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CEVA, Inc. (NASDAQ:CEVA)

Q1 2010 Earnings Call Transcript

April 29, 2010 8:30 am ET

Executives

Richard Kingston – Director of Marketing & IR

Gideon Wertheizer – CEO

Yaniv Arieli – CFO

Analysts

Daniel Meron – RBC Capital Markets

Matt Robinson – Wunderlich Securities

Anil Doradla – William Blair

Allan Mishan – Brigantine

Warren Darilek – Morgan Keegan

Operator

Good morning. My name is Glen and I will be your conference operator today. At this time I would like to welcome everyone to the CEVA Q1 2010 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator instructions) Thank you. I will now turn the conference over to Mr. Richard Kingston, Director of Marketing and Investor Relations. Please go ahead, sir.

Richard Kingston

Thank you. Good morning everyone and welcome to CEVA’s first quarter 2010 earnings conference call. This conference call will be conducted by Gideon Wertheizer, Chief Executive Officer of CEVA; Yaniv Arieli, Chief Financial Officer of CEVA, and I, Richard Kingston, Director of Marketing and Investor Relations.

Gideon will cover the business aspects and the highlights on the quarter followed by Yaniv who will cover the financial results for the quarter and provide financial guidance for the second quarter and fiscal 2010.

I will start with the forward-looking statements. Today’s conference call contains forward-looking statements that involve risks and uncertainties as well as assumptions that if they materialize or prove incorrect could cause the results of CEVA to differ materially from those expressed or implied by such forward-looking statements and assumptions.

Forward-looking statements include financial guidance for the second quarter and fiscal 2010, a general outlook for 2010, optimism about our licensing pipeline, royalty revenue, an increased design activities in 2010, optimism about our customers displacing It and Qualcomm, including Infineon and Broadcom, optimism about their market growth in LTE, set top boxes, digital TVs, HD video, the Chinese TD-SCDMA market, and alternative WiFi connectivity devices, and our position within them, and our customer production schedules, and our ability to generate revenues from new products and technologies.

The risks, uncertainties and assumptions include the ability of the CEVA DSP cores and other technologies to continue to be a strong growth drivers for us; our success in penetrating new markets and maintaining our market position in existing markets; the effects of the intense industry competition; the possibility that markets for our technologies may not develop as expected or that products incorporating our technologies do not achieve market successes; our ability to timely and successfully develop and introduce new technologies; our ability to continue to improve our licensing and royalty revenue in future periods; 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 like to now turn the call over to Gideon.

Gideon Wertheizer

Thank you, Richard. Good morning to everyone, and thank you for joining us today. I hope you had the opportunity to review our press release with the financial results for the first quarter of 2010. Our revenue for the first quarter was $10.6 million, a record for CEVA, and above the mid-range of our guidance.

Total revenues increased by 11% when compared to the first quarter of 2009. Royalty revenue for the first quarter of 2010 was $5 million, also a record, and representing a 32% increase over the first quarter of 2009.

During the first quarter we concluded five new license agreement. Four of the agreements were for our CEVA DSP cores, platforms, and software, and one agreement was for SATA technology. Geographically, two of the license agreement were in Europe, and three in Asia. Target application for the licenses concluded during the quarter are primarily for 2G, 3G handsets, and data cards, set-top boxes, digital TV, and SSD drives.

Our record revenue and to a larger extent our pipeline build-up during the quarter reflects a growing interest in our diverse product portfolio. This trend confirms to our market expectation following the general business improvement in our primary markets, particularly the cellular baseband market. I will elaborate on this subject later during the call.

Another indicator of the increased design activity is the 37% sequential increase in our support revenue due to higher sales of software and hardware design kits needed for design activity. Higher sequential revenue, royalty revenue followed the seasonal trend whereby first quarter royalties reflect generally higher fourth quarter shipments. However, the magnitude of the increase was lower than – is typical. This is primarily due to the higher third quarter shipments reflected in our fourth quarter royalty revenue, which was driven by unique recovery quarter with strong demand and inventory replenishment.

A noteworthy positive development associated with our royalty paying customers is the addition of two new customers in the cellular space. Although these royalties will initially be small, they are expecting to ramp up in the coming quarters. Going forward, we believe we are on track with our revenue growth plans, both in licensing and royalty. There is a noticeable progress on license agreements with existing and new customers as well as handset buildup in the licensing pipeline.

On the royalty front, we believe second quarter revenue reflecting first quarter shipments will generally follow the seasonal trend of lower shipments during the past Christmas season but could be partially offset by shipments of new model by our cellular baseband customers, displacing TI and Qualcomm as well as new royalty paying customers.

With regard to the first quarter licensing agreements, I would like to elaborate on two important agreements. The first one was with an existing customer that uses our technology for its baseband process or product line. This customer entered into a comprehensive multi-use license agreement with us for our TeakLite-III to be used in broad range of future baseband processor for 2G and 3G applications.

A recent important development in the baseband market is the strong and well-established evolution within each of the 2G, 3G, and the 4G segment. This evolutionary enhancement provides simple, cost-effective upgrade of the existing network, offering extended performance and user experience. For example, the 2G GSM GPRS technology is now migrating to EDGE, I mean the future to evolve EDGE, offering a three- to four-fold increase in performance.

In 3G, the mainstream HSPA is now migrating to HSPA+ and can provide capabilities in proximity to the LTE [ph]. The LTE space followed along (inaudible) with LTE early deployment anticipated for the second half of 2010 and LTE advanced capability [ph] is up to one gigabit per second anticipated in two to three years from now.

Within this landscape, CEVA is leveraging its core strength offering significant value proposition in the form of broad based DSP products and providing roadmap [ph] that serve different price point, performance, and power metric for each of these market segments.

Another important licensing agreement that I would like to highlight was with a new customer, a leader in the home entertainment space focusing on integrated digital TV and set-top box product line. This customer decided to use our DSP for demodulating functionalities, which extracts digital information from the signal coming out of the digital tuner. A digital demodulator chip has to reside in every set-top box of digital TV due to the migration of TV broadcasting from analog to digital.

Our DSP core offer two key benefits for the demodulator space. The first is its capability to integrate the demodulator with audio and video onto a single chip to reduce cost. The second is the use of software-defined radio technique to support multiple broadcasting standards such as DVB-T, DVB-T to ATSC, ISDB-T, and also WiFi. All these different standards can be supported by our (inaudible) DSP core especially by our best-of-breed the CEVA-XC.

The demodulator functionality posses a significant DSP core of (inaudible) on top of the audio and the video cores, which we are already targeting within our home entertainment product line. Based on a recent study by (inaudible) the set-top box market is expected to experience a 12% CAGR, reaching 200 million units in 2013. Based on the same study the DTV market is expected to experience a 10% CAGR reaching 219 million units in 2013.

In February, we attended the Mobile World Congress, the largest mobile exhibition in Barcelona. At the show, we demonstrated our CEVA-XC platform, running LTE spec fully in software [ph]. It is a major technology milestone and as expected, attracted lot of attention from prospective customers some of whom we are currently in discussion with.

Another demo at the conference was for our newly announced video platform, the MM3000, which supports HD video playback and recording in software. The MM3000 software based architecture is unique in that it allows the support of broad set of video related technologies such as 3D video, image signal processing, and gesture recognition. This offers our customers substantial cost saving as it combines in one platform the role of multiple hardware blocks needed to support the same features.

Before turning the call over to Yaniv for financials and guidance, I would like to share with you few highlights on our primary market, the handsets. At the Barcelona show we announced two new licensees for our DSP

Beceem that licensed the CEVA-XC and Sequans that licensed the CEVA-X1641. Beceem and Sequans are two leading WiMAX chipset vendors. We believe that collectively the two capture approximately 90% of the WiMAX Soc market. Both companies are aiming to use our DSP core for multi-mode solution for WiMAX and LTE.

Also at the show we announced that Samsung has introduced and LTE dongle enabled by our DSP technology. This dongle is now deployed by TeliaSonera. TeliaSonera is a Swedish mobile operator that’s screaming out to Verizon and DoCoMo of Japan, frontrunners in the LTE deployment.

The growing deployment of LTE investment [ph] product was clearly highlighted in Barcelona. For example, Verizon officially disclosed its plan to bring LTE to 25, 30 markets, one million potential customers by the end of 2010. AT&T plans to launch LTE translator in 2010 with initial deployment underway sometimes next year. Informatix predicts that LTE will be used over 41% of the wireless devices in the U.S. in 2014.

From CEVA perspective, we see growing design activity in which eight designs are already using our DSPs. Our pipeline is consistently growing composing of companies that target the LTE space. As we stated in the past, our CEVA-XC offer a software approach that allows our customers to migrate seamlessly from their CDMA, GSM, and WiMAX legacy products to the newest LTE and later on to LTE advanced products.

With regard to the existing 3G landscape, Tim Luke, a semiconductor analyst at Barclays, Samsung and LG both plan to diversify their supply base, which could signal meaning more business in the mid- and low-end 3G phones from both Korean companies and (inaudible) any business in Samsung high-end handsets. These eventually will take substantial market share from Qualcomm. Based on Gartner recently both Samsung and LG are ranked number two and three in the handset market, with collectively 30% of the market share. This reiterate [ph] a noteworthy growth potential for CEVA as both are our customers.

Another 3G segment that is becoming significant where CEVA has foothold is the Chinese homemade standard, the TD-SCDMA. According to the latest research from a Strategy Analytics, these segments will 600% during 2010 as a result of a strong push by the world’s largest operator, China Mobile. This will be one of the fastest growing technology, making China an important 3G market.

In the first quarter we (inaudible) a record 81 million handsets, surpassing the 80 million we shipped in the previous quarter and the 36 million units shipped in the first quarter of 2009.

Last but not least, at the largest exhibition for the wireless and consumer products, the CES in Las Vegas and the Mobile World Congress in Barcelona, we witnessed the demonstration of a wide range of products providing for new users of cellular technology, products such as tablets, Netbooks, eReaders, and machine-to-machine devices that are essentially add-on to the traditional wireless market. (Inaudible) group these new products will pervade the markets to north of two billion units in 2014. All these big products announced strong foothold in the 3G and the 4G space put us in a very good position to leverage these opportunities as well.

I will now turn the call to Yaniv for financials and guidance.

Yaniv Arieli

Thank you, Gideon. I will now review the results of our operations for the first quarter of 2010. Revenue for the first quarter was a record $10.6 million above the mid-range of our guidance and 11% higher than the first quarter of last year. The revenue breakdown is as follows.

Licensing revenue were $4.6 million, reflecting 45% of total revenues, 4% higher than the first quarter of ’09. Royalty revenue was $5 million, an all-time record high, reflecting 47% of our total revenues and 32% higher than the first quarter of 2009. Service revenue was 0.9 million, which accounted for 8% of our total revenue, down 26% compared to $1.2 million for the first quarter of 2009.

Quarterly gross margin was 93% on both U.S. GAAP and non-GAAP basis, which is an all-time record high for CEVA. For the first quarter of ’09 gross margin were 87% and 88% on GAAP and non-GAAP basis, respectively.

As for the operating quarterly expense, research and development expenses were $4.6 million for the quarter, including approximately $200,000 of equity based compensation expenses. Sales and marketing costs were $1.8 million, including approximately $100,000 of equity-based compensation expenses. And our G&A cost were $1.5 million, including approximately $300,000 of equity-based compensation expense.

Total operating expenses for the quarter were $8 million, which included an aggregated equity-based compensation expense of approximately $600,000, which is approximately 11% higher than the operating levels we had for the first quarter of ’09.

Our total operating expenses for the first quarter excluding equity-based compensation expenses were $7.4 million, reflecting the mid-range of our guidance and approximately 15% higher than the operating levels from the prior year.

The expense increase in overall operating expenses is associated partially with headcount increase in R&D, which should allow us to further leverage opportunities in LTE and HD video, and we have also increased our presence in China and Japan in headcount compared to the first quarter of 2009.

U.S. GAAP operating margins for the first quarter of 2010 were 18% of sales, a 72% increase from 12% for the same quarter in 2009. Our non-GAAP operating margins for the first quarter of ’10 excluding equity-based compensation expenses was 24% compared to 20% for the first quarter last year, a 30% improvement.

Interest and other income for the was $556,000, and on the tax front we recorded a tax expense of $422,000 or 14% of pre-tax income.

U.S. GAAP net income for the quarter grew 51% to $2.1 million, and fully diluted net income per share grew 29% to $0.09, compared to $1.4 million and $0.07 respectively for the first quarter of ’09.

Non-GAAP net income was a record $2.6 million, up 21% compared to the same quarter in the prior year. Fully diluted net income per share was $0.12 per share, an increase of 9% compared to the same quarter last year. Remember, these figures exclude about $600,000 and $800,000 of equity-based compensation expenses for the first quarter of 2010 and 2009, respectively.

As for other related data, shipped units by CEVA licensees during the first quarter of this year were a record 122 million units, up 106% and 1% from the first quarter of ’09 and from the fourth quarter of ’09, respectively. Of the 122 million units shipped, 81 million or approximately 675 of the units are for handset baseband chips, and reflect similar levels as the prior quarter, which recorded $80 million units shipped for Q4.

Also, of the 122 million units shipped in Q1 101 million were attributed to licensees currently paying per unit royalties, and 21 million units were shipped by licensees who were under a prepaid arrangement. This compares to similar numbers, 121 million units shipped during the fourth quarter of ’09 of which 99 million units were attributed to per unit royalty payers and 22 million were attributed to the prepaid arrangement.

As of March 31st, 2010, 24 licensees were shipping products incorporating our technology, one higher than the prior quarter. (inaudible) 33 licensing agreements are two higher than the prior quarter. One of the two additions is a newcomer for CEVA in the multimedia product line and the other is an existing customer, which came out for the first time with a 3G product line. Of the 33 licensing agreements, 29 are under pay per unit royalty arrangement and four are under prepaid arrangement.

As for the balance sheet item, as of December 31st – sorry, as of March 31st, 2010, our cash and marketable securities and long term deposits reached a record high of $106.7 million compared to $100.6 million at year-end.

During the first quarter we generated positive cash flow of approximately $6.1 million including proceeds of $3.4 million from option exercises. Our DSOs for the first quarter of 2010 slightly increased to 57 days compared to 54 days for the prior quarter mainly due to back-end loaded first quarter.

As for the 2010 annual guidance, after a strong first quarter in which we ended up higher than our mid-range guidance we provided earlier in the year, we are comfortable with our annual guidance based on healthy licensing pipeline, prospects for closing deals, and forecasted royalty growth. As a reminder, we have already targeted 2010 as a growth year in revenue, EPS, profitability, and positive business prospects.

Our reiterated annual guidance include total 2010 annual revenue is expected to be in the range of $41 million to $44 million. Gross margin is expected to be slightly better than what we have forecasted earlier, and will be in the range of 91% to 93%.

Operating expenses, including equity-based compensations are expected to be in the range of $30.5 million to $32.5 million. Annual equity-based compensation is forecasted to approximately $2.4 million. Our annual operating expenses, excluding equity-based compensations are expected to be in the range $28.2 million to $30.2 million.

Interest income, net, is expected to be around $1.8 million. Tax rate for the year is expected to be at 13%; and the share count for 2010 is expected to be approximately 22.2 million shares.

Our U.S. GAAP EPS is expected to be in the range of $0.33 to $0.39 per share, and our non-GAAP EPS, excluding the $2.4 million for equity-based compensation expenses is expected to be in the range of $0.43 to $0.49 per share.

Our guidance for the second quarter of 2010 is as follows; revenue is expected to be in the range of $9.7 million to $10.7 million. Gross margin is expected to be in the range of 91% to 93%.

Operating expenses, including equity-based compensation, is expected to be slightly lower than the first quarter and in the range of $7.3 million to $8.3 million. Our anticipated total operating expenses for the first quarter $600,000 is expected to attributed to equity-based compensation expenses, so the non-GAAP operating expenses is forecasted to be $6.7 million to $7.7 million.

Interest income, net, is expected to be approximately $450,000; the tax rate for the second quarter approximately 12% to 14%, similar to the last few quarters; and our share count for the second quarter is expected to be in the range of 22 million to 22.2 million shares.

That will bring us to a U.S. GAAP EPS expected in the range to $0.06 to $0.08 per share. The non-GAAP EPS, excluding the $600,000 of equity-based compensation expenses is forecasted to be in the range of $0.09 to $0.11 per share.

Operator, we will now open the floor to questions.

Question-and-Answer Session

Operator

(Operator instructions) And your first question comes from the line of Daniel Meron of RBC Capital Markets.

Daniel Meron – RBC Capital Markets

Thanks, guys, and congrats on the ongoing execution. Gideon or Yaniv, first of all, if you can provide with info on the market share that you have in the cordless phone market as of last quarter?

Yaniv Arieli

Sure. The worldwide baseband market share went down marginally by 1%. It’s now at approximately 26% of the worldwide Q1 shipments. We believe that it will add to one customer in the low end, which grew significantly last year both in the second and third quarter and dealt with inventory management towards the end of the year. It’s a well-known effect in the market and a known practice to these specific customers, and we are getting only good indications for increased ramp-up and penetration these days to Samsung, LG, Nokia. So, overall, we are continuing to be positive in the continued market share gains for CEVA over the next couple of quarters.

Daniel Meron – RBC Capital Markets

Okay. And should we think about the trajectory, 2010 unfolds, how is your market share?

Yaniv Arieli

You know, we never gave specific numbers I mean for the next quarter or for the next couple of quarters. We did give two or three year type of scenario that we believe we could reach at least 40% to 55% market share and I think I could you refer you to TI’s conference call. Earlier this week, they talked about on the call of having about $420 million of revenues coming from baseband in Q1 2010 for them. And in the Q&A mentioned that by the end of 2012, that number will be zero. We believe that the 2G low-end segment will probably be very low by the end of 2010. And the 3G market loss in baseband, although it’s not happening in middle of 2011 and onwards.

Gideon Wertheizer

Daniel, this is Gideon. Let me just add a few more data points. First of all, Broadcom, they announced their Q1 results. They were not specific about the baseband market share and ramp-up, but they say that when it comes to Samsung and Nokia, it’s growing, and it has to be significant. The reason that we are required to be very specific is the timing of the – this opportunity. This is new models, new phones, operators take their time to just move meaning [ph] customer acceptance. So, the timing and the magnitude [ph] of this ramp-up is something that we know it’s happening but we don’t know the exact pattern.

Daniel Meron – RBC Capital Markets

Okay, fair enough. And as far as your penetration into consumer electronics, I see that you guys a few wins in this space, can you give us a little bit more color on the trajectory that we should expect there? Is it just a matter of like waiting for two more years or so until you guys gain further traction in this space and then we can talk about meaningful market share in the various segments that you are going after and if you – are there any specific product that you think are going to be the ones that you guys are going to make a mark and just like you did in the handset market?

Gideon Wertheizer

Yes, first of all, consumer electronic, let me draw your attention, what I said about one of the strategic business that was signed in Q1, this is a consumer electronic business. We – it’s a key customer that is new to us that is in the DTV and set-top box that decided to use our DSP for what we call demodulator. If you – I don’t if the – this is a bit technical, but in general, in every set-top box and DTV you have a demodulator function that is inherently a DSP function. So this customer is going to use us broadly in his products and we are going to – we are approaching this market with other customers as well, especially with our CEVA-XC. This is the growth engine for us on top of what the multimedia – the video (inaudible) activities that we so far with other customers. Other than these we have a few companies that – in the mobile multimedia space and they – I think we spoke, one of them is Rockchip. They have a significant department portfolio composed of tablets and they are approaching in the low end segment. And we have another customer we cannot name in the smartphone space that started to get into the (inaudible) actually.

Daniel Meron – RBC Capital Markets

Okay, very good. Good luck. Thank you.

Gideon Wertheizer

Thank you, Daniel.

Operator

Your next question comes from Matt Robinson of Wunderlich Securities.

Matt Robinson – Wunderlich Securities

Hi, good morning. First, I have a couple of housekeeping items. What – you mentioned some headcount, I didn’t catch the overall headcount for the quarter.

Yaniv Arieli

182.

Matt Robinson – Wunderlich Securities

Okay. And your – do you have a operating cash flow number? I know you mentioned the 6.1 and the 3.4 from the options, but a formal operating cash flow number, do you have that handy?

Yaniv Arieli

2.8 million, very similar to the net income. So, essentially in this line of business because we don’t have a significant CapEx expenditures, over a longer period of time, the net income and the free cash flows should be quite similar.

Matt Robinson – Wunderlich Securities

You don’t have the depreciation CapEx handy? (Inaudible) But Gideon what kind of cores, or SoC’s, licenses were included in the five that you – I know you mentioned one set of license, but what were the product types for the others?

Gideon Wertheizer

Well we had gotten an agreement about particular (inaudible). This is a company that is already using our technologies and going to expand to the 3G. The 3G becomes very significant in this space. We see well the cost then becomes the key element. In the – in my prepared remark I mentioned Tim Luke, an analyst saying that Samsung and LG are now getting to work with Infineon and Broadcom specifically. So, there is all the secret free license. There was another (inaudible) we did not find in Q1, but we have concluded and given out in last week, well definitely let’s see.

Yaniv Arieli

Okay, so two CEVA-X and then the – I mean another CEVA-XC so far this quarter.

Yaniv Arieli

Yes.

Gideon Wertheizer

Yes.

Matt Robinson – Wunderlich Securities

Okay, well congratulations on that. I think I am going to have to come back for my other question. That’s it from me for now.

Yaniv Arieli

Okay, thank you, Matt. The depreciation was $130,000 for the quarter.

Matt Robinson – Wunderlich Securities

And that was CapEx less than that?

Yaniv Arieli

It was twice as that. $240- 50ish.

Matt Robinson – Wunderlich Securities

Okay. Over.

Operator

Your next question comes from Brian Nugent, William Blair.

Anil Doradla – William Blair

Hi, this is Anil Doradla. Hi. Couple of questions. One was, if I look at your full year guidance, $0.43 to $0.48 and I am trying to look at the year-over-year growth. On the high end it would be maybe somewhere around 15%. Now, that guidance that you have, can you give us a little bit more color on what you are assuming both on the royalty side and the licensing side. Given the variability in the licensing side, is that – I mean given that you’ve got more visibility on the royalty side, is that based on your greater traction on the royalty side while being conservative on the licensing side or can you give any color on that, that would be helpful.

Yaniv Arieli

Sure. You know for a long enough time, it’s known that as much as you have true understanding of the market and your customers and the magnitude of the changes that we have talked about earlier of the market share gains in royalties and so on and so forth, you don’t exactly have those numbers and Gideon that, the hockey stick event, until the quarter, the next quarter when you see those royalty reports and know which customer did better and what is picked up and so on and so forth. So we are very optimistic that the royalties will grow significantly so in 2010 from 2009. We took some (inaudible) and this is how we guided the annual – our annual guidance. The majority of the growth comes from royalties. That’s an IP model, a working IP model, that’s the healthy, profitable revenue stream. We just don’t want to guess before we actually see the numbers. We – so on a quarter by quarter by quarterly basis, we update them based on real, as much as real facts we conclude. And hope that at the end of the day we could do better than what we planned conservatively.

On the licensing front, I think it’s is the same story. In the past last couple of years we’ve been quite consistent to be somewhere between $4 million to $6 million per quarter in licensing. Gideon mentioned in his earlier remarks that we have a very solid pipeline and a lot of interest, strong interest in our licensing, so we are very optimistic about this compared to a year ago. And I am sure we will revisit our annual guidance in July. It’s just too early to do it at this timeframe, but I hope I could give some new insight as soon as we finish another quarter later in this year.

Anil Doradla – William Blair

So, Yaniv, the guidance for the year what do you assume for your royalty market share on a worldwide basis, can you give some color on that?

Yaniv Arieli

Anil, we were just asked that question ago – 10 minutes ago. We don’t break for the same exact reason that I just mentioned, we don’t bring in – or guess, a wild guess of an annual market share. We are at 26% today. I am sure that that number will increase by the end of the year, but it’s going to be 30% or 35% or 32%, it’s just a guess. I don’t think you know, and I don’t think anyone knows, because there are so many moving parts, good moving parts from TI, from Qualcomm, from the different players in the market, we are not magicians. We gather all this information, but we don’t have a magic spell to know what exactly are going to be the key models and the successful ones by – nine months from now.

Anil Doradla – William Blair

Okay –

Yaniv Arieli

Go ahead.

Anil Doradla – William Blair

No, no, go ahead, Yaniv.

Yaniv Arieli

No, so – the best tools we could give you is to look at the market dynamics, to look at our customer base. As Gideon mentioned too, to look at and I am sure you have at the Broadcom, the Infineons, the Spreadtrums, recent announcement and build your model from there. They continue to make and build share. The way they are showing and presenting optimism in their business for baseband and wireless, we should enjoy that and the upcoming wars.

Anil Doradla – William Blair

And finally, Yaniv or Gideon, big picture question, we’ve been noticing kind of an accelerating pricing pressures with some of the larger guys especially in the 3G space. From your vantage point of view, what are you seeing, how are the dynamics playing out especially on the pricing environment kind of in the 3G space?

Gideon Wertheizer

We have like everybody else, there is pressure on pricing from our standpoint. We are very unit driven and see how things are going. Right now that’s what we see in the pressure we see, but now – from our standpoint it’s per unit for us.

Anil Doradla – William Blair

Okay. Thank you very much.

Gideon Wertheizer

Thank you, Anil.

Operator

Your next question comes from Allan Mishan of Brigantine.

Allan Mishan – Brigantine

Hey, guys, I saw the services rev ticked up nicely in the quarter after a couple of very low numbers. Do you expect this to be the new base level going forward at $900,000 or could it possibly recede again or maybe does it go higher, what are you expecting for that through the year?

Yaniv Arieli

I believe that the base was like in the last part of 2009 somewhere around $650,000 to $70.000. That would be the base. On top of that as we mentioned, there were some fairly interesting design activities by our customers, meaning they bought more design tools, bores, software that will just accelerate their development cycle. I believe this is going to be slightly higher than that may be by $100,000 than the base. I am not sure if Q1 will repeat itself, yet to be seen how many orders for more development tools will come in. So, I don’t think it’s going to really $600,000 or $650,000, but I would look at somewhere around $750,000 for Q2.

Allan Mishan – Brigantine

Okay, thank you very much.

Gideon Wertheizer

Thank you.

Operator

Your next question comes from Matt Robinson of Wunderlich Securities.

Matt Robinson – Wunderlich Securities

I ask you before was that, can you give us a feel for how much of the royalty reports you have seen so far, is it 80% or 90% or – I know we have, we saw good numbers out of Broadcom a couple of nights ago. So, is your guidance based on 100% of your royalty reports or are you still waiting for a few of them?

Yaniv Arieli

No, we are still waiting. Most of our customers tend to report either at the end of the third month following the quarter or up to a few days, two weeks after that date. So we don’t have very – usually in our conference call we don’t have the full picture, we have a pretty good understanding how the next quarter could look like. I would say from that point of view you do see some seasonality in Q1. Some numbers you arrived at came in early very nice. On the other hand, you could see that LG, for example, came out with 20% lower quantities in Q1 compared to the previous quarter. And I think this is a typically seasonality to some of the OEM.

We are not going to see that much of a decline. I believe that the overall decline because of the continued market share and other positive factors for us is going to be somewhere between 5% to 10% from this existing $5 million level, not worse than that.

Matt Robinson – Wunderlich Securities

Okay, thanks, that’s helpful.

Gideon Wertheizer

Sure. Thank you.

Operator

Your next question comes from Warren Darilek of Morgan Keegan.

Warren Darilek – Morgan Keegan

Hello, gentlemen, appreciate the call. I had a question in regards to the large cash build-up you’ve accumulated over the years in forecast of rising cash flow as well. What are the thoughts for you and would you consider a meaningful or measurable dividend in the future? What are your thoughts there?

Gideon Wertheizer

Well we – let me say this. First of all, our intention and focus is to provide shareholder value and the means that you could – you mentioned the dividend, it’s some thing that it is – these things we are considering and discussing continuously. On the other end, we are looking to grow the business and also (inaudible) we have pinpointed several opportunities that are complementary to our technology, meaning, we can leverage on what we are doing so far and get more business there. We don’t say we are not specifically, we don’t tell specific, but we have targeted few things, and we are looking for how this will help us to grow the business there non-organically.

Warren Darilek – Morgan Keegan

Okay, thank you.

Gideon Wertheizer

Sure, thank you.

Operator

And at this time I am showing no further questions.

Richard Kingston

Okay. Well, we’ll end the call there. Thank you again for joining us today and for your continued interest in CEVA. We will be attending the following events in the coming few months and I invite you to join us there

The 11th Annual Israeli conference on May 16 at Tel Aviv, the Stern Agee Annual Semiconductor Conference on June 3, New York, ThinkEquity’s First Annual Semiconductor Conference also on June 3 in New York, the RBC Technology, Media, and Communications Conference on June 9 in New York, and the Piper Jaffray European Conference on June 22 in London.

Thank you and good-bye.

Operator

And, ladies and gentlemen, thanks for participating in today’s CEVA Q1 2010 earnings conference call. This call will be available for replay beginning at 11:30 AM Eastern Time today through 11:59 PM Eastern Time Thursday, May 6, 2010. The conference ID number for the replay is 67571646. Again, the conference ID number for the replay is 67571646. The number to dial for the replay is 1-800-642-1687 or 1-706-645-9291. We thank you and appreciate your participation

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