CEVA, Inc.

Good day, and welcome to the SEVA, Inc. Fourth Quarter and Year-End 2023 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.

Thank you. Good morning, everyone, and welcome to SEVA's fourth quarter and full year 2023 earnings conference call. Joining me today are Amir Panoush, Chief Executive Officer, and Yaniv Ariyeli, Chief Financial Officer of SEVA. Before handing the call over to Amir, I would like to remind everyone 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 CEVA to differ materially from those expressed or implied by such forward-looking statements and assumptions. These forward-looking statements include statements regarding our market positioning, strategy and growth opportunities, including expectations for expansion into new markets and use cases, as well as expectations regarding our customers' production of products using our IP, market trends and dynamics, demand for and benefits of our technologies, and our expectations and financial goals and guidance regarding future performance. VIVA assumes no obligation to update any forward-looking statements or information which speak as of the respective dates. In addition, following the divestment of the Intrinsics business to Cadence, financial results from Intrinsics were transitioned to a discontinued operation beginning in the third quarter of 2023, and all prior period financial results have been recast accordingly. We will also be discussing certain non-GAAP financial measures, which we believe provide a more meaningful analysis of our core operating results and comparison of quarterly results. A reconciliation of non-GAAP financial measures is included in the earnings release we issued this morning and in the SEC filing section of our investor relations website. With that said, I'd now like to turn the call over to Amir, who will review our business performance for the quarter, review the year and provide some insight into our ongoing business. I'm here.

Thank you, Richard, and good morning, everyone, and thank you for joining us today. 2023 was the beginning of a transformational journey for SIVA, and I'm very pleased with the progress we made in my first year with the company. Following the recent in-depth strategic review, to really understand our strengths and technology leadership, we have positioned SIVA as a trusted partner for semiconductor companies and OEMs We need our IP to enable three fundamental use cases for smart edge devices. The ability to connect, send, and infer data more reliably and efficiently. We have realigned our business to focus our investments and R&D efforts around these use cases and on mega end markets where we see very strong growth opportunities. Consumer, automotive, industrial, and infrastructure. Even against a difficult business backdrop in 2023 that continues to affect the semiconductor industry and its end markets, we are already seeing evidence that our updated strategy is producing results. Our customer engagements are deeper across the value chain, across our entire technology portfolio, and expanding into new end markets and strategic opportunities. I will provide a review of the year shortly, but before that, I will review the fourth quarter. For the fourth quarter, our total revenues were in line with our expectations. I'm proud of how we have and continue to manage through the challenges in the markets we serve and significantly improve our profitability and earnings power through our focus on operating efficiency. In licensing, while the total licensing revenue recognized in the quarter was lower than usual, the interest in our diversified portfolio and potential new customer opportunities remained solid. We saw good progress on a number of fronts, including a strategic license deal with a US-based MCU leader for our Wi-Fi 6 IP and a licensing deal with one of our major automotive customers, to integrate our AI software compiler into their ADAS chips. In royalties, we saw a return to a year-over-year growth for the first time since Q3 2022, with a rebound in mobile and across consumer IoT and industrial IoT, where we have a large and diversified customer base. Both mobile and IoT markets produced their strongest royalty revenues of the year. Units volume in the quarter were up 21% from the fourth quarter 2022 level. Overall in licensing, we signed 17 deals in the quarter, 11 of which were for our IPs enabling Connect use cases, where we continue to leverage our broad portfolio of long and short-range wireless IPs to build our leadership position and market share in connectivity for smart edge devices. This is evidenced by agreements spanning Bluetooth, Wi-Fi, UWB, cellular IoT, and 5G REDCap signed in the quarter, as more and more chips designs integrate connectivity as a mandatory requirement. As I mentioned a few months ago, one of the deals was a leading US MCU company for Wi-Fi 6 IP. This company licensed a Wi-Fi 6 IP to augment their internal wireless connectivity development efforts and ensure they have a leading solution for their customers. This is a trend that we are seeing more and more recently, where established companies with internal R&D teams and major investments around wireless connectivity need help to advance their product roadmap and stay competitive. DIVA is constantly at the leading edge with the latest standards developed in the same timeframe as the market leaders. As these technologies become more complex and the demands on the customers to consistently be in the market with the latest features, we are viewed as a trusted partner who can help these companies reach their product development goals while reducing the risk and time to market. This is why we are increasingly being recognized as the de facto choice for wireless connectivity IP globally, which forms the backbone of our smart edge strategy. We also had a good quarter in licensing for our hardware and software IPs for sensing and inference, with six deal signs highlighted by a licensing deal with one of our major automotive customers to integrate our AI software compiler into their ADAS chips. This customer has already licensed and deployed our AI engine to add high compute performance in their automotive systems on cheap product family targeting ADAS and autonomous driving. These SOCs are now in production and are expected to be deployed in mass market vehicle by the end of 2024. The licensing deal we completed this quarter with this customer enables automotive tier one suppliers and OEMs direct access to our AI engine in the SOC to deploy the proprietary AI software algorithms and allow them to bring value add functionality and differentiation to the performance of the production vehicle. This is an important milestone for our customers and for SIVA, as the automotive industry is constantly looking for open ADAS architectures as an alternative to closed vertical solution that don't allow for differentiation. We anticipate that we will generate meaningful royalty revenues from automotive SFCs with initial royalties contributing to our growth in 2024 and continuing to grow in 2025 and beyond. Other deals in the quarter under this category include customers for our audio AI and sensor fusion AI DSPs and our voice processing software. At SIVA, when we speak about Edge AI and Smart Edge devices, we are not just focusing on the inference workload that most people associate with these devices. Every one of these devices needs to be connected in order to get data off the device and connect via the internet. Every one of these devices needs to be able to sense its environment using vision, sound, and motion, and generate data. Every one of these devices will increasingly need some inference capabilities to interpret and act upon this data. This is what the smart edge is, and we are the only IP company capable of delivering the technology required to address all three use cases. Turning now to royalties for the quarter, we saw a strong recovery in mobile, driven by restocking demand for Android smartphones in emerging markets. In consumer IoT and the board industrial IoT markets, demonstrating our diversified offering and customer base, we recorded our best quarter of the year with notable trends for our connectivity customers. This was our third consecutive quarter of royalty growth as we built momentum throughout the year. More significantly, this was the first quarter to surpass $12 million in royalty since Q4 2021. and serves as a strong proof point for our royalty business potential going forward. For the full year 2023, we reported total revenue of $97.4 million, 19% lower than 2022, primarily due to a return to a more normal licensing environment following a couple of years in which we were able to capitalize on a surge in design activity driven by exceptional consumer and market demand resulting from post-COVID spending and the shift to work from home. Licensing and related revenue was $57.6 million, down 23%. We signed 53 licensing agreements across our extensive IP portfolio. Ten of those deals were with OEMs who are integrating our IPs into their end products. In terms of end markets, 29 of these deals target consumer and 23 for industrial IoT, including seven for automotive and one for other markets. This deal breakdown serves as another indicator of our focus on the end markets with the largest licensing base and the greatest projected growth potential. In full year royalties, Despite the slow start to the year and the soft end market throughout 2023, royalty grew sequentially each quarter throughout the year to reach $39.8 million, down 12% year-over-year. The decline is mainly attributed to mobile and 5G RAN-related royalties, which combined to be down 22% year-over-year. On the positive side, and in line with the trends of our connectivity products, Royalty revenues related to our Bluetooth, Wi-Fi, and cellular IoT business lines combined to grow 5% year-over-year, mainly due to the higher royalty rate contribution from our new Wi-Fi 6 customers. In terms of end markets, consumer IoT was 41% of royalties, followed by mobile at 36%, and the growing industrial IoT end markets at 23%. Looking ahead to 2024, we are excited by the royalty growth potential of our Y56 royalties, the continuing momentum in our Bluetooth and cellular IoT customer base across consumer and industrial markets, and the expected initial ramp of automotive ADAS royalties in the second half of the year. Looking back on the year in terms of achievements and milestones, there are a few that I would like to elaborate on. As I mentioned earlier, we started the year with a strategic review of the business and decided to focus all our efforts on being a pure IP player. This led to the decision to diverse the intrinsic aerospace and defense design services business. In line with this strategy, in April we acquired Visisonics, a small special audio software business, which bolsters our software business and enable us to address the high-volume headsets and earbuds space with value-add software. This culminated with our first special audio deal with Bose, India's number one wearables and hearables OEM and number two worldwide behind only Apple. The strategic review also led to the decision to give the company a brand refresh to better reflect our position as the trusted partner or transformative IP for the smart edge. Collectively, these efforts have enabled us to align our investments and focus, and were implemented in tandem with a stringent plan to control expenses and ensure we create operating leverage for the betterment of our shareholders. All of this culminated in our investors and analyst days in December, where we shared our vision and strategy