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CEVA Inc. (NASDAQ:CEVA)

Q4 2012 Results Earnings Call

January 30, 2013 8:30 AM ET

Executives

Richard Kingston - Director, Marketing and IR

Gideon Wertheizer - Chief Executive Officer

Yaniv Arieli - Chief Financial Officer

Analysts

Joseph Wolf - Barclays

Gary Mobley - Benchmark

Daniel Meron - RBC Capital Markets

Brian Nugent - William Blair

Vijay Rakesh - Sterne Agee

Matt Robison - Wunderlich

Jay Srivatsa - Chardan Capital Markets

Operator

Good morning, ladies and gentlemen. And welcome to the CEVA, Inc. Fourth Quarter and Year End 2012 Earnings Conference Call. All participants will be in listen-only mode. (Operator Instructions)

After today’s presentation, there will be an opportunity to ask questions. (Operator Instructions)

Please note this event is being recorded. I would now like to turn the conference over to Mr. Richard Kingston, Director of Marketing and IR. Please go ahead, sir.

Richard Kingston

Thank you, and good morning, everyone. Welcome to CEVA’s fourth quarter and year end 2012 earnings conference call. I’m joined today by Gideon Wertheizer, Chief Executive Officer of CEVA; and Yaniv Arieli, Chief Financial Officer of CEVA.

Gideon will cover the business aspects and the highlights on the quarter, and also review our progress during 2012. Yaniv will then cover the financial results for the fourth quarter and full year 2012, and will provide guidance for the first quarter and fiscal 2013.

I will start with the 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 2013, market data from ABI Research, Infonetics Research and Strategy Analytics incorporated herein, optimism about our business outlook and growth opportunities generally, including trends in the 3G, LTE, smartphone and base station markets, as well as market penetration, product releases and design wins by our customers that incorporate CEVA technology.

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, global chip market trend, the possibility that markets for our technologies may not develop as expected or that products incorporating our technologies 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

Thank you, Richard, and welcome, everyone. As I’m in the process of getting over the call, Richard will lead and present the business prepared remark, and I will join in the Q&A session. Richard?

Richard Kingston

Okay. Thanks, Gideon. I’m pleased to report a solid finish to the fiscal year 2012 with revenue at the mid range of our guidance and 16% sequential royalty revenue growth. As you know, 2012 was much more difficult than initially anticipated due to the challenging microeconomic environment and product transitioning in the handset space.

As a point of reference, the semiconductor industry was projected to have contracted by almost 5% in 2012 as compared to 2011 according to ABI Research. According to data from IHS, the handset market was projected to have grown only by 1% in 2012 as compared to 2011, which was significantly below what was expected at the beginning of the year. In fact, 2012 had the lowest annual growth rates in the handset market for the last three years.

Looking at our fourth quarter results, total revenue was $13 million at the mid range of our guidance. Royalty revenue was $8.2 million, a 16% sequential increase and down by 19% on a yearly basis. Our fourth quarter royalty revenues saw sequential growth driven by unit growth in all three segments, 2G, 3G and 4G.

In this respect, customer unit shipped reached an all time high record for CEVA surpassing 300 million units. This impressive shipments milestone more than offset moderate price reduction in 2G feature phones, the ramp down of old iPhones and the ramp down of 2G phones at Nokia by one of our customers.

In the fourth quarter, our licensing revenue was $3.6 million. We signed eight new license agreements. Five of the agreements were for our CEVA DSP cores and software, including two new CEVA-XC customers.

Geographically, two of the license agreements were in the U.S., one in Europe and five in Asia, including Japan. Target applications for the agreements closed during the quarter are primarily baseband processors, G.Fast modems that enable operators to offer Fiber-To-The-Home like speeds of up to 1 gigabytes per second, mobile audio and Solid State Drives.

Other revenues were $1.2 million, higher than what we projected and relates to licensing of development tools in conjunction with the fourth quarter licensing deal with a large customer.

In previous reporting periods, we broke down revenue from license agreements into two components, licensing revenue and other revenue. Other revenue includes primarily sales of development tools, tools licenses for our cores and a fee for technical support.

As this revenue component is directly associated with licensing revenue starting with the first quarter of 2013, we planned to consolidate these two revenue items for the sake of simplicity.

On licensing, we are experiencing a longer decision making process by our customers as compared to the beginning of 2012. This prolonged decision making process could be explained to some extent by the macroeconomic environment and also by the complexity of next-generation technologies for LTE-Advanced, audio processing, DSLR like imaging performance and computer vision, all of which are considered revolutionary technologies rather than evolutionary.

In this regard, large companies with whom we have had no previous business relationship are discussing with us a framework for long-term engagement involve in the use of our future products to replace our incumbent DSP-enabled products.

Our 2013 annual expense guidance includes the anticipated execution of a very strategic agreement which will involve additional R&D investments for such an advanced product.

Further more, notwithstanding, the longer decision making process by potential customers and strategic engagements, there continues to be strong interest in our DSPs and platforms across all of our wireless baseband, Wi-Fi, audio imaging and vision product lines.

I will now take a few movements to provide some perspective on the business outlook in our main markets and the progress CEVA has made during 2012.

At the beginning of the year, we outlined the key drivers for our continued growth in the handsets space. The first of these was the evolution of cellular networks specifically the growth of 3G networks in emerging countries and the migration from 3G to LTE in developed countries.

The second was the mass adoption and features set enhancements in smartphones. These growth profiles remained intact and the positive impact on our royalty revenue is already evident in our Q4 sequential royalty revenue growth.

The following are a few related data points that reflect our strategic and competitive positioning.

Annual 3G and LTE shipments grew 21% on a yearly basis in line with market growth. This excludes shipments of old iPhone 3G and 4 models that use our DSPs and have been displaced by newer non-CEVA based models. Shipments of CEVA-based smartphones excluding legacy iPhone models grew 446% on a year-over-year basis compared with 40% for the overall smartphone markets.

In its recent Analyst Day Broadcom disclosed that it has achieved 500% yearly growth in 3G baseband shipments on a quarterly basis. Broadcom continue to have strong traction at Samsung deployed within many variance of the high profile Galaxy brand such as the Galaxy S II Plus, Galaxy Grand, Galaxy Pocket Plus, Galaxy Chat, Galaxy Music and the Galaxy Y.

Its diversification strategy that includes a full turnkey design targeting the emerging markets has also started to bear fruit with design wins at TCL, ZTE, G5 and operator branded phone from T-Mobile and Vodafone.

Another encouraging sign is Spreadtrum’s 3G traction within China mobiles proprietary TD-SCDMA network. There is a strong incentive for Spreadtrum to focus on TD-SCDMA as China mobile is the world’s largest operator with more than 700 million subscribers, yet only 10% are TD users today. Through successive price drops market research firm BMI projects TD-SCDMA handset sales could surpass 500 million units in 2017.

Spreadtrum has been at the forefront of TD technology from its inception and recently redefined the space with highly integrated smartphone chipsets such as the SC8810, which provides exceptional user experience at phone prices as low as $80.

Spreadtrum serves 12 out of the top 15 OEMs targeting the China market, including Samsung with its flagship phones the Galaxy S3 and Galaxy Note 2, Lenovo, Huawei, ZTE, HTC, TCL, Hisense and more. With the strong momentum for new first time smartphone users in China, it is expected the Spreadtrum will shipped between 80 to 100 million smartphone chips in 2013.

As per LTE, recent data from Strategy Analytics predicts that the shipment of LTE devices will hit 275 million units in 2013, a threefold rise from 91 million units that shipped in 2012.

Quite a lot has been discussed by the Qualcomm dominance in the LTE space as it is the only merchant vendor so far that ships in volume. However, recent announcements by some of our customers indicate significant progress and availability, as well as superior performance.

For example, at its recent Analyst Day, Broadcom showed its 4G/LTE chip manufactured at 28-nanometer and incorporating our most Advanced DSPs. This chip is planned to be released to customers in 2013.

Broadcom demonstrated that if its LTE technology had been deployed in an iPhone 5, it would have yielded 37% smaller size versus Qualcomm. This attribute allows for both lower power consumption and lower costs for one of the most expensive chips in a phone.

Moreover, as this chip uses our software to find radio technology, it supports multiple wireless standards, such as FDD LTE, which will be used by most of the world’s network, as well as TD-LTE, TD-SCDMA and the legacy WiMAX to cover the rest of the world’s wireless standards including China Mobile.

Furthermore, Spreadtrum has announced that it’s multi-mode TD-LTE chip, the SC9610 which uses our CEVA-XC DSP will be shipping in a datacard from Hisense that was awarded a portion of China Mobile’s recent 4G procurement tender.

It integrates multiple communication standards including multi-band’s TD-LTE, dual-band TD-SCDMA and quad-band EDGE/GPRS/GSM on a single-chip. As a result of its incumbent position in TD-SCDMA, Spreadtrum is ahead of many other potential suppliers into China Mobile including Qualcomm.

Another key customer of ours that is well-advanced and currently ramping sizable volume in LTE is Samsung. In a strategic move to reduce dependency on merchant silicon vendors for LTE, Samsung continues to migrate to their in-house developed LTE solutions, which are based on our leading DSP.

In addition, our key customers such as Intel, Broadcom and Spreadtrum are consistently expanding within Samsung’s high-volume segments in 2G and 3G smartphones. Samsung recently predicted their shipments for 2013 will be over 0.5 billion handsets.

Another target market that we have recently started to address is the LTE base station markets, including the emerging small cells, which we elaborated on in prior calls. According to market research firm Infonetics Research, the number of small cell units sold is forecasted to grow nearly 40 fold from 2011 to 2016.

Our publicly announced anchor customers addressing this space are Broadcom and Mindspeed. Broadcom has recently announced that Huawei has incorporated its CEVA-based chip into picocell products and Mindspeed recently reported a rollout of its CEVA-based Transcede SoC within the SK Telecom network in Korea. These major achievements combined with the accelerating market trends highlights [Andri and Force], four key elements that underpin our growth strategy.

CEVA is firmly established in the largest space in the semiconductor industry, baseband for mobile handset, as well as other evolving cellular markets such as machine-to-machine.

Our competitive edge in software defined radio technology for the next-generations of LTE and Wi-Fi, and the inherent low cost and power performance balance of our technologies puts us in a strong position to capitalize on the mass market adoption and allows us to address all of the growth vectors of the space simultaneously.

Our proven track record in baseband technologies, in particular our pioneering position in software defined radio allows us to expand into the base station markets including the high volume potential in small cells.

The spectra of efficiency of LTE enable additional and very interesting new opportunities for DSP related products. One such use is voice over LTE where higher bit rates speech codecs combined with advance noise and echo cancellation allow substantially clearer phone calls along with higher intelligibility that is acquired for services such as voice recognition. With our new TeakLite-4 audio DSPs, we are in a superior position to address the high levels of processing yet low power usage that is required for these products.

Finally, our new technology pillar that we have recently added to our product offering relates to image enhancement and vision analytics in cameras. As per ABI Research, 1 billion cameras were shipped in 2012 and this number is predicted to grow to 2.7 billion units in 2017, 80% of this volume is attributable to smartphones where we already have a strong foothold through our other technologies.

Mobile OEMs are looking for new DSLR features such as smarter autofocus, best picture using super resolution algorithms and best image capture in low light environments.

Furthermore, with the addition of video analytic supports the camera will enable new services like augmented reality, gesture recognition and advanced safety capabilities in cars. We see this new revolution other than emerging opportunity for us to significantly expand our footprint in smartphones and further into tablets, PCs, automotives and others. With our MM3101 platform, we are the only vendor that offers a unified vision and imaging platform that can support these future developments.

While we continue to make inroads in the handset markets, the contribution from our non-handset business which primarily composes of high profile portable game consoles and long-tail legacy consumer products suffered continuous weakness throughout 2012. We expect this trend to continue while the economy is uncertain.

So to summarize, while 2012 proved to be a more difficult year than we had originally thought, despite this we continued to make good overall progress during the year and entered 2013 in a solid position.

Our engineers and sales and marketing teams worked tirelessly to expedite the design cycles of new products, such as CEVA-XC4000, the TeakLite-4 and the MM3101, and to signup new key customers. Notwithstanding the ongoing macroeconomic uncertainty, we are optimistic about our prospects for 2013 and beyond.

I’d like to take this opportunity to thank our customers and investors for their continued support and loyalty, and to thank our employees worldwide for their dedication and commitments towards achieving our goals. We wish you all a happy and prosperous new year.

With that said, I’d now like to turn the call over to Yaniv who will outline our financials and guidance.

Yaniv Arieli

Thank you, Richard. Thank you, Richard. I’ll start by reviewing the results of our operations for the fourth quarter 2012. Revenue for the fourth quarter was $13 million at the mid-point range of our guidance as provided and 19% decline compared to last year. The revenue breakdown is as follow.

Licensing revenue was $3.6 million, reflecting 28% of total revenue, down 25% for the fourth quarter of last year. Royalty revenue was $8.2 million, reflecting 63% of total revenue, down 19% from the fourth quarter of last year but up 16% sequentially. Other revenue was $1.2 million, reflecting 9% of our total revenue, up 12% from the fourth quarter of last year and 62% sequentially higher.

Gross margin was 92% on U.S. GAAP basis and 93% on non-GAAP basis as forecasted. Our non-GAAP gross -- quarterly gross margin exclude approximately $64,000 of equity-based compensation expenses.

Total operating expenses for the quarter were $9.5 million at the mid range of our guidance, which included an aggregated equity-based compensation expense of -- $1.3 million and $0.4 million of due diligence cost associated with the mix transaction.

Total operating expenses for the fourth quarter, excluding equity-based compensation and expenses associated with the MIPS transaction were $7.8 million, reflecting the lower end of our guidance.

U.S. GAAP net income for the quarter decreased by 43% to $2.8 million and fully diluted net income per share decreased 40% to $0.12. This compares to $4.9 million and $0.20, respectively for the fourth quarter of 2011.

On a non-GAAP basis, net income decreased by 33% to $4.3 million as compared to the same period for the prior year. Our non-GAAP fully diluted net income per share decreased 27% to $0.19 per share as compared to the same quarter last year.

These figures exclude approximately $1.2 million and $1.5 million of equity-based compensation expenses, net of taxes for the fourth quarters of 2012 and ‘11, respectively, and exclude $0.3 million of transaction cost associated with the MIPS transaction, net of taxes recorded for the fourth quarter of 2012.

Other related data, shipped unit by CEVA licensees during the third quarter of 2012 was an all time record high of 303 million, up 2% and 19% from the third quarter of 2011 and the second quarter of 2012 respective.

Of the 303 million units shipped, 275 million, another record high or approximately 91% are for baseband chips and reflect an impressive 22% increase in volume as compared to the prior quarter in which 226 million units of baseband chips were shipped.

As of December 31st, 27 licensees were shipped in products incorporating our own technologies, too lower than the prior quarter due to end of license specific products and we have 35 shipping customers under licensing agreement, too less than the prior quarter.

Despite the challenging year, our customers shipped a record of 1.1 billion CEVA-powered chipset, compared to 1 billion units shipped in 2011.

Baseband shipments also increased on year-over-year basis by 6% to 981 million from 927 million chips. We concluded 2012 with 46% market share based on third quarter baseband shipments, strong customer base and new exciting products that were introduced throughout the year.

As for the balance sheet item, as of December 31st, CEVA’s cash and cash equivalents, balances, marketable securities and long-term bank deposits were approximately $158 million.

During the fourth quarter, we generated positive cash flow of approximately $5.6 million, offset by $3.5 million used for our buyback program.

Our DSOs for the fourth quarter were 44 days, two days lower than the prior quarter.

As previously discussed, we have a share buyback program of up to 2 million shares. We continue to actively exercise this plan. During the fourth quarter, we repurchased approximately 243,000 shares at an average price of $14.4 per share and the total consideration of approximately $3.5 million.

We have an additional 484,000 shares available to repurchase under the existing 10b-18 plan. On an annual basis we purchased approximately 1.5 million shares of our stock and an average price of $18.3 per share and a total contribution of approximately $27 million.

We believe the continued execution of the buyback program illustrates our confidence in the long-term growth opportunities for CEVA, its strong fundamentals and earnings leverage.

Now for the guidance. As we have stated today, in past conference calls a key element of our forecast for the company relates to growth in the low cost 3G smartphones, LTE and 2G base smartphones replacing feature phones. The trend of the transition of these products and standard remain intact.

However, given recent public reports from a number of our customers and our uncertain timing of this transition and actual penetration of 3G and 4G devices in our key markets, we have decided to continue to give quarterly guidance but to refrain from giving annual guidance.

We generally believe that our growth preliminary relates to market share capture via introduction of new and superior handsets enabled by our DSP, which usually ramps us starting from the second quarter. We believe the impact of this in terms of sequential royalty growth, and annual royalty growth on a quarterly basis will take place from the second half of the year onwards.

Our guidance for the first quarter of 2013, revenue for the first quarter is expected to be in the range of $12 million to $13 million. Gross margin is expected to be 92% on GAAP basis and approximately 93% on non-GAAP basis, excluding 123R related expenses.

Operating expenses including equity-based compensation expense are expected to be in the range of $9.1 million to $10.1 million. Of our anticipated total operating expenses for the first quarter, $1.2 million is expected to be attributed to equity-based compensation expense. So non-GAAP OpEx is expected to be in the range of $7.9 million to $8.9 million.

Net interest income is expected to be about $700,000. Tax rate for the first quarter is expected to be approximately 17% on GAAP basis and 16% on non-GAAP basis. Its non-tax base excludes the tax effect of equity-based compensation expenses.

Share count for the first quarter is expected to be in the range of 22.6 million to 23 million shares. U.S. GAAP EPS will be in the range of $0.08 to $0.10 per share, and our non-GAAP EPS is forecasted to be in the range of $0.13 to $0.15 per share excluding aggregate based compensation expenses, net of tax of $1.1 million.

With that, we’ll open the session for our Q&A.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions) The first question will come from Joseph Wolf of Barclays. Please go ahead.

Joseph Wolf - Barclays

Hi. Just going into the guidance, can you talk a little bit about seasonality since the fourth quarter, reflective of the end of 2012 being weak? Board comments last night reflected a pick up or perhaps even a market share gain in its 3G business with a sequential uptick in the first quarter, which I guess impacts your second quarter. So, if you could correlate or collaborate some of those data points that would be great.

Second question I have is, if you just look at the -- this pace of this transition which you talked about on the guidance, of the 1.1 billion units shipped last year, what was -- could you give us -- I think you gave some of the numbers for the 2G versus 3G. And what kind of expectation could we get in terms of mix for 2013 both in terms of end market exposure and perhaps even with regard to ASPs based on current pricing trends?

Gideon Wertheizer

So, good morning, Joseph. Let me start with a number that I gave then Yaniv will add a bit more on the expectations. What we’re seeing in Q1, our Q1 compared to Q4 and again, as you mentioned correctly these are Q4 shipments of chips versus Q3 shipments of chips. We see about a 10% sequential decrease in royalties, which is very similar to last year’s room.

I would divide them into two. On the handset side, we’re only talking about single digit decrease about 10%, but much lower than that. And this is due to the fact of the growth drivers that got us into Q, a very nice 16% sequential increase into Q4. If you recall, we talked about 21% increasing volumes shipments of 2G and 23% sequential growth in 2G, 3G, and 4G.

So, on the one side we don’t see the typical seasonality that the market is seeing in handsets. But what is offsetting that number -- for it to be a 10% decline in royalties is really the consumer related devices.

These are older devices that we have with customers shipping into a bunch of consumer device, DVDs, hard disk drives to some extent the portable gaming console, which we saw, not a great Christmas in Q4. A number than that is reflected in weakness in royalties for our Q1.

I think these are the major drivers for the royalties, very similar to last year. If you looked at the overall rates and the seasonality, the typical pattern seasonality. I would say to summarize, consumer a bit weaker and on the handset side, we still see a very good result.

On an overall basis, out of the 1.1 billion, close to a 1 billion were in 2G with overall baseband and out of that 1 billion around 800 million were 2G base. Still the bulk of the business is 2G and now asking them to have their -- about the transition and how we see the year evolve.

Yaniv Arieli

Yeah. And Joseph, let me just highlight one point regarding the handset in Q4. I don’t know if you know, but there is one large OEM customer in the handset space that every Q4 makes an inventory adjustment. And that’s a major source of the decline that we had in units in Q3 versus Q4, which in a way offset by other higher shipments in the China region.

So there shouldn’t be any surprise. This OEM, this large OEM makes this inventory adjustment in every Q4. And if you -- since you referred to Broadcom, they say that in Q1, they’re going to regain more volume in 3G and one of the reason that this large OEM is going to restart all during in the first quarter.

So that’s when it comes to the royalty revenues in Q1 reflecting Q4 shipments. When it comes to following markets going forward, that’s what we said in the prepared remarks. 3G smartphones, this is something -- the low cost 3G smartphones. This is something that we are seeing. These new phones probably will get introduced in the market in Q1 and Q2 and start shipping. And we’ll start seeing their impact starting from our Q3 reporting.

LTE, it’s hard to say when we’re going to see this go into production. Right now, we have one big customer that ships and see when it’s going up. 2G, in fact in 2012 our market share under 2G market went up. So we are still catching their market share.

There is still smartphones that’s going into India and other emerged economies, and when you have smartphones also they are still higher. So this is in a nutshell, the landscape. It’s all moving elements for us. It’s the same thing that we show this people in the park. The pace of this change is something that when we are in the food chain, we help to focus.

Joseph Wolf - Barclays

But I’m assuming a strong Q2 second half, would of that 800 million would half of that transition in 2013 or is that too aggressive an assumption?

Gideon Wertheizer

This is exactly the question that we’ve been asking ourselves and our customers. I don’t think if you have these types of inputs from the Intel’s, the Broadcom, the Spreadtrum and ST Ericsson’s of the world I don’t break it down, nor they are forecasted. But I’m sure we’ve seen increase in 3G markets from the 200 and something million that we shipped this year.

To what extend, to how many million or 100s of million or 10s of million that’s something that we’ll continue to monitor and we unfortunately for now, we don’t want to get and get it wrong.

Joseph Wolf - Barclays

Okay. Great. Thank you.

Gideon Wertheizer

Thank you.

Operator

Our next question, I’m sorry. Our next question will come from Gary Mobley of Benchmark. Please go ahead.

Gary Mobley - Benchmark

Hi, guys. I wanted to dig a little bit deeper into your licensing revenue. In the application processor market, particularly on the mobile side, we’ve seen companies like Tegra in the market, frankly because of the different OEMs have kept the solutions. In the baseband market we’re seeing, Samsung with their own captive baseband.

And I’m assuming that’s hindering the ability for companies like ST Ericsson to compete so on and so forth. Is Samsung’s decision to internally supply a captive baseband hurting your overall licensing activity with the rest of the merchant baseband community? And then as well, was the attempt by MIPS a distraction for your overall sale force during the fourth quarter?

Gideon Wertheizer

So, when it comes to the Samsung and in-house development, I don’t think this reduces the amount of licensing or the potential for other customer to keep selling merchant chip to Samsung. Samsung is a big company. They have -- they want to cover all the different volumes of the LTE. And yeah, indeed, they want to rely more and more on in-house, but still there is a sizeable volume beyond that. That’s one thing.

The other thing, LTE is a big market. We’re seeing many companies are targeting the China market, which has a different variant of LTE. We see a lot of Chinese companies that are developing baseband for these purposes. We see companies taking the LTE for the machine-to-machine application. So, we have a lot of licensing opportunities. Can you repeat the second question?

Gary Mobley - Benchmark

The MIPS certainly.

Gideon Wertheizer

The MIPS again.

Yaniv Arieli

Yeah. Again, I think that when you look at overall other revenues and I think we clearly mentioned that in the prepared remarks. One of the deals that we signed or one of the customers also took a large portion of different software which we called more of the developing kits and development software.

At the end of the day, this is the same type of a licensing deal and is caused by licensing agreement, so probably somewhere between $400,000 to $500,000 of the other revenue. The jump from the $700,000 range to $1.2 million is actually looked upon and should be looked upon as regular licensing activity, which is all new and based on new deals that we signed within the quarter.

This is one of the reasons why we’re bundling it, and this will still be in the range of $4 million to $5 million like in the pure licensing environment. So, I don’t think that the sales guys actually were too disturbed from the MIPS transaction. It was very few people and then not the sales team that are still focused on executing the business in the DSP strategy and after risk processor strategy.

Gary Mobley - Benchmark

Okay. I just want to also follow-up on your prepared comments, commentary regarding increased R&D activity for a specific customer engagement. I’m curious to know, how big of an R&D investment are you making there? What is the payback in terms of licensing revenue, and which specific end market is this customer engagement targeting?

Gideon Wertheizer

I think it’s premature to speak about it at this stage. The investment that we will make there is -- and the comment on investment that we’ll make there is not something that takes off chart our expense level, but it’s really premature. The deal is not signed there. If it’s signed, we’ll provide the whole indication.

Yaniv Arieli

Anyway from a dollar perspective, we’re not talking about anything major. It is very similar to prior years. Although, our OpEx was probably $1 million, $2 million type of ranges, we’re not talking of something unusual.

Gary Mobley - Benchmark

Okay. All right. Very good. Thank you, guys.

Operator

And our next question will come from Daniel Meron of RBC Capital Markets. Please go ahead.

Daniel Meron - RBC Capital Markets

Hi, Yaniv, Gideon and Richard. As we look in today’s ASPs, do you see signs of stabilization there? I mean, based on my math, it sounds like it’s roughly similar to where it was, maybe still slightly down from the prior quarter. If you can just give us a sense of how it’s looking from here?

Yaniv Arieli

Ask that again, Daniel, sorry your voice is breaking out. What?

Daniel Meron - RBC Capital Markets

Sorry. The ASPs on your royalties, what is the trend right now? It seems like it’s stabilized, maybe just a little bit sequentially. But overall stabilizing, how do you see it going forward?

Gideon Wertheizer

I see. Yeah. You’re right that it stabilizes from Q3 to Q4. And even if you look at the annual -- on an annual basis you will see that overall 2012 versus ‘11 went from about $0.035 to $0.03 in average for the whole company. So, not a major decrease and that is all due to the fact of the transition that we talked about.

2G did go down very, very significant in pricing. We all know that and we have experienced that throughout the year. And with that said, the 3G and LTE has helped to offset that and I think that will continuously go along. The pace is all determined and the unit growth in each of these segments that I think we talked about earlier, we did not want to guess but we see the trends from Q3 to Q4.

And we hope that these types of trends will continue throughout 2013. The pace and what exactly, what quarter it’s going to happen and to what magnitude, that for now we’re putting aside and we’ll continue to monitor it as we go along.

Daniel Meron - RBC Capital Markets

Okay. Great. And another question relates to diversification of your business. You guys did a pretty -- what I commend you for an opportunistic move to acquire MIPS, which didn’t occur at the end of the day, but I think it was a good move if at all it were to happen. What other means are you looking to expand your business, be it organically, maybe into consumer arena or in the connecting devices elsewhere and inorganically? And also what is the timeframe for such initiatives to take hold? Thanks.

Gideon Wertheizer

Okay. Daniel, when it comes to organic investment that we are making, we are having decent amount of development instead of beyond baseband. We are addressing the base station market. I mentioned in my prepared remark, the audio, which is a distinctive market for us as well as one as imaging and vision that will take us to beyond even to mobile. It takes us to [commodity], it takes us to DTV.

So when it comes to organic investment, the level of investment and the products and the software that we are developing, I’m comfortable with it. When it comes to non-organic, you mentioned MIPS, we are continuously looking for the IP cellular and if you put aside for a second ARM is composed of many present companies and they like in the case of MIPS, we will take it -- we are very cautious here. We don’t just rely on brands and future strategies, but also some traction in business, which we can leverage.

Daniel Meron - RBC Capital Markets

Okay. Thank you. Good luck.

Gideon Wertheizer

Thanks, Daniel.

Operator

And our next question will come from Anil Doradla of William Blair. Please go ahead.

Brian Nugent - William Blair

Hi, guys. This is Brian for Anil. I think, you mentioned in the guidance kind of implies $5 million in licensing and other -- the quarter is weak, but can you just talk about the pipeline relative to maybe a year ago. I know, you commented on your prepared remarks, but are there more pent-up deal now waiting to happen and is there anything you could say about activity thus far in 2013?

Gideon Wertheizer

Yeah. Brian, it’s Gideon. The pipeline in fact is lot different than we had in the year ago In short, we’ve compared lots of things with handsets type of development. We mentioned in the prepared remark a strategic deal that we are working. By the way, we are more strategic type of things than we had in the past. And the reason is what we mentioned in the prepared remark, people that are going into the next generation are facing a lot of challenges because the new technologies are kind of a step versus the existing one.

So, if you want to move from 3G to LTE, that’s a big step. That’s a reason that you see so many companies now struggling, and you’ll see only Qualcomm and Samsung in the market today with production via the product. So, we see new customer company that didn’t work with us in the past coming to us and say, what can you offer us and besides that we can work together.

So on those pipelines, I wouldn’t take -- I wouldn’t take this 3.6 and then you have mentioned that they are delivering add-on in terms of two license that really take us to the ends where we used to be. I wouldn’t take it as a trend but more like a single outpoint where companies are taking their time and we are trying to expedite it but we couldn’t do it the last quarter but it’s -- we keep going.

Brian Nugent - William Blair

Yeah. On those strategic deals, I mean can you just -- is that that sounds like it’s more to firm up your position in the next generation technology into, I guess, is it aimed at reducing kind of market for your customers or I mean are you really looking for incremental revenue opportunities there. And then you also mentioned the little bit of an OpEx headwind I guess that’s not -- I wanted to clarify that’s not factored into the first quarter guidance but can you -- is there any way to sort of give a sense of the magnitude of how that could progress, the incremental expenses in 2013?

Yaniv Arieli

Yeah. I think I said that several times $1 million to $2 million overall not something that is part of the ordinary from pioneers. I think that said and you’re right that it doesn’t have too much effect in Q1 as we see it for now. But as the year evolves and we’ll keep close monitor both on that and on the model in the top line of course.

Brian Nugent - William Blair

All right. And then just real quick on small cells, you mentioned two customers, but are you working to expand into a broader set of customers there that you’re not announcing. And then can you also talk about sort of how we should think about content in those systems. You talked about the unit growth, but I imagine it’s more of a flat royalty rate. And if you can talk anything about timing in 2013, how meaningful that could be? Thanks.

Gideon Wertheizer

Given the efforts that we saw because we have a very long list in 10 minutes -- well, the small cells we are addressing many customers. We have an advantage because the two customers that I mentioned are in production and not that many companies in the production today in this space. And thus makes our technology more mature. The other question was about unit growth.

Yaniv Arieli

No. I think what we could offer them and what type of market. I think we covered in the sense that the DSP is targeting not just typical handset, but many other markets. And you could see that even in this Q1, we find a G.Fast modem for the fiber to the home. So a lot of this in modems that at the end of the day can enhance our licensing and future royalties is not just typical OEMs or semis in handsets.

Brian Nugent - William Blair

Thanks.

Gideon Wertheizer

Thank you, Brian.

Operator

And our next question will come from Vijay Rakesh of Sterne Agee. Please go ahead.

Vijay Rakesh - Sterne Agee

Hi guys. Just wondering if you can give what the 2G, 3G mix is now?

Gideon Wertheizer

It hasn’t changed much. We said about 800 million out of the 1 billion in 2G, its about 80% on an annual basis.

Vijay Rakesh - Sterne Agee

For the year. How about for the quarter?

Gideon Wertheizer

Slightly higher than that because in the last quarter we had more 3G so slightly higher them in that.

Vijay Rakesh - Sterne Agee

Okay. And I know you mentioned some uncertainty in the licensing side and things are little affected by macro, how does your licensing pipeline look for 2013?

Yaniv Arieli

I think we just answered that. Gideon just talked about it in the last question and so I’m not sure we want to repeat it, but essentially we are saying that it’s as good as a year ago even more. We have new products that we talked about that we did not have in the beginning of last year. And few markets that we did not have like around the multimedia vision, audio so we just covered that in the prior answer if that’s okay.

Vijay Rakesh - Sterne Agee

Got it. Okay. And obviously, you saw some weakness here on the consumer side, any thoughts on when you see any pick up between the handset on the consumer side. Obviously, June will deflect March which tends to be a little weak, but how do you see, how do see that whole royalty side picking up?

Yaniv Arieli

Well, its probably the consumer will -- will probably in the second half of the year. But you are right it, when it comes to consumer it’s economic.

Vijay Rakesh - Sterne Agee

Right. Okay. Great. Thanks.

Yaniv Arieli

Thank you, Vijay.

Operator

And our next question will come from Matt Robison of Wunderlich. Please go ahead.

Matt Robison - Wunderlich

Hey, thanks for taking the question. You guys have had sequentially down licensing comparisons in ‘05, ‘06, ‘07 and ‘08 and now in ‘12. Now are we -- is part of this services maintenance commitments that’s effected the way you recognized this and the other thing maybe more profound is it looks like you made being kind of a structural shift here. Can you talk about the percentage of your licensing that was direct to brands in 2012 and how you expect that mix to shift in 2013?

Yaniv Arieli

I’ll try to answer the question. I am not so sure you will understand. First of all we come both from historical 2007, 2008, the company had a very large communication business. We had many more people there and we had like other products to license. We had more product to license you can -- I will say theoretically get a higher license.

Matt Robison - Wunderlich

No. That was back when you were…

Yaniv Arieli

It continues now.

Matt Robison - Wunderlich

That was back when you were doing more kind of job shop licensing and…

Yaniv Arieli

Yeah. No. If you -- we are not -- right now we have the DSP, we are not changing the model by doing more services and things like that. We continued to do the way we did so far though -- the shortfall in licensing in the quarter as I said it’s a point just one singular point. I don’t see this as a trend.

Matt Robison - Wunderlich

Okay. So let’s talk about the shift in customer mix. You are talking about these strategic deals. You mentioned one big leadership customer that’s doing more captive work, how do you -- how do you expect that percentage that comes from captive type brands change in ‘13 versus ‘12?

Yaniv Arieli

Well, we have -- we have gone specific to the customers and the type of the customer. I mean, let’s make sure that we get the deal and then we’ll be happy to address question about it.

But, in general, we are dealing with more the customer base because we have technology that are beyond the modem. We have this RDR and we are speaking with codec guys and application processor guy and we are managing in regions and we meet automotive companies and we meet DTV companies. And the addressable market that we have today are bigger and that’s one of the reason that the product line is bigger.

Matt Robison - Wunderlich

How much has consolidation in the merchant semiconductor business. How much negative impact did that had on your licensing business?

Yaniv Arieli

It generally has an impact because when it comes to baseband, let say LTE handset, you don’t have that many companies. If you leave aside for now Qualcomm, real companies if it create all the conditions what we are looking, we are looking for companies that generate volumes, you have less renewals to be in the past.

However, we are -- we have now the Wi-Fi and that’s open up in other countries, the same BSP technology. We are addressing the base station, that’s more sales and decelerated different customers. So in terms of the amount of customer that we are having in front of us, we manage to basically extend it even beyond what we had in the past.

Matt Robison - Wunderlich

Yeah. Okay. So you’ve got some -- at least qualitatively, you’ve got some addressable market expansion off?

Yaniv Arieli

Yeah. It’s not -- yeah, it’s not qualitatively, its quantity wise we have much bigger customer -- potential customer base.

Matt Robison - Wunderlich

Do we -- are we going to see any change in capital spending associated with some of the tools?

Yaniv Arieli

No.

Matt Robison - Wunderlich

Resale tools

Yaniv Arieli

No. No. Last quarter it was about 300 and something thousand dollars, $100,000 overall on an annual, less than 1 million and that should not change into 2013.

Matt Robison - Wunderlich

And the depreciation flat sequentially also?

Yaniv Arieli

About same numbers more or less, 150,000 for the quarter, about 600 for the year, that’s not going to change in 2013.

Matt Robison - Wunderlich

Okay. Thanks.

Yaniv Arieli

Thanks, Matt.

Gideon Wertheizer

Thanks, Matt.

Operator

And ladies and gentlemen, the final question for today will come from Jay Srivatsa of Chardan Capital Markets. Please go ahead.

Jay Srivatsa - Chardan Capital Markets

Yeah. Thanks for taking my question. Gideon, in terms of the mix, clearly you’ve been expecting the smartphone business to ramp up and looks like it started ramping up in some part. That should start to improve your ASP, would it not? I mean, looks like ASP is up relatively stable, but the offset in the units should be counteracted by the increase in the ASPs at some point, don’t you think?

Gideon Wertheizer

Yeah. I think so. There is one thing that I -- it may be considered not as a good news. But we are -- on a quarter-to-quarter, still we are expanding our market share in the 2G, so the volume in 2G are growing. Let me just give you an example, Nokia, all the Asha product is still -- they are shipping more.

So, yeah, indeed we see the trend in 3G and more volume. But also 2G is growing and in fact, in the last I would say two-quarters -- no, let’s say, this two quarter, 2G is growing faster than 3G.

Jay Srivatsa - Chardan Capital Markets

Okay.

Gideon Wertheizer

So that’s -- but I don’t know how long will it take the growth in unit wise in 2G and definitely the 3G and LTE is more sustainable. But in the 2G, it’s more like, I think this year we are going to see more smartphones and 2G smartphones that also take the ASP higher.

Jay Srivatsa - Chardan Capital Markets

Okay. In terms of the full-year guidance, I know you refrain from giving full-year guidance. I guess the question is, what’s the rationale behind that decision, are you concerned about just volatility in the market in general or are you concerned about the mix or what was the rationale behind not giving full-year guidance any more?

Gideon Wertheizer

Well, I think it’s quite simple. The fact is none of our customers actually open up and give more color or specific color about the handset business and baseband in particular. If you don’t have that to backup, you have -- it’s our own analysis. We did not want to repeat 2012 by misinterpreting in the market, the Nokia, the RIM business at the time.

I think we have a very interesting growth drivers ahead of us that we’ve mentioned. But we don’t want to take a calculated risk versus just seeing all the announcements. Let’s wait for next month specifically around mobile world congress. I think you will see a lot of new phones out there, a lot of introductions of the phones that this is exactly what we’re talking about. We are continuing to replace PI in the higher end phones and Qualcomm in essence, in the lower end 3G phones.

The magnitude and the product enhancement, this is something that we want to first see out there and then we’ll be much more comfortable to guide and to build them all. So our longer term mall is intact.

We still see growth in handset on the shorter meaning the next couple of quarters, we did not think that it’s right to take a calculated gift versus sharing with you the growth drivers, the customer base, the markets that we’ve stocked in lengths about newer markets and that’s just a traditional baseband guide. And I’m sure we’ll see few new players that will start contributing royalties for us in 2012 from all of these different segments that we’ve just talked about.

Jay Srivatsa - Chardan Capital Markets

All right. Last question for me, Gideon at the end of the day, even though you’ve tried to penetrate several of their adjacent market, you’re still dependent heavily on the handset business, when do you foresee to have -- to get a point where you have some level of certainty in other areas that will potentially offset the seasonal fluctuation or the uncertainty around the handset business?

Gideon Wertheizer

Jay, I’m going to say that the handset businesses are uncertain. The handset business is consistent and in terms of migrating from 2G to 3G to 4G and we better be focus -- having that -- make sure that we have foothold in all these three segments and we have it.

Now, regarding other growth engines and please interprets this as a growth engine and not something to cover any shortfall in mobile. I don’t know and I don’t see any shortfall in mobile, I want to be there, I want to go there from 46% that we are now to the 60% and 70%. I want to go from 2G to 3G and get higher rates in PN&T to be there. This is primary goal of this company.

Regarding the other gross engine of the company, we have signed -- I mean we signed, I don’t recall exact now. I don’t give in something that I don’t take in mind but in general, we’re going to see starting, let’s say end of this year competition from other -- royalties from other businesses.

Jay Srivatsa - Chardan Capital Markets

Okay. Thank you.

Gideon Wertheizer

And incremental, it’s incremental. It’s not…

Jay Srivatsa - Chardan Capital Markets

Thank you.

Gideon Wertheizer

Thank you.

Operator

And ladies and gentlemen, that will conclude our question-and-answer session today. I would like to turn the call back over to Mr. Kingston for his closing remarks.

Richard Kingston

Thanks, Denise. Thank you again for joining us today on the call and for your continued interest and support at CEVA. We will be attending the Mobile World Congress, the world’s largest mobile exhibition on February 25th through February 28th in Barcelona. Yeah, you can find more information of upcoming events and conferences that CEVA will attend on the Investor Relations section of our website. Thank you and good bye.

Operator

Ladies and gentlemen, the conference has now concluded. We thank you for attending today’s presentation. You may now disconnect your lines.

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