CEVA, Inc.

Good day and welcome to the SEVA Inc. Fourth Quarter and Full Year 2021 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, Market Intelligence, Investor and Public Relations. Please go ahead, sir.

Thank you, Rocco. Good morning, everyone, and welcome to SEVA's fourth quarter and full year 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 highlights form the fourth quarter and provide general qualitative data. The NE will then cover the financial results for the fourth quarter and full year 2021, and also provide guidance for the first quarter and full year 2022. 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, changes in the semiconductor industry, and our plans to capitalize on the foregoing, beliefs regarding benefits and the impacts of the intrinsic acquisition, including expansion into the aerospace and defense market and ability to offer integrated IP solutions and enrich security and assurance products. Expectations and financial guidance regarding future performance, including growth in licensees, revenues, and customer agreements and qualitative data for 2022, and objectives regarding sustainability. 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 the 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. Viva 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. Good morning, everyone, and thank you for joining us today. The first quarter and the fiscal year 2021 was extremely intense and exceptionally successful. If the digital transformation drives industry to become connected and intelligent, our ubiquitous technology and collaborative business model present a significant and secular growth prospect. Our record financial results for 2021 and the 2022 guidance that Yaniv will shortly outline, bodes well with these dynamics. For the fourth quarter, we delivered record revenue of $34.1 million, the third consecutive quarter of record high revenue, up 22% compared to the fourth quarter of 2020. The licensing environment continues to be robust at $21.3 million on the back of 20 new license agreements and four first-time customers. The fourth quarter licensing engagement highlights the transformation in our value proposition from licensing of standardized IP cores to our licensing of comprehensive IP platforms which leads to higher upfront license revenue and larger royalty opportunities. In this context, we executed a number of sizable agreements this quarter, among which our agreement with the Japanese OEM for the nationwide deployment of 5G fixed wireless access in Japan, a lead OEM customer for next generation Wi-Fi 7, and a tier one semiconductor company for an AI-based advanced driver assistance systems, ADAS, project. We also executed the first integrated IP solutions agreement where we coupled IP licensing with intrinsic chip design for comprehensive platform for smart motor control product for a large U.S. semiconductor vendor. Wealthy revenue for the quarter came in ahead of our expectation at $12.7 million. Our diverse base station and IoT product category continued to expand up 21% in wealthy revenue versus the respective quarter last year. Our technologies being deployed in wearables, PCs, smart TVs, robot vacuum cleaners, surveillance cameras, and in plenty of other IoT devices are key drivers for that growth. On 5G Run, a key customer of ours released for field testing new 5G Run product enabled by our latest and most advanced DSP, the XC16. Comparing to the fourth quarter of 2020, royalty revenue was down 21% as large U.S.-based handset OEMs moved to 5G, for which it uses chips from a competitor, which we alluded to on prior calls. For the full year 2021, our total non-GAAP revenue grew 22% to a record of $122.9 million, driven by step-up in our licensing and RE and related revenues. Revenue for this part of our business had a record performance of $73 million, up 39% compared to last year, with 73% agreement up from 55% last year. These achievements in licensing are key for our business growth, as signing up licensees is the precursor for royalty revenue, which in turn scale our operating leverage and earning per share. Our consistent and relentless effort to grow and diversify our licensees is already apparent in the royalty revenue out of the base station and IoT segment that grew by 29% year over year to a record of $28.6 million and 69% in units and approaching 1.3 billion units. Overall, royalty revenue was record high, $49.9 million, of which strong growth in royalty revenue out of the base station and IoT category more than offset the decline in the handset category. To grow further our licensee base and strengthen our value proposition in this engagement, we completed the strategic acquisition of Intrinsic during the year. Intrinsic brings in new customer base in the lucrative aerospace and defense market, and enable us to offer integrated IP solutions where we offer combination of IP licensing with SOC design for an optimal performance outcome and larger revenue share with our customers. Let me at this stage walk you through the thought process we went through to determine our focus, go to the market strategy. The ongoing turmoil in chip supply has made evident the foundational role the semiconductor industry has in technology innovation and the overall economy. According to Deloitte, in 2020, global semiconductor sales rose 6.6% to $440 billion, even as global GDP shrank 3.5%. And for the next decade, the semispace is expected to show 50% faster growth than global GDP. Furthermore, geopolitical tension and criticality of cheap supply to national security drive government to spend and incentivize investment in the semispace, as can be seen by the anticipated U.S. Senate bill for $52 billion investment in semiconductor technologies, the Chinese government announcement of $150 billion investment in semi-space over the next 10 years. This explosive demand for chips drives OEM and IT companies to internalize their chip needs and to engage directly with funders and IT companies. Also, the Chinese government's ambitious to be self-sufficient in the semiconductor space encourages local investors and technologies to form new chip companies to drive the fast-growing electrical, industrial, and consumer product industries. Against this backdrop, SIVA broad IT portfolio and capabilities to expedite and streamline customer chip development is open new and sizable customer opportunities. Let me add more color on how we plan to capitalize on these electronic changes. Wireless. Wireless technologies, including cellular, Wi-Fi, Bluetooth, and UWB, have been key strengths for SIVA. Over the years, we have been able to focus on the right-hand market and to build a very large customer base, key customers. We have earned strong reputation, which enables us to engage with and sign up top customers to drive next generation and new trends in wireless. Strategically, we will pivot in two main wireless trends. First, the proliferation of 5G in broadband and massive IoT. The recent Ericsson Mobility Report projects 5.5 billion cellular connections by 2027 that are not handset. up from 1.9 billion connections in 2021. Cellular IoT applies to broad markets, among which are fixed wireless access devices, automotive, industrial laptops, and more. Cellular IoT is fundamental to enable smart transportation, smart grid, robotics, and remote health care. SIVA offered to OEMs and semiconductor companies targeting cellular IoT two highly integrated IP platforms, the Pentagy for mobile broadband IoT and Dragonfly for massive IoT. We believe that by capitalizing on these two technologies and the upcoming new generations place us in a position to address the whole market needs and to enable new entrants to penetrate this huge space. Second is Wi-Fi upgrade cycle. The Wi-Fi market is huge and growing. ABI research forecasts 5.5 billion Wi-Fi devices by 2026. up from $3.5 billion in 2021. The rollout of the latest standard Wi-Fi 6 and recently 6E is underway and expected to see more shipments than any prior standard as it extends beyond smartphone, PC, and tablet to smart home, industrial, cars, AR, VR, and many more markets. The complexity and compass in new Wi-Fi's design along with new connected devices that require Wi-Fi IP integration is driving strong momentum in our overall licensing and NRE business, which was up 39% in 2021 versus 2020. Our R&D investment will focus on the next generation Wi-Fi 7 which is expected to be in the market by 2024. As mentioned earlier, in the fourth quarter, we signed a lead customer Wi-Fi 7 agreement with one of the largest OEMs in China, which seeks to decouple its dependencies on chip incumbents that currently dominate the advanced Wi-Fi chipset market. Edge AI. Edge AI emerges from growing need to handle AI processing from cloud to smart devices, such as smartphones, cars, robots, or 5G base stations, to gain faster response and higher security. With a recent ABI research forecast, Edge AI is a fast-growing market, expecting to surpass 1.3 billion units by 2026. SIVA has targeted the edge AI market for early on. We already have good penetration with edge AI in automotivate this market, where we are closely working with industry leaders, including both SEMIS and OEM, and in the surveillance and consumer market. To further capitalize on our strengths, we unveiled last month our new generation AI processor, the New Pro-M. New Pro-M delivers a significant performance leap compared to its predecessors, Neopro S, and for the first time introduced new concepts in AI architecture design, security integration, and chiplet scalability. Its heterogeneous multiprocessor architecture offers performance ranging from 20 tera operations per second, or TOPs, to 1,200 TOPs. It extends beyond video to a whole new range of AI usages, such as natural language processing, 5G network optimization, level 4.5 fully autonomous car, industrial machines, and more. For the first time, uProM enabled chiplet scalability, for which our intrinsic team can offer anti-design for heterogeneous SOCs. Wearable and hearables. The onset of COVID-19 has increased the demand for wearable and wireless headsets and catalyzed innovation in these spaces. Wireless headsets are looking for high-quality sound with smart and dynamic noise suppression. Smart watches are disrupting the traditional watch market and are evolving into health and activity monitoring devices. Research from YOL Development forecasts that shipments of TWS earbuds, hearing aids, smart watches, and smart speakers will surpass 1.3 billion units by 2026. SIVA already has a strong position in the wearable and hearable space with dozens of active customers. We are in a unique position to standardize wireless audio processing IP with our latest BlueBot platform. Last month, we enriched the BlueBot value proposition with the launch of BlueBot HD, a suite of pre-configured software for high-quality audio, voice conversation, and contextual awareness. BlueBuck HD lowered the cost of entry for many semiconductor and OEMs that lack the skilled expertise in wireless audio, which SIVA masters. China. Our revenue out of China grew 30% this year versus last year. Unit shipment by our Chinese customer grew 38% versus 2020. We are the de facto standard in wireless communication used by all major players, among which are ZTE, Uniswap, Best Techniques, Beacon, ASR Micro, and others, which overall constitute more than 75 active customers. ZTE, our key customer in 5G base station run, is set to substantially grow network footprint in China as can be seen by its recent securing 31% of the recent China mobile procurement bid for 5G 700 MHz network, and 34% of the 5G standalone construction for China Telecom and China Unicom. We are uncovering sizable opportunities in automotive, robotics, and mobile, where leading OEMs are internalizing chip design. Our most advanced technologies and our brand recognition set up for further growth in China. Next, before my closing remarks, I want to update you on our objectives and commitment to our future sustainability. Companies around the world have provided sustainability plans for decreasing their carbon footprint over the next decade. At our end, being an IT company, our direct carbon footprint is minimal, with activities primarily by R&D engineers and no manufacturing facilities. However, we intend to take advantage of our expertise in wireless AI and low-power design to help our customers achieve their own sustainability goals. As I stated above, we are focusing on wireless IoT where our technology can add resiliency and runtime analytics to optimize energy and water utilization and to expedite the shift to renewable energy. We will also work with our base station run customer on next generation DSP technologies that will serve their objective of lower heat dissipation and energy consumption. we will continue to periodically consult with our investors of their perspective on sustainability. So in summary, FIBA is uniquely positioned to capitalize on the semiconductor momentum and market transformation through digitization, AI and connectivity, Our customer pipeline at the end of the year is historically high. We believe our key customers are keenly receptive to our product roadmap and priorities and willing to extend the scope of engagement with us. We expect 2022 to be an exciting year with growing momentum in revenue, EPS, and customer engagement. We are determined to continue to develop standout products and consistently grow our customer base and licensing engagement to scale our business. Finally, I would like to take this opportunity to thank all our employees for their hard work and dedication, innovation, and fantastic execution. I would like to extend my thanks to our partner suppliers and our shareholders for their confidence and support. We wish you all a healthy, happy, and prosperous year, and please stay safe. With that said, I'll now turn the call over to Yaniv, who will outline our financials and guidance. Thank you, Guido. I'll start by further reviewing our results of operations for the fourth quarter of 2021. Revenue for the fourth quarter was a record high at $34.1 million, up 21% compared to $28.1 million for the same quarter last year, our third sequential all-time high. Non-top revenue was $34.2 million, up 22% year-over-year, $0.2 million higher due to the purchase price allocation adjustment associated with our intrinsic acquisition. The revenue breakdown is as follows. I can see NRE-related revenue was $21.3 million, reflecting 63% of our total revenue, up 78% as compared to the fourth quarter of 2020, and just slightly below our third quarter record high. Realty revenue was $12.7 million, reflecting 37% of our total revenue, down 21% from $16.1 million, for the same quarter last year, but up 13% sequentially. Base station and IoT royalty revenue contributed $7.8 million in the quarter, up 21% year-over-year, including all-time record high contribution from our sensor fusion product line and continued growth and strength across our base station and IoT product line overall. Gross margins were 83% on GAAP bases and 87% on non-GAAP bases, both higher than projected due to lower allocation of intrinsic MRE costs from R&D into cost of goods expense line. Non-GAAP early gross margin excluded approximately $0.3 million of equity-based compensation expenses and $1 million of amortization of acquired assets associated with the Intrinsics Acquisition and Immigration Investments. Our total operating expenses for the fourth quarter was $26.6 million over the high end of our guidance due to lower allocation of Intrinsics NRE costs from RMB to the cost of revenue compared to our prior core guidance. Such shifts between the two expense line items may happen from time to time and are tied to the actual chip design work performed in a quarter. OPEX also included equity-based compensation expenses of approximately $3.2 million, amortization of acquired intangibles of $1 million, and $0.3 million of intrinsic-related view costs. Our total operating expenses for the fourth quarter excluding equity-based compensation, amortizations of intangibles, and deal costs were 22.4 over the high end of our guidance due to the same region I just stated for GAAP. Income included a $1.5 million revaluation net of taxes of our investment in CIFIA, formerly called iSight Technologies, a leading provider of in-cabin sensing solutions in the automotive industry that recently went public in the Tel Aviv Stock Exchange. We'll adjust our investment quarterly based on the market valuation of their shares. Gapped net income for the fourth quarter was $3.9 million and diluted net income per share 17 cents compared to a net income of $0.6 million and 3 cents for the fourth quarter of 2020. Our non-gapped operating income increased 8% to $7.2 million and $6.7 million for the same quarter last year. Our non-GAAP net income in diluted EPS for the fourth quarter was $5.3 million and 22 cents respectively, significantly higher than our internal estimates. Net income in diluted EPS for the fourth quarter of 2020 was $4.7 million and 20 cents respectively. Other related data. Shipped units by SEVA's licensees during the fourth quarter were 416 million units, down 5% sequentially and down 14% from the fourth quarter of 2020 reported shipments. The 416 million shipped, 83 million units, or 20%, were for handset-based vent ships. reflecting a sequential increase of 148% from 33 million units in handset basements shipped during the third quarter of 2021, and a 62% decrease from 149 million units shipped a year ago. Our base station and IOT product shipments were $333 million in the quarter, down 18%. percent sequentially, and up 25% year over year. Of note, sensor fusion with a record 21.8 million units in the quarter, with cellular IoT, Bluetooth, and Wi-Fi also delivering strong contributions. That's for the year. Our total shipments increased 24% year-over-year to over 1.6 billion units, an all-time record high, which equates to approximately 52 SIVA-powered devices sold every second in 2021. Annual shipments of handsets were down 33% year-over-year to 383 million devices. This decline is attributable to a socket loss of a customer at a key OEM who was replaced by Qualcomm 5G modem chipsets and lower shipments of overall 2G feed performed in the emerging markets last year. Our base station and IoT product royalty revenue continue to grow. and reached a new record level of $28.6 million, up from $22.3 million in 2020, and $13 million in 2019. In terms of units, base station IoT product units shipped were 69% year-over-year to almost 1.3 billion devices. Non-GAAP operating income from 2021 increased 43% to $22.7 million from $15.9 million reported from 2020. Overall, excluding our intrinsics business, we grew our revenue 14% year-over-year, with the non-GAAP licensing business growing 22% to almost 64 million units. With the intrinsic business, we're now fully on board with the new opportunities outlined by Gideon earlier. We are excited by the potential ahead of us. Let's show the balance sheet items. As of December 31st, 2021, Steva's cash, cash equivalent balances, marketable securities, and bank deposits were $155 million. We did not repurchase any shares during the year and have approximately half a million shares available for repurchase. Our DSOs for the fourth quarter were 39 days, slightly lower than the prior quarter, and below our norm level. During the quarter, we generated $11 million cash for operation, depreciation and amortization of $2.3 million, and the purchase of fixed assets, $0.7 million. On an annual basis, we generated $25.8 million from operations, compared to $15.2 million a year ago. At the end of the year, our headcount was 476 people, of which 390 were engineers, slightly lower than the 485 people at the end of September. Now for the guidance. As Gideon explained, we expect 2022 to be another exciting year with strong growth expected in licensing and energy revenues and in royalties from our base station and IoT category. Overall, we're forecasting total revenue to be in the range of $141.5 to $145.5 million versus $122.9 million million in 2021. Our licensing and related revenue business is expected to grow and expand as we benefit from multiple growth vendor vectors where we excel. In particular, 5G, Wi-Fi 6 and 7, Edge AI, wearable, and hearable. In addition to our new integrated IP solution offerings, and expanded access to the lucrative aerospace and descent market via intrinsics present further compelling opportunities. In royalties, our base station IOP product category continues to flourish, and we will have a noticeable contribution in royalties in 2022. Anticipate royalties from base station, RAN, Bluetooth, Wi-Fi, and sensor fusion will be the main drivers and will outgrow their representative markets. Overall, we forecast another growth here in royalty revenues with the strength of our base station IoT royalty drivers will more than offset the anticipated decline in handset base station royalties as the remaining 4G Smartphones from the Tier 1 OEM are phased out over the course of the year. On the expense side, we forecast just over $18 million in additional overall expenses in 2022 versus 21, recorded both in COGS and OPCS. As we consolidate intrinsic business on a full year basis compared to only seven months in 2021, and from our other R&D ongoing investments. Specifically, on COGS, we expect higher non-GAAP expenses of over $10 million due to the cost of NRE revenues from intrinsics. OPEX, with a strong licensing execution in recent years and even stronger expectations for 2022, will continue to support these new customers and reinforce our leadership with disciplined investment in R&D. Overall, non-GAAP operating increases, OPEX increases will be approximately $8 million. Part of it is also contributed to the consolidation of the intrinsic business on a full year basis compared to only seven months in 2021. Equity-based compensation is forecasted to be higher in 2021, around $16 million. This is due to special retention efforts targeting our employees compared to pre-COVID-19 era and the recent competitive semiconductor industry in all worldwide R&D sites. Annual gross margin is forecasted to be in the region of 80% on a gap basis, 82% to 84% on non-GAAP basis. Interest income is forecasted to be higher than 2021 due to the increased interest rate environment and hopefully better FX effects than we experienced in 2021 at approximately $0.4 million per quarter. Taxes are expected to be approximately 25% of pre-tax income on non-GAAP basis. And our share count for 2022 is expected to be approximately 24 million shares. Specifically for the first quarter of 2022, gross margin is expected to be approximately 80% on GAAP basis. 82% on non-GAAP basis, excluding an aggregated $0.3 million of equity-based compensation expenses and half a million dollars of amortization of other assets. OPEX for the first quarter of 2022 is forecast to be lower than the fourth quarter on a GAAP basis and slattish on a non-GAAP basis. Gap-based optics is expected to be in the range of $26.4 to $27.4 million. The anticipated total operating expenses for the first quarter, $3.2 million is expected to be attributed to equity-based compensation expense and $0.8 million for amortization. excluding those items, non-GAAP topics for the first quarter is expected to be in the range of 20 to $21 million. Then interest income is expected to be approximately $0.4 million. And with the trend in the first quarter of 2021, taxes in the first quarter of 2022 are expected to be higher than the norm, with strong pipeline and backlog revenue mix for our connectivity product, originating in France, which has a higher corporate tax rate, and from utilization of withholding taxes in Israel. Last share count for the first quarter is expected to be approximately 23.8%. You're welcome. You can now open the Q&A session.