CEVA's CEO Presents at Barclays Global Technology, Media and Telecom Conference (Transcript)

May.23.13 | About: CEVA, Inc. (CEVA)

CEVA, Inc. (NASDAQ:CEVA)

Barclays Global Technology, Media and Telecom Conference

May 23, 2013 04:40 PM ET

Executives

Gideon Wertheizer - CEO

Analysts

Joseph Wolf - Barclays Capital

Gideon Wertheizer

Thank you Joseph, good afternoon everyone, thanks for joining us but I guess Barclays saved the best for last. So you got to be last you got to be best. We will run through the basic slides quite quickly just to get up to speed and then talk a little bit more about the current environment, times and where we see the market in the next couple of years. Of course the forward looking statement, introduction, market growth drivers, and wrap up with some of the financial data.

So CEVA of course is the world’s leading licensor of DSP technology. We have been here for a while and specifically in architecture for baseband in the wireless handset space and focused with new innovative technologies and the leap frog as the market move from 2G all the way to LTE advanced over the years.

This business could only be successful. The IP business is high volume markets and other than just focusing, I would say probably 90% of our volume in the past is around the wireless. We are recently quite successful in diversifying it and moving into the wireless infrastructure which I'll touch on, digital photography, embedded vision, audio and voice which are all heavily used DSP markets and applications and first time for us in many of these types of devices. Last but not least it’s a licensing and royalty business model. It has high leverage when you get it right. You have the customer base, you have the volume, then a lot of this business of course is very high margin business.

Few snapshots of where CEVA is today. We're as I mentioned number one licensor of the DSP technology in the world, more than 4 billion devices powered by our technology. So it has been around, proven, has the right customer base and design win. This is why the volume is so big. We are number one in architecture for handsets and more than a billion devices powered by CEVA just in 2012. So by far bigger than any of the other semiconductor or IP vendors out there in wireless last year and in the last couple of years.

LTE, which is the next big thing for us and the world and the industry over the next couple of years, more than 20 design there and only one shipping or maybe two I would say, shipping. So the potential there is quite big. In Q4 which these are the numbers that we represent in Q1 and reported, these are always one quarter [in arrears] [ph], 43% worldwide market share and we have been keeping north of 40% for a while. And also the audio, if you add up the number of devices that we powered, specifically and mainly in the wireless business, but also in gaming consoles and some other devices, more than 2.5 billion devices so far. 200 licensees, north of 300 agreements, so solid customer base and lot of traction.

The business model is quite simple, upfront license fee. That gives access to the semiconductor companies to use our technology and then the nice and sort of sexy part of the IP businesses is the royalty stream which is 100% gross margin, no cost of R&D or sales and marketing is involved with it and that kicks in as soon as our customers get into the production, starts selling those chips, probably somewhere between one year to two year after they start the design of a chip. There are no limitations on time as long as our customer or quantify or dollars, as long as our customer ships silicon with our IP inside we get paid and that’s really the key business model and the growth in the IP model.

To recap where we have been over the last couple of years and how this market and business work for us, if you look from 2008 all the way to 2011, the 2011 was sort of the peak demand for 2G phones. This is the bulk of other ramp up over the last couple of years. Even if you look at end of 2011 there was a lot of demand, no significant price erosion, normal in the industry but nothing that big or no changes and we have been not able to only increase our units but also of course the dollar amount and the royalties which extrapolated to better earnings and growth over the years.

2012, the industry suddenly changed. They’re just not foreseeable but looking around whether it’s been hitting Nokia, HTC and bunch of different players and I’ll get to it in a second and explain a little to what happen in 2012 and where is this transition period that we are hopefully getting to close to the end of it or at least are seeing positive signs with some positive input and I’ll try to touch on what those are in the next couple of slides.

That sort of product and if you’re on our IR distribution list and if not we’ll be happy to add you, we send once a quarter an updated list of new products that we see in the market. This type of slide year ago at this conference we were not able to show. A big portion of them is our low cost Smartphone running 1 gigabits processor, all the bells and whistles that one could find in a sophisticated iPhone or Galaxy but at sub $100 prices and I’ll show you in a minute that not only sub $100 prices but a lot of these devices are sub $50. We’re talking about $48 a piece, all the nice things that we could find in a Smartphone and this is exactly the sweet spot and the pricing point that we believe could get this industry to change into much, much higher volume.

And again a year ago at this conference, none of these phones everybody was talking about this, everybody was then mentioning sub $150 phones and end of the day year later we’re talking about somewhere between $50 to $100 phones. Those are the drivers for the Chinese, Indian, Latin America, all the emerging economies over the next couple of years to ramp up with these devices. And of course we have on the higher end all the Samsung devices, even Blackberry the recently with non-LTE devices powered CEVA and lot of other devices that you could see in the slide.

Okay a snapshot of 2012 before we jump into some of the explanation on the growth for the next couple of years. Overall mobile space $2.2 billion phones were sold. A billion of them are CEVA powered. On the consumer side out of 900 million about 100 million were CEVA powered. So summarizing all that we had about 1.1 billion devices out of about a third of the market, of the potential market.

And looking into what is happened and what is about to ramp up, and we see two major trends here. One is 2G to 3G and then further out 3G to LTE. Here I would mention and tie the previous slide into one conclusion that as soon as these - at the end of 2011 beginning of 2012 a lot of the consumer in the emerging economies decided no more, they don’t want spent $10 or $20 on a simple phone. They want the touch screen, they want the color, they want the video and audio and all the user experience of a Smartphone. But it took the industry, it took about a year to actually come up with the right devices that I showed you in the previous slide.

Both the semiconductor companies, whether it’s the Broadcom or the Spreadtrum, the Intels of the world, the ST Ericsson did not have the right chip that runs the 1 gigabits processing if you have the application processor and all the baseband either combined or separate. They didn’t have the technology to do it. They didn’t have the right pricing and of course the OEMs did not know a year ago how to manufacture a Smartphone in less than $100. That’s behind us and if you look at the market today, still the bulk of them, 1.2 billion devices were CEVA powered for 2G and we have 63% worldwide market share.

Because these are relatively cheaper chips these days and we get around 1% of the average chip price in average, this is the business model, we get somewhere between $0.01 to $0.02 per chip sold.

On the other hand when we talk about 3G and the opportunities there, in just China alone the numbers are quite dramatic and big. Only about 200 million devices were CEVA powered last year. The content for us is 2 to 3X more I would say an average $0.04 to $0.05 in high volume when we get to hundreds and millions of units, versus the $0.01 to $0.02 in the older generation.

And of course the most interesting aspect, when all this starts kicking in and that's LTE, there are entry barriers even higher because we have a very sophisticated system that support all the prior generation, very compatible.

Today we have only one customer actually shipping and that's Samsung's own internal chips or a semiconductor division selling into the Samsung phones. There our content in average for LTE is around $0.10 a piece. Of course there are lots of market data about the opportunities of LTE. I'll try to show you around in the next couple of slides quickly about different market segments but the opportunities for us in the next couple of years is to get more and more volume in these higher ASP and higher end type of a market and end-devices.

Now there is going to be price erosion. This is how the market works. So if 3G chips today cost $6, $7 maybe $8 maybe two or three years down the road, they will be $4, $5. LTE chip if its north of $10 or $20 today, it may cost less than $10 in the next couple of years. That is obvious and that's the nature of the semiconductor industry.

When we look at this business, we are not asking ourselves how much price erosion will happen in each segment of the market but where do we see ourselves today versus three years from now and an average of $0.03 today versus potentially higher ASP over the next couple of years.

With that said, I will show you when we go over some of the other markets, there are other markets with much higher volume opportunities like machine to machine, entering of things; the ASP maybe even lower than it would have been lower than $0.01 but the volumes are much-much larger.

For us at the end of the day, the day we look at the royalty business is incremental dollars. We don’t care, of course it's not as if its higher ASP but it's not a metric that is a must for us other than the fact that if you get more units, if you got more royalties, that improves the profitability and the rest of the business model.

Next couple of slides give us a little bit more insight of each segment of the market. I will try to run them a quite quickly and get to the summary. So each of these different segments also highlights when do we think this gross driver kicks in and the first one is the 3G, the low cost migration into 3G. This is a 2013 and 14 event.

As I mentioned, this are the some of the phones that you could see out there today selling high since $48, 1 gigabit processor, TD, local Chinese market with a Spreadtrum chip inside. This types of phones were not invented, nor were on sale, even six months ago.

The opportunity is pretty huge. If you look at the China mobile byte cell, just one operator in China the biggest one, spend of 700 million subscribers and only a 100 millionish are 3G. If you look at Europe, and look at U.S., if you look at the penetration of high end or 3G devices, we're talking of somewhere between 65% to 85% versus 16% in China.

The numbers are even lower if you look at it and talk about the other emerging economies like India, Africa, Latin America. So just by looking at the Chinese opportunity over the next couple of years, these could be hundreds of millions of users eventually moving from their simple 2G phones to a much more sophisticated 3G phone but at a very reasonable, it's not even very, very reasonable price of less than $50 around, $50 to $100.

Lots of opportunities in market. So if you look at CEVA's 3G, we had four quarters in a row with sequential growth in units and we believe this will continue into the next quarter as well being the stiff sequential quarters, so we don’t see any seasonality, we don’t see any slowdown, 3G for us across the industry, more and more volume.

To remind you, Qualcomm and TI were the only players, a 100% of this market three year, four years ago. At these price range we did not see or did not see at least in the past Qualcomm complete in the 2G arena. So a very interesting question for us, we think that our customers, whether it’s the Broadcom Intel, Spreadtrum, ST Ericsson have a very good potential of winning, whether it’s the light box market or the Tier 1 brands in this type of scenario.

Next is 3G to LTE, 2014, 2015 type of a road map. If we look at the number of players, look at what Broadcom had to say in their analyst day just about a month ago, they tore down a iPhone5, took out the Qualcomm chip, put their own chip inside and showed and stated that at 35% smaller in size and 25% more efficient in power, pretty remarkable numbers and quite a change in the industry.

We are working with all the big players today in LTE, 20 design wins, Samsung is shipping in high volume into the Korean market, their own LTE version of the high end Samsung devices with few other markets and the potential is to grow that business to the rest of the world over the next period of time. All of the internal Samsung stuff is CEVA based. So we're working on that with really a Tier 1 player in an industry and on top of the specific LTE opportunities enhanced it, I'll talk about in a separate slide, the opportunities for LTE in the infrastructure space as well. To customers shipping LTE today is the potential for a number of users and of course the volumes are much bigger over the next couple of years.

Machine to machine and base station, a relatively new market for us. We have seen a lot of discussions about machine to machine, we're getting to the price fall and very similar to the cellphone industry, where a dollar type of chip or close to that could get into 100s of millions or billions of devices. This could be in the car industry, the automotive, your refrigerator and lots of other devices, we're getting to that inflection point.

If you look at the overall semiconductor TAM for infrastructure today, it's about 3 billion units. If we used just an average number of 1% of that market, this market opportunity for us in the next couple of years is as big as our success story thus far in the wireless handset space, essential double the royalty content that we can get,. Of course we were not going to have a 100% of that market, but two of the biggest players Tein and Freescale today dominate this $3 billion chip business, have not really designed a new DSP for LTE or LTE Advanced for the last decade.

So we see, and we see a huge opportunity. We talked about a very-very significant new player that we signed in Q1 and the infrastructure space, unfortunately we cannot add more data or color about that specific player but we do believe that this could potentially be a game changer in the industry.

On top of that we are using, working with companies like Mindspeed that came up with a very nice solution. They are selling already into the Korean infrastructure space successfully with very good technology and the royalty for us there is much higher than a $0.10 per device. Because there is multiple implementations of DSPs on a single chip, we get multiple times ASPs or royalties for each chip that is being sold. So we could be talking about $0.50 to a $1.00 type of royalties when this market kicks in, especially on the high end infrastructure side.

Larger market, very interesting, brand new for us. So whatever we see the first shipments for Mindspeed and potentially others in the future that is all incremental to our existing wireless business. Event audio-voice, in the last I think 18-24 months we've been constantly winning somewhere around the one agreement the quarter in this new technologies. A few of the recent success stories that we could mention like Toshiba that within less than a year, these guys came with a very effective new chip, audio chip, high end for the automotive industry.

The idea is that you plug that chip into the infotainment system, you could have your windows turned down, your radio on and with very effective and advanced algorithms, noise cancellation, echo cancellation. You could talk, activate different devices, talk on the phone with a lot of background noise. This is Toshiba. We have the SP Group working on the same type of solution competing with audience of the world. This is a brand new opportunity for us and we believe we have all the right technology in order to succeed in the audio space.

Looking into vision, gesture, photography again, very high and very sophisticated DSPs. We have a specific line of products. This a 2015 or 16 type roadmap for us or royalty driver for us, a little bit further out, but the idea and the way we believe and see the consumer market is that you'll two main themes to activate devices, either voice related or gesture. This has been true for TV, cars, laptops, lot of different devices and in both of them we are in the last couple of quarters, last two years or so are planting the seeds with pretty interesting leading edge technology, which hopefully will get us to enjoy the fruit in the next two or three years.

So to summarize the growth for us in the last couple of years, constantly, for many, many years our customers have been using more and more of our technology. From 300 million we're up to north of a billion units in the last couple of years.

If we look ahead, about three years down the road and we use the existing customer base that we have, the existing design wins, not if and when we’ll build some new technology or may be find somebody interesting new, we are talking but pretty much what we have today. We did a lot of different marketing analysis, looked at different segments that I have mentioned in this presentation and believe that out of 5 billion addressable devices, we could probably power about 1.7 billion.

I leave it to you because we are not giving guidance three years down the road, getting the sort of the model or way to look at the potential earnings growth in this business, if it all works out and if you get the traction and this type of volume. Even if you use today’s average royalty rates and not increase them because of these new standards and new technology, we believe we have pretty significant opportunities of 600 million more devices, even at $0.03 a piece, that could take earnings to a new level and a much higher level than where we are at today.

Of course this is no model nor guidance but just a little bit of the way we try to forecast how the company can grow over the next couple of years with its existing customer base and technology. So quite exciting.

Summarizing our abilities and capabilities in the technology front, this is a snapshot of CEVA’s portfolio. Essentially, it’s divided into three main segments, our bread and butter, 90% of the volume today is around the connectivity. The newer stuff are on audio voice. We have three different cores, one very sort of old and done very well, the TeakLite but the newest and latest TeakLite-4 does all the noise cancelation, echo, high end audio, surround and all that. That was introduced in the market at the beginning of last year.

And on the photography and vision, relatively newer technologies have been around for last couple of years but I would say in the last 12 months we have got some pretty nice design wins around photography, vision, gesture and still it’s in infancy stage and we are still working and educating the industry that these are very interesting designs, specifically for face recognition, noise, gesture, much, much more efficient. This would be 10 to 20 times more power efficient than the ARM processor or Intel processor. The DSP is much more suitable for these types of application. So we are trying to educate semiconductor companies, OEMs to take the right step or the next step for these types of newer leading edge technologies.

On the financial front, the next couple of slides snapshot of Q1, which is pretty old news by now. We came out a little bit of a low end of our guidance, 12.1 but still within the guidance. Operating margins of around 22% non-GAAP and $2.9 million or $0.13 a share on a non-GAAP basis, not the best quarter we ever had but it's pretty much and in line with our expectation and guidance.

I think if you look historically we had much better quarters and that all was associated with this transition period about the royalty. Royalty level a year ago was 9 million, this year it was 7 million. As soon as these 3G and 4G devices kick in, we hope to be able to get back or at least improve the overall numbers that we are in today.

Balance sheet, very solid one, $157 million active on the buyback program, $2 million in Q1. Overall last year $27 million. So this is something that we believe is a good use of cash, especially these types of prices and we have constantly, at least in the last two years or so been active on the buyback front.

Historical models, I am sure Joseph could send you, I'll skip those. Snapshot of the history. We know how to run an IP company. We have done it for many years. Last week I celebrated eight years at the CEVA. I think we have made all the wise decisions so far and the right technology in the right markets and the right target, the applications that we want to take over the years. We think that we understand where the market is heading in the next couple of years with this transition from 2G to 3G and LTE.

We do hope that we have the right customer base and opportunity to continue and get back into growth in earnings growth with this and if course if that continues we will be able to generate more cash and either use it for buybacks or potentially ways to increase our IP offering and look for other IP add-ons to our existing technology portfolio.

So to summarize, let to run to the rain, number one architectural player today in cellular baseband by any means, the two other players that do not work with us today are Qualcomm and Media Pick. They have their own internal DSP. All the rest of the big players, whether it’s direct OEM or the semiconductor guidance space use CEVA.

We are consistently gaining market share in high volume 3G smartphone segment. This is probably the biggest volume driver in the industry for the next couple of years and it will position pretty well to gain similar market traction like we have in 2G because these are the same players at the end of the day. And when we look further out for LTE more than 20 design wins only two have just started to ship and two infrastructure design wins, one we announced last quarter, one about a year ago, one of the two big Asian players in the infrastructure space. So quite excited about this new opportunities which we did not see any royalties yet but still in the design cycle.

New product line they mentioned digital photography, embedded vision, audio voice, wireless infrastructure these are all incremental markets and of course if that works then we know how to make some money and generate earnings growth and that will fall in place when the other bullets kick in.

So I want to thank you for the time and opportunity. Joseph do you want to run Q&A or after?

Question-and-Answer Session

Joseph Wolf - Barclays Capital

On the transition from 2G to 3G, it took longer than people expected and you went through some of those reasons. What makes you more confident that that won’t happen again from 3G to LTE or 4G?

Gideon Wertheizer

First of all, there is nothing that we know for sure. It is a huge industry, probably be one of the biggest if not the biggest one in volume today in the world but we are seeing a lot of traction already in LTE. If 3G took a decade before it really picked up and it is the beginning only to high end $600 phones and LTE nobody has phones around us and in many, many countries already moving to LTE. The operators have a big advantage, cost advantage of deploying LTE networks.

You get much more bandwidth for your buck and for your investment in it and you could offload the system with different Wi-Fi connectivity because of the similarity to 802.11 a/g and LTE which are very similar standards and the fact of the matter that everybody is trying to copy the Apples and the Samsungs of the world with LTE phones today is, it means that this has already started.

The pace of it is going to be probably faster than what we have seen before because it is in the process already, and I think this time unlike 3G or 2G we are going to see the LTE in a much, much wider array of products, tablets, laptops, we have not talked about smart grids. If you put a box in your house for gas, electricity or water metering you want that box to work for the next 15 years, you do not want to change it every three or four years when the standard now changes from 2G to 3G and LTE is going to be there for probably quite a long period of time.

So therefore other than the fact that we are seeing this demand coming from the operators, it is not going to be just the handsets this time but it is going to be the laptops and the tablets and a lot of these other devices. So many other industries and we see that in our licensing activity it is much more than our traditional five big players in the wireless space.

Unidentified Analyst

In terms of royalty dollars, is the royalty dollars from 2.5G to 4G now larger than the relative dollars from 2G, if not when is that going to happen?

Gideon Wertheizer

Yes, we didn’t breakout yet the dollars. Usually we give very detailed guidance in volume. I think last quarter we said that 28% of our volume was 3G and 72% was 2G. At the end of last year it was 80-20ish. So we are seeing a positive trend.

If you do the simple math that the price difference was one to two and the volumes are getting to one to two, we are getting very close to the inflection point where the dollar should, [from] [ph] 3G are also suppressed. 2G we are getting close but still the bulk of the volume so far has been from 2G, but I believe we will get there.

Unidentified Analyst

You guys talked about a gaming market too, the Xbox to PS4 and so on. With the introduction of these new products are you getting any uplift in terms of royalties in these gaming consoles?

Gideon Wertheizer

With Xbox, historically we were in the portable gaming consoles. This is where we have much more power efficiency and that is our advantage because we came from the wireless space so that the Nintendo DS devices for example, their audio was powered by CEVA. Some of the Sony Playstations, we have some controller functionality there.

I think that the next-generation we could be seeing more activity around the gaming consoles. It wasn’t a core forte in the last couple of years. It was more in the portable, less in the stationary type of devices. But we see it as an interesting opportunity going forward.

Okay. Thank you very much everyone.

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