CEVA Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 10, 2023

There are 10 speakers on the call.

Operator

Good day, and welcome to the CEVA, Inc. First Quarter 2023 Earnings Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note, today's event is being recorded.

Operator

I would now like to turn the conference over to Richard Kingston, Vice President, Market Intelligence, Investor and Public Relations. Please go ahead, sir.

Speaker 1

Thanks, Rocco. Good morning, everyone, and welcome to CEVA's Q1 2023 earnings conference call. Joining me today on the call are Amir Panooj, Chief Executive Officer and Yaniv Arieli, Chief Financial Officer of CEVA. Before handing 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 Forward looking statements include statements regarding market trends and dynamics, Opportunities for WiFi and 5 gs our market position, strategy and growth drivers, including with respect potential benefits of our acquisition of the 3 d spatial audio business from Visisonix, demand for and benefits of our technologies, Expectations and financial guidance regarding future performance, including guidance for the Q2 of 2023 and our plans for attending investor events. For information on the factors that could cause a difference in our results, Please refer to our filings with the Securities and Exchange Commission.

Speaker 1

These include consumer demand and the global economy generally, The ability of CEVA'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 technology to achieve market acceptance, The speed and extent of the expansion of the 5 gs 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 and our ability to successfully integrate Intrinsics In addition, we will 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 filings section of our Investor Relations website at investors. Cevadsp.com. With that said, I'd like to turn the call over to Amir, who will review our business performance for the quarter and provide some insight into our ongoing business. Amir?

Speaker 2

Thank you, Richard. Welcome everyone and thank you for joining us today. Our first quarter results show continuous progress in diversifying and expanding our licensing business. However, royalties were impacted by customer inventory adjustments and prolonged weak demand for smartphone and PCs. Looking at licensing in more detail, thanks to the hard work and efforts of our team, we signed 30 new licensing and NRE agreements in the quarter.

Speaker 2

We continue to have excellent traction across our wireless connectivity portfolio, in particular, where our 5 gs and Wi Fi 6 platforms Are in strong demand. Of note, 3 of the licensing agreements we signed in the quarter are of strategic significance. 1 for our DSPs, we have a leading Android smartphone OEM for their in house 5 gs modem efforts. 1 for our Penta G2 platform For Broadband IoT and 1 for our Wi Fi 6 access point IP with a global OEM, who is one of the leading providers WiFi access points and other networking devices. I will expand on these deals shortly.

Speaker 2

Other deals signed in the quarter target Bluetooth connectivity for TWS earbuds, consumer IoT and industrial devices, WiFi 6 for access points and mesh use cases, sensor fusion for robot vacuum cleaners and AI for automotiveators. In royalties, the magnitude of the decline in smartphone and PC related royalties was primarily driven by a pull in of handset in the Q4, which combined with the traditional seasonality resulted in a correction in the Q1 due to inventory buildup. Following conversation we have had with customers and others in the supply chain, we understand the demand has resumed and expect to return to more normal levels as early as the Q2. Outside of smartphone, we saw excellent growth our WiFi and cellular IoT royalties, both of which contributed all time high royalty revenue in the quarter. WiFi royalties more than doubled sequentially, thanks in part to 3 new royalty paying customers that reported WiFi 6 shipments Bluetooth also continued to perform well across the board consumer IoT markets, Where we have a large presence, while Bluetooth royalties from smartphones were affected by the correction I spoke of.

Speaker 2

Overall, Enset royalties declined 64% sequentially and 71% year over year, while base station and IoT royalties declined just 4% sequentially and 7% annually. On our last earnings call, I outlined 3 areas I identified as key growth driver for CEVA, which align with the longer term global megatrends. I want to make the opportunity now to update you on our progress in relationship in relation to this. The first is Wi Fi, where we saw excellent progress in both licensing and royalties During the Q1, in licensing, we signed 3 new customers in the quarter, bringing our total number of Wi Fi 6 licenses to more than 35. While Wi Fi 6 has achieved a high penetration rate in smartphone and PC to date, The adoption of Y6 in industrial and the broad consumer IoT markets such as TVs, set top boxes and other smart home devices It's still nascent.

Speaker 2

This is the market opportunity that many of our Wi Fi CX licensees are targeting. And following strong licensing activities among IoT devices customers in the past 2 years, we are now also engaging with customer licensing our Wi Fi 6 and 6E solutions for access points, including with the strategic customer that I mentioned earlier. This is a significant development as access points are an uncharted market for us. We have minimal exposure and traditionally dominated by the incumbent Wi Fi chipset providers. There is a strong appetite for new chipset providers to enter this market and they are able to accelerate their design activities with our industry leading Wi Fi 6 IP.

Speaker 2

These new Wi Fi chip customers include network equipment OEMs and semiconductor companies such as the global OEM I alluded to earlier. Moreover, the royalty associated with access points are higher than those from consumer IoT devices, Providing a new potentially lucrative royalty stream. And as our customer base expands, our future royalty opportunity for WiFi 6 Continue to grow. Market research firm, Technosystem Research forecast that Wi Fi 6 device shipments We'll reach 2,800,000,000 devices annually by 2027, growing at a CAGR of 25%. As we have discussed previously, we believe the market opportunities for us in WiFi 6 based on our customer design wins Is as big as Bluetooth, but with greater royalty revenue potential.

Speaker 2

Our action this quarter only serve to reinforce my belief That our Wi Fi business will be a key royalty growth contributor in the coming years. The second area I would Like to update you on is 5 gs, where we signed 2 important agreements in the quarter. The first of this is a strategic deal We're one of the world's leading Android smartphone OEMs. These OEMs license our DSPs for the first time As they begin their own in house 5 gs modem efforts aimed at reducing their reliance on the 5 gs merchant semiconductor companies. These trends of OEM designing chips for their own devices bodes very well with semiconductor IP companies like CEVA.

Speaker 2

OEMs do not have the in house capabilities to design all aspects of the chip and turn to IP licensors to get many key components of their chip, reducing the risk and allow them focus on areas of the chip where they can achieve differentiation and utilize their in house expertise. In late 2020, this OEM also licensed our Bluetooth and Wi Fi IPs, The first chips of which are expected to be in production shortly. If they are successful with their connectivity and 5 gs chips, This smartphone OEM has the potential to become a key royalty customer for CEVA in the coming years. The second 5 gs deal we signed in the quarter was for a customer looking to develop a 5 gs broadband IoT modem targeting a wide variety of end markets requiring high data throughput, low latency and large data volumes. These end markets include connected cars, wearables, smart grid, surveillance, ARVR devices, industrial automation and more.

Speaker 2

According to the latest Ericsson Mobility report, there will be more than 3,000,000,000 5 gs broadband IoT connection worldwide by the end of 2028. This is an exceptional market opportunity. These customers license our Penta G2 platform specifically designed for 5 gs, board and IoT, which would allow them to seamlessly develop their 5 gs Redcap enabled chip with reduced risk, thanks to our integrated platform offering, which provides the key building blocks of a 5 gs modem. Also at Mobile World Congress in February, We announced our most powerful and efficient DSP architecture to date, the CEVA XC20. The CEVA XC20 Addresses the massive compute requirements of 5 gs Advanced and beyond and can scale to fit customers' requirements From smartphone SoC through to the WiFi 5 gs advanced ASICs for base stations, private networks, ORAN And other wireless infrastructure.

Speaker 2

We believe there is a strong demand for new 5 gs chips across the wireless industry And among many equipment OEMs, CEVA XC20 can help to significantly lower the entry barriers for new entrants And incumbents who wish to accelerate their cheap designs for these lucrative market opportunities. The 3rd area is application software for embedded system. In addition to earnings, we also announced our acquisition of the 3 d Special Audio Business From Visisonics today, special audio is emerging as one of the most interesting areas in audio, enabling a real world audio experience Within the digital world, this is increasingly becoming a feature of headsets and TWS earbuds To ensure to enhance the user experience for watching movies, gaming, listening to music, podcasts and even conference calls. VISYSONIC has been our partner for 3 d Special Audio for the past year and we developed and joined products which combine their special audio software With our head tracking technology to deliver a complete special audio experience. This joint solution known as RealSpace It's now going into production with our 1st joint customer, both India's first hearable and wearable company.

Speaker 2

THX, the world class audio and video certification and technology company is already an existing customer, a testament to the quality of this software. Following on from the success of the collaboration with both Turning the significant opportunity for special audio across end markets, we made a decision to acquire the business And on the complete special audio software solution. Initially, with our dominant presence in TWS earbuds market Through our Bluetooth and audio DSP customers, we intend to offer headphones and earbuds OEMs the capability to seamlessly Add special audio to enhance their product lineups. We can also address the broad set of other markets where special audio is being adopted, including ARVRAR, audio conferencing, healthcare, automotive and media determinant. Market research firm, Future Market Insights, estimated 3 d Audio revenue will grow 4.1x From 2022 to 2,032, reaching nearly $31,900,000,000 in 2,032, indicative of the significant market opportunity that special audio possesses.

Speaker 2

The team is located next to our Sensofuture R and D team in Rockville, Maryland, making the integration of this team straightforward. We believe this modest acquisition Provide excellent potential to increase our application software royalty opportunity in the coming years, especially audio becomes a massive feature of wireless audio devices. In summary, despite market challenges this quarter, I believe the opportunities we have in front of us Continue to grow. We have an outstanding portfolio of wireless connectivity and smart sensing technology and have fostered stronger strong relationship around the world with leading fabless companies and OEMs. I met with a number of key customers around the world In the quarter, and I'm encouraged by their appetites to expand their relationship with us.

Speaker 2

Finally, the Visisonics Special Audio Business acquisition We announced today is an additional step in building our future strategy, bolstering our application software licensing business. Now I will turn the call over to Yaniv for the financials.

Speaker 3

Thank you, Amir, and good day to all. I'll start now to review the results of our operations for the Q1 of 2023. Revenue for the Q1 was $28,700,000 as compared to $34,400,000 for the same quarter last year. The revenue breakdown is as follows: Licensing and Arena related revenue reflecting 72% of our total revenue was $20,700,000 as compared to $22,400,000 for the Q1 of 2022. Growth in revenue, reflecting 28 percent of our total revenues was $8,000,000 as compared to $12,000,000 for the same quarter last year.

Speaker 3

Quarterly gross margin came as expected on GAAP and slightly lower non GAAP basis due to lower royalty Revenue in the quarter. Gross margin was 82% on GAAP basis and 84% on non GAAP basis compared to our 82% and 85% guidance on GAAP and non GAAP respectively. Our non GAAP quarterly gross margin excluded approximately equity based compensation expenses of $400,000 And amortization of the client intangible of $300,000 Total GAAP operating expenses for the Q1 was above The high end of our guidance at $28,200,000 due to the timing of the Israeli Innovation Authority grants received, Lower allocation of intrinsic NRE cost from NRD NRE to the cost of revenues and higher professional fees. Total non GAAP operating expenses for the Q1, excluded equity based compensation expense and amortizations of intangibles and hold back were $24,100,000 also above the high end of the guidance due to the same reasons I just explained. GAAP operating profit loss for the quarter was $4,800,000 down from GAAP operating $500,000 in the same quarter a year ago.

Speaker 3

GAAP quarterly operating profit included equity based compensation of $3,900,000 the impact of amortization of $700,000 associated with the acquisition of Intrinsics and Hillcrest A business of $300,000 associated with the Intrinsics acquisition. Our non GAAP operating profit was $100,000 lower than the Q1 of 2022 of $5,500,000 expenses were $1,400,000 mainly associated to withholding tax deducted by our customers that could not be utilized and were expensed. And our GAAP loss was $4,900,000 and diluted loss per share was $0.21 for the Q1 of 2023 compared to a net loss of $1,700,000 and diluted loss per share of $0.07 for the Q1 of 2022. With respect to other related data, Shipped units by CEVA licensees during the Q1 were 297,000,000 units As compared to the Q4 of 2022 reported shipments of 375,000,000 units, primarily for the following reasons Amir discussed earlier. Of the 297,000,000 units reported, 27 1,000,000 units or 9% were for handset baseband chips.

Speaker 3

Our base station IoT product shipments $270,000,000 units as compared to $308,000,000 for the Q4 of 2022 and 531,000,000 units for the Q1 of 2022. Lulu shipments were 190,000,000 units in the quarter as compared to 220,000,000 units for the Q4 of 2022, mainly due to lower shipments from Bluetooth smartphone customers associated with the inventory correction. Cellular IoT units were 19% up sequentially to an all time record high of 29,000,000 units. WiFi shipments were 21,000,000 units as compared to 37,000,000 for the Q4 of 2022. However, we're encouraged by the Wi Fi product mix as it starts to shift towards Wi Fi 6, which commands a higher average selling price, resulting in higher royalties.

Speaker 3

This positive trend reflects the long term Wi Fi royalty opportunity for us. Other shipments, other under the base station IoT umbrella Totaled 30,000,000 units for the quarter. This includes our computer vision, AI, audio, sensor fusion, 5 gs RAM And DSPs for non cellular communications. As Amir stated, Both Wi Fi and cellular IoT contributed all time record high in this category for royalty revenues in the quarter. WiFi royalties more than doubled from the last quarter, thanks in part to 3 new royalty paying As of the balance sheet items, at the end of the quarter, our cash, cash equivalents, balances, marketable and bank deposit were approximately $145,000,000 Our DSOs for the 1st quarter increased to 69 days from 34 days in the prior quarter.

Speaker 3

During the quarter, we used $5,100,000 Cash from operation activities, ongoing depreciation and amortization were $1,400,000 and the purchase of fixed asset was $100,000 At the end of the Q1, our headcount was 4.97 people, of whom 413 were engineers. This is up from a total of 4.87 people at the end of 2022. Now turning to our outlook. As Amir discussed, The smartphone and PC markets continue to experience soft demand. However, within the handset And base station customer mix, we expect strong ship shipments recovery in the 2nd quarter.

Speaker 3

Our licensing and REIN related revenue business continue to generate customer traction across our diversified portfolio. In royalties, with several new customers that recently started production and with the expectation for a meaningful Higher shipment volumes of our handset and base station customers in the 2nd quarter, We forecast sequentially higher royalties. Also, the strength of our wireless connectivity markets and customers We'll continue throughout the year. In light of the macroeconomic environment, We continue to monitor our expenses closely and we'll take all appropriate steps as we see fit. In this regard, we're currently planning for non GAAP OpEx to be slightly lower than the 1st quarter level in each level of approximately 82% on GAAP basis and slightly higher sequentially on non GAAP basis to 85%, excluding an aggregated base compensation expense of $400,000 $300,000 for amortization Of intangibles.

Speaker 3

OpEx for the 2nd quarter is expected to be flattish with the 1st quarter and in the range of $27,700,000 to $28,700,000 excluding an Expected $4,100,000 of equity based compensation, dollars 200,000 for Intrinsics holdback related expenses and $300,000 for amortizations of acquired intangibles. Our non GAAP OpEx is expected to be slightly lower than the Q1 in the range of 23.1 to 24.1. Net interest income is expected to be approximately $700,000 Taxes for the 2nd quarter is Expected to be flattish at $1,400,000 again, derived mainly from withholding taxes And the share count for the Q2 is expected to be approximately 24,400,000 shares. And Rocco, we could now open the Q and A session, please.

Operator

Thank Today's first question comes from Matt Ramsay with

Speaker 4

I guess in the short term, Amir, I just want to see if I can characterize this correctly. It seems to me that All the long term business trends are the way that you guys hope they would be and the licensing momentum diversifying and very strong, but There were just a couple of inventory corrections. 1 in China handset modems with the well known weakness there with Your sort of large customer in China and the other one in Bluetooth in Scandinavia. Is that really all that's gone on here in the term that affected royalties and everything else is kind of, I don't know, running as expected on the broader business?

Speaker 2

Yes. Thanks for the question. I will say in high level, this is very correct, but I will add a little bit more color on a few things just to make sure this is clear. So first, In terms of the overall trends, as you pointed out, we are very, very encouraged by the type of deals that and licenses that we got this quarter, Some of them will drive very strong long term royalty potential for us and continue great momentum for our Wi Fi and 5 gs opportunities overall. In terms of the royalty this quarter, definitely, as you pointed out that with that one key customers in China, The corrections in the smartphone and specifically in Q1, we expect meaningful and strong recovery Sequentially from Q1 to Q2 in regards to that one specifically.

Speaker 2

And then I would Say about Bluetooth, it's really to the most part the impact from the same smartphone impact of the Bluetooth. If we look at our Bluetooth outside that, It actually has been very solid and continue with the trend. And on top of that, of course, what we mentioned about Wi Fi and Narrowband IoT, All time high and we see basically the continued growth of these technologies with more companies are basically shipping our products.

Speaker 4

Got it. No, that's really helpful. And I'm sure that stuff will just work its way through the system. We're Noticing that with many of your peer companies in the ecosystem as well. For my follow-up question, I wanted to change gears a little bit and Talk about some M and A that's happened in and around your company and by your company.

Speaker 4

I think the first one is, as you guys announced the Visiononics deal Today alongside of the earnings and I wonder if you might expand on the technologies, the people a little bit more and what your plans are for that business. On the flip side, I did notice that one of your customers A particularly interesting area around automotive called AutoTox was acquired by Qualcomm and I believe that is an important licensee for CEVA. And The Qualcomm guys, it's a small deal, a tuck in for them, and they've not said too much about what they plan to do with it. But if you could talk a little bit about what the

Speaker 2

Yes. So first on the Visiononics deal, as I mentioned in the prepared remarks, Basically, 3 pillars of growth that I've highlighted, the Wi Fi, the 5 gs and software embedded application. We have Already licensed to some of those customers and some OEMs, our sensor fusion. And With VISASonic, we basically combined into a complete 3 d special audio solution. What we've seen in the market for TWS, earbuds and so on, really very strong demand for 3 d special audio.

Speaker 2

We see it as one of key emerging technology for that space. And with this technology, which is really state of the art for those type of capabilities, We are looking to expand it significantly into additional customer base. We recently announced basically The customers bought as licensing this technology and now we can offer that as a complete solution. Also from integration point of view, this is so Seamless integration as both the location and the technology and the roadmap that we have worked together It's already in place, and we'll basically continue that as a one team. And then the last piece on that, I would say, it's also going to be accretive As a non GAAP within 2023.

Speaker 2

So all along, we see it as a great deal to keep expanding our software embedded application technologies And be able to provide more innovation and differentiation to our OEM customers in the ecosystem. In terms of the other deal,

Speaker 3

Yes, please. Sure. So we have a long relationship in history with the AutoTalk. This is the benefit of being an IP company. You could have Help the small ones that don't have the capabilities, especially around cellular and communication, which is quite complex to come up with an interesting product and later on to be acquired by the top giants and the leaders in the space.

Speaker 3

So obviously, we know them and help them out from day 1 as a young startup with the communication Scale is a technology that we brought. They're already starting to ship products last year, and we got the initial royalty reports from them. So in this market, when a bigger company acquires you as a customer, first you start a relationship and it needs to Bypass or work with you on the way to integrating the product and getting the rights. So that's an interesting opportunity for us. And we'll see where it takes us to the next step.

Speaker 3

It would be nice to be in their product line in the future. And if not, this is part of the startup world and part of Our add ons as an IP company to help the smaller companies. And sometimes we Make and build the relationship with the bigger companies and continue with them and show them and give them other products that we can in the future. And sometimes it ends with at least in the near term some nicer royalty opportunity for us coming from a bigger company.

Speaker 2

And I would add on that is that in the past, again, when people thought about 3 gs, 4 gs and 5 gs, the It's 5 gs really paying to the table, right? And this is a great example when we have innovators in the market To come with the new use cases and technology that 5 gs enables. And then from there, basically to help expand for us the warranty base and technology And the innovation to be deployed in the marketplace. So vehicle to infrastructure, vehicle to vehicle so called V2X a great technology that we believe will expand nicely in the markets in the future years. And we believe there are also many other 5 gs use cases and opportunities For us to enable in the market and expand the technology in the business.

Speaker 4

Thank you very much guys for the detail. Really appreciate it.

Speaker 3

Thank you, Matt. Thank you.

Operator

And our next question today comes from Kevin Cassidy of Rosenblatt Securities. Please go ahead.

Speaker 5

Yes. Thanks for taking my question. On the just to follow-up on the 5 gs modem application, will that include millimeter wave?

Speaker 2

Which data of Slack do you mean?

Speaker 3

In general, the offering or the specific customer?

Speaker 5

Yes, this specific customer.

Speaker 3

I guess

Speaker 2

It's the other talks, which is Yes. About other talks you're asking? Yes.

Speaker 3

I think so.

Speaker 5

Yes. Whether it's going to be just the sub 6 gs or is it

Speaker 2

Yes. I would say we provide the SP6. Yes. I would say, in general, we provide the DSP as quite agnostic, so called to the radio technology. And our customers basically tune into their needs.

Speaker 2

Specifically about their product releases and plans, I will defer that As they announce more about their product releases.

Speaker 5

Okay. I understand. It's up to the customer. And on the ASP increase with Wi Fi 6, I guess I'm just trying to gauge how large that market can be for you. And does it double your TAM?

Speaker 5

And if the units stay the same or do you see Wi Fi 6 units far exceeding previous generations?

Speaker 3

That's a great question, Kevin. So the 2 there are 2 aspects here, maybe even 3. 1 is the volume. Last year, We managed to power 1,000,000,000 Bluetooth devices, and we only started to ramp up our Wi Fi. It was just shy of 200,000,000 I believe.

Speaker 3

There's no reason that the volumes of Wi Fi shouldn't reach over a short period of time. The Bluetooth type of volumes Or even surpass that as they go along because of the use cases, the much wider use cases that Wi Fi has. That's why. So the volume is a big push for us and we saw the new customers, 3 out of 35 customers that have licensed Wi Fi So the potential with volumes from existing and new customer is the answer of why those volumes should increase. 2nd ASP because of the use cases that the Wi Fi Sysco is in, our higher end, our industrial, Our medical or lots of other devices that ASPs overall of the chips and the solution is higher, then we get A larger portion, it could be 2x or 3x of what we're getting from a Bluetooth device and those are the ratios of the chip prices.

Speaker 3

And number 3, a lot of our customers are combo customers that want both Wi Fi and Bluetooth today or in the future. And therefore, the overall added value for us and ASP is higher if we could provide 2 technologies and charge for 2 instead of the ones. We have a lot of very good aspects working in our favor and it's a significant very short term opportunity. Look at the numbers from Q4 to Q1 with all the inventory issues and all the slowdown that we are reading and seeing, we have doubled Our Wi Fi revenue from Q4 to Q1 this year in dollars.

Speaker 2

I would add to that, there is basically as you look at the so called there is There's so I would call it a simple client Wi Fi and there was now we are going through the upgrades from Wi Fi 4 to Wi Fi 6 that on its own. Of course, in general speaking, the semis in the market, the value of a Wi Fi solution is higher than Bluetooth. And then on top of that, what you have is the more complicated enhanced throughput Wi Fi 6 client. And then on top of that, you have the Wi Fi 6 Access point that we are just now basically are going to start ramping more and more. And I would say as The market typically the different fighting in the market for those solution as a silicon solution out there, you can draw basically analysis of Our potential from an ASP point of view, but it's meaningfully and very significantly above what you would expect on average from a Bluetooth solution On a mixed

Speaker 6

basis. Okay, great. Thank you

Speaker 5

for those answers. And just a quick question on the acquisition. Does this include engineers?

Speaker 2

Yes. This includes a small number of engineers that basically located in the same And they will join us immediately after the close.

Speaker 6

Okay, great. Thank you.

Speaker 3

Thank you.

Operator

Thank you. And our next question today comes from Martin Yang at Oppenheimer. Please go ahead.

Speaker 7

Hi, good morning and good afternoon. Thank you for taking the question. My first question on spatial audio is, maybe And give us more details to help us understand the competitive dynamics in that market. Who are we competing with and where are the competitors Positions in terms of market verticals.

Speaker 3

Competitive dynamics. I

Speaker 1

can take that, sure. Hi, Magnus. Richard here. So when you look at the spatial audio market, we're still it's pretty nascent and we're still in the beginnings of it. In the smartphone space, it is really Apple That's seated the market and they have their own internal solution.

Speaker 1

Obviously, Dolby is playing there as well with some other players, but really The difference between what we're bringing to market here versus what these other guys are is normally you have to have a link between the handset and the earphones. They both have to have technology In order to make this work, with the solution that we're bringing to market for spatial audio with BusySonics, this is only on one side. So it's only in the headset. Don't need any particular codecs or any particular software on the handset for this to work. And this is a game changer for the We'd say the low to mid end of the earbuds and headset market where today spatial audio is not really playing.

Speaker 1

So when we think about the opportunity, there's probably 400,000,000 mid range TWS headsets a year. You've got the gaming headsets and all these other opportunities there Where we feel there's a very good opportunity for us to double down on our strong presence in the handset sorry, in the headset market that we already have today. We know the customers, we know the industry there and we can take the spatial audio solution into these markets, the much broader mid range and lower range of the market and Address it with the spatial audio solution that we have, something that today is not really available or there. So that's our focal point and target. It's not so much competing With Dolby and Apple at the higher end of things, it's going for the mass market option here.

Speaker 2

The other thing to enhance on what Richard said is that What's unique also about our technology is really to develop that such that it can get into a very small form factor, Very optimized in terms of size and power, which really can enable these use cases to penetrate more and more the mid and the low end markets of the TWS,

Operator

Thank you. And ladies and gentlemen, our next question today comes from Suji Desilva at ROTH MKM. Please go ahead.

Speaker 6

Hi, Amir. Hey, Nav. So on WiFi 6, it's good to see that coming out of the gate. What do you expect to be the pace of unit adoption here relative to other Wi Fi standards in the past and what end markets are initially driving the Wi Fi 6 units?

Speaker 2

I would say Wi Fi 6, the replacements from Wi Fi 4 To WiFi 6 is very, very strong. So we definitely see it first on the client side. And I would say in the consumer, it started 1st in smartphones and PCs and now it's propagating so called to the old IoT consumer clients devices around us. And then from there, of course, more and more penetrating the access point field as well.

Speaker 3

And the pace, again, I'm not sure if we could continue We're doubling like we did from Q4 to Q1, but the pace no doubt should be now with more players starting to really Ship Wi Fi 6, the first ones that have joined the team and the potential, as I said earlier, from 35 customers It's quite big. We think it's going to be one of the faster growth driver for us this year when looking at all the different segments and Product lines, yes.

Speaker 2

And overall, I would say the expectation in terms of the transition. If we look at the history of Wi Fi, right, the fastest and the strongest transition was from G211 and back then in terms of performance and capabilities. And now it's basically into 11ax and Wi Fi 6, right? So this is really The biggest one in the last few years in terms of transition of Wi Fi technology, and we are well, well established right now across the ecosystem We have our IP embedded into our customer product line. So I would expect it to really grow very, very nicely Through the years and continuing through 2024 2025.

Speaker 6

Good. It sounds like you're well positioned there. And my second question is on the acquisition. It seems to be a software licensing model. Can you just remind us how many products you guys have now that are software licensing versus typical license royalty?

Speaker 6

And What percent of revenue could that be as a mix part of the mix in 1 to 2 years as part of your strategic plan?

Speaker 3

Great question. Thank you, Suji. And this brings us back to what we talked about even last earnings call of the 3 pillars of growth for us. One of them was embedded software. We started up 3 years ago, to remind you, with the Hillcrest The acquisition, Sensor Fusion, we got into TVs, laptop, vacuum cleaners.

Speaker 3

Electronic hands, yes, correct. So this is how it started. We added in the last 2 or 3 years, different audio 2 different audio solution. And now this is probably the 4th, if I'm counting, just the standalone Pieces of software embedded software that we are licensing, trying to target sometimes the OEMs, The value there and the proposition is much higher both for us and as a differentiator for the OEMs. And it's worked extremely well, very high margins of that.

Speaker 3

We have doubled the revenues of some of those aspects when we 3 years ago, acquired and got into the business. And on top of that, we're also starting to add AI software packages on top of the processor and the solution itself. So I'm not sure if I have a number as a percentage of revenue, but for sure this is one of the Strategic avenues for us to go after. I think we know how to run these types of businesses and this recent acquisition from today Enforces that.

Speaker 6

Okay. All right. Thanks, guys.

Speaker 3

Thank you.

Operator

Today's next question comes from Chris Reimer of Barclays. Please go ahead.

Speaker 8

Hi, thanks for taking my questions. Actually, most of Your topics have already been addressed. Just one touching on China, have you seen any Changes in the dynamics there may be impacting the reopening. And when you mentioned that demand has resumed, Are you talking about that area? Or are you talking about in general?

Speaker 3

Thanks for that, Chris. It's good to emphasize that A lot of our business and customers in China are well known chip vendors to Top guys are OEMs around the world, all over the world and they in most cases ship Mainly outside of Mainland China. So the manufacturing, the design is there, but the Goes out to the emerging economies and India and other large countries for the low and mid range phones. So When we talk about demand, it's not necessarily for Mainland China, but throughout the world and all the different segments, I We have mentioned and we talked about earlier.

Speaker 2

I would add also that the reduction that we've seen This quarter is from the handsets market and our key customers there. I would say in terms of we already see Indication of restocking that started in March and will continue through April and now beyond it. So overall, We are quite confident or very confident that basically we'll see a sequential recovery quarter over quarter. And again, the demand It's global demand and specifically also in the different emerging markets where our customers serve quite strongly. We start seeing a stronger recovery and restocking of the inventory.

Speaker 3

By the way, I may add one thing that we didn't talk about. If you ask about the licensing and not the royalty or we move to the licensing, we see no slowdown whatsoever in China. There's still good demand for technology development And didn't see any really change in the last two quarters coming from China. One of the interesting changes that we have seen globally Is coming from Europe and this is a lot of new money coming from governments of the EU to develop They're semiconductor company and the markets and this is a brand new opportunity for CEVA as being an IP company and we talked about is one of the nice example, but there are many, many others as soon as money flows in. We've seen the trend in China for the last decade.

Speaker 3

The U. S. Has started with their ChipEx and we see a lot of potential there for us. And last but not least, maybe 2 or 3 weeks ago was this new On the trend of investments in Europe and we are there to try to make the best of it. So from a licensing perspective, The contract, there's a lot of money that's being put in around the world to do the ARM chip designs.

Speaker 3

And the IP model fits exactly that avenue.

Speaker 8

Great. Thanks for the color. That's it for me.

Speaker 3

Thank you.

Operator

Thank you. And our next question comes from David O'Connor at Exane BNP Paribas. Please go ahead.

Speaker 9

Great. Thanks for taking my questions. Maybe Yaniv, on the topic of licensing, following on from your commentary there, Any reason that you can't get back to year to year growth this year on licensing? And then on royalties, Maybe also for you, Yaniv. Any additional color on the kind of how we should think about the year over year growth on royalties?

Speaker 9

That Q over Q recovery talked about how strong is that going to be and sustain the rest of the year? Thanks.

Speaker 3

Yes, sure. You won't be mad at me if I restate the first question. I don't see a drop in the licensing. We do see a drop in the royalties and we explained why. In licensing, as we know this business and have been in this business for a long time, dollars 1,000,000 Up or down, doesn't change the trends, it doesn't change the outlook or anything around that.

Speaker 3

So yes, maybe we're a little bit Short of the typical 21 to 22 ish, but it's not nothing That we are concerned about and nothing that has changed. And we mentioned specifically the quality of the deals in Q1. And this is not We can't say that in every quarter because sometimes we license to startups and we have no idea how successful and when they'll come up with a product and if the product will go into mass Market, the design wins that we have licensed and Amir talked about this earlier in Q1 could get us to Single double digit royalty contribution annually from those deals. So from a licensing, I don't see a problem. On the royalty front, Q1 was an anomaly.

Speaker 3

We understand in the high side why the handset market It did take a beating as you said and the numbers did drop there. We think it's a short term and we talked about the correction into the second quarter. When you look at the rest of the business and what has been growing at CEVA for the last couple of years dramatically, and this is the base station and IoT royalties, There was only a 4% sequential decrease from Q4 and Q1. And even if I compare it to last year's Q1, And obviously, it's a different environment to many companies and the demand and inventory levels are different. We're only down 7% and some of the internal Markets there like Wi Fi and Cellular IoT did extremely well.

Speaker 3

So we think those trends will continue throughout the year. We believe that the 2nd quarter should be sequentially higher with high magnitude, maybe not to the same norm We were used to a year ago in handset, but they should start correcting themselves nicely in the second quarter. Could we make up the loss of the handset royalties in the Q1 throughout the year? That's the question that we It's harder for us to answer. We don't usually give guidance on royalties because we don't have the insight of exactly how much each customer could ship And when?

Speaker 3

And we have never done that. And I don't think we are changing our methodology because nothing has happened there. We don't get the royalty reports ahead of time from the OEMs. But the trends of Wi Fi 6, higher ASPs, multiple products, more embedded software that It also possesses higher ASPs. And the ramp up in some of these end markets that we talked about, And that's something that we are very positive and do believe that they will continue.

Speaker 3

We've seen that growth also happening in Q1. So trying to answer The different side of your question, hopefully, I didn't miss anything.

Speaker 9

No, that's super helpful. Thank you, Yaniv. And maybe just one follow on from on the strategic agreement with the Chinese OEM and 5 gs Smart Homes. So they're coming to market now with their Bluetooth and Wi Fi chip that they licensed from you guys 3 years ago, how meaningful is that going to be this year? And is that kind of 3 year timeframe about right how we should think about them to come to market with a 5 gs modem?

Speaker 9

Thank you.

Speaker 6

Yes, sure, sure.

Speaker 2

In regards to the Wi Fi Bluetooth, again, we expect production to start this year. The exact magnitude, it's hard to know because it depends The level of penetration, they will use this technology across their product line and how they will propagate it there. So I would say the significant portion of that The upside will come toward the second half of the year and the next year. In terms of their deployment of the so called the 5 gs solution, I would say it's I wouldn't say 3 years, but probably in the range of 2025, as we see it today.

Speaker 6

Very helpful. Thanks, guys.

Speaker 2

Welcome. Thank you.

Operator

Thank you. And our final question today comes from Martin Yang at Oppenheimer. Please go ahead.

Speaker 7

Thanks. I have just one follow-up regarding spatial audio. Is it right to assume that RealSpace technology always integrates with

Speaker 3

Yes, Richard.

Speaker 1

Yes. Sure. So yes, it's You can do spatial audio with or without head tracking, but it's much more effective with head tracking. So the solution that we offer into the market Is Hillcrest Sensor Fusion integrated with the RealSpace into a single product, which we will call RealSpace going forward? So that's The technology, it's much more attractive to OEMs that way.

Speaker 1

It gives a much better spatial audio experience, and that's the avenue we're going

Speaker 3

With that said Martin, with that said, part of the acquisition was also to bring on THX, a well known audio Solution provider, this is a Visonix customer and our CEVA customer and they have used the Visonix standalone solution in their use cases. So as Richard said, it could go both ways, but we also already have customers in production, Both in India and in the U. S. With this technology and in these two avenues, 1 on a standalone basis and the second with This is Eva Hillcrest Technology.

Speaker 2

Eva, I will add on top of that with Jessel's comments. Generally speaking, again, if there are OEMs that would like to See some portion of our technology and that would make sense where we can definitely support it. But the real value of the technology and that's why strategically also a technology point of view, we decided to go ahead is that we have a best in class sensor fusion technology that is really, I wouldn't say massive, but very, very important components to make 3 d special audio a good solution. Business Sonic brings really great algos and capabilities On the audio domain related to that and as you combine these 2 together, it's that brings to bear basically a Top notch 3 d special audio solution. And as I mentioned previously, it's also the way that we combine it into embedded cord that is small in size And very low power.

Speaker 2

It's a great, great fit to the TWS market and to help penetrate these features from the top tier all the way to the mid and low tier of that market.

Speaker 7

Thank you, Amit. Yes, sure.

Operator

Thank you. Ladies and gentlemen, this concludes our question and answer session. I'd like to turn the conference over to Richard Kingston for closing remarks.

Speaker 1

Thanks, Rocco. Thank you everyone for joining us today and for your continued interest in CEVA. As a reminder, the prepared remarks for this conference call are filed as an exhibit to the current report on Form 8 ks and accessible through the Investors section of our website. With regards to upcoming events, we will be participating in the following conferences: the TD Cowen Israel Investor Trip on May 16 in Israel Oppenheimer's 24th Annual Israeli Conference, May 21st in Israel and Cowen's 51st Annual TNT Conference, May 31st June 1st in New York. Further information on these events and all events we will be participating in can be found on the Investors section of our website.

Speaker 1

Thank you and goodbye.

Operator

Thank you, sir. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.

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Earnings Conference Call
CEVA Q1 2023
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