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CEVA, Inc. (NASDAQ:CEVA)

Q3 2013 Earnings Conference Call

October 30, 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

Matt Robison - Wunderlich

Tavy Rosner - Barclays

Suji De Silva - Topeka

Anil Doradla - William Blair

Vijay Rakesh - Sterne Agee

Brad Erickson - Pacific Crest Securities

Jay Srivatsa - Chardan Capital Markets

Operator

Good morning, and welcome to the CEVA, Inc. Q3 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). Now I would like to turn the conference over to Richard Kingston. Mr. Kingston, please go ahead.

Richard Kingston

Thank you. Good morning everyone and welcome to CEVA’s third 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 third quarter and provide guidance for the fourth quarter 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 but if they materialize or approved 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 our prospects for the licensing deal that was not executed in the third quarter of 2013, financial guidance for the fourth quarter of 2013, optimism about our business outlook and the growth opportunities including with respect to our strategy to expand our customer and revenue base, positive implications from Microsoft acquisition of Nokia’s mobile phone business, 3G expansion in China and the LTE trends.

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 trends, the possibility that markets or our technologies may not develop as expected or that products incorporating our technology do not achieve market acceptance, our ability to timely and successfully develop and introduce new technologies and general market conditions and other risks relating to our business, including but not limited to those that are described from time to time in our SEC filings. CEVA assumes no obligation to update any forward-looking statements or information which speak as of their respective dates.

With that said, I would now like to turn the call over to Gideon.

Gideon Wertheizer

Thank you, everyone and thank you, Richard and welcome. As you know from our press release earlier of this month, revenues for the third quarter was lower than originally projected, primarily due to significant license agreement that was not executed as planned. Those results saying that the licensing portfolio is very disappointing, nonetheless we continue to see momentum in our licensing business with the verification of our customer portfolio and the increase of our market presence beyond the basement market.

Our expanded product portfolio allows us to address the needs of larger customer base as evidenced by the customer design wins has been closed during the quarter. Total revenue for the third quarter was $10 million, down 17% compared to the third quarter of 2012. Licensing and other revenue was $4 million and royalty of revenue was approximately $6 million.

During the third quarter we closed five new license agreements. This customer is targeting base stations, satellite communications, smart meters, automotive and connectivity applications. Geographically, two of the license agreements were in Europe and three in Asia.

In the second quarter we continue to expand our customer base in addressable market. To this end, we signed five agreements in the quarter, four out of the five agreements sign, with first time CEVA customer. These important new customers are targeting interest in gross market, such as smart meter, automotive, connectivity and satellite communications.

Overall in the last two years, CEVA has signed more than 20 DSP related licensing agreement with non-cellular baseband customer, because of wide range of growing market. In addition to the market that I mentioned above we made strong strike into new applications including embedded vision, digital photography for mobile, audio and voice for mobile, WiFi connectivity and wireless infrastructure.

These non-cellular baseband agreements offer three significant benefits for our future growth. First, the potential royalty stream are incremental for our baseband business, resolve destruction over churn and conflict.

Second, the market and the customer base that we are targeting are fragmented which significantly reduces the inherent risk depending on few last layer of competing in the single marketplace. Though the royalty ASP for these products are higher than the CEVA average royalty today, we stand to raise CEVA royalty revenue per unit if this customer bring CEVA power product to the market.

We viewed these as a major advantages that underscore our strategy into an enthusiasm in diversifying our revenue streams into new non-cellular growth market that can play significant role in helping drive our future earnings growth.

Now I’d like to highlight and comment on recent development in our main market, cellular. During the third quarter Nokia announced that it will sell its mobile phone business to Microsoft. CEVA’s DSPs enabled the majority of Nokia mobile phone shipment. We don’t have currently presence in the smartphone category. We were recently asked about the possible implication of this acquisition, in particular if Microsoft eventually abandons the mobile phone segment. Although we can’t comment specifically on this transaction, Nokia and Microsoft executives help provide the sharp visibility into their plans for this business retail/salesmen.

According to Nokia Head of Marketing, Microsoft plans to enhance the Asia phone line up bringing key services to the platform. Microsoft and its CEO Steve Ballmer has already stated that some of Microsoft services that were previously restricted to the higher-end smartphone maybe adopted for the Asian lines of phone. Additionally Nokia has commented that bringing low cost phone options to the next billion people and beyond that has yet to on come on front is a priority. If Nokia is successful in this strategy under Microsoft ownership, CEVA is poised to burn a slip by future of our DSP power in their mobile phone portfolio.

On LTE, their reform of telecom and media reference, the LTE penetration in the U.S. is 18%, significantly higher than Asia-Pacific with the penetration rate of only 1%. In all other regions, the penetration rate is less than 1% including Western Europe.

Despite this very small penetration rate which globally adds up to only 2% of auto and mobile subscription, fairly be a research, LTE shipments are expected to roll to 850 million units by 2018.

As discussed in previous calls, CEVA baseband customers are slowly rolling out LTE product into the market. The latest entrant is Intel who in late August stated that it is going into mass production with its first multi-mode LTE chip, the XMM 7160. This is in addition to Samsung who is already in the market and Spreadtrum and Lead Call who are targeting next deal for expected launch of China Mobile TD-LTE network.

In China, 3G smartphone expansion continues to gain momentum. The IDC China second quarter shipment reached 110 million units, of which 86 million are smartphones. The main reason for the high penetration rate of smartphone is availability of low cost smartphone which are priced as low as US$60.

Leading the way is China Mobile, the world’s largest operator after a slow start with its home grown 3G standout TD-SCDMA, China Mobile and its suppliers are gaining momentum. 40% of the smartphones sold in the second quarter in China were compliant with the China Mobile network. Our 3G market share at China Mobile is 50%. With regard to 3G wideband CDMA smartphone, the potential for true low cost smartphone on this network has yet to be realized, both in China and other developed nations.

Spreadtrum’s recent entry into this market is their wider CDMA feature phone and smartphone offering are aimed at exploring this opportunity and accelerated wideband CDMA deployment with low cost solution.

These data points I just highlighted, reflect the general dynamic of the handset market. From review of the preliminary royalty report we received thus far, we are seeing a sizable quarter-over-quarter growth in 2G mainly driven by low cost edge smartphone shipments by Nokia, Samsung and White Box manufacturer.

In 3G we are seeing modest sequential growth in light of China Mobile’s expected inventory adjustment to its TD-SCDMA smartphone offering. In LTE, all our shipments are associated with one OEM supplier who uses us in selected skews of phones and tablet to-date, so shipments here are subject to fluctuation based on modern introduction and inventory levels. All-in-all we are expecting a sequential royalty revenue growth for the fourth quarter.

So to summarize, the fundamental Android space for royalty growth are intact and in line with the market dynamics. In licensing, our expansion to adjunction DSP market continuous with five new dealers in the quarter ranging the number for more than 20 non-cellular handset DSP representative sight in the two in the last three years.

With that said, I will hand over 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 third quarter of 2013. Revenue for the third quarter was $10 million, 17% decline compared to the same period of last year. The revenue breakdown is as follows. Licensing and related revenue was $3.9 million reflecting 39% of former revenue, 36% and 20% lower sequentially and on a year-over-year basis respectively. Our royalty revenue was $6.1 million reflecting 61% of total revenues, down 9% and 14% sequentially and on a year-over-year basis respectively.

Revenue gross margin was 89% on both U.S. GAAP and non-GAAP basis. Non-GAAP quarterly gross margin excludes approximately $73,000 of equity-based compensation expenses. Our total operating expenses for the quarter were $10 million, slightly above the high-end of our guidance range due to delay in receiving research and development grant payments from the Office of the Chief Scientist.

Total operating expenses included an aggregated equity-based compensation expense of approximately $1.7 million. Our total operating expenses for the third quarter excluding equity-based compensation expense were $8.3 million reflecting the mid to higher end of our guidance.

U.S GAAP net loss for the quarter was $0.3 million and fully diluted net loss per share is $0.01. This compares to net income of $2.6 million and fully diluted earnings per share of $0.11 for the third quarter of 2012.

Our non-GAAP net income decreased 66% to $1.3 million as compared to the same period for the prior year. Non-GAAP fully diluted net income per share decreased 63% to $0.06 as compared to the same period last year. These figures exclude approximately $1.6 million and $1.2 million of equity-based compensation expenses, net of taxes for the third quarters of 2013 and 2012 respectively.

Other-related data, shipped units by CEVA licensees during the second quarter of 2013 were 200 million, down 29% sequentially and 21% from the second quarter shipment of 2012. Of the 200 million units shipped, 174 million units or approximately 87% were for baseband ships reflecting a sequential decrease from 259 million units of baseband shipped and down from 226 million shipped on a year-over-year basis.

As of September 30th, 29 licensees were shipping products incorporating our technology, same as the prior quarter. And we had 36 shipping customers under licensing agreement, one higher than the prior quarter.

As for the balance sheet items, as of September 30th, CEVA’s cash, cash equivalents, marketable securities and long-term bank deposits were approximately $154 million. Our DSOs for the third quarter of 2013 increased to 84 days as compared to 65 days in the second quarter. I stated in the prior earnings call that we forecast that this figure will diminish closer to the end of the year and is due to the timing of payments from new customers and project-related payment milestones.

I want to share with you that during the month of October we further collected from our customers approximately $2 million. And we believe that our accounts receivable and DSOs will return to more historical levels towards the end of next quarter.

With regards to our share repurchase program, during the third quarter and the first nine months of 2013, we repurchased approximately 138,000 and 443,000 shares of our common stock at an average price of $16.9 and $16.2 per share respectively for total consideration of approximately $2.3 million and $7.2 million. At the end of the quarter, we had an additional 2 million shares available for repurchase under our 10b-18 plan. We believe the continued execution of our buyback program illustrates our confidence in the long-term opportunities for CEVA, the company’s strong financials and considerable earnings leverage.

Now for the guidance. Summarizing the insight Gideon provided and from the initial royalty report and worldwide market trends, handset market trends, we forecast our fourth quarter royalty revenue to grow from the third quarter in high single-digit growth rate. For licensing and related revenue, we forecasted to be in the range of $5 million to $6 million.

Our guidance for the fourth quarter of this year. Revenue for the fourth quarter is expected to be in the range of $11.5 million to $12.5 million. Gross margin is expected to be similar to our normal level, approximately 92% on GAAP and non-GAAP basis, excluding equity-based compensation expenses.

Operating expenses, including equity-based compensation expense, are expected to be in the range of $8.8 million to $9.8 million, lower than the last two quarters due to higher R&D grants. Of our anticipated total operating expense for the fourth quarter, $1.4 million is expected to be attributed to equity-based compensation expenses. So, our non-GAAP OpEx is also expected to be lower than the prior two quarters and in the range $7.5 million to $8.5 million.

Net interest income is expected to be lower and approximately $600,000. Tax rate for this quarter is expected to be approximately 14% for GAAP and 13% for non-GAAP. Non-GAAP tax excludes tax effects of equity-based compensation expenses.

Our share count for the fourth quarter is expected to be lower and in the range of 22.1 million to 22.5 million shares. U.S. GAAP EPS is expected to be in the range of $0.08 to $0.09 per share and our non-GAAP EPS, excluding aggregated $1.3 million for equity-based compensation expenses net of taxes, is expected to be in the range of $0.14 to $0.16 per share.

Operator, you could now open the floor for Q&A session.

Question-And-Answer Session

Operator

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

Gary Mobley - Benchmark

Can you explain why you saw sharp increase in royalty rate per unit in the third quarter? And based on your on prepared comments, should we assume a large increase in royalty units on a sequential basis and then perhaps some reversion back down to that [$0.25] royalty rate per unit in the fourth quarter?

Yaniv Arieli

First of all, the $0.03 average that we came up for the third quarter was mainly due to a inventory correction by Nokia before their acquisition to Microsoft. Whether it’s a timing of new product launches or inventory, we don’t exactly know, but there were tens of millions of units lower and you can see that in the difference in our baseband and all around 2G. These are low cost simple type of phones.

So if you take out the equation lower ASPs and high volume, our mix was more higher end, more 3G, more smartphones and it helps to increase the ASPs by about 30% on a sequential basis. Going forward, it’s all about the question of mix. As we anticipate and as we’ve talked in the past the more 3G launches, and of course in the future LTE and the higher ASPs and the higher average ASP that we could have.

I think that Q3 was a little bit of normally because of that huge inventory correction and our baseband went down from 259 to 174. All of it is 2G related because our 3G business is continuing to grow. So when that gets back to higher volumes and it does and it’s really in Q4 because we have seen that inventory correction and there were some of those OEMs already discussing such corrections on their earnings call in the last couple of days. That will probably shift slightly the ASP lower, but maybe only single digit up to 10% or so not back to 2.5% as far as we could tell it. And again, we don't have the full royalty report. So we don't have the exact math, but the concept is that our 3G is continuing to grow and it does a positive mix from the ASP perspective.

Gideon Wertheizer

Gary, this is Gideon. I want to add some marketing color to what Yaniv explained. First of all, with regard to 2G, as Yaniv pointed out, last quarter meaning the Q2 shipment was significantly lower in the 2G front and it relates to inventory replenishment (inaudible) new category of phones. And these are the 2G Edge based. If you are looking for example, so the Asha, Nokia Asha product is an example, but we have some smartphones and we have lot of white box manufacturers.

What we have seen in Q3 shipments that we will report the royalty or we see the royalty and petition in our guidance is that there is a significant quarter-over-quarter increase in the Edge category or the Edge class. These are smartphone person that are not 3G-based, but 2G-based and what the (inaudible) they said at the beginning of the quarter about the internet all G, this is in light of everything. The idea is to provide to people in the low cost economy or the low income economy internet access at almost zero payments on the data plan. So better than 2G.

Other than this in 3G we have as I said in my prepared remark that it progresses as we expected. There is some new things in the TD-SCDMA, I think (inaudible) commented all this in 2G in second quarter. There was a huge amount of shopping increase in 2G, 3G smartphone in the TD space, now it’s a bit slow, but not significant and the expectation in the TV side to continue growth same goes to all the other aspect, wideband CDMA, HSPA, these are all growing segment.

Gary Mobley - Benchmark

Okay. Just want a follow-up question, based on the midpoint of your license revenue guidance at about $5.5 million, should we take that to mean $2 million license deal which sort of slipped during the third quarter. Has that since closed here in the early part of the fourth quarter? And remind us again with the other revenue now included in licensing revenue, what is the new quarterly long-term guidance range for licensing?

Yaniv Arieli

I don’t think we're changing anything. So $5 million to $6 million is something that we've been comfortable with for a long period of time. I don’t think anything has changed other than handset miss of a deal in Q3. That deal right now is in our pipeline like many other deals. And as you all know in the licensing and IP business as soon as the deal gets closed, we recognized it and we talk about it and then it’s recognized as revenues. And as long as it’s not closed yet then it’s sitting in our pipeline with the potential to close. And so that’s I think was in continuing on the longer term as well and no changes from our business model or prospects thus far.

With regards, Gary to the second part of your question, whether in the long term are we going to see a higher license revenue per quarter. It’s pre-mature to say, we all know in this quarter and the last few quarters, more and operated about all the non-baseband design wins. Our intention is not just higher license fee, we are looking here for higher ASP and broader customer base.

They are not to be dependent on one market or few key anchor customers. So that's their intention and with the new product line that we have we can address the needs of these markets and when we look in our pipeline today, it’s a full of non-baseband customers and that's encouraging.

Gary Mobley - Benchmark

All right thanks.

Gideon Wertheizer

Thank you.

Operator

Thank you. And the next question comes from Matt Robison with Wunderlich.

Matt Robison - Wunderlich

Hey good morning. Gideon, you talked about LTE, engage some statistics for 3G plus LTE. Do we expect LTE essentially immaterial until 2015 at this is point or what’s your sense of that?

Gideon Wertheizer

It’s a good question. My frank answer is it’s hard to know. But Samsung is definitely if you look from where they are in baseband, in LTE product portfolio and their design activity, they are well advanced and they can surely be a key contributor in 2014. Intel definitely has a good product and could be in 2014. I mentioned also Spreadtrum and [LeadCo], these are China players and it all depends whether they expect on tender that’s supposed to be concluded by the end of the year will be indeed concluded and they can start shipping LTE. So they are still some unknown, but I think important from our standpoint is that products are in place.

Matt Robison - Wunderlich

The inventory overhang related to China 3G is all TD or is it a combination with W?

Gideon Wertheizer

WCDMA is at least if you refer to Spreadtrum they just entering to this market. I think yesterday they post another press release for another smartphone wideband CDMA that are now in production. So there is no inventory issue in the wideband CDMA. TD-SCDMA, honesty speaking we do not have full -- we didn’t review fully the report, but it looks like and I think Spreadtrum say that that there is some inventory, it’s not something dramatic I should say.

Matt Robison - Wunderlich

So you at this point you think that there is a potential for a flatter or maybe up shipment period for TD new licenses in their fourth quarter?

Gideon Wertheizer

Fourth quarter I don’t know, fourth quarter shipment. I don’t know. But what Spreadtrum said, they said the definitely the market is not slowing down. Just see out of the whole smartphone shipped China, 40% in China Mobile they are very good in terms of pricing, they are very aggressive in terms of [well dosed] and different forms that they do. I don’t see slowdown in TD?

Matt Robison - Wunderlich

You guys mentioned new customers for good reasons, it seems not a metric you often do, I am sure varies widely from quarter-to-quarter. It is interesting to hear what the trend has been n terms of new customers on annual basis. So I just took that out there for something you might like to think about giving us in the future, will that all you need. But I just like to get the actual numbers for the cash flow from operations, CapEx and depreciation as always?

Gideon Wertheizer

Sure. So 1.3 is the cash flow from operations and $150,000ish is the depreciation in the fixed asset and 199 employees at the end of the quarter.

Matt Robison - Wunderlich

And CapEx as same as depreciation?

Gideon Wertheizer

Same number, around the $150,000.

Matt Robison - Wunderlich

Thanks.

Gideon Wertheizer

Thank you Matt.

Operator

Thank you. And our next question comes from Tavy Rosner with Barclays.

Tavy Rosner - Barclays

Hi and just a follow up question on the licensing side. You mentioned the expansion into new gross markets, I was just wondering if you could talk about the breadth of the new licensing deals? What kind of size are we talking about here?

Gideon Wertheizer

Well, it's semi-conductor companies, those companies that are same baseband working in the same volumes. We are speaking here of a very fragmented market, the volume per customer, the annual volume per customer is between 10 to 15, maybe 10 million to 20 million unit a year. But that the application is all over the place and the royalty 300, something that drive us higher than and we are using their cell phone.

Tavy Rosner - Barclays

Okay. Thank you

Gideon Wertheizer

Thank you

Operator

Thank you. And the next question comes from Suji De Silva from Topeka.

Suji De Silva - Topeka

Good morning Gideon and Yaniv. Quick question on the cellphone market. The 2G versus the 3G, can you talk about the mix there and share in those segments.

Yaniv Arieli

Sure. So, our market share in Q3 which is based on Q3, took huge second quarter shipment is a big awkward because of this huge inventory replenishment cycle that we have talked about to our 34% worldwide market share in Q3, but it should go back to the normal 40ish% net growth next quarter we believe.

With regard to the 2G, 3G breakdown, first of all 87% of the overall volume out of $200 million 87% which is a $174 million were baseband and so $26 million were non-baseband. If I add a little bit more color to the prior question and answer that Gideon gave about the non-baseband on an annual basis if you look at this number and annualized it we got about a 100 million units of non-baseband deal. So if we have then we call a few of these 10 to 20 million units of different markets as Gideon mentioned our goal is to multiply and maybe much more than that in the next couple of years are non-baseband business. So if the growth from 100 to 200 or 300ish and to the 10x ASP in front of these deals compared to the $0.03 average that is exactly the targeted opportunity that we are looking for.

And last piece of your question, I believe that out of the 175 were 3G and the rest close to 100 are 2G. So from a volume perspective we have the run rate of the fee online 75 or about 300 million units for 3G, it’s continuing to ramp up but the opportunities there are hundreds of millions be substitute part the lower-end 2G market.

Suji De Silva - Topeka

Great. And then follow up on the 2G market. Do you think that Gideon you need that 2G as a flattish unit environment for 2014 and having ASP trends stabilized the 2G is the a longer headwind for you guys? Thanks.

Gideon Wertheizer

If you take 2G as some of the GSM which is the voice only and edge, so there is I would say modest decline year-over-year. But from our standpoint the more edge you have the higher ASP we are collecting, because the edge is, I mean let’s put it very simply, edge is smartphone. And you have the electronics and the contracts and our ASP is high.

Suji De Silva - Topeka

Great. Thanks guys.

Yaniv Arieli

Thank you.

Operator

Thank you. And the next question comes from Anil Doradla from William Blair.

Anil Doradla - William Blair

Hey guys. Broadcom on its earnings call Scott McGregor highlighted that the 3G baseband mid-tier market is under ferocious pricing. So can you help us understand how would that, whether it would impact the CEVA or not and how could it play out? And second back when I look at the handset market, clearly there is an inventory build up that you are referring to due to the Nokia baseband mix, but beyond that there was an inventory build up for some of the higher end handsets too. So from your perspective, when you look at inventory build ups whether it’s Nokia or non-Nokia related, can you shed some light and color on that? Thanks a lot.

Gideon Wertheizer

Yeah. Let’s start with the second one, I think it’s easier. The Nokia was one fine event in Q2 or very strange event in Q2 and that’s about tens of millions units have disappeared from their shipments in overall to report. That has a big portion of that, not all, but a big portion of that has returned as we said earlier to the fourth quarter. So we expect to see significant unit volume increase back to 2G and to the normal level. So I wouldn’t say, I would call it, it’s an inventory issue. They decided and as far as to that you see the Samsung is 41% drag and White Box guys are 12% drag, they want to do now an edge smartphone. It’s a new phone, a new chipset and they need that Samsung phone to stop producing old stuff and go to the next one that happened in the second quarter shipment. Third quarter, we are start seeing -- that’s for 2G. 3G?

Yaniv Arieli

Yeah. 3G, we don’t want to comment specifically whatever in any specific company that made a sentence or snapshot of the market or its issues that they are encountering. From CEVA’s perspective we do not see ASP erosion in 3G. Now I think the dynamics are completely different than we have discussed that in the past and that has not changed. The dynamics for CEVA is different than from a semiconductor company. And every new smartphone whether it’s 3G or Gideon mentioned earlier, edge which is can be called a 3G, I mean we are talking about smartphone. The content for CEVA is 2X to 3X the content that we historically has in the 2G market.

So from that point of view, we don’t see price erosion from that point of view, we don’t see ASP pressure expecting to be an OEM and to be able to sell $600 phone four years later at $50 or $40 smartphone that’s significant price erosion in the industry, but that’s on a OEM level, it’s different from the chip vendor or chip players and it’s different from CEVA, I think from our perspective, our number that we see in that up, we are happy of course and the numbers will be better as we obviously get more 3G and more edge related products.

Anil Doradla - William Blair

Okay. And one quick follow-up which is, do I understand rightly that the license deal that got pushed out in the current quarter is not going to materialize the next quarter, it might take a couple of quarters or that license share renew has been, will be recognized in the December quarter? Thanks?

Yaniv Arieli

No, we didn’t mention specifically what’s the situation. We have a pipeline of tens of difference of prospects across different markets and different customers each one we have our own assumptions when it could be closed. And I think we said earlier that in the licensing business it’s over until the [fact] [ph] that you’re seeing. So until we get this signature and the deal is signed and over the, and recorded then we transfer the clause and can recognize the revenue, we don’t know exactly with any other of our fix, the other prospects what can be signed and when. It’s in the pipeline and we have also execute it, but we don’t know exactly.

Anil Doradla - William Blair

Okay. And on that licensing trend, I mean given the volatility in the licensing business, I mean as you said, it’s not then to look stun, is there any sense from your point of view to try to see whether you could amortize it over a year or two years, kind of create some kind of smoothness to the licensing model. Is there, as you’re going to more complex for 4G non-mobile baseband licensing deals. Is there anyway convert that into from a one-time payment to perhaps a little more amortized regular approach? Thank you.

Gideon Wertheizer

It's a good question, it's a different model. I think it's more to the ball in many cases either for EVA type of companies, software type of companies or much, much larger type of companies that signed $20 million and $30 million deals and then if you amortize it over the years, them it much makes sense. If we take a deal of $2 million $3 million of sort of amortize in over three years, of course it creates backlog and it's much easier and smoother, but on the other hand, I think it's pretty difficult to keep with the positive $60 million range with 5 to 8 deals signed every quarter.

So I think we are like somewhere in the middle that for now the upfront right model makes a bit more sense for this size of company. Of course if we would be an EVA player or -- then it would be much easier to amortize because of the size and the scale. And at least historically we could see that we have been above, you are right that it's a lumpy type of business let's say historically we have been quite successful managing it. So we had to end up now in Q3, but we hope that we would not get to 2 to 2.5 such an event again anytime soon.

I mean I would say first of all, I want to make goal out of the license agreement growth to sign an agreement and then to recalled it. I mean we can make all these up and call the license deal and to show what their outstanding or good for and disappointing. We can make goal and that’s what we see mainly in license deal that we are discussing is the impact on our deals.

So that’s been, [royalty] [ph] is what we're looking in our business. Was there, it will be whether it’s lumpy or not whether it’s and if it moves from one quarter to another, I don’t think this is something that is significant. The idea is to have together customer introduction and to collect royalties at the end of the day. So Indian companies are doing that good, they’re looking for the quarter-over-quarter licensing or EDA tool and that’s the reason they are always flat.

Anil Doradla - William Blair

Okay. Pretty good, thanks, Gideon.

Gideon Wertheizer

Thank you.

Operator

Thank you. And our next question comes from Vijay Rakesh from Sterne Agee.

Vijay Rakesh - Sterne Agee

Yeah. Hi guys. Just looking, I think you mentioned on the China market that 2G edge was stronger, I’m just wondering what do you see in the China market in terms of the 2G, 3G mix in 3Q and when you look at the shipments there, how do you see that mix in the China market in the fourth quarter?

Gideon Wertheizer

So 2G is not in China anymore. The 2G edge that we were (inaudible) goes beyond China to Africa to India, India is stronger and to some extent in Latin America. So 3G is all in China. As we pointed out, if you look and I am telling you of all it’s just a brief look on what’s going on in 3G. There is a momentum there. TD, some inventory fixes because it was a quarter before that [shock], something very outstanding [shock] as this is expected. From the royalty revenue and competitive market, very dynamic, fast growing and that these kind of markets we like, because this is where our customers are -- this is what our approach is now to create revenue.

Vijay Rakesh - Sterne Agee

Got it. And on the Nokia side, I know you mentioned there were some inventory adjustments post acquisition of the mobile business that hurt you in the third quarter, but do you see those coming back post those adjustments, do you see their shipments speaking backup, I know you mentioned it’s picked up a little bit on a 2G Edge side, but do you see those shipments taking back to the prior levels?

Gideon Wertheizer

That's a good question. The only thing that we see that they are very hectic in this space, they have a technology edge in (inaudible) compared to information and in this way provide smartphone user experience over the 2G network. And then they are coming from products quite often, I think adjustments of a few Asha product, new Asha product that’s the vision and whether they will come, they are out there I think 50 million units a quarter, 50, 50 something million a quarter to 100 million this quarter, the market is there, but it’s competitive.

Vijay Rakesh - Sterne Agee

Got it. And last question, when you look at the handset market in China, obviously you mentioned spectrum and LED-lit core some of your wins there. On the tablet market, MediaTek has been pretty aggressive. As we look at those two markets, what are your new design wins in the China market from the OEM perspective and also on the tablet side, what’s your share there and how do you see it going forward?

Gideon Wertheizer

Tablet, we don’t break down all of these different segments, but regarding your question about, well the growth in 3G? The growth in 3G TD-SCDMA is growing market. Bear in mind that the lifecycle of a phone in China is very short. People are very demanding. They are replacing phone once in one and half year. They are now in the single core, they want dual core and quad core, and all these things, people like all those services.

And the other thing which is in my opinion at this stage not realizing now opportunities of the wideband CDMA, all these emerging markets, China and India and going forward to the other nation will adopt wideband CDMA, not TD-SCDMA. Wideband CDMA is where we have plenty of customer, both companies doing nice early in the HSPA and (inaudible) as we mentioned is there and Intel is there and bunch of other.

Vijay Rakesh - Sterne Agee

Got it, thanks.

Operator

The next question is from Brad Erickson with Pacific Crest Securities.

Brad Erickson - Pacific Crest Securities

Thanks for taking my questions. Just a follow-up on the royalty revenue guidance, I think you indicated that it would be sounds like kind of seasonal range, but probably no better than that. Just still want to understand, you talked about the snapback, you mentioned Nokia and Samsung and others in China. I am curious to know kind of the reason that it would seem the guidance should be kind of better than seasonal based on those indicators. Can you kind of walk us through again what might be going on there? Is there just strictly pricing headwinds associated with mix shift back to 3G or there other headwinds going on there?

Gideon Wertheizer

Okay. So when it comes to, I wouldn’t speak the revenue, the guidance of revenue increase that we said today is just a seasonal. Certainly Q3 Christmas season is seasonal but bear in mind that we have our main market is Asia and Christmas is not there a high season. So it’s most attractive structural changes in the market that slowly but surely materialize. So we mentioned TD. TD, by the way, it’s all on. I think they have 30% penetration ready. In some day they will go to a 100% the way it will be 90%. So TD-SCDMA Edge smartphone, this is a structural change.

Wideband CDMA that I mentioned is something that is just starting. So I don’t see headwinds. Of course, from time to time seasonality, from time to time people are doing inventory, some (inaudible) in the fourth quarter do inventory adjustments. So these are things that happen, but overall we are in my opinion in the course of the structural changes, within the changes that we avail.

Yaniv Arieli

Brad, let me put it in a different way. I think we look at it completely different. In the last two years we all saw in the wireless, in the market that there is, Gideon mentioned, there is no seasonality whatsoever. Every company has its own issues, different time to introduce products whether it’s Apple, it’s Samsung, it’s Chinese market or the Blackberrys or Nokias of the world. Everybody has a different seasonality and there is no rules from anymore. From (inaudible) quite a few cores of down guidance and the royalties were taking it higher to the first time. We see positive prospects ahead of us and they in every segment of the market, where there is as Gideon mentioned 2G, 3G, Edge and even in the U.S. This is the first time that Samsung is coming up with their own internal modem for the S4 Zoom which is an LTE phone and selling now in T-Mobile from October.

So even in LTE, this is the first time that we make it into the Chinese market and replacing most likely a Qualcomm design. So no headwinds, no real seasonality, I don't think that exist that much anymore in this and it's higher guidance which we haven't had for quite a long time.

Brad Erickson - Pacific Crest Securities

Great. That's really helpful. And then just one other follow-up, you mentioned kind of the higher ASPs for some of these non-cellular products, where you guys have been signing some good deals and the pipeline mix pretty strong for next year. Can you kind of talk about how those could contribute in 2014, particularly on the royalty revenue line and obviously the guidance this year looks like it has the royalty revenues down kind of mid to high teens somewhere in there. Is it possible that some of these contributors could offset and get the royalty revenue growth back to growing next year, is that a reasonable expectation?

Gideon Wertheizer

We were in October, if guidance showed and we get to January we will have some more insights and some better analysis for 2014. I think for today’s call we repaid ourselves for Q4 much further and we gave is there highlights and the growth engines for us in the next couple of years. So specific in 2014, I think we’ll discuss it on the next call most likely.

Brad Erickson - Pacific Crest Securities

Great. Thanks very much.

Gideon Wertheizer

Thank you.

Operator

Thank you. And the next question comes from Jay Srivatsa from Chardan Capital Markets.

Jay Srivatsa - Chardan Capital Markets

Yeah. Thanks for taking my question. Gideon you mentioned there are strengths in the edge market. It also appears that lot of the emerging markets have been suffering because of currency devaluation and current weakness which has affected lot of the sales of 2G handsets. How does that contrast with your comments about the strength in the edge side?

Gideon Wertheizer

The microeconomic is on and off, I don’t see it, I didn’t see it at least for what we so far to manage to investigate from the royalty report. But the edge phones in these regions what important for the customer is not the price of the phone. The price level of edge phone has reached to the level that people can afford. They’re looking for edge phones because they cannot -- there is the only way for them to access the internet without being oblige to pay a data plan or to play close to zero for data plan. And that's the reason the edge works there.

Of course global economy has adopted money to buy these $20, $30 phone, can take the timing of purchasing. But the important thing is that that's the way for them access the internet is important for them.

Jay Srivatsa - Chardan Capital Markets

Okay. In terms of some of the new licensing agreements in areas that you highlighted, the smart meters, the autos and the satellite areas. When do you start to see revenues from that to become material to the point where dependence on the handset business kind of goes away?

Gideon Wertheizer

I think I said it, I did say it in conference. We are doing the effort in expanding our market share and product portfolio not because we gave up the baseband handset back on the company. We have our prospect, but as a company we will do expand our business further.

So it’s not either, neither baseband nor non-baseband. Now specifically to your question, this really takes between two to three years for the time the customers gets makes it out conclude the license agreement until you see the sizeable volume. Retail proxy is bit earlier, but sizeable volume is between two to three years.

Jay Srivatsa - Chardan Capital Markets

Thank you very much.

Gideon Wertheizer

Thank you, Jay.

Operator

Thank you. As there are no more questions, I’d like to turn the call back over to management for any closing remarks.

Richard Kingston

Thank you very much. Thanks everyone for joining us today and your continued interest and support in CEVA. We will be attending the Barclays Select Growth Conference on November 18th in New York and we invite you to join us there. Thank you very much and bye, bye.

Operator

Thank you. That concludes today’s teleconference. Thank you for participating. You may now disconnect your phone lines. Have a nice day.

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