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CEVA, Inc. (NASDAQ:CEVA)

2Q 2013 Results - Earnings Call Transcript

July 31, 2013 08:30 AM ET

Executives

Richard Kingston - Director, Marketing and IR

Gideon Wertheizer - Chief Executive Officer

Yaniv Arieli - Chief Financial Officer

Analysts

Gary Mobley - Benchmark

Suji De Silva - Topeka

Joseph Wolf - Barclays

Anil Doradla - William Blair

Matt Robison - Wunderlich Securities

Jay Srivatsa - Chardan Capital Markets

Vijay Rakesh - Sterne Agee

Operator

Good morning, and welcome to the CEVA, Inc. Q2 2013 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 that this event is being recorded. Now I would like to turn the conference over to Richard Kingston. Mr. Kingston please go ahead.

Richard Kingston

Thank you very much. And good morning, everyone and welcome to CEVA's Second Quarter 2013 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 Yaniv will then cover the financial results for the second quarter of 2013 and provide guidance for the third quarter.

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 but 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. These forward-looking statements include financial guidance for the third quarter of 2013 and prospects relating to a specific feature phone customer, third-party market data incorporated herein, optimism about our business outlook and the growth opportunities including with respect to our strategy to expand our customer and revenue base.

Internal chip development by customers, the replacement of 2G to 3G, higher royalties from LTE and the migration to low-cost smartphones. The risks, uncertainties and assumptions includes 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 a market acceptance, the effect of intense industry competition and consolidation, global chip market trends, 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 the respective dates. With that said, I would now like to turn the call over to Gideon.

Gideon Wertheizer

Thank you, Richard and welcome everyone. I am pleased to report both second quarter 2013 financial results with revenue and earnings that exceeded our guidance range. Total revenue for the second quarter was $12.8 million up 6% sequentially and down 6% compared to the second quarter of 2012.

Our strong results were driven by our licensing business, where we completed several, pivotal agreements with our multimedia and baseband products.

During the second quarter we concluded six new license agreements, four of the agreements were for CEVA DSP cores platform and software, one was for our SATA/SAS technologies and another was for our Bluetooth technology.

Geographically, one of the license agreement was in U.S. and the other five were in Asia including Japan. Key DSP agreement signed during the quarter were with 3G and LTE, cellular baseband, imaging, vision and audio for mobile devices.

Looking at our quarterly licensing achievement, the key takeaway is the successful execution of our strategy to expand our customer and revenue base, beyond our strong foothold in the baseband space, our competency to create vertically integrated product offering comprising of our DSPs and software enable us to address a substantially larger customer base and further diversify our revenue streams.

I believe the agreement executed during the second quarter reflects the efficacy of this strategy which will underpin our future royalty goals and allow us to capital our multiple vertical end market and trends.

Let me now elaborate on the key deals completed during the quarter. During our previous conference call we discussed the recent trends of OEMs moving to internalize developments of multimedia processing chips. This is especially evident in the smartphone space, where companies such as Apple Samsung and Huawei are gradually relaying more and more on usage of their internally designed proprietary chips to achieve product differentiation.

As we have previously discussed, we believe that this is a positive development for our business, as it will work to extend our licensee base beyond the merchant chips vendor and connected directly into the OEM space.

In particular, we continue to see strong interest in our digital photography and embedded vision platform the MM3101. Our comprehensive offering is enable OEM to differentiate the product by combining their proprietary technologies with the advantages of our MM3101 platform.

During the quarter we continued to see traction with this offering successfully signing up two new OEMs, both first time CEVA customers, targeting mobile multimedia application. At this point, due to confidentiality clauses we are unable to disclose their identity. I will just say they both are major player in their respective mobile markets.

In the same context of diversification, we also managed to sign a new first time customer in China for our audio DSP offering during the quarter. This customer is one of the largest vendor in audio space in terms of product volume. For this agreement we wanted to specifically highlight our and customer decision to switch from audio processing on a CPU to our DSP.

Advance audio technologies aimed to enrich user experience in the form of audio rendering and voice control requires significantly more DSP performance at much lower power levels than what can be achieved on a CPU.

CEVA's expertise with this capability played a major role in winning us this business, and we are seeing the movement our offloading audio processing to a dedicated DSP gaining momentum.

We continue to make positive inroad into new markets and technology, while also developing and investing in our strongest market, the cellular business space. It is a very demanding space, where players like CEVA have to consistently be at the forefront of technology and adapt to emerging trends.

CEVA has been able to take a lead in the DSP front as we demonstrated with successive generation of our CEVA-XC architecture that already support the performance requirement of next generation cellular both for handsets and (Inaudible)

We are fortunate to work exclusively with three out of the five largest players. We have been in strategic relationship with these key customers which involve ongoing discussions, coordination and planning. As a result of our solution expertise and customer oriented business model, we are extremely happy to announce that one of these key customers has decided to extend the use of our product for 3G and LTE development.

We begin this adoption set the stage for continued long-term and successful relationship with one of our most important customers. Now for the reminder of my prepared remarks I would like to provide you with updates on our markets and customers. Although, the handset market for the first quarter of 2013 which translate to our second quarter royalty revenue was slightly weaker than we expected.

According to Strategy Analytics global health achievements dipped 1% annually during the first quarter of 2013. While the low cost smartphone segment in emerging markets continued to grow long field 2G feature phone continue to decline and are being displaced by a low cost smartphone. A recent report from ABA Research projects the achievement of sub $250 smartphone will grow from 259 million units this year to 788 million units in 2018 and we make up 46% of the global smartphone market. In contrast to this, midrange and high end smartphone will grow at a much slower pace.

We see that there is a clear market shift underway is valued most market, low cost smartphone are beginning to dominate where price (inaudible) residents over the technical superiority. These lengths get to boarder way for CEVA customers as they strategically target their large installment base of OEMs and ODM in China, in Asia with cost effective turnkey smartphone solution enable them to capitalize on this trend.

Following a few data points about those customers. Spreadtrum shipments grew 36% year-over-year to Strategy Analytics latest report. They are ranked number one in the 3G TD-SCDMA market with over 50% market share. The TV space continues to offer huge migration opportunities for low cost smartphone vendors. In Q1, 2013, only 140 million out of China Mobile 726 million subscribers have switched to 3G. The transition from 2G to 2B to 3G is expected to accelerate as already seen by recent encouraging financial pre-announcement of Spreadtrum.

Spreadtrum also recently extended its 3G product offering to the ubiquitous wideband CDMA market which focused its reach 1 billion unit in 2015. The FC [7701] is spreading first wideband CDMA integrated base-band chip and is said to further reduce twice as in the wideband CDMA market. Spreadtrum announced yesterday that this platform performance has now successfully reached mass production and Samsung is one of the customer that is (inaudible)12:52

Broadcom has the comprehensive technology offering for the low end and meatier segment of the smartphone including recent in production of quad core processor. Samsung is its largest customer, numerous Samsung mobile launched recently and might reach our various Galaxy brands such as Mega Grand, Grand duos, Fame and more.

Broadcom is also looking to diversify its customer base and recently remarked that it discontinues to head design win with handset brands like (inaudible)13:27 totaling more than 40 designers.

These trends where 3G base form, displays 2G form strongly benefit CEVA at the royalty to collect is relatively higher compared to 2G working level. This quarter results represents the first time, this royalty revenue contribution from 3G shipment exceeded the royalty new contribution from 2G.

Looking ahead, we expect this trend to continue and expedite. Next, we will anticipate to record incremental contribution to our worthy chips, which carry high royalty per unit than 3G. Last before handing over the call to Yaniv for financial, I would like to comment on the second quarter shipment is implied by our customers quarterly ending segment and from our preliminary review of the royalty reports we receive thus far from our customers.

The general theme is that outside China their handset market is slow which is currently on OEM to use order and to adjust inventory. In the high end smartphone the trend is cover into smartphone that replace 3G smartphone. As our key customer in mass production for LTE, our market share and royalty revenue derived from LTE smartphone to-date is minute.

In the low cost high volume 3G smartphone we are progressing very well. We had noticeable sequential unit shipments into it, in particular on the 3G TD-SCDMA Smartphone in the China and china mobile. This has been driven by consumer preference to migrate to a more enriched user experience also by smartphone or else feature phone.

While we expect a continuous decline of shipments of feature phone as a result of this trend, there appears to be a substantial and extraordinary decline in the shipment of feature phone related to one key customer in the second quarter. We believe that these low shipments level of feature phone does not represent a normal trend and that it is a result of inventory adjustment in the two shelves of order to the second half of the year.

With that said, I will handle the call to Yaniv for financial results and guidance.

Yaniv Arieli

Thank you, Gideon. I will start by reviewing the results of our operations for the second quarter of 2013. Revenue for the second quarter was $12.8 million above the high end of our guidance and a 6% decline compared to last year. The revenue breakdown is as follows. Licensing and related revenue was $6.1 million reflecting 48% of total revenue, 22% and 2% higher sequentially and on a yearly basis respectively. Royalty revenue was $6.7 million reflecting 52% of our total revenue down 6% and 12% sequentially and on year-over-year basis respectively.

Quarterly gross margin was 91% on the GAAP basis and 92% on non-GAAP basis excluding approximately $81,000 of equity-based compensation expenses. Our total operating expenses for the quarter were $9.1 million at the mid to high end of our guidance range, which included aggregated equity-based compensation expense of approximately $1.3 million.

Our total operating expenses for the second quarter excluding the equity-based compensation expense were $8.6 million reflecting a gain from the mid to high end range of our guidance. US GAAP net income for the quarter decreased by 37% to $2.2 million and fully diluted net income per share decreased by 33% to $0.10. This compares to $3.5 million and $0.15 respectively for the second quarter of 2012.

Non-GAAP net income decreased by 24% to $3.4 million as compared with the same period for the prior year. Our non-GAAP fully diluted EPS decreased 21% to $0.15 per share as compared to the same period last year. These figures exclude approximately $1.2 million and $1 million of equity-based compensation net of taxes for the second quarter of 2013 and 2012 respectively.

Other related data, shipped units by CEVA licensees during the first quarter of 2013 were 281 million, down 1% sequentially and up 14% from the first quarter shipments of 2012. Of the 281 million units shipped, 259 million units or approximately are for baseband chips reflecting a sequential decrease from 264 million units of baseband shipped and 14% year-over-year growth in volume shipment.

As of June 30 this year, 29 licensees were shipped in products incorporating our technology, two more than the prior quarter and we had 35 shipping customers under licensing agreement, same as the prior quarter.

As for the balance sheet item, at the end of June CEVA's cash, cash equivalent balances and marketable securities reached approximately $154 million. Our DSO for the second quarter of 2013 increased to 65 days as compared to 55 days in the prior quarter. We forecast that this figure will reduce closer to the end of the year due to timing of payments for new customers and product related payment milestones.

With regards to our share buyback program, during the second quarter and first half of the year we purchased approximately 176,000 and 305,000 shares of our common stock at an average price of $16.2 and $15.9 per share for total consideration of approximately $2.8 million and $4.9 million respectively. At the end of the quarter, we had additional 179,000 shares available for repurchase under our existing plan.

Yesterday, our Board of Directors decided to increase the share buyback pool by an additional 2 million shares. We believe the continued execution of our buyback program illustrates our confident in the long-term growth opportunities for CEVA, the company's strong fundamentals and considerable earnings leverage.

Now for the guidance. As Gideon commented earlier, from our preliminary view of the royalty reports that we received thus far, we continue to experience a noticeable growth in the 3G low cost smartphone segment and is replacing feature phones. However, the decline in feature phone shipment in the second quarter was substantial and extraordinary, reflecting inventory reduction in order to push out by a key customer.

In the consumer part of our business, after a few successive quarters of decline, there are still indications that our markets for our product in the segment are stabilizing and expect shipment volumes to increase as we get closer to the Christmas season.

Our guidance for the third quarter of this year, revenue for the third quarter is expected to be in the range of $11.5 million to $12.5 million. Gross margin is expected to be similar to the second quarter and approximately 91% on GAAP basis and 92% on non-GAAP basis, including 123R related expenses.

Operating expenses including equity-based compensation expense are expected to be in the range of $8.8 million to $9.8 million, higher equity-based compensation expenses offset by higher R&D grants. Of our anticipated total operating expense for the third quarter, $1.5 million is expected to be attributed to equity-based compensation expense and our non-GAAP OpEx is expected to be lower than the prior quarter and in the range of $7.2 million to $8.2 million.

Net interest income is expected to be up approximately $700,000, tax rate for the third quarter is expected to be the same rate and in the second quarter an approximately 14% for GAAP and 12% for non-GAAP. Share count for the third quarter is expected to be in the range of 22.7 million to [23.9] million shares.

Our U.S. GAAP EPS is expected to be in the range $0.8 to $0.10 per share and our non GAAP EPS excluding aggregate to $1.5 million of equity-base compensation expenses net of taxes is expected to be in the range of $0.15 and $0.17 per share.

Operator, you can now open the Q&A session.

Question-and-Answer Session

Operator

(Operator Instructions). The first question comes from Gary Mobley from Benchmark.

Gary Mobley - Benchmark

Thanks for taking my question. So couple of trends which seem to drive average royalty rate up on a per unit basis for the quarter, you had higher mix of non-cellular royalty units. And as you know mentioned you had a greater mix of 3G royalty revenue versus 2G. So I hope you can reconcile why we actually saw an overall decrease in the blended royalty rate per unit given those two factors?

Yaniv Arieli

Good morning, Gary. If we look at the handsets space, this is the first quarter that we actually saw the first change of the needle into higher blended ASP overall in the wireless segment. So what you just noted and exactly what happened in this second quarter and that should continue and go into the third quarter, but us credit as the number of average in the non-baseband business we had one new customer shipping pretty high volume of Bluetooth chip, this is the first time this introduction with our technology. And of course the Bluetooth chip is a new market for us and defends that it's a very much smaller and low cost chip and the ASP there is lower than the regular mix. So it's new add-on a new customer that could get into very high earmark and volume growth as we go along. That unfortunately offset the overall ASP of demand baseband business and has some slight effect on the overall ASP as well because of that new customer. Overall, say one if you want to add then look at Q3, we believe that an ASP overall blend in mix we could see from the same as you mentioned up to 20% sequential increase sin EPS next quarter.

Gary Mobley - Benchmark

Congrats on a strong licensing quarter and based on your commentary, it looks like you're doing a good job of diversifying your future royalty stream. So I was hoping you can share with us your best estimate as to the timing of when we'll see significant royalty contribution from these [MM 3K] type licensing arrangements and then as well some of the others in audio subsystems etcetera.

Gideon Wertheizer

This is a good question. This is Gideon. First of all when it comes to [MM] and the audio digital kind of a consumer type of product, the difference between consumer type of product, multimedia product and baseband is that in the multimedia you don't need to go through a certification in the operator in case. Once it works in your lab, and your customer lab, we can go out into production so usually a cycle of multimedia, it's about 12 months. And the deals, the licensing deals, I mean the [tape out] date and the production timeline, the outline in front of us are much faster than in baseband.

Gary Mobley - Benchmark

Okay, last question from me has to do with how the licensing revenue shaped up for the quarter, I'm just curious if there's a lot of customization work involved and was that factor for the higher than expected R&D. I know you don't break that out specifically, but it appears as though that was a pretty high number and that as well was there, was the licensing activity skewed toward late in the quarter and that's why we saw it increase in AR, that's it for me.

Yaniv Arieli

So no that's not necessarily the case. There was no customization work at all this quarter, all the deals were straightforward immediately recognized upon the execution and delivered the technology and the fact that R&D was higher was due to the timing of some of the R&D grants that we received. (Inaudible) grants yet this quarter which we hope will go into Q3 and that's why we guided lower OpEx overall. And what was the other part of the question?

Gary Mobley - Benchmark

The timing of license deals?

Gideon Wertheizer

Yeah.

Yaniv Arieli

As usual, at the end of the quarter. Yes, usually we have a nice last two weeks of the quarter and Gideon canceled all the vacations, so that's when we get the deals done.

Operator

The next question comes from Suji De Silva from Topeka.

Suji De Silva - Topeka

Good morning, guys so perhaps a question there on the license revenue as well. The two large deals, was that a significant part of your overall license revenue, you reported this quarter?

Yaniv Arieli

Not necessarily, we don't break it out. We have two licensing arrangements. One is the multi-use which can use our technology across multiple product lines and multiple generations of chips and one is the single use which is for one product line 01 and one type of the first product and then if they want to go to a new design, new feature, low cost type of next generation, they come and pay another license fee for that.

Usually, what we see it for new technologies we have more of the single use flavor and for either larger companies or a more advanced companies that use it across multiple product lines when you see the multi-licensed deals. Sometimes it's a mix, not necessarily the newer markets or the bigger deals and so on. I think it's an overall mix this quarter like any other quarter.

Gideon Wertheizer

Suji, this will give you, one thing that I want to add to what Yaniv is saying. The noteworthy topic or the point with regard to the deals, the multimedia deal is the fact that we signed with OEMs. When you signed these OEMs basically you're raising revenue (inaudible) allow significant more customer base or licensing opportunity base. As you know, the handset space, when it comes to merchant chip is a very consolidated market and it's how to get there with a differentiated product. The fact that OEM figure out that they need to differentiate and the way to do for them is to make a chip that's a good news for us because we can go and speak with them directly and expand the licensing opportunity.

Suji De Silva - Topeka

That is very exciting trend, Gideon, thanks for the color there. And so Yaniv, you've talked in the past about license being in I guess $4 million to $5 million range, and with the MM ramping that might see an uptick, should we think of new range for licensing with MM is that going to be steady contributor here to help licenses going forward?

Yaniv Arieli

No, I don't think we are changing overall metrics of where we are comfortable with our licensing business. Of course if you see this licensing business, I believe it's the highest we had in the last four years, so Gideon mentioned it's a very nice to be able to diversify, but I wouldn't change anything that far on the other hand, we all know that there is consolidation in wireless space fewer companies overall in our core business much larger, much more successful companies.

But I think it's a blend of new market, new opportunities with some older markets and its own merits and opportunities in newer generations [in fact] but they have a new product line. So for our growth then we're happy that we're able to differentiate a bit more than just baseband.

Suji De Silva - Topeka

And then the last question on 2G can you just talk about the longer term trends in terms of the pricing, has it stabilized and what you've seen in the past and should we expect it to be flattish units or declining units going forward? Thanks.

Yaniv Arieli

That's a good question and overall when we look on the low mid range of the market, 3G is growing and 2G declines. And this will continue I think for the while, we don't know exactly how to do, in the 2G when it comes to ASP, it's pretty stabilized, it's not, it's not something that we were facing years ago, there is some dynamics in the 2G there are few big customers like and even Samsung, they're still committed to 2G and find opportunities there.

But in generally it's declining and that's being replaced with 3G and that's what we are looking because when we moved to 3G ASP is higher and we are progressing.

Suji De Silva - Topeka

Fair enough, thanks again.

Yaniv Arieli

Okay, thank you.

Operator

Thank you. And the next question comes from Joseph Wolf from Barclays.

Joseph Wolf - Barclays

Thanks, I have two questions. The first is and I think you touched on this, but I was hoping for a little bit more clarity on China Mobile, if you look through, they've had some pretty steady increase on the 3G side. And I am wondering if you could at least give us some sort of ballpark in terms of what you think your market share in 3G in china is with those new customers I would say important (Inaudible).

And then my second question is given the commentary on the 2G that you made on the call, now my last question when do you think your units of 3G will be greater than your units of 2G now that revenue is already gone in the direction of 3G?

Gideon Wertheizer

Joseph, this is Gideon. Let me take a one by one. First of all when it comes to China Mobile, this is regular at least just from spread on spread per say we have between 50% and 60% market shares. (inaudible) I think doing the right thing in the TD and CDMA space they are focusing on the low need range product of the space.

Qualcomm for example in their conference call said clearly that they are not investing in this price range and in segment. So, they are like 14% of 13% penetration rate right now and Spreadtrum by themselves they are very bullish about going forward growth. And other thing about Spreadtrum is that the announcement that they made yesterday, they are now in much production in the wideband CDMA market, wideband CDMA market is much more ubiquitous and in my prepared remark, I spoke about 1 billion unit in 2015, because this is the 3G that go to India and Africa and Latin America and Eastern Europe both drive special feel in 2G.

So, they will take down the prices and bring up the volumes. So this brings me to the second question, we have to say for now when exactly will cross the point, but at least one thing that we can tell you, it's consistent, the ASPs in 3G are stable and they are significantly higher than 2G. And business trend and they are still few customers as I said to 2G that they are still committed to 2G. Nokia still has plan to 2G, Samsung has plan to 2G, the Edge based smartphone they are well short of ideas how to provide value proposition in the 2G.

Yaniv Arieli

And that Gideon -- when Gideon said we did cross this last quarter our first junction with regards to the dollar revenue. So now with the overall 3G contribution was higher for the first time ever for us and 2G your question is a very good one our next target should be also crossing over the volumes and then you have a nice thing to talk about.

Operator

The next question comes from Anil Doradla from William Blair.

Anil Doradla - William Blair

Couple of questions, now you talk about this inventory build out from one particular customer 2G centric. I just want to understand whether this is related to weaker than expected sell through, is it you know due to some structural shift away from 2G, any, basically are people not buying the models that you are designing in or this is just a temporary hiccup and I have a follow-up question.

Gideon Wertheizer

Anil, this is Gideon. You know, I think its little bit of everything. These specific customers said that after a slow start at the beginning of the year we start seeing a June pick up in demand for whatever forms that you will refer it. That's one data point. The other data point is that we see looking on the customer royalty breakdown that there is movement from 2G feature phone to 3G feature phone. So it means that these specific customers you know not going all the way to smartphone but still going to 3G, whether it's a sell through issue, I don't know, we don't know but definitely that's what the customers tells us that the decline is extraordinary and the results are (inaudible)39:54

Anil Doradla - William Blair

So you do not rule out the possibility that these revenues which you have seen a strong decline does not even come back?

Yaniv Arieli

No I believe that they will come back. Lastly, they don't necessarily will come to the full extent of feature phone. They may, some of it will come back in the low cost 3G phone which is good for us, it's even better for us. There is a lag of a quarter. Before that, clears off or partially clears off the point that we don't exactly know because it's an OEM.

Gideon Wertheizer

At the end of the day, 2G goes down, the 3G is going up and it's not one-to-one, it's not the same pace and along the way, there will be, and in the first thing, the easiest thing is to do is to clear inventory and what we were told by the customers that this is a low point in the 2G volume for sure.

Anil Doradla - William Blair

Okay, great, and couple of follow-ups. Could you just give us sense of how you expect the licensing royalties break down to look. I know you don't break it down but give us some qualitative commentary around that and the other question I had was, one of the key things we're seeing is that whether it's a mix or it's an ASP pressure, we're noticing that 20% plus year-over-year decline in ASPs. Now, that is eating up into some of the unit volume growth for you guys, resulting in any equivalent growth rate on the topline. When do you think the ASPs will start moving upwards, when will we start seeing year-over-year ASP increases? Is it 2014 or is it sometime in 2013? Thanks a lot.

Gideon Wertheizer

Yeah, that's a good question on year-over-year basis, I am not sure, I think we need to go and do a lot of math and lot of guessing and I would look at it different then we from one quarter to other and then on the sequential basis. I think that will show you that it progressed or not progressed.

Anil Doradla - William Blair

Right, even sequential is fine.

Yaniv Arieli

Okay. Because on year-on-year basis there are two issues, the one of them was of course we all experienced and we all know about the significant price arisen in the 2G form a year ago and that's 30% to 40% that's one of the factors and in the last couple of quarters, we also had an issue with our older generation of consumer products which were down over time and also had a difference in volume and the mix.

And we said two things on this call, as we said it earlier, one from the consumer side, first when we look at Q2 that's we reported today and we look at the partial royalty quarter we received so far from a dollar perspective, we do not see any further decline at least for Q3.

So at least for us it's good news, because it's stable and if Christmas is around the corner, hopefully and again we don't guide Q4 just on this conference call, but hopefully if the volumes pick up then we should enjoy a higher (inaudible)43:16 and higher volume on the non-basement stuff.

Anil Doradla - William Blair

So basically you are saying, you knew that the June quarter receives thrust on the ASP is that right way to look at it?

Yaniv Arieli

Say that again.

Anil Doradla - William Blair

The June quarter will mark the bottom in your ASPs and starting from the September quarter onwards we can start seeing a positive sequential growth in ASPs?

Yaniv Arieli

Yes, in the positive sequential growth it could reach even 20% next quarter. Again, I don't know if you ask me how Q4 2014 would look like but at least in the short-term that we do have the data and the visibility and that's the assumption.

Anil Doradla - William Blair

And the color on the licensing and royalties qualitatively as we are go into September quarter?

Yaniv Arieli

And I think that from the feature phone issue that we talked about there is going to be a decrease in volume in overall 2G not just because of the normal trend, Gideon mentioned and the market is flavoring smartphone, but we will come back single customer issue to lower volume. That lower volume on lower ASP is higher, we will take a royalty down from this level today and I would say somewhere up to maybe 10% or so, and with that said, if you look at the guidance and that also applies to prior question about (inaudible)44:50, I think the guidance also indicates that if you will compared Q3 of this year at least the guidance part of it versus the actual non-GAAP of last year, we are very, very close on the same type of level that could hopefully or potentially show the first time over positive comparison on a year-over-year basis after quite a few quarter not being here. So I think we are getting there at least the guidance does supports a flat year-over-year comparison these are the issues we talked about.

Anil Doradla - William Blair

Thank you very much.

Operator

Our next question comes from Matt Robison with Wunderlich.

Matt Robison - Wunderlich Securities

Thanks for taking my question. First, have you received reports from all your major royalty players at this point?

Gideon Wertheizer

Yes, I would say that the majority of the, yes about a 100%, but the bigger players did.

Matt Robison - Wunderlich Securities

Okay. How significant to licensing was the infrastructure deal you announced on the last call?

Gideon Wertheizer

Infrastructure deals, we've been taken into this quarter?

Matt Robison - Wunderlich Securities

Yeah, I know was the monthly quarter kind of a situation you announced that in the prior…

Gideon Wertheizer

Yeah. As we said I can get the last quarter as well as say today few hundreds of thousands of dollars that's we recognized in the Q2, Q3 and 4 we believe that we'll be finishing the project.

Matt Robison - Wunderlich Securities

Okay. And the strength in, I know you are not breaking out design services anymore, should we take it that the strength was from new licenses as opposed to big uptick in design services?

Gideon Wertheizer

Yes, correct. The design services are in normal level of $700,000. So, if you exclude that the highest licensing number, we came up in the last four years.

Matt Robison - Wunderlich Securities

And relates to Nokia and their commentary about the destocking process during the first couple of months of Q2 and then the improvement they start to see in the third month, do you expect to see some 3G contribution from the growth of Asha or is it purely a 2G with those guys?

Gideon Wertheizer

No, it is also 3G and we already start seeing it.

Matt Robison - Wunderlich Securities

Okay. And so that's really what we should look for I guess in the fourth quarter for you guys?

Gideon Wertheizer

That's a key, that I think is the key for the whole work that they did is inventory probably to [straighten up] things for more advanced funds.

Matt Robison - Wunderlich Securities

Okay, and you need just these were housekeeping.

Gideon Wertheizer

Housekeeping. $300,000 CapEx, $200,000 depreciation, 193 employees.

Matt Robison - Wunderlich Securities

And cash flow from operations, give us that and I presume it was a mix shift towards licensing most of it coming late in the quarter with the 10-day stretch in DSOs, is that the culprit there?

Gideon Wertheizer

That's true but still positive. It was about $800,000 of cost, so still positive.

Operator

The next question is from Jay Srivatsa from Chardan Capital Markets.

Jay Srivatsa - Chardan Capital Markets

Gideon, at a higher level, you know over the past few quarters you've had some disruptions either in the consumer electronics business or in this case the feature phone business. As you look ahead, I mean how do you manage this kind of volatility and give the confidence to investors that you have a sustainable business model that will continue to grow in terms of revenues and earnings as you look at 2014?

Gideon Wertheizer

Yeah, you speak about the royalty, it's not like in royalty fee, it is not under our full control. I wouldn't when it comes to the consumer activities that we have to-date, it's not something that I would consider it and distraction our business or controlling. Our place in the baseband in unit terms more than 90% of our, into baseband. Now the baseband market is overall is in transition and we're as part of this transition, the fact that feature phones goes down and the second quarter, it goes down beyond the regular trajectory that happen. It's not something that concern me because at the end of day, the trend is moving to 3G and I want to be more and more in 3G and there was a question when will we have more volume in the 3G than 2G. That's the point that I want to be there and any 3G point we have any 3G going up, we have higher royalties. We will be also next year and as part of the LTE and that will be incremental. So I don't think that from CEVA standpoint, we're surprising people. We're growing with the market and we're doing well where we should be when this is the high volume.

Yaniv Arieli

I would also add to Gideon. If you look at the players today in the wireless space in the baseband, all of the big players and we're talking about north of a 2 billion units market opportunity other than the QUALCOMM and the MediaTek of the world all the large other players they work with fewer. So at the end of the dayb, whether they have the issues or the market has issues one quarter or the other at the end of the day if we're continued to work from one generation to the other then we shouldn't enjoy the wave of higher ASPs as we go to from 2G to 3G and 3G to 4G and of course if you look aside from just the cell phone market and look at the other incremental baseband business like machine to machine or macro or picocell that all is incremental and with new customer base that could help us in baseband overall.

Jay Srivatsa - Chardan Capital Markets

All right, spectrum as you know is not going to be acquired by state owned enterprise in China, what does that do to your relationship, do you see any change or do you see it continuing as it as you've had in the past?

Gideon Wertheizer

I think I don't see something dramatic change in terms of the relationship (inaudible) with any group relationship despite the deals are exclusively, I think people will contain it, but we will have to wait and see.

Operator

And the last question comes from Vijay Rakesh from Sterne Agee.

Vijay Rakesh - Sterne Agee

You mentioned weakness of the 2G feature phone customer, you see them coming back in the second half to 3G and how do you see that trending?

Gideon Wertheizer

Yeah. I think somebody asked me this question before, I believe that it's a mix, definitely part of the 2G feature phone going forward will be turn to a 3G feature phone. But still there is a relatively big market for 2G feature phone and by saying 2G is now we are selling to EDGE base, what you can do a internet surfing and you can add Wi-Fi and you can add things and give you and then I would say, in my knowledge and (inaudible) we will experience at about (inaudible) so there is a market for this. We don't know how big it is, we don't know how the customers that we're saying how committed to this one, we will have to see, but definitely when it comes to migration for this specific customer to 3G we will see it.

Vijay Rakesh - Sterne Agee

Got it. You mentioned ASPs bottoming and might be with this 2G follow-up, when do you see the units crossing all on the 2G side?

Gideon Wertheizer

Yeah, I think we answer that the majority here this and quarter and the first quarter and second call that the revenue will cross over and was higher in 3G. On the volume we don't have any crystal ball for that, but there is no doubt from whatever we report and the market data that we see but the trend is for 3G volumes to continue to grow much faster than overall pace of the market. So eventually down the road this should happen and we don't know an exact date yet for it to happen but that's our target to reach there. At this point, of course it should increase our ASP, it should increase our overall dollar revenues and that is our trend. And the mobile get 3G and the mobile get LTE designing and you ask for the action that is our good inputs and good progress.

Vijay Rakesh - Sterne Agee

Got it. And last, I know you mentioned something about was end of the units, ASP is growing 20% into the third quarter and the 3G LTE OEM will go up the license, is that a global tier 1 OEM or a Chinese OEM?

Gideon Wertheizer

Can the repeat the 3G, can you repeat the last part of your question?

Vijay Rakesh - Sterne Agee

In the prepared remarks you mentioned one OEM has up their license of the 3G LTE and expecting from them, I am wondering who was that, it is that a global tier 1or?

Gideon Wertheizer

Those two OEMs that licensed our MM3101 platforms, we saw a global -- we say global OEMs that answer your question. And the other one on the 3G going into LTE, that's also tier 1 global OEM that in semiconductor company, an existing customer for us.

Vijay Rakesh - Sterne Agee

And what is growing 20% sequentially I missed that?

Gideon Wertheizer

That's ASP increase or potential increase from the average second quarter to the third quarter

Vijay Rakesh - Sterne Agee

Okay, great. Thanks a lot.

Operator

Thank you. This concludes our question-and-answer session. I would like to turn the conference back over to Richard Kingston for any closing remarks.

Richard Kingston

Thanks very much. So thank you every one for joining us today and your continued interest and support of CEVA. We will be attending the Oppenheimer's 16th Annual Technology Internet & Communications Conference on August 13th and 14th in Boston and invite you to join us there. Thanks very much, and bye, bye.

Operator

Thank you. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

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