CEVA, Inc.
Q4 2010 Earnings Call Transcript
Published:
- Operator:
- Good morning. My name is Jackie and I will be your conference operator today. At this time we would like to welcome everyone to the CEVA fourth quarter 2010 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks there will be a question and answer session. If you would like to ask a question during this time simply press star then number 1 on your telephone keypad. If you would like to withdraw your question press the pound key. Thank you. I would now like to turn the conference over to Mr. Richard Kingston, Director of Marketing and Investor Relations. Mr. Kingston, please go ahead.
- Richard Kingston:
- Thank you and good morning everyone. Welcome to CEVA’s fourth quarter 2010 earnings conference call. This conference call will be conducted by Gideon Wertheizer, Chief Executive Officer of CEVA, Yaniv Arieli, Chief Financial Officer of CEVA, and I, Richard Kingston, Director of Marketing and Investor Relations. Gideon will cover the business aspects and the highlights of the quarter, followed by Yaniv, who will cover the financial results for the fourth quarter and annual 2010. Yaniv further will provide financial guidance for the first quarter of fiscal 2011. I will start with forward-looking statements. Today’s conference call 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. Forward-looking statements include financial guidance for the first quarter and fiscal 2011, market data from AVR Research, iSupply, Shandem semiconductor industry and strategy analytic incorporated herein, optimism about our customer’s product pipelines and market penetration and such impact on our future revenues, including our customers in the Chinese local OEM market and mobile broadband device markets, optimism about the continued growth in the handset markets including LTE, 2-G and 4-G spaces, opportunities in the wireless infrastructure, HD audio and video, networking and machine-to-machine products and our ability to generate revenue from these new products and technologies. The risks, uncertainties and assumptions include the ability of the CEVA DSP cores and other technologies 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 products incorporating our technologies to achieve market acceptance, the effect of intense industry competition and consolidation, the possibility that markets for our technologies may not develop as expected or that products incorporating our technology do not achieve market acceptance, our ability to timely and successfully develop and introduce new technologies and general market conditions and other risks relating to our business including but not limited to those that are described from time to time in our SEC filings. CEVA assumes no obligation to update any forward-looking statements or information, which speak as of their respective dates. With that said, I would now like to turn the call over to Gideon.
- Gideon Wertheizer:
- Thanks Richard. Good morning everyone and thank you for joining us today. I hope you had the opportunity to go through our press release with the financial results for the fourth quarter and fiscal 2010. Our revenue for the fourth quarter was $13 million, which was at the high end of our guidance range. We started (out with a vision of our client outlook during our third quarter earnings cycle). This (reflects) a record high and a 28% increase compared to the fourth quarter of 2009 and a 22% sequential increase. Royalty revenue for the fourth quarter of 2010 was also an all time high of $7.5 million, representing a 55% increase over the fourth quarter of the year before and a 43% sequential increase. Operating margin reached 33% on a (non-GAAP) basis compared to 22% last year, which also represents a record high. Fourth quarter non-GAAP EPS increased 73%, which was a substantial increase when compared to the same period in 2009 and reached a record high of 19 cents. During the fourth quarter we completed five new license agreements. All the agreements were for our CEVA DSP cores, platforms and software and one agreement was for our Bluetooth application. Geographically, three of the license agreements were in the US and two were in Asia. Target applications for the licenses concluded during the quarter are primarily 3-G and 4-G based on processors for handsets, cell phone cells and low power medical devices. The fourth quarter was by far the strongest quarter CEVA ever recorded in its eight-year history. It’s primarily the result from a strong momentum in the shipment of cellular based processors enabled by our DSP that are now widely deployed across all market segments, from intra-local ports and feature ports. Targeted developing economies to high end smart phones and newer logic devices such as tablets, data storage and machine to machine equipment. On the licensing front we continue to increase our strategic customer base, which plans to use our advanced DSP for mass deployment of 4-G handsets, data cards, tablets and for new categories of smaller size microcells and to increase mobile broadband capacity and improve indoor voice quality. These strategic engagements will fuel our future royalty streams. Now let me take a moment and provide a few key highlights regarding 2010 accomplishments. 2010 was an outstanding year for CEVA. Our royalty revenues grew substantially to a record of nearly $23 million, a 41% increase (unintelligible). We achieved new records in earnings and positive cash flow generation as well. Our non-GAAP EPS and net income grew 33% and 46% respectively and our non-GAAP operating income grew 52%. We generated $30 million of free cash flow and bought back approximately 140,000 shares of our common stock for a contribution of approximately $1.6 million. Also, during 2010 we announced a new share buy back program of up to 2 million shares. Our CEVA DSP architecture set a competitive benchmark for 4-G (based on) licenses. We have already signed 11 4-G related licenses, among which are Intel and two tier-one health food makers. Our later DSP called the CEVA-XC 323 will enable us to leverage opportunities in the large and lucrative wireless infrastructure markets including cell to call, pick up cell and micro cell. To provide some context of the potential market opportunity (KIBI researched) more than 4 billion people will have access to 4-G technologies in 2015. This is double the amount of people that are connected today to 3-G. Our initiative to expand our presence in new and under penetrated markets are beginning to bear fruit as we recently extended our market reach to include two additional and sizable segments. The first is modern global with products such as tablets, e-books and USB data cards. Strategy analytics believe that more than 4.3 billion non-(unintelligible) - will be in place in 2020. The second segment is Chinese audience who specialize in local support for emerging markets. It is allowed strategic, untapped market for us that until recently was dominated by media. Strategy analytics (recently shipped) nearly 200 million units in the first half of 2010. However, (unintelligible) - are now becoming notable players, which directly benefit CEVA with their (own customer base). All in all, with the addition of the above market segments to our traditional healthcare market, our addressable market becomes significantly larger. Our strategy analytics in the first three quarters of 2010, there were 1.4 billion units shipped in this space. Looking beyond cellular we have also made significant progress with our home entertainment product line, particularly high definition audio. Earlier in January we announced a new DSP, the TeakLite III 3211. This product targets the performance demanded by HD audio users in digital TV, Blue-Ray DVD, satellite boxes and the like. iSupply estimated more than 178 million LCD TVs were sold in 2010, a 40% increase versus 2009. While 16 million Blue-Ray players were shipped in 2010, an 82% jump versus 2009. Let me now go through relevant market data and customer profiles. According to strategy analytics approximately 498 million baseband chips will ship in the first quarter of 2010. This figure will include both handset and non-handset products such as tablets, e-books, data dockets and the like. CEVA’s customer base shipped 178 million units during the third quarter of 2010, reflecting a 36% market share. Please note that we report our royalty revenue one quarter in arrears so royalty revenue we report on this call actually relates to the third quarter of 2010 shipments. Strategy analytics market data also includes shipments by Chinese OEMs who specialize in manufacturing local feature port for the sizable market in emerging economies. As I mentioned, we are experiencing a substantial growth in this stage, distribution designed by our customers while taking market share (unintelligible) - the dominant player who until recently maintained between 85-90% share of this market. We also announced this morning a very significant milestone for CEVA that reflects the strong momentum behind the growth of our DSP cores in the wireless industry. Shipments of baseband chips (unintelligible) - the traditional leaders, (QUALCOMM), Indiatech and Texas Instruments (will make) CEVA the world number one DSP architecture deployed in baseband chips. This has been a goal of ours for many years. We are very pleased to have achieved it and strive to build on this leadership. (Dot Com) in its recently analyst day disclosed that it’s ramping up production of edge platforms at Nokia and (Centron) in 3-G (unintelligible). These products are all based on CEVA technology. (Dot Com) also strengthened its 4-G technology base by acquiring (Vision) to use our CEVA (C engine) for (unintelligible). In the (unintelligible) - (Dot Com) acquired (Turcell) which also bases its products on our DSP. (NYSE
- Yaniv Arieli:
- Thank you Gideon. I will now review the results of our operations for the fourth quarter of 2010. Revenue for the fourth quarter was $13 million, at the high end of our guidance range and 28% higher than the fourth quarter of 2009. The revenue break down is as follows. Licensing revenue was $4.6 million, reflecting 35% of our total revenues, 2% lower than the fourth quarter of 2009 in which we recorded $4.7 million. Royalty revenue was $7-1/2 million, a fifth sequential record high, reflecting 58% of total revenue and 55% higher than the fourth quarter of 2009. Service revenue was $0.9 million, which accounted for 7% of our total revenues, up 38% when compared with the fourth quarter of last year. Quarterly gross margin was 91% on a US GAAP basis and 92% on a non-GAAP basis compared to 91% for both for the fourth quarter of last year. As for the quarter’s operating expenses, research and development expense was $4.7 million for the quarter including approximately 160,000 of equity based compensation expenses. Sales and marketing costs were $2.1 million including approximately $80,000 of equity based compensation expense. Our G&A costs were $1.4 million including approximately $207,000 of equity based compensation expense. Our total operating expense for the quarter were $8.1 million, which included an aggregated equity based compensation expense of approximately $450,0000, approximately 4% higher than the operating expense levels for the fourth quarter of 2009. Our total operating expenses for the fourth quarter excluding equity based compensation expense were $7.7 million, reflecting the mid to upper range of our guidance and approximately 8% higher than the operating expense levels for the fourth quarter of ’09. The higher OpEx is primarily associated with higher sales commission expense due to higher fourth quarter revenue and higher research and development expenses in 2010. Our US GAAP operating margins for the fourth quarter of 2010 almost doubled to a record high of 29% of sales from only 15% for the same quarter in ’09. Our non-GAAP operating margins for the fourth quarter excluding equity based compensation expenses increased 50% to a record 43% from 22% of sales for the fourth quarter of 2010 and 2009 respectively. Interest and other income for the fourth quarter was about $504,000, in line with the prior quarter. On the tax front, we recorded the quarterly tax expense of $64,000 on a US GAAP basis and a tax expense of $406,000 on a non-GAAP pre-tax income basis. Tax law carry backs, which allowed us to reduce taxes already paid in previous years as well as tax planning strategy to better utilize certain deferred tax assets, enabled us to reduce our tax charges for this quarter. US GAAP net income for the quarter improved 45% to $4.2 million and fully diluted net income per share increased 29% to 18 cents. This compares to $2.9 million and 14 cents respectively for the fourth quarter of ’09. Our non-GAAP net income increased by 82% to $4.3 million compared to the same period in the prior year, an overall record high. Non-GAAP fully diluted net income per share increased 73% to an all time record high of 19 cents per share compared to the same quarter or the same period in the prior year. These figures include approximately half a million dollars and $700,000 of equity based compensation expenses for the fourth quarter of 2010 and ’09 respectively. On an annual basis our total annual revenue increased 17% with the royalty revenue being the driving force behind the increase and representing annual 41% growth on a year over year basis. CEVA’s non-GAAP earning metrics recorded best every figures of 27% operating income, a 52% increase on a year over year basis. Record net income was $12.7 million, a 46% increase on a year over year basis. And fully diluted EPS of 56 cents, a 33% growth on a year over year basis. As for other related data, shipped units by CEVA licensees during the third quarter of 2010 were a record 222 million units, up 73% and 57% for the fourth quarter of ’09 and the third quarter of 2010 respectively. Of the 222 million units shipped, 178 million units or approximately 80% were for baseband chips and reflect significantly higher volume as compared to the prior quarter in which 106 million units of handsets and non-handset basebands were shipped. This ramp up was driven by the shipment of a large volume of featured phones especially targeted to the emerging economies as well as the shipment of mobile broadband devices. Also, of the 222 million units shipped in the third quarter 199 million units were attributed to licensees currently paying per unit royalties and 23 million units were shipped by licensees who are under prepaid arrangements. This compares to 141 million units shipped during the third quarter of 2010 of which 123 million units were attributed to per unit royalties and 18 million units were attributed to the prepaid arrangements. As you recall, we stated in the prior earnings call that this would be the last quarter in which we would provide prepaid data as all but one customer exhausted their prepaid status and will start to pay royalties on a quarterly basis starting with the first quarter of 2011. As of December 31, 2010 29 licenses were shipping products incorporating our technologies, two higher compared to the previous quarter. This increase is attributable to two new customers that started to ship products for multimedia applications, application processors and baseband related customers. Also three customers concluded their prepaid status. As of the end of last year, we had 38 customers under licensing agreements shipping products. In 2010 our customers shipped a record 613 million units, a substantial increase of 83% compared to 334 million units shipped in 2009. These shipments correlate with significant increase in our overall royalty and royalty revenue, which increased 41% from 16 to 23 million units and it contributed nicely to our improved profitability. As for the balance sheet, as of December 31 of last year, CEVA’s cash and cash equivalent balances, marketable securities and long-term bank deposits reached a record high of approximately $131 million compared to $117 million as of September 30th and 101 million as of the end of 2009. During the fourth quarter of last year we generated positive cash flow of approximately $14 million and $30 million on an annual basis. This figure for annual 2010 cash flows are (also) taking into account some buyback activity of approximately $1.6 million, which represented approximately 140,000 shares of our common stock. Our DSO for the fourth quarter of 2010 continued to slightly improve to 42 days compared to 43 days for the prior quarter. Now for the guidance. As Gideon discussed earlier, we believe 2011 will be a growth year in terms of the revenues and particular royalties which result in further sequential profitability growth which has been our practice for the last six years, especially on a non-GAAP basis alongside with continued investment in new research and development programs for future technologies. Our guidance for the full year of 2011 - total 2011 revenue is expected to be between $53.1-55.1 million. Gross margin is expected to be in the range of 92-94%. Operating expenses including equity based compensation expense are expected to be higher than 2010 levels due to a few items. Most significant items will be increased (unintelligible) - to our equity based compensation expenses due to new option grants to employees and management, additional R&D investments in next generation baseband processors for LTEs as well as for our new MM3000 HD video platform and higher sales and marketing expenses associated with higher commission related expenses which anticipated increase in our 2011 revenue as well as higher marketing and branding expenses. Our overall operating expenses are forecasted to be in the range of $36-38 million. Annual equity based compensation expense is forecasted to be approximately $4.8 million, as I mentioned, significantly higher than the prior years due to the anticipated increase in option grants in light of the minimum grants in 2010 and increased stock price of our common stock, which reflects the fair market value of stock options under (123 R calculation) with approximately $300,000 on an annual basis R&D cost increase. Annual operating expenses excluding equity based compensation expenses are expected to be higher and in the range of $31-1/2 to 33-1/2 million. Interest income is expected to be around $2 million. Our tax rate for the year is expected to be approximately 14% on a GAAP basis and 12% on a non-GAAP basis. Share counts for 2011 is expected to be in the range of 23.7-24.1 million shares. Our US GAAP EPS is expected to be in the range of 53-57 cents per share. A non-GAAP EPS excluding aggregate $4.8 million of equity based compensation expense is forecasted to be in the range of 72-76 cents per share. As for the guidance for the first quarter of 2011, revenue is expected to be in the range of $13.3-14.3 million. Gross margin is expected to be in the range of 93-94%. Operating expenses including equity based compensation expense is expected to be higher than the fourth quarter of 2010 in the range of $8.8-9.8 million and of our anticipated total operating expense for the first quarter, $1.2 million is expected to be attributable to equity based compensation expense. Our non-GAAP operating expense is anticipated to be $7.6-8.6 million. Interest income is expected to be approximately half a million dollars. Tax rate is the same as the annual figures, 14% for GAAP, 12% for non-GAAP. Our share count for the first quarter 2011 will be in the range of 23.6-24 million shares and that all brings us to a US GAAP EPS expectation in the range of 13-17 cents per share, and non-GAAP EPS excluding aggregated $1.2 million of equity based compensation expenses is forecasted to be in the range of 18-22 cents per share. Operator, we can now open the floor for questions. Jackie.
- Operator:
- At this time I’d like to remind everyone if you’d like to ask a question please press star then the number 1 on your telephone keypad. Your first question comes from the line of Gary Mobley with Benchmark.
- Gary Mobley:
- Hi guys. Congratulations on another good quarter. I had a couple questions if I could just lay them out all at once. I was hoping that you could share with us what you think your 4-G market share is in cellular basebands. And then as well could you talk about the licensing pipeline? And then more specifically in the licensing pipeline, do you see any sort of benefit from a more fragmenting baseband market given the evolution of 4-G and various other factors as well?
- Gideon Wertheizer:
- Gary, it’s Gideon. First of all, when it comes to baseband market share in 4-G I think it’s natural because the way I see it is market share is where you have shipments. (Unintelligible) - So I wouldn’t speak about market share as before but we have a very I would say active design activity (unintelligible). And out of this movement we have at least two just in the back of my mind, at least four tier-one customers. So that’s when it comes to the business. Now when it comes to licensing pipeline I think it’s healthy. I don’t - it’s composed mainly of ATV activities both with equipment and collection of the handsets and data cards and infrastructure (unintelligible) - and higher integrated (parts of it) which is (unintelligible). That’s it when it comes to the licensing pipeline.
- Gary Mobley:
- Okay. One last question for Yaniv - I know you guys have probably put the breaks a bit on the share repurchase program. With cash rising as quickly as it is, any more consideration of perhaps a dividend?
- Yaniv Arieli:
- (Unintelligible) - I think this is the first quarter that we have made such a significant roadmap with our (opening). We forecast this continued ramp up throughout 2011 and I think that would be the right time to revisit this idea on the use of cash when we get to that mark. I think we’ll just make our first milestone in massive royalty and revenues and growth opportunities and we took the first step with the buyback initiative, did some in the past. It was a bit halted recently but again I guess we could revisit it (as we go along). Nothing for this conference call yet.
- Gary Mobley:
- All right. Great. Thanks.
- Richard Kingston:
- Thanks Gary.
- Operator:
- Your next question comes from the line of Matt Robison with Wunderlich Securities.
- Matt Robison:
- Hey. Good morning and congratulations on another good performance. And maybe I was wondering first of all a little housekeeping, what’s the head count and where do you expect it to go over the next year?
- Yaniv Arieli:
- Right now we’re 181 and I believe that we’ll see it no more than 190 or so by the end of the year.
- Matt Robison:
- Okay. In terms of those five licenses or the four that were DSP, how many of them were CEVA-X? And maybe if you could update us on when the multimedia 3000 will be available for licensing and you mentioned there was an increment to R&D we should associate with that, maybe give us a flavor of when that will be and if it will continue beyond when that product will be available for licensing. And also Gideon, if you could give us a little bit of a sense on what proportion of that remarkable unit growth you saw in the sequential unit percentage, what of that came from indigenous brands or demand from indigenous brands?
- Gideon Wertheizer:
- Okay. Let’s take one step at a time because you’ll have to repeat the first question. When it comes to licenses you mentioned CEVA - I think you mentioned CEVA-XC, the new generation DSP, right?
- Matt Robison:
- Right. Well, beyond the ones that are named after plant lift. CEVA-XC surely but I’m really looking for the licensees that are a departure from the older legacy architectures. But go ahead.
- Gideon Wertheizer:
- Out of the five (unintelligible) - the departure - if you are asking me something that I cannot be that precise, but we see a lot of interest to move - by the way, there are 30 licensees for CEVA-XC today. We see a lot of interest to move to the CEVA-XC first of all with new customers. Now companies that in the past we didn’t do business now want to do DSP. I mentioned OEMs that are doing it. When it comes to existing customers to switch we have I would say one only this week. I was thinking of a key customer, one who recently switched and I think in the coming year we will see at least two more from the existing large customers that we have that will switch to CEVA-XC. Now the second question was about MM3000, this will be our new growth engine on which the licensing is based on it (unintelligible) - with the most advanced features like 3D video of which we’re going to show a prototype of it in the coming NWC show. I believe that we’ll open it for licensing in the second half of the year. I’m not so sure that we’ll have a significant licensing deals of this product this year but we’re expecting to have it I think more mature early next year. Now the third question is something that I’d like you to repeat.
- Matt Robison:
- Yeah. I kind of garbled it. I was hoping you had some remarkable unit volume growth especially on basebands and to 178 million and I was wondering if you could give us a flavor as to what portion of that growth came from I guess you’d call them indigenous brands, brands in market brands that are different than what has been driving your business in the past.
- Gideon Wertheizer:
- I need to level with you because I think this is an important question. First of all, in my prepared remarks I tried to be very clear that we are speaking now of an expanded, addressable market. Our traditional market was basically composed of the branded area and companies like Nokia, Samsung, AG - basically six out of the eight largest OEMs (in the world) are using our technology today. Now (unintelligible) - and the second market (unintelligible) - the industry and the OEMs in China. These are non-branded OEMs (effecting future phones now even sell to cell phones) that don’t sell to the American economy but to places like China, India, Brazil (unintelligible) - and I just gave you the prepared remarks that only the first six months of 2010 (unintelligible) - I don’t see many companies going into this space like (unintelligible) - I see Erickson. All these companies are going into this market on top of (unintelligible) - basically Q3 ’10 shipments (and we’ll be in there). Here’s the thing - if you think about a company like Nokia or Samsung, they speak about 400 million units per quarter roughly. That’s what they said for the Q4 shipment. (Unintelligible) - so there is something between 100 million units per quarter that is between the non-digital (users) and the data cards, the mobile broadband side. The growth that we are seeing now, it’s hard for us now to really break down which one belongs to the three categories. So far we are speaking about a significantly larger market. I mean we are coming up to 2 billion units versus 1.3, 1.4 that we spoke of before and that’s (unintelligible).
- Matt Robison:
- So would it be fair to look at that unit, that sequential growth and attribute more than half of it to the penetration of this non-branded OEMs and mobile broadband?
- Gideon Wertheizer:
- Yes. I mean again we monitor it on a quarterly basis but half of it is a good number.
- Matt Robison:
- Thank you.
- Gideon Wertheizer:
- Thank you Matt.
- Operator:
- Our next question comes from the line of Anil Doradla with William Blair.
- Anil Doradla:
- Hey guys. Thanks for taking the question. Congratulations. Clearly you’re in the sweet spot and inflection point but coming back to the previous question and building upon that, the trend going forward that we saw with the jump up in these unbranded products in emerging countries, is that a trend that will sustain itself in 2011 or how does it break down between kind of the branded and the unbranded over the next 12-24 months?
- Gideon Wertheizer:
- Anil, this is Gideon. I wouldn’t break it down because there are suppliers that are - some people consider them as (unintelligible) - BP for example, they are the fourth largest supplier but most of their shipment is going to China (unintelligible). So I wouldn’t break it down between all these categories, try to see whether each segment is (great). I look at this as one chunk. If you ask us how it’s going to be in 2011, it will grow. I think the guidance that we gave is already reflective of the beginning of the year. There are things to have a look. It’s a new trend, it’s significant, it’s a fast growing space. But all in all I think it’s reflective.
- Yaniv Arieli:
- Anil, let me add that some of the known players in the industry, not just the unknown brands but take for example Nokia what they said on their earnings call last week. They announced a 24% increase to 22 million units a quarter in the greater China market. It’s not just the non-branded, it’s even the tier-one players that are getting access to the Chinese market. 24% growth on a quarter by quarter basis is very, very fast growth in this economy. So I think as Gideon said, we’ve guided higher revenue. The biggest portion of it is of course the royalties. We believe that next quarter we could see a sequential increase in royalties due to these same factors that we just mentioned of at least 12%. So I think that also helps to answer your question.
- Anil Doradla:
- Great. And a couple of follow ups - now if I look at the opportunities, kind of the big item opportunities, clearly we’ve seen the handset and that’s playing out. We’re seeing some of the emerging markets in the handset arena but beyond that, you talked about femtocells, picocells and microcells. Clearly that market - I don’t know. I suspect that’s nowhere close to the handsets. But can you tell us or share with us the next say couple of years what are the big market opportunities that you would see some ramp similar to the levels we have seen in the handsets?
- Gideon Wertheizer:
- Yeah. So other than the segments that you mentioned there is the 4-G momentum going there both handsets and all the other ones. Now CEVA beyond the cellular has I would say two more business lines. One is called mobile multimedia. This is a collection starting from the (unintelligible) - we have four tier-one companies that are in production going both in the consumer side (incorporating) all application processors. So that’s the mobile - the MM3000, which will come the second half of the year and will take us to the next step in terms of video features. Now the other line segment is the home entertainment. We are already licensing and we just developed a new DSP for this market, the 3211 basically. And that will take us to this all new HD, the audio that you have in your TV, Blue-Ray, DVD, console boxes and the like. The MM3000 by the way, one of the derivatives of the MM3000 as a platform, one of the derivatives will cover also video. So this will eventually become something for next year a licensing opportunity for us. And something around 2014 or south of 2015 we’ll start seeing shipments coming from this fresh new revenue source.
- Anil Doradla:
- Okay. Great. Thanks a lot guys and congratulations.
- Gideon Wertheizer:
- Thank you Anil.
- Operator:
- Your next question comes from the line of Jay Srivatsa with Chardan Capital Market.
- Jay Srivatsa:
- (Thanks for) taking my question. A couple of follow ups on the comments on Nokia - clearly they seem to be ramping up pretty aggressively. What’s your sense in terms of transition from TI to alternative solutions as Nokia looks ahead to this year?
- Gideon Wertheizer:
- Could you repeat the question?
- Yaniv Arieli:
- (Unintelligible)
- Gideon Wertheizer:
- Well, that’s something that you should ask them. But (unintelligible) - as of Q3 2010 already still 20% of the baseband market overall. And all these are 3-G Nokia and these should someday go to customers like (unintelligible) - I think in their last conference call they mentioned that this year there will be new suppliers supplying Nokia with 3-G. I guess it’s somebody they’re using now. And probably for the second half of this year we’ll see (the usual) revenues from 3-G. From TI (unintelligible) - and taking it into 2012 (and beyond).
- Jay Srivatsa:
- Okay. Subsequent to your comment in terms of Mediatech in China, it appears that this year at least 2010, Mediatech lost a lot of market share which allowed several other competitors to jump in and get some of the market share in China. What’s your expectation for 2011 in terms of effectiveness of other competitors to continue to pursue that market and which obviously favors you?
- Gideon Wertheizer:
- Yeah. I think I mentioned it in my prepared remarks. We have a market (share gain) of 22% of the share in this space that Mediatech used to dominate, went already to companies like (unintelligible) - I see them also losing to (unintelligible). Now let me tell you this one. It’s for us, we are winning also through Mediatech because one of the things that Mediatech is doing is coming with a smart phone (for this specific market) and this is based on our technology. So we hope to see and try to hold the rope in two sides. That’s what we’re referring to whether it’s Mediatech losing market in baseband to some of our customers, which would bring us more business. On the other hand Mediatech could get back into this space with a higher end combo of application processor and a baseband which would do more than just (receive) on the application processor front. So hopefully we can enjoy both fronts and all this is happening and continues to happen in 2011 and onwards.
- Jay Srivatsa:
- Last question on the competitive space in your market itself in terms of just the IP licensing, have the dynamics changed within between yourself and your competitors or are you seeing more price spreads? Can you give us an update on where things are?
- Gideon Wertheizer:
- No I don’t think so. I can refer you to market analyses that would give you but I don’t know who. Maybe Richard can - who did the DSP landscape market analysis? Anyway, we have (unintelligible) - however, our challenge is to convince companies (unintelligible) to move to our tech and not to these competitors.
- Jay Srivatsa:
- Okay. And maybe one follow up on the last question - in the past you’ve talked about how you expect your non-GAAP EPS over the next few years to be similar in the range of 80 cents to $1. Given that you’ve guided very strongly for ’11, is there any change to that number? Are you expecting it to be sooner or later? Can you give us an update there?
- Yaniv Arieli:
- Yeah, sure. We build that mid-term model you’ll recall back in 2008 and that was the first time where the shift in the wireless industry started happening, TI decided to bail out of this industry and we saw huge consolidation in the space. And we reckoned that three years down the road we would be the leading provider of DSP technology, that this will year after year post 2008 we are achieving those milestones and as you mentioned, that 80 cents to $1 is probably (just) around the corner. We would somewhere down the line build a new model and a new longer term strategy for the company but I think that’s an opening model and that’s achievable. I would not say when because it’s a 2008 type of model. But there’s no doubt that based on this new data that we supplied today and the market dynamics that we are all monitoring including yourself, this was mentioned (inconceivable) and of course we’ll have higher expectations as we go along.
- Jay Srivatsa:
- Thank you. Good quarter.
- Yaniv Arieli:
- Thank you. Take care.
- Operator:
- Your next question comes form the line of Doug Rosenberg with RBC.
- Doug Rosenberg:
- Hi. Thanks. A lot of my questions were answered. Just one quick housekeeping - I’m trying to better understand the license trends going forward. I know you guys - I mean you guys guided for a midpoint of about 20% in revenue growth. I was wondering I understand the majority of that will be royalties. I want to understand in FY11 what you guys expect a little bit for licenses.
- Yaniv Arieli:
- I think we mentioned in the past (with Anil) that we’re comfortable with these types of levels somewhere between the $4-5 million - we’ve been executing in that range quarter after quarter and we did not expect any large or big surprises around this. So this is our comfort level. It is 18-ish to $19 million in annual licenses if we make and close the right deals with the right customers. And I think over the last couple of years we have been doing so successfully. That by itself will generate royalties, it will generate growth, it’ll generate profitability and that’s the current strategy and plan for 2011. With that said of course, we have other engines that Gideon talked about and other interesting licensing opportunities. But from a model perspective what I just said is the model and is our plans for this year.
- Doug Rosenberg:
- Okay. And if I can just go back to China for one second, if I follow and sort of see, you’re saying that the fact that Mediatech is losing its market share in baseband you think that you expect to be able to sort of compensate in other places also within the emerging markets?
- Yaniv Arieli:
- That’s only one aspect of it. The broader aspect of it is what we talked and Gideon mentioned earlier, this totally available market for CEVA. Even if you look at our presentation, the industrial presentations over the last couple of years, we have worked with (Gardners) and (iSupplies) and they agree the addressable market for CEVA is somewhere around 1.3-1.4 million phones. Over the last 12 months that market has expanded significantly and today we’re looking at an existing market of somewhere slightly higher than 2 billion units. This includes the Chinese market from different angles and we talked about baseband, we talked about application processors, we talked about new customers shipping products. It also includes broadband, machine to machine, connected license, infrastructure - a bunch of other devices that are all around the modem, DSP type of functionality, which is our bread and butter and this is what we know and what we do best. So from all of these factors and significantly increased addressable market, we are quite comfortable with Gideon giving the optimistic guidance for 2011 and hopefully onwards.
- Doug Rosenberg:
- Okay. Great. Thank you very much.
- Yaniv Arieli:
- Thank you Doug.
- Operator:
- Your next question comes from the line of Mark McKechnie with Gleacher & Company.
- Mark McKechnie:
- Great. Thanks and congrats on the big royalty numbers. A couple questions - how much of your 2011 guidance is royalty versus license or are you actually going to break that out? And then I have a follow up.
- Gideon Wertheizer:
- Usually we don’t break that out. But based on the last question that I was asked and then answered was the licensing front, I guess you could figure out the royalty opportunity. But (unintelligible) - overall revenue but not necessarily break it down to the different sectors.
- Mark McKechnie:
- Got you. I mean should we just plan for royalties to be flat to down - I’m sorry - the license side to be flat to down the way it was this year? Or could you see growth in that spot?
- Gideon Wertheizer:
- Flat to up slightly.
- Mark McKechnie:
- Flat to up.
- Gideon Wertheizer:
- Yes. Not down. I think it’s good technology and we’re looking forward to increasing our licensing revenues. And the rest of the (bark) will be coming of course from royalty growth.
- Mark McKechnie:
- Got you. And then just a follow up - just a quick map on the ASP trends, did I hear right the units that you shipped in Q3 were 222 million? So that would correspond to the royalties that you recognized in Q4? Is that right?
- Gideon Wertheizer:
- Almost. You are a newcomer to the story. Unfortunately we had in the past some old history that we pulled in that were called prepaid royalties. So out of the 222, 23 million were units that were earlier paid for and the real paid royalty count is around 199 million. So next quarter on it’s going to be relatively simple math, overall units and overall royalties and one could figure out the royalty rate for the whole combination of the company. It has been four cents for the last couple of quarters and our customers with that level for Q1.
- Mark McKechnie:
- Around four cents - yeah. I guess what I was trying to get at was the uptick or potential uptick in ASPs as you move to newer products. You’re still seeing the newer products would be obviously higher than that four cent average, yeah?
- Gideon Wertheizer:
- Absolutely Mark. That’s an excellent question. That’s true for application processors. That’s very, very true for 4-G, more than double. And that’s true for the infrastructure side. So right now a lot of volume is coming from the emerging economies but as soon as we get into some of the higher end or new products as you call them, that will contribute to the mix.
- Mark McKechnie:
- Great. Thank you.
- Gideon Wertheizer:
- Thank you.
- Operator:
- Our next question comes from the line of Doug Whitman with Whitman Capital.
- Doug Whitman:
- Congratulations on the great quarter guys. I have a question on the overall year guidance. A year ago you guided relatively flat off the first quarter for the year and obviously you exceeded the number and you were feeling fairly conservative about the economy. And so we’re looking at the same sort of pattern in your guidance this year and I know you’re a very conservative guider. But could you tell us a little bit, is some of that conservatism related to worldwide economic concerns and what drives it? Or is it just not knowing what the outlook is six months down the road?
- Gideon Wertheizer:
- So you are asking me (unintelligible)?
- Doug Whitman:
- Obviously I know you have taken the guidance up. If you take the first quarter and you times it by four you basically end up with a year number, which is the same thing as last year. And so I’m trying to get obviously you’re on a growth trajectory and I know the royalties will be down in the second quarter sequentially. But could you talk a little bit about kind of some of the conservatism overall for the year (based on your first quarter guide)?
- Yaniv Arieli:
- Sure. Yes. The first quarter I think is very solid and good guidance based on the guidance that should be probably the best quarter we ever had if all works well. Second quarter you mentioned correctly. There is always a royalty reduction with the post Christmas season and we build on the magnitude because when you have 36% of the worldwide modem baseband function now because we were starting to become a big player, we had to rethink how Q1 would look like in this typical seasonal affect, usually around 20%, let’s see how it plays out this year. And then taking that into account and then continuing to grow from Q3 and throughout Q4, we came out with this guidance. I think you know most of our customers or at least the big ones, all public companies. As they guide, as they feel that business is booming around the wireless industry then that should be reflected a quarter after in our numbers. It’s pretty simple from that point of view. Of course we don’t have the full picture or the moving parts but (unintelligible) - if things are better we’ll of course be happy to announce that things are up. (Unintelligible) - but I think the guidance is based on bottom down analysis of the markets, the landscape, our customer base and the growth as we anticipate it for 2011 in the base case.
- Gideon Wertheizer:
- Yes. By the way, I believe you know how to extract the royalty out of the guidance that we give you. The digital market is going to grow based on other companies’ focus about 8%. Our royalty guidance is significantly higher than 8%. So we are growing well above the market.
- Doug Whitman:
- Okay. Well, thank you for the great results and outlook as well.
- Gideon Wertheizer:
- Thank you.
- Yaniv Arieli:
- Thank you.
- Operator:
- That was our final question. I’ll now turn the floor back over to management for any closing remarks.
- Gideon Wertheizer:
- That’s it? Back to Richard. We may have lost Richard. So again, thank you for joining us today and your continued interest and supporting CEVA. We’ll be attending the following upcoming conferences and events and invite you to join us there. The first one is with Oppenheimer the 15th annual equity one on one conference on February 9th in New York. And then we will be attending the Mobile One Congress, the worlds’ largest mobile exposition. That’s February 14-18 in Barcelona, Spain. There will be lots of interesting demos and new technologies that we will be demoing there while we’re traveling to Barcelona. And then the Lazard Capital Markets Technology Media Conference on March 14th in Boston. Thank you again and good-bye.
- Operator:
- This concludes today’s conference call. You may now disconnect.
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