methodologies being developed as part of this program will enrich our security and insurance IT, offering bringing new levels of protections to connected cars, wireless communication, and other industrial markets. Another project that Intrinsic is concluding during the quarter is with a major U.S.-based defense company for advanced node chiplet design. Chiplet technology is a new wave in semiconductor integration with the goal to cost-effectively assemble multiple dyes or chiplets into one small chip package and by such gain time to market and lower entry barrier to key markets. Chiplet technology is already deploying cloud chips by Intel, Broadcom, AMD, and Marvell. The intrinsics team, with the financial backing of DARPA and its ecosystem partners, is aiming to drive chipless to the defense market and further to proliferate them for commercial applications. And lastly, regarding our activities and market dynamics in cellular IoT. Cellular IoT module is used in a wide variety of verticals among which are logistic, asset tracking, industrial agriculture monitoring, parking, payment system, automotive connectivity, and more. It is a high-volume and fast-growing market, forecasted by ABI to reach to 920 million modules by 2026, growing at a 29% compound annual growth rate. A main segment in the cellular IoT space is NB-IoT, capturing approximately 40% of the volume and growing 44% CAGR between 2019 and 2026. CIVA has strong traction in the Cat1 and NB-IoT spaces, the two standards which dominate the deployments today. During the third quarter, we continue to see strong growth in volume, up 356% compared to the third quarter of last year, and received royalty reports for the first time from a new cellular IoT customer, one of the world's top 10 ranked IC design houses. Europe also prioritizing cellular IoT at the back of its large manufacturing base. We have three widely known European customers that have designed SIVA technology. The first is Nordic Semi, using SIVA for NB-IoT with dozens of customers. The second, Sequance, is using our Pentagy platform for 5G cellular IoT with number of high-profile design wins. The third is an unnamed leading semiconductor who is developing cellular IoT chips targeting its large industrial and smart customer base. So in summary, SIVA is transforming from specialty in DSP core technology to a trusted technology house with the pivotal role in enabling new industries to become connected and smart. Our success is underpinned by our unique strengths to combine DSP, AI, software, analog, and RF designs into a holistic solution for customer and industry needs. We believe we are at an inflection point to scale our business and strengthen our collaborations with key players across a broadening range of industries. Finally, we continue to monitor any possible implications of the ongoing supply chain constraints. As commonly acknowledged, the semiconductor supply chain challenges impact our broad industries in different manners. which may translate to low visibility. With that said, we are on track to meet our target and will continue to work with our customers and partners to mitigate negative impacts. With that said, let me hand over the call to Yaniv for the financials. Thank you, Guillaume. I'll start reviewing our operations for the third quarter of 2021. Revenue for the third quarter was up 31 percent to $32.8 million, our second sequential all-time high as compared to $25 million for the same quarter last year. The revenue breakdown is as follows. Licensing NRE and related revenue is approximately $21.6 million, an all-time high reflecting 66 percent of our total revenue, growth from $12.4 million to the third quarter of 2020, and 39% sequential growth. This is the full first quarter that we recognized NRE revenue, which resulted from our acquisition of Intrinsics back in June. Royalty revenue was down 11% to $11.2 million, respecting 34% of our total revenues. compared to $12.5 million for the same quarter last year. As Divya noted, our consistent growth in base station and IoT and the penetration to 5G smartphones is muted by larger than expected decline in 2G royalty revenue. Quarterly growth margins came in better than expected due to lower allocation of intrinsic NRE costs from the RMD expense line to the cost of goods expense line. Gross margin was 85% on GAAP basis and 87% on non-GAAP basis, as compared to our 81% to 82% guidance. Non-GAAP quarterly gross margin excluded approximately $0.2 million in equity-based compensation expense and $0.2 million for the impact of amortizations. Total GAAP operating expenses for the third quarter was over the high end of our guidance at $26.3 million. Due to lower allocation of intrinsic NRE costs from R&D to the cost of goods, as per our prior quarter's guidance. Such shifts between these two expense deadlines may happen from time to time and are tied to the actual design services performed in the quarter. OPEX also included an aggregate equity-based compensation expenses of $3.2 million and $1.2 million for the different amortizations. Our total non-agreement GAAP optics for the third quarter excluded these items were $21.9 million over the high end of our guidance due to the same reasons I just stated with regards to the GAAP numbers. GAAP operating profit for the third quarter was $1.7 million, up from $2,000 in the same quarter a year ago. Non-GAAP operating profit was $6.5 million up 51% in the third quarter of 2020. For the first nine months of 2021, non-GAAP operating profit was up 69% year-over-year to $15.5 million, illustrating the growing operating leverage we are achieving while we scale the business. Tax expenses for the third quarter was approximately $1.8 million, a bit higher than forecasted, with strong revenue mix and interest for connectivity products originating in France, which have a higher corporate tax rate. U.S. GAAP net loss for the quarter was $0.2 million, and diluted loss per share was 1 cent for the third quarter of 2021, as compared to a net loss of $0.7 million and diluted loss per share of 3 cents for the third quarter of 2020. Non-GAAP net income in diluted EPS for the third quarter of 2021 were $4.7 million and 20 cents, up 29 percent and 25 percent year-over-year, respectively. Non-GAAP net income in diluted EPS for the third quarter of 2020 were $3.6 million and 16 cents, respectively. With respect to other related data, shipped units by CIVA licensees during the third quarter of 2021 was 438 million units, up 26% from the third quarter of 2020 reported shipments. The 438 million units reported 33 million units or 8% were for handset baseband ships. our base station and IoT product shipments were a record 405 million units, up 29% sequentially and 103% year-over-year. Of note, Bluetooth was a new record of 291 million units for the quarter, and cellular IoT also reached a new record high of 26 million units. As for the balance sheet items, as of the end of September 2021, CMS cash, cash equivalent balances, marketable securities, and bank deposits were $145 million. Our DSOs for the third quarter were 43 days, a bit higher than the prior quarter, but at our norm level. During the third quarter, we generated $6.4 million from operating activities, Depreciation and amortization was $1.7 million, and the purchase of fixed assets was $0.2 million. At the end of the third quarter, our headcount, including the forensics team, was 485 people, of which 403 are engineers. Now for the guidelines. Our strong top-line performance in the first nine months of 2021 was outstanding and provides us with a strong confidence in our business and strategy going forward. We therefore are raising our annual revenue guidance up to a new range of $120 to $122 million. Our licensing business and our market reach is expanding. We have good backlog and pipeline for the upcoming quarter. We believe the growth trend in the base station and IoT category, LTE and 5G, will persist into the fourth quarter, with the extent of such growth in the fourth quarter being subject to any near-term supply chain constraints. Specifically for the fourth quarter of 2021, Gross margin is expected to be approximately 82% on GAAP basis and 84% on non-GAAP basis, including an aggregate $0.3 million for equity-based compensation expense and $0.2 million of amortizations. OPEX for the fourth quarter should be slightly lower than the third quarter. For the fourth quarter, gap-based OPEX is expected to be in the range of $25.5 to $26.5 million. On the anticipated total operating expense for the fourth quarter, $3.2 million is expected to be attributed to equity-based compensation and $1.2 million to the different amortizations. Therefore, our non-GAAP OPEX is expected to be in the range of $21.1 to $22.1 million. Net interest income is expected to be approximately $0.3 million. Access for the fourth quarter is expected to be approximately 25% on a non-GAAP basis. And share count for the fourth quarter is expected to be around 23.8 million shares. In a while, we can now open the Q&A session. Thank you. Thank you.