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spk09: Good day, and welcome to the SEVA Incorporated First Quarter 2022 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 a touch-tone phone. To withdraw your question, please press star, then two. Please note, 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.
spk01: Thank you, Betsy, and good morning, everyone. Welcome to SEVA's first quarter 2022 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. Jenny will then cover the financial results for the first quarter and also provide guidance for the second quarter and full year 2022. 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 statements regarding our market position and strategy, including efforts with respect to 5G and edge AI innovation, demand for and benefits of our technologies, expectations regarding market dynamics, and expectations and financial guidance regarding future performance, including for the full year and the second quarter of 2022. 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, including continued restrictions in China, 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 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. SIVA assumes no obligation to update any forward-looking statements or information which speak as of their respective dates. With that said, I'll now hand the call over to Gideon.
spk05: Thank you, Rachel. Good morning, everyone, and thank you for joining us today. We delivered a strong start for 2022 with a record high revenue of $34.4 million, up 35% on a year-over-year basis, driven by better-than-expected smartphone shipment and strong licensing executions. The licensing and the NRE environments continue to be strong, delivering $22.4 million in quarterly revenue, up 56% year-over-year with 14 new agreements, of which three were with first-time customers. We continue to bolster our relationship with key customers, sign comprehensive agreements for a new generation of new DSPs, Civa XCDSP technology with a top-tier base station OEM and with a lead customer for our new Pro-M Edge AI platform targeting the brief automotive market in China. We continue to experience strong demand for our wireless and Edge AI platform technologies by customers targeting a broad range of markets and applications, among which are smartphones, smartphones, PC, ADAS, 5G IoT, and low-Earth orbit LEO satellite communications. Wealthy revenue came in at $12 million, up 9% year-over-year, with a record of 531 million SIVA-powered shipments, up 56% versus last year. In the smartphone space, we experienced better-than-expected shipment as a key customer of ours, is gaining share with top-tier OEMs. Royalties from base station and IoT product category were impacted by our customers' ability to ship product to OEMs or DM in China, resulting from the lockdown there and due to supply chain constraint that our 5G base station-run customers are facing. Despite these headwinds, the base station and IoT category was up 24 percent in revenue versus the respective quarter last year. Let me take the next few minutes to add more perspective on our market position and strategy. Wireless connectivity is vital to drive IoT proliferation. It is a fast-growing market that is focused to reach to 15 billion units annually by 2026. In the last few years, SIVA has emerged as a prime wireless IP vendor, with the position and market dominance as ARM LTD is for CPU IP. Our indisputable ability to offer comprehensive wireless solutions for the most advanced and complex wireless protocols for 5G, Wi-Fi, Bluetooth, and UWB lowers the entry barriers, for a growing numbers of OEMs and semiconductor companies to incorporate wireless technologies for the sizable markets of smartphone, smart home, wearable and hearables, automotive, metaverse, industrial and more. Underpinned by this powerful foundation we have built, we are intensifying our 5G innovation and looking to realize the full potential of 5G new radio in enabling new industries and attributes such as broadband satellite communications, side link to support pedestrian safety for direct cellular connection of smartphone and wearables to vehicles, red cap to enable energy constraints, medical wearables and industrial IoT and more. recent Mobile World Congress event, we announced the PentaG2, our second generation 5G basement processor platform IP. PentaG2 is a comprehensive 5G architecture that integrates multiple SIVA DSPs, highly efficient hardware and AI coprocessor, along with the associated software. PentaG2 streamlines the complexity of developing and integrating 5G modem into the new class of 5G cellular IoT devices across its two main segments, broadband IoT and massive IoT. An additional 5G space where we are looking to catalyze demand is 5G radio access network or RAN. The latest generation of 5G base stations architecture are virtualized with disaggregation of the run workloads between the distributed unit or DU and the regular unit or the RU. Both are highly demanding and accustomed to DSP processing and effectively more than doubles SIVA addressable market versus traditional LTE base station architecture. As I noted earlier, we have concluded in the first quarter a sizable and strategic agreement with top-tier OEM for a new class of DSP architecture that we will announce in the coming months. This new DSP architecture will set the stage for the proliferation of virtualized run and open run and will be our underlying technology for our next generations cellular solutions. We also made noteworthy progress in the past quarter in the edge AI space. In our prior earning call, we outlined our AI strategy, which focuses on AI at the edge, a fast-growing market forecasted by ABI research to surpass 1.3 billion units by 2026. To capitalize on this sizable opportunity, we unveiled a new edge AI processor architecture, the new POEM, with scalable performance, starting from 20 Tera operations per second, or TOPs, and going up to 1,200 TOPs. New POEM addresses the AI requirement of broad markets and applications, among which are smartphone, autonomous car, mixed reality, 5G, and more. noted earlier, we signed a lead customer license agreement with a semiconductor that targets the ADAS and the intelligent cockpit market in China. It is our first entry to the vibrant automotive market in China that leads the transformation of cars in the form of software-defined architectures and electrification. In summary, SIVA continued to execute well in the first quarter with a strong performance and financials, even in the face of challenging macro events. We have the vision, the market reach, and the execution capability to monetize our technology innovation. While the lockdown in China has impacted our customers there, the end market demand for our product continues to show strength which position us to continue to outperform through 2022. With that said, let me hand over the call to Yaniv for the financials.
spk06: Thank you, Gideon. I'll start by further reviewing our results of operations for the first quarter of 2022. Revenue for the first quarter was a record high, $34.4 million. up 35% compared to $25.4 million for the same quarter last year. The revenue breakdown is as follows. Licensing NRE and related revenue was a record high, $22.4 million, reflecting 65% of our total revenues, up 56% as compared to $14.4 million for the first quarter of 2021. Royalty revenue was $12 million, reflecting 35% of our total revenues, up 9% from $11 million in the first quarter of 2021. Base station and IoT royalty revenue contributed $7.1 million in the quarter, up 24% year over year, despite a headwind from supply chain constraints in the 5G base station, RAM, space, and impact of the lockdown in China on some of our Chinese customers. Quarterly gross margin was 81% on GAAP basis and 84% on non-GAAP basis, both better than expected. Non-GAAP quarterly gross margin excluded approximately $0.3 million of equity-based compensation expenses and $0.5 million of amortizations of assets associated with the intrinsics acquisition and email vision investments. Total operating expenses for the first quarter were $27.5 million at the higher end of our guidance due to lower allocation of intrinsics NRE cost from R&D into cost of revenues per our prior quarter's guidance. Thus, shifts between these two expense line items may occur from time to time and are tied to the actual chip design work performed in any specific quarter. OPEX also included aggregated equity-based compensation of approximately $3.1 million, amortization of acquired intangibles of $1.1 million and $0.3 million for the cost associated with the intrinsic acquisition. Total operating expenses for the first quarter excluding these items were $23.4 million just over the high end of our guidance due to the same reason I just discussed for GAAP. On the tax front, there were few developments in the quarter. We have implemented a new tax regulation in France named IP Box Tax Regime, enabling our corporate tax rate to be lower than the statutory 25% on specific types of revenues. This was offset with higher withholding tax associated with our future utilization in our Israeli subsidiary. Gap other income, including $1.1 million loss from the re-evaluation of the investment in Scipia, formerly EyeSight Technologies, a leading provider of in-cabin sensing solution for the automotive industry that went public in the fourth quarter of 2021. As we explained last quarter, we will continue to adjust our investment quarterly up or down based on the market valuation of these shares. Gap net loss for the quarter was $1.7 million and diluted loss per share was 7 cents compared to a net loss of $3.6 million and diluted loss per share of 16 cents for the first quarter last year. Non-GAAP operating income more than doubled to $5.5 million from $2.6 million reported in the first quarter of 2021. Our non-GAAP net income and diluted EPS for the first quarter of 2022 was $4.2 million and 18 cents respectively. And net income and diluted EPS for the first quarter of 2021 were $0.3 million and one cent respectively. Other related data. Shipped units by SEVA's licensees during the first quarter of 2022 were a record 531 million units, up 21% sequentially, and 56% for the first quarter of 2021. Of the 531 million units shipped, 100 million, or 19%, were for handset baseband ships, reflecting a sequential increase of 20% from 83 million units of handset baseband ships shipped in the fourth quarter of 2021 and a 22% decrease from 129 million units shipped a year ago. Our base station IoT product shipments were 431 million units in the quarter, up 21% sequentially and 104% year-over-year. Of note, Bluetooth with a record 333 million units in the quarter, an all-time record high, with sensor fusion, Wi-Fi, and cellular IoT also delivering strong contributions. As for the balance sheet items, as of the end of March 2022, our cash, cash equivalents, balances, marketable securities, and bank deposits were $162 million. Our DSO for the first quarter of 2022 continued to be lower than the norm at 32 days compared to the first quarter of 39 days. During the first quarter, we generated $9.8 million of cash from operation. Our depreciation and amortization was $1.9 million, and the purchase of fixed assets was $0.9 million. At the end of the first quarter, our headcount was 476 employees, of which 391 are engineers, slightly lower than the total of 475 employees at the end of December, 21. On our yearly guidance, as Gideon explained, the fundamentals of our business are strong. which is implemented by record revenue in the first quarter. We continue to dominate the wireless IT space, stepping up our relationship with top-tier customers and are encouraged by the share gains by our key handset customer, the Tier 1 smartphone OEMs. We therefore are raising our annual revenue guidance to a range of $142 to $146 million versus $122.9 million for 2021. This guidance contemplates consistent recovery in China as the restrictions there are gradually lifted throughout the year. Specifically for the second quarter of 2022, gross margin is expected to be approximately 78% on GAAP and 82% on non-GAAP basis, excluding aggregate of $0.3 million of equity-based compensation and half a million dollars for amortizations. OPEX for the second quarter is forecasted to be similar to the first quarter of 2022. Gap-based OPEX is expected to be in the range of $27.1 to $28.1 million. And of our total operating expenses for the second quarter, $3.3 million is expected to be attributed to equity-based compensation, $0.8 million for amortizations, and $0.3 for the cost associated with the intrinsic acquisition. Our non-gap OPEX, including all these items, is expected to be in the range of $23 to $24 million. Net interest income is expected to be approximately $0.4 million. And taxes for the second quarter are expected to be similar to the first quarter. Taxes generated from the new 10% significantly lower tax rate on specific revenue sources for our French activity offset by tax expenses associated with holding taxes and their future utilization in our Israeli subsidiary. Share count for the second quarter is expected to be 24 million shares on a non-GAAP EPS calculation basis. Betsy, you can now open the Q&A session.
spk09: Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2.
spk08: At this time, we will pause momentarily to assemble our roster. The first question today comes from Kevin Cassidy with Rosenblatt Security.
spk09: Please go ahead.
spk02: Thanks for taking my question and congratulations on a great quarter. Just maybe on the topic of the earnings season has been China and all the shutdowns, but you're expecting a gradual improvement. I guess, are you getting that from your customers that are saying that they see this change in their government policy?
spk05: You know, government... Hi, Kevin. Thank you for... what you said, government policy is not something that our customer can control. The lockdown in the Shanghai area is still in place. There are a few areas that you see releases. When it comes to our customer, as we pointed in the prepared remarks, the things that happen when people cannot go to work and manufacturing lines are basically almost shut down. There's no point to assemble product and get the chip for that. Nobody is there. The indication that we are getting from there is that they don't see a decline in demand. The demand is there. Keep in mind that our technology goes to all sorts of new applications in the IoT areas, in the industrial areas, things that are wireless-driven and that's in high demand. So we believe that once they get back to work, things will recover quickly. Okay, great.
spk02: So yeah, no demand destruction. And maybe, you know, I think your acquisition of Intrinsic is extremely important and has great opportunities. Can you talk a little bit about your funnel of opportunities that you're working on, what might have changed during the quarter?
spk05: Yeah, I think there are two aspects of the activities or the dynamics that we see with intrinsics. Number one is they have a very solid position in the defense market. And you see it from the U.S., the ambitions and the need to ramp up the investment both in the defense side at the back of what is happening in Europe, as well as overall building a semiconductor infrastructure. We see this implied to intrinsic in terms of engagement. The other thing that we are now under the umbrella of CIVA, are doing is to promote or propose to customers a new business model that we call integrated IP solutions. So basically we take the SIVA IP and the intrinsic capability to design, chip design, pretty complicated one, combination of RF, mixed signal, digital processors, and we basically elevate our proposition to customers and say, let's do not just take the component, the core, but rather we'll build you the design of the SOC. As a result, and we are getting in particular in the U.S., we see a lot of interest from OEMs and also semiconductors that lack both the IP and the resources. You know, there is a scarce resources about engineers. And we are getting good feedback, and we see some movement in this respect. So overall, the intrinsic acquisition takes SIVA to the next level of, more of a trusted partnership with customers and not just a supplier-customer relationship.
spk10: Great. Thank you.
spk11: Thank you, Kevin.
spk09: The next question comes from Suji DelSava with Roth Capital. Please go ahead.
spk07: Hi. Thanks. I'll echo my congratulations as well to Gideon and Yaniv. So maybe following up on Kevin's question, the intrinsic value efforts here. Are you seeing the business model kind of, I guess, extension or shift to maybe more licensing up front? Is that starting to take hold, or will that take some quarters to kick in?
spk05: I mean, it's ongoing. We believe that as time goes by, when you see the integrated IP solution, which are larger deals overall, both in the upfront side and the the royalties, you see more higher components of IP in the intrinsic deal, which you're going to see it in the cock side of our business. But it is a process that we gradually want to promote it and focus on large customers because it's a different relationship.
spk06: By the way, to remind you, Sujit, that the first deal that we signed of integrated IP was last quarter in Q4 of last year. That was the first deal. The project should end now in the second quarter. And then eventually we should see a flow of royalties down the road as soon as that chip gets into production. So that first part of being able to design the IP with the surrounding And a rework is something that we have already started. And I think from every once in a while or every quarter or so, we will be able to talk about a new deal. That's the goal.
spk07: Okay, great. That's very helpful. Of the areas in auto IoT that are positioned to grow, sensor fusion, Wi-Fi, cellular IoT, can you talk about which ones maybe have the most opportunity in the second half of this year? I know they're all growing. I'm just curious, you know, is Any of them starting to inflect at all, or are they all steady growers?
spk05: Yeah, Suji, I would say that wireless and edge AI are the two hotspots. When I'm saying wireless, it's all over the place. We have four ubiquitous technologies, 5G to offer, 5G, Wi-Fi, UWB, and Bluetooth. And in 5G, the interest that we see is in the IoT side, cellular IoT, the upcoming standard in 5G, release 17 and release 18, will open up a lot of new use cases. Some of them I mentioned in the call Red Cup, which will displace the narrowband IoT usage model. And there is Sidelink, which is Basically, think about putting these kinds of cellular blocks for every smartphone and wearable device so you can communicate with a vehicle and get additional safety. So these are, in the 5G, we see a lot of customers are interested. Wi-Fi, we see it in China, all over the place for smart home access points. and also industrial. And UWB is upcoming standard that you see it in key fob for automotive. And people even talk about audio over UWB as the de facto standard for metaverse. in terms of interest and potential wireless all over the place. And I said in the prepared remarks, we are in a position that is dominant in this wireless IP space as ARM is the CPU IP. We are the go-to guy when people want to do because the comprehensiveness and the and the proof, the success stories that we have. The other area that I mentioned is edge AI. We believe that going forward, every SOC will have an AI processor in different form factors. And we build this new Pro M, the new product that we announced back in CS, in light of something more generic than the previous generation, Edge AI, which was more camera-related. And that's what we see now. People are coming to us with the requirement to do. And the challenge with Edge AI, and we are addressing it not just in the hardware, but the software as well, is to make it simple for people to develop these applications. And that's make us strong, the way we look holistically on these problems and not just the technology itself.
spk07: Okay. Thank you for all that color, Gideon. Thanks, guys.
spk11: Thank you.
spk08: The next question comes from Chris Raymer with Barclays. Please go ahead.
spk09: Hi. Thanks for taking my questions and congratulations on good quarter. You mentioned some of the problems with China and the COVID restrictions. Can you give a little more color on how that is impacting the business in terms of getting things out? Or you mentioned shipping. And then just on a follow-up, the guidance for revenues I believe that's an increase. Can you give some of the things going into that that made you more confident about raising the guidance?
spk06: Sure. Let me try to help out, Chris. So first on the guidance perspective, we took it up. You're right. from the beginning of the year and obviously much higher than last year. Last year we closed at 1.22.9. The new guidance is 1.42 to 1.46, so a notch higher than what we had in mind at the beginning of the year due to a strong start for Q1. China, I think what Gideon talked about earlier, I would look at it from two perspectives. From a licensing perspective, You know, we have all been doing business with COVID alongside for the last two years, two plus years. So on the licensing front of licensing new technologies, nothing has changed in China, nor in the rest of the world. Companies and the technology sector are continuing to license new technologies over Zoom and Teams and all the virtual platforms. capabilities without less travel from country to country, but when there are no lockdowns, of course, our internal teams, the local teams in each country does go from a customer to customer and to face-to-face meetings. You saw that in the licensing, record licensing in the quarter, a lot of deals in China, five deals out of the 14 are in China, business as usual, Unfortunately, they're under lockdown, so part of that design work is done from home and remote, but not from their own offices and facilities. That's one side of China that really hasn't changed. On the contrary, there's still good demand, and we saw that in licensing both last year and this year, and the numbers continue to be quite strong there. It's the same as the interest. So now we're moving to the royalty front, and in the royalty front, We also came up with a better quarter compared to last year. So China is a big factor in our revenues and our customers. But we have seen that in specific markets, like the base station market, our customers didn't probably get the full access of supply to build the base stations. It's not SIVA only related, it's an industry related. This is a lot to do with the lockdowns that have been happening for the last month and a half or so in China. And I think that's what we referred to is that in some segments of our business, the royalty reports were lower than what we had in mind for the first quarter. But we believe that will catch up because the demand is there and 5G based stations are in record demand around the world. And even the consumer devices that some of our customers wore down maybe 20% or 30% from what we anticipated, the overall scheme of things, you saw that our royalties were up year over year from $11 to $12 million. So I think that the problem is really having some of these facilities being closed for such a long time. As soon as it reopens, we may see that correction quite fast. We saw it two years ago when China was locked down in the first quarter, and the second quarter was robust in China because everybody was picking up the pace. So we don't have that crystal ball of the exact timing, but as Gideon said earlier, the demand for all these products that we are in, both whether they're a consumer or or electronics or the digital era still is around us. And we probably could have had a better set of numbers without the pandemic right now in China. But with that said, record high. So I think that's what we're trying to convey, that still business is strong there, although they're facing some difficulties.
spk09: Thanks. Thanks for that. And just one more, if I could. How are you looking at the M&A pipeline? Has anything changed?
spk05: You know, when it comes to M&A, it's a valid strategy for us. We are looking at different options. We don't see any change in terms of, you know, reluctance to sell company or ambitious to buy company. We do it one by one, different aspects, in order to find the right fit for us. We did in the last, I would say, nine years, three acquisitions, and all of them are extremely successful in growing our business.
spk08: Great. Okay, thanks. That's it for me. Thank you.
spk11: Thank you.
spk08: The next question comes from Matt Ramsey with Cowen. Please go ahead.
spk10: Hey, good morning. This is Sean O'Loughlin on for Matt. Thanks for taking my question.
spk03: I wanted to talk about ASPs quickly. And I think if you look at the license ASP in the quarter, it seems strong. Um, but no, I know that there's probably more NRE there in the past than in the past from the intrinsic. So maybe you could, um, speak to the split between license versus NRE in that line. And then just on the royalty side, you know, Bluetooth, as you called out, uh, record shipments is that's what's driving the, maybe a little lower ASP there, or is there something else in the baseband mix? Thanks.
spk06: Sure. Good question. On licensing, we've always said for years that it doesn't make too much sense. You come up with a number, but there's not too much logic behind it if you take the licensing number and divide it by 14 deals. Some deals are service-oriented, so you don't recognize that amount up front, so you add one of those 14 deals or a few of those 14 deals that you divided by are not really relevant to the revenues because they're not in the revenue line. Sometimes because of the accounting rules or startups, you don't deliver before the customer actually pays you. So again, the same result that you get a number, but it doesn't necessarily reflect if it's a single use, if it's a larger multi-million dollar deal for a wider range of products. I think that over the years, we've managed to come up with a nice portfolio of different technologies, now services as well. The pipeline is strong, and the numbers are going up. So that $22.4 million, I think, is a combination of all these different factors. What we could say, maybe in the wireless side, obviously, 5G-type deals are more expensive and lucrative than 4G deals a few years ago and same applies for Wi-Fi. Wi-Fi 6 and now we talked last quarter about Wi-Fi 7 as leading edge technology are of course being higher priced than a Bluetooth type of device. That's on the licensing front to give you a little bit more color and the more type of technologies we come up with, like Gideon talked about Edge AI, the nicer offering and the higher ASPs we have for these types of deals. It's really technology driven and the newer technology that comes out, we were able to charge more than a technology that's two or three years old. On the royalty front, Bluetooth, you know, surprisingly, the ASPs are not even going down, but not just flat, but slightly even higher. And the reasoning is that we have more and more customers, new customers that are joining in, and the ASP is usually in a newer customer with the royalty scheme is higher than the existing customer with a very large volume. So that's a nice edge that's keeping the ASPs even better than flat on the on the Bluetooth side, and no doubt, as you said, that 333 million units a quarter, that does move the needle with royalties. So the royalties overall for us for Bluetooth and overall IoT and base station group is higher due to that. A nice factor, and I think maybe we were asked earlier about this, is how do you see the rest of the year, some of the exciting things. One of the exciting add-ons to Bluetooth is Wi-Fi. and we see much more demand for combo chips today. And if we will start seeing more Bluetooth and Wi-Fi devices in the market, ASPs are not necessarily one and one is two, but that one and one type of technology could be even equal to three because the ASPs of a Wi-Fi chip is more expensive than a Bluetooth. So from our perspective, the percent of that combo chip can be a nice contributor. And if part of our customers, powering 300 million devices a quarter, start adding Wi-Fi to it, that's a winning factor on the road. So I think that's something to take into account from the ASP perspective. And these are the two biggest factors right now that are probably worthwhile mentioning from an ASP perspective.
spk03: Thank you. No, that's helpful. And maybe segueing off of that, you talk about Wi-Fi flowing potentially into the royalties. Maybe bigger picture, if you could just talk about licenses that you've signed in 2021, how you're thinking about the timeline of those flowing into the royalties. I mean, it was a pretty solid year for you last year, continued into this quarter. And Obviously, it depends on the end market. Auto is going to be longer, but how are you thinking about that? Are you starting to see royalties already from 2021 licenses, or is that a 23-24 type thing?
spk05: In general, the connectivity, which we are Wi-Fi, Bluetooth, UWB, the design cycle is much shorter than, let's say, 5G. 5G, it's a much bigger SOC. There is more stringent certification with operators, and that takes between 18 to 24 months. I believe that we're going to see deals that will sign in, let's say, in the first, late first half of Last year, we see it in early 2023 in mass production, because the whole process of certifying a chip is much shorter, and most important, the proposition that we have for connectivity is much more integrated. We not just provide the hardware, but also the software. So the cycle is something between 12 to 15 months for mass production.
spk10: Super helpful. Thanks a lot, guys.
spk08: The next question comes from Martin Yang with Oppenheimer. Please go ahead.
spk04: Hi. Good morning, and thank you for taking my question. Looking to the Bluetooth strength in the first quarter, Can you maybe talk about where did that trend come from, how sustainable that is, and whether or not that's associated with any inventory replenishment activities by our customers? Thank you.
spk05: Bluetooth is a very powerful standard in terms of the diversity of applications. What we are seeing now in terms of customer shipment, it relates to TWOS, the earbuds market. The market, that's a growing market. That's close to 1 billion units in the next year or so. And this market is now getting into different headsets. whether it's for VR, metaverse, and in gaming in general, to do it. So to your question, it's extremely sustainable and growing. The Bluetooth standard is working on next generation technologies. that will provide to add the customer beyond the audio that we all know use Bluetooth for that purpose about location. So think about the different trackers that are going to be all over the place. That's going to be an even bigger market than the audio side. So overall, you talk about Bluetooth of 4 billion units a year annually. and it's expected to grow.
spk04: Understood. My next question is on your Edge AI comments. Are you implying that most of the Edge AI implementations you have are mostly for camera-related applications? For this newer generation, where do you think or what market segment do you think will get first adopted besides camera applications?
spk05: That's a good question. When people talk about edge AI or AI, the edge AI terms, just in the last two years, people start using it to distinguish between the AI activity that happens in the data center. Edge AI, the initial use was related to camera. So when people talk about ADAS, so it's a camera that you make, you use AI to detect pedestrian or detect traffic lights or things like that. So surveillance camera, you need to... to detect strange behavior. As time goes by, people got more familiar of how you use AI of other applications. So in 5G, you can use it for optimizing the network performance, or when it comes to a smartphone in general, you can use AI to optimize the power metrics by collecting data, knowing how people specifically use it, natural language processing, voice recognition. We are seeing a lot of customers using AI for things that in the past they wrote software. And that's what drove us to come out with a new program and to say, This is not just AI for camera. This is AI for sensing in general. This AI is for any workloads that you need to do it. Think about CPU for AI. It's the same thing. CPU, customers are not trying to use it for certain tasks. They just use it for everything that they need. Same goes for the new Pro-M. People will reuse Pro-M. People will use this platform for any workload, any application that relates to AI.
spk11: Thank you for the insight.
spk06: Martin, I'll add one more thing to your prior question, and Gideon talked about the size of the Bluetooth market. Don't forget that last year, and this is part of the excitement for us in the connectivity and the wireless space. Last year, we talked about two design wins that we had into the cellular space with Bluetooth or Wi-Fi, that connectivity. One is a semiconductor company and one was an OEM, an actual Chinese OEM doing handset, and they're going to do their own chip with our connectivity technology, replacing an incumbent supplier that is there today. So That's part of the growth and part of the opportunity that we have in Bluetooth, not just the IoT devices, but also back in handsets with more technology than just the modems that we have done for many years.
spk11: Makes sense. Thank you. Thank you.
spk09: The next question comes from Gus Richard with Northland. Please go ahead.
spk12: Yes, thanks for taking the question. I apologize in advance for having to ask this. You know, in the old days, you used to recognize revenue for royalties, one quarter in arrears. And then when FASB 606 came along, you had to recognize revenue in the current period. But I don't think you get all of your royalty reports by the time, you know, you put your numbers together. And I'm just wondering, has that changed and your customers get the royalty reports to you? And if not, how do you estimate royalties in a period without all the reporting? Any color there would be helpful.
spk06: Yeah, excellent question, Gus. Good morning. I mean, first, you're most welcome to write to the FTC. and request to change the rules that will make all of our lives much easier. And it is more complex. There is no doubt that we don't get all of their reports, especially this quarter when companies in China were specifically were shut down and people can't come to work and close the numbers and use the systems. So we did call up all our customers. We did try to get as much insight as we can for their business. Some gave us a verbal estimate. Some gave us an assumption of where they think they are compared to the prior quarter. And we used the estimates for the best to translate it into royalties. That's the best we could do with companies that did not report to us. And a big portion did report on time and still manage. whether it's a draft or a final report, but to those that were not around their offices, that was the theme that we did for this quarter. A bit more challenging than prior quarters when the business is usual and people are in the office.
spk12: Got it. And when do you just true up any inaccuracies from Q1 and Q2 earnings?
spk06: Yeah, that's always the case. The next quarter we always... update it and true it up to the final report. Usually, you know, we know these customers for many years, the ones that are in production, so they're not big surprises. And if they are, they will be true it up in the following quarter.
spk10: Got it. Thank you so much. Very helpful. Sure. Thank you.
spk09: This concludes our question and answer session. I would like to turn the conference back over to Richard Kingston for any closing remarks.
spk01: Thank you and 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 events, we will be participating in the following investor conferences the Oppenheimer 23rd Annual Israeli Conference, May 22nd to 24th in Tel Aviv, Cowen's 50th Annual TMT Conference, June 1st and 2nd in New York, and Rosenblatt Securities Technology Summit Age of AI Conference, June 9th and 10th. For further information on these events and all events we will be participating in, can be found on the investor section of our website. Thank you and goodbye.
spk09: The conference has now concluded. Thank you for attending today's presentation.
spk08: You may now disconnect.
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