CEVA (NASDAQ:CEVA) Q2 2020 Earnings Call

0:01 Good day and welcome to the SEVA, Inc. Second Quarter 2020 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 of Market Intelligence, Investor and Public Relations. Please go ahead, sir.

0:40 Thank you, Rocco. Good morning, everyone, and welcome to SEVA's second quarter 2020 earnings conference call. I'm joined today by Gideon Wertheiser, Chief Executive Officer, and Yaniv Arieli, Chief Financial Officer of SEVA. Gideon will cover the business aspects and the highlights from the second quarter and provide general qualitative data. Yaniv will then cover the financial results for the second quarter and also provide qualitative data for the third quarter and full year 2020. 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.

1:31 These forward-looking statements include guidance for the third quarter 2020 and qualitative data for the remainder of 2020, optimism about 5G opportunities, including expectation of royalty revenue increase in the third quarter associated with 5G base station RAM in China, optimism associated with the SIVA XC DSP portfolio and PentaG 5G modem platform, Seva's ability to play a pivotal role in the ORAN space, Seva's ability to leverage opportunities that may arise from the pandemic and the US-China trade tensions, and positive market data by GSMA Intelligence and Forrester Research.

2:18 For more information on the factors that could cause a difference in our results, please refer to our filings with the SEC. These include The scope and the duration of the pandemic The extent and the length of the shelter in place and other restrictions associated with the pandemic and the impact on customers, consumer demand and the global economy generally The ability of SIVA's IPs for smarter connected devices to continue to be strong growth drivers for us Our success in penetrating new markets and maintaining our market position in existing markets The ability of new products incorporating our technologies to achieve market acceptance The speed and extent of the expansion of the 5G, O-RAN, Wi-Fi, and IoT markets Our ability to execute more non-handset baseband license agreements The effect of intense industry competition and consolidation And global chip market trends SIVA assumes no obligation to update any forward-looking statements or information which speak as of their respective dates. With that said, I'd now like to turn the call over to Gideon.

3:36 Thank you, Richard. Good morning, everyone, and thank you for joining us today. We are living in unprecedented times where we all continue to adapt to the implications of the COVID-19 pandemic. First and foremost, we continue to look out for the health and safety of our employees, customers, and partners worldwide. Our employees have stepped up to ensure we meet our customers' milestones and maintain the development schedule of our new products. I would like to take this opportunity to thank our employees for their hard work under these difficult circumstances.

4:21 Second, we are closely monitoring the impact of the measure to control the spread of the coronavirus on our ongoing business and also the strategic opportunities the pandemic uncovers. I will allude to this later in the course. Despite this lingering uncertainty, we had a very good second quarter with revenue of $23.6 million, up 28% year-over-year, the highest second quarter revenue we ever recorded. The licensing environment continues to be healthy with $13.5 million in licensing revenue, up 25% year-over-year, We signed eight new license agreements, of which three were for smart sensing and five were for connectivity products.

5:23 One out of the eight deals was with first-time customers. Target applications of our customers include automotive powertrain, a new growth opportunity for us in the automotive space. and a range of IoT devices. Reality revenue came in ahead of expectations at $10.1 million, up 10% sequentially and 33% year-over-year, driven by strength in the base stations and IoT product line, formally referred to as non-handset projects. This product line posted 70-70% year-over-year revenue growth to $4.3 million, comparable to our all-time record high, and driven by record high Bluetooth and Wi-Fi royalties, resulting for many new IoT production reps.

6:32 In this product line, we expect a step up in our royalty revenues in the third quarter, associated with the fast deployment and share gain of 5G base station Rai in China. The handset product line also showed growth where solid demand for new low-cost smartphone from a U.S.-based customer more than offset weakness in the low-tier LTE shipments into emerging markets. India, which is currently the second largest handset market by volume, experienced a 48% year-over-year decline, according to Canalys report, due to supply and demand constraint as a result of the Indian government measure to control the spread of the virus.

7:30 Let me take the next few minutes to walk you through our perspective on COVID-19 and the geopolitical tension between U.S. and China. On COVID-19, recent market data from research firm GSMA Intelligence predicted that IoT Net Edition for this year are expected to be down 45% on a yearly basis due to the pandemic. GSMA Intelligence is, however, maintaining its forecast for 2025 of 24 billion devices, doubling 2019 levels because it expects strong post-pandemic activities to offset the current decline.

8:19 With that said, the social distancing measures have uncovered new services for mobile technology. The latest UNESCO figures claim that nearly 1.4 billion students around the world have shifted to remote study via mobile technology, in particular in emerging markets where wired broadband is not available. Furthermore, and Forrester Research predict that more than one billion virtual care visits are expected within the DOS this year. The magnitude and the pace of adoption of these new services call for the persistent and expedited deployment of 5G networks where we believe there will be attractive opportunities for a strong technology portfolio.

9:19 As I commented earlier, based on discussions with our customers, we expect to see a sizable production ramp and noticeable step-up in loyalty revenue for 5G base station run in the third quarter. Furthermore, COVID-19 brings forward new usage models for 5G, including fixed wireless access, 5G-enabled PC, and B2S. With our latest CYCDSP portfolio and our Pentagy 5G modern platform, we are well equipped and positioned to address this new usage model for incumbents and newcomers.

10:06 On to the geopolitical tension between China and the U.S. Existing export control rules do not directly apply to our current technology developed in Israel and Europe. We continuously monitor development on this front and are prepared to adapt our business as required. A byproduct of the trade tension, the U.S. government is looking to stimulate the use of Open RAN, or ORAN, technologies for 5G mobile networks. ORAN enables mobile operators to mix and match hardware and software components from different suppliers rather than use vertical solution for a few T1 OEMs.

10:56 Orange dramatically reduced the entry barrier for software and hardware companies, the majority of which are U.S.-based, such as Intel, Facebook, Cisco, Microsoft, as well as new startups like AltioStar, Marvenir, and Parallel Wireless. TIVA is aiming to play a pivotal role in the orange space using The power efficiency of our DSP platform for the stringent runtime and low latency requirement associated with baseband processing. We have gained a lot of experience and pedigree in the run space to be able to proliferate the supplier base.

11:42 On the China front, The central government came out in March with a new ambitious plan called New Infrastructure. The plan highlights investment in seven areas, of which 40% to 50% of the investment are associated with 5G, AI, and IoT. These are areas in which SIVA already has strong presence and deployment in China. We are continuously discussing with our major Chinese customers and how we can expand our presence in China based on this plan. So in closing, our business in the first half of the year was robust, despite the volatility and uncertainty brought about by COVID-19.

12:32 This affirms the strength of our company's vision and business model. Furthermore, the current situation poses new opportunities for us to expand in Iran and China's new infrastructure plan. While I am satisfied with our first-half performance and opportunities ahead, the recovery from the pandemic is slower than was anticipated earlier in the year, and the U.S.-China trade tension poses additional uncertainty. We are therefore laser-focused. Thank you, Guido. I'll start by reviewing the results of our operations for the second quarter of 2020.

13:37 Revenue for the second quarter was up 28% to $23.6 million as compared to $18.4 million for the same quarter last year. It was the highest second quarter revenue we ever recorded. The revenue breakdown is as follows. Licensing and related revenue was approximately $13.5 million reflecting 57% of our total revenue, 25% higher than $10.8 million for the second quarter of 2019. Royalty revenue was $10.1 million, reflecting 43% of our total revenue, 33% higher than $7.6 million for the same quarter last year. The OT revenue from our base station and IoT product line in the quarter was $4.3 million.

14:36 This is comparable to the all-time record high we reached in the fourth quarter of 2019. For the gross margin was 87% on GAAP and 89% on non-GAAP basis, both slightly better than what we projected. Non-GAAP quarterly gross margin excluded approximately $0.2 million of equity-based compensation expenses and $0.2 million for the impact of the amortization of acquired intangibles. Our GAAP operating expenses for the second quarter was just below the high end of our guidance at $22.1 million. also included aggregate-based compensation expenses of approximately $3.3 million and $0.6 million for the amortization of acquired intangibles.

15:31 Total operating expenses for the second quarter excluding these two items were $18.3 million, just above the high end of our diet. U.S. GAAP net loss for the quarter was $1.1 million, and diluted loss per share was $0.05. This compares to a net loss of $1.5 million and diluted loss per share of $0.07 for the second quarter of 2019. Our non-GAAP net income and diluted EPS for the second quarter of 2020 increased by 130% and 140% respectively. to $2.9 million and 12 cents.

16:17 Non-GAAP met income in the alluded EPS for the second quarter of 2019 for $1.2 million and 5 cents respectively. Other related data. Shipped units by SEVA's licensees during the second quarter of 2020 were 231 million units. Down 11% sequentially and up 6% from the second quarter of 2019 reported shifts. Of the 231 million units shipped, 99 million units, or 43%, were for handset-based ventures, reflecting a sequential decrease of 11% from 111 million units during the first quarter of 2020, and a 19% decrease from 122 million units shipped a year ago.

17:24 Our base station and IoT product shipments were 132 million units, down 12% sequentially, and up 37% year over year. As a reminder, we have categorized all our non-handset basement chips under the umbrella of base station and ILP products since the beginning of this year. This product line hosted 77% year-over-year growth and 17% sequential revenue growth to reach $4.3 million. And for the balance sheet items. As of June 30, 2020, SEBA's cash and cash equivalent balances, marketable securities, and bank deposits were $157 million.

18:18 We did not repurchase any shares this quarter under the terms of our 10b-5 plan. We only have approximately half a million shares available for repurchase. Our DSOs for the second quarter of 2020 was 27 days, significantly lower than the 63 days we recorded for the first quarter of this year. During the second quarter, we generated $6.2 million of net cash from operations. Our depreciation and amortizations were $1.5 million, and purchase of fixed assets was $0.6 million. At the end of the second quarter, our headcount was 401 people, of which 333 were engineers, up from a total of 390 people at the end of March 2020.

19:20 Now for the data. As demonstrated by our results for the first half of this year, SEVA's product and Customer Diversity enabled us to migrate the economic challenges the pandemic presented. We remain focused on our near-term objectives and continue to invest in future growth. As for the second half outlook, prolonged measures to contain the spread of the coronavirus posed economic uncertainty, partially in emerging markets, particularly in emerging markets, where our primary exposure is for low-tier handsets.

20:08 On the other hand, we are encouraged by the indicators we have noted in recent customer reports reflecting to the base station and IoT product line. And as Gideon just alerted to, we expect a step up in the 5G base station royalty revenue in the third quarter royalty reports. So with that said, we believe the second half royalty revenues will be higher than the first based on the assumption of the gradual recovery in economic activities. The current restrictions are listed. Licensing, we maintain the licensing target we have focused on earlier this year.

20:55 of up $2 million to $4 million over the 2019 record annual licensing revenues, specifically for the third quarter of this year. Gross margin is expected to be approximately 88% on GAAP bases and 89% on non-GAAP bases, excluding an aggregate $0.2 million for both equity-based compensation expenses and the amortization of other assets associated with our immune vision and distance. OpEx for the third quarter is forecasted to be slightly lower than the first two quarters of 2020.

21:43 Gap-based OpEx is expected to be in the range of $21.5 to $22.5 million. Of our anticipated total OpEx for the third quarter, $3.4 million is expected to be attributed to equity-based compensation expenses and $0.6 million to the amortization of acquired intangibles. Our non-GAAP OPEX is expected to be in the range of $17.5 to $18.5 million. Then interest income is expected to be approximately $0.7 million Taxes for the third quarter expected to be approximately half a million dollars on both GAAP and non-GAAP basis.

22:32 And our share count for the third quarter is expected to be approximately 23.1 million shares. Rocco, you could now open the Q&A session, please. Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on a touch-tone phone. If you're using a speakerphone, we ask that you please pick up your handset before pressing the keys. To enjoy your question, please press star then 2. Today's first question comes from Matt Ramsey with Cowan. Please go ahead.

23:07 Thank you very much. Good afternoon and good morning, everybody. Gideon, I wanted to start with a question about 5G. In general, for sort of both sides of the business, the infrastructure side and the handset side. And maybe you step back and kind of characterize where you guys feel like you are competitively and maybe more important, where your licensees are competitively on 5G. It sounds like things are going to start to materially ramp in the third and fourth quarter on the base station side. But on the flip side, we've seen some share consolidation with Qualcomm and MediaTek on the 5G handset side at the expense of some of your licensees. So if you could just kind of level set how you're thinking about the 5G opportunity for the company, that would be helpful. Thank you.

23:56 So let me start with the 5G run. Run is ready. That's the base station. Let me start by saying that 5G has substantially more There are four new components in 5G that weren't in LT. The first one is what is called active antenna. In LT, the antenna was passive. Now when you go to 5G and you have this high bandwidth and the fact that you have massive amount of antennas, So we moved some of the baseband processing into the antenna. Today it's done by FPGA primarily.

24:42 And Huawei was the first company that managed to build it with their own DSP. And now our customer moved and come out with a solution based on our DSP. So that's Thank you very much. that gradually operator will start rolling out these services.

25:34 The third component that you have in 5G run is what is called private network. So there was announcement coming from Toyota with our customer and Ford. They all installed private base station in their manufacturing line. to get these low latencies and the security that they need for the robots in the manufacturing. And the first one I referred in the call is the ORAN. ORAN is an initiative that is for a long time now with the polarization between China and the U.S. It's stimulated by the government, and that's it.

26:21 A very good sweet spot to guys like Intel, like Facebook. They're already active in this area. Microsoft made acquisition in this area. And all of them more or less will, and some others, intersect what we offer. So all those are areas that weren't in MT and in 5G we are doing. And one of the reasons that we have a step up in China now is is the antenna, and the fast deployment, and we sell all those components, and we have a good visibility and very optimistic about the prospects there.

27:06 I think you asked about handset, so you put it right. It's a consolidated area. MediaTek and Qualcomm is there. We are engaged with our customer in China. This customer has Initial rank on 5G. A way for us to approach the 5G, not with the modern side that is consolidated and people want to build their own stuff, other than customers that we have there, is to go to the application portal. Because this is now revolutionized and opened up. So the camera becomes much more DSP-oriented with feature AI. and also what is called conversational AI or NLP, natural language processing. This is moving to the edge.

27:58 This is moving to the smartphone. And that's where we are coming with our smart sensing portfolio and getting traction there. So you may not see, there will not be news in terms of Qualcomm MediaTek in 5G modern, but there are other avenues that we're going to approach and have engagement. And you know, the market is not just the ASSP, the merchant chip, it's also the OEMs that are building their own chips and looking for our stuff as well.

28:42 Thank you, Gideon. That's great perspective all the way around. As a follow-up for me, Any of you talked about in the guidance royalties being higher in the second half of the year versus the first half, and it's notable that I would expect the revenue you get from the Intel modem would be significantly less in the back half of the year. So if you could talk about maybe the magnitude that you're expecting out of 5G base station in the back half of the year, just kind of the moving parts on the royalty side would be helpful. Thank you.

29:20 Yes, so as you said, there are many moving parts. It was always the case in the SEVA model, and this is why, on one hand, it's quite difficult to model this out, and based on the new rules of the 606, we just wait for the customer reports at the end of the 30 days after the quarter end, and then we get the real visibility of how the quarter worked out. In every segment, we have ups and downs. In every segment, we have seasonality. This year, I think seasonality and COVID-19 has completely changed. We saw vacuum cleaners being very, very strong, or TVs in the first half of the year, something that is not common practice because people wanted to have more time to Thank you for joining us.

30:34 We believe that Q2 will be the low point of the year for us, and from there on, it's going to pick up. So how long were we just two and a half or three months ago? So very difficult to predict an answer, the right answer, knowing today how Q3 and Q4 are going to look like. You mentioned correctly the handset space, the change, at least with one well-known OEM in the 5G aspects, but They came out with a very, very successful low-cost version, which is doing extremely well. I think all of us were super surprised by the excellent results they came up with two weeks ago. Not everybody by surprise, and that's part of the very strong second quarter for us as well.

31:25 We couldn't have known that in advance, nor do we know how Q3 and Q4 will look like from that aspect or from this aspect. That's one area. Another area is the emerging economy. As Gideon mentioned, India was down close to 50% in the consumptions of foam glass core. This was because of the curfew and corona, direct impact of people not walking around, being able to go to stores and buying. Amazon is maybe less Thank you very much. Different indications that we are seeing from our customers.

32:18 We shared with you last quarter that they have won significant design wins in China, and we'll have north of 30% market share in that segment, and that's starting to ramp up and be deployed. So as soon as we get those royalty reports, we'll have a much better vision. What's the magnitude of it? There's no doubt that per the different... and use and deployment data that we're getting, this could be quite significant. But there are moving pieces. So overall, we believe it's going to be a stronger second quarter. I don't think we have the data to guess right now, like we were wrong on the positive side a few months ago for Q2.

33:03 And we'll just need to look how these play out in the second half on a quarterly basis. Hope I managed to give you a little bit more color on these different moving parts.

33:14 No, thanks very much for that. I'll jump back in the queue, but much appreciated.

33:20 Thanks. And our next question today comes from Tavi Rosner with Barclays. Please go ahead.

33:27 Hi, this is Peter Bebsky on for Tavi. Congratulations on the quarter. Regarding the continued strength in licensing, I was wondering how we should think about the sustainability of that in the 2H, given that we saw a bit fewer deals in the quarter versus Q1.

33:43 Is that a headwind at all, or is it that you're just seeing a bit bigger deal size? And then if I could have a follow-up, I was hoping if you could give us an update on the integration of the imaging and sensor fusion acquisitions, both from the operational, but particularly from a commercial point of view.

34:04 Okay, it's Kavi, right? Yes. Let me take first the licensing. So the way we see it is the momentum continues. Don't look the fact that you have 8 or 10 or 11 does not mean licensing is a lumpy business. You have peaks and valleys. You have to look things in perspective. The pipeline looks solid. We manage to continue those deals now. We have strong interest in our Wi-Fi product. We have strong interest in computer vision products. We have strong interest for Bluetooth. We signed a very important agreement in the powertrain in cars. This space by itself is going to grow 30%.

35:00 It's part of the electrification of cars. This space is going to grow by 30% CAGR between 2020 and 2030. So, I mean, We don't see any weakness. Again, this is licensing. You know, it's timing of closing deals. We want to do the complete evaluation with customers, do the legal negotiation properly, commercial negotiation properly, but we are on a solid ground there. Regarding integration of sense of fusion and imaging, So the sense of fusion is part of SEVA already. It's a strong contributor.

35:49 Yaniv mentioned vacuum cleaner, you know, by product of the pandemic, we start seeing significant increase in voltage there. With our HILCRES team, we are at the PC space. With the HILCRES team, we are much stronger on the DPV space. We do cross-sales between the SIVA products like Voice and Sense of Future. So it was a smooth integration. Like what SIVA is doing. When we acquire a company, we look on the history, we look at this thing, know what they do, and then based on this, we make a decision.

36:37 So that's... Did you ask another question? I'll ask you one more thing that we said earlier that on the licensing front overall, not on a per quarter basis, We are still reiterating our guidance from earlier this year, which is like $2 to $4 million on top of the $48 million, which was all-time record high last year. And this means that we're looking to cross the $50 million level for the first time, and this is for 2020. So with all that said, this is still our plan. We kept it last quarter. We are still very confident with it for this quarter, and this is where we are targeting for the rest of the year. Very helpful perspective.

37:23 Thank you.

37:25 Sure. And, ladies and gentlemen, as a reminder, if you would like to ask a question, please press star, then 1. Today's next question comes from Suji DeSilva with Roth Capital. Please go ahead.

37:37 Hi, Gideon, Yaniv, and Eve. Congratulations on the momentum here. So the second half guidance for an improvement, can you talk about what you're assuming there in the consumer-exposed, non-smartphone markets, the volume markets? Are you expecting a seasonality recovery or kind of still muted demand? A lot of the other areas we had comments on, but I'm curious just the broader consumer non-smartphone.

38:04 So this ties a bit to what we tried to convey a bit earlier. It's an excellent question. And historically, Q3 was seasonally strong in a lot of these consumer devices. This year, we hope that that's still the case, especially after, on one hand, some of the manufacturing was lower in the beginning of the year and picked up in the second quarter. Demand, as people start going back to normal or sort of normal alongside COVID and continue work, it should, historically at least, it did pick up. Q2 was down in volume in a lot of these IoT devices, although we saw new product ramps of new devices for the first time.

38:59 So with those in mind and those new products that just hit the shelves in Q2 with relatively lower volumes because of the pandemic, we do believe that they will continue to pick up. The taste of all this whether it's a TV or earbud or vacuum cleaner TV or all of these other devices that we are powering is a lot of moving pieces and from lots of different segments. And even one of our customers in the action camera space came out surprisingly with a very strong quarter and increased their guidance for Q3, which is, again, it's not... Not the easiest guess for us if people don't start taking a bit more vacations going out to the outdoors.

39:48 So even there, that's a good sentiment and good sign that Q3 seasonality is maybe, I don't want to say back on track, but on the right track. And these are the moving parts we want to see.

40:03 No, I appreciate the call there, Yaniv. I mean, it sounds very optimistic in a challenging environment there. and then the automotive market. You started talking about it, Gideon, but can you talk about how many wins you have now? You have one you talked about in the press release and what the timing of potential revenue contribution there is, maybe the content per car, things like that.

40:24 You need to, as you know, in automotive, you need to take a deep breath until you go to production. I mean, we have activities ongoing with... and other customers for all the products. I think in late 2021, we'll see an initial product or another with no significance specifically for this product. If all goes well, that's 2023 mass production.

41:00 Okay, great. Thanks, guys. Ladies and gentlemen, this concludes the question and answer session. I'd like to turn the conference back over to the management team for any final remarks.

41:12 Thanks, Rocco. Thank you all for joining us today and for your continued interest in SEVA. As a reminder, the prepared remarks for this conference call are filed as an exhibit to the current report on Form 8K and accessible through the investor section of our website at investors.seva-dsp.com. With regards to upcoming events we will be participating in, these are the following virtual events that we'll attend in August and September, starting with Oppenheimer's 23rd Annual Technology, Internet, and Communications Conference, August 12th, Jeffrey Semiconductor IT, Hardware, and Communication Infrastructure Summit, September 1st and 2nd, and Citi's 2020 Global Technology Conference, September 8th, 9th, and tenth. Thank you. This concludes today's conference call.

42:03 You may now disconnect your lines and have a wonderful day.