CEVA's (CEVA) CEO Gideon Wertheizer on CEVA RivieraWaves Acquisition - Transcript

Jul. 9.14 | About: CEVA, Inc. (CEVA)

Start Time: 09:07

End Time: 09:30

CEVA, Inc. (NASDAQ:CEVA)

CEVA RivieraWaves Acquisition

July 9, 2014 09:00 AM ET

Executives

Gideon Wertheizer - CEO

Yaniv Arieli - CFO

Richard Kingston - VP, IR & Corporate Communications

Analysts

Gary Mobley - Benchmark

Suji De Silva - Topeka Capital Markets

Joseph Wolf - Barclays Capital

Operator

Good morning and welcome to the CEVA RivieraWaves Acquisition Conference Call. All participants will be in listen-only mode. (Operator Instructions) After today’s presentation, there will be an opportunity to ask questions. (Operator Instructions) Please note this event is being recorded.

I’d now like to turn the conference over to Richard Kingston, Vice President of Investor Relations and Corporate Communications. Please go ahead.

Richard Kingston

Thank you and good morning everyone. Welcome to our conference call to discuss the acquisition of RivieraWaves. With us on the call today are Gideon Wertheizer, Chief Executive Officer of CEVA; and Yaniv Arieli, Chief Financial Officer of CEVA.

Following the call, we invite you to visit the Investor Relations section of our Web site at www.ceva-dsp.com where there is a presentation available to download summarizing the main discussion points of the acquisition.

Before we begin the call, please note that today’s 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.

These forward-looking statements include CEVA’s plans for the RivieraWaves business, the financial impact of the acquisition and the benefits of the acquisition on CEVA’s product offerings combined IP portfolio and addressable market, and expectations regarding trends in the connectivity markets.

The risks, uncertainties and assumptions include the ability of CEVA to successfully integrate the RivieraWaves business, the ability of DSP products incorporating RivieraWaves Wi-Fi and Bluetooth technologies to achieve market acceptance, the speed and extend of the expansion of the connectivity markets, and other risks described 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’d now like to turn the call over to Gideon.

Gideon Wertheizer

Thank you, Richard and good morning everyone. I’m pleased to announce today that we recently completed the acquisition of RivieraWaves, a prominent and leading provider of wireless connectivity IP for Wi-Fi and Bluetooth. Headquarter in the south of France, privately held RivieraWaves has 29 employees, the majority of which are research and development staff with extensive experience in leading edge connectivity IP.

RivieraWaves was the first company to offer the most advanced Wi-Fi implementation 802.11ac and is the market leader in Bluetooth Smart and Smart Ready technologies. The RivieraWaves has more than 25 licensees to date, among which are Dialog Semiconductor and Renesas as well as multiple blue chip semiconductor companies.

In addition, there are a number of recent new customers that use RivieraWaves Connectivity IP in conjunction with CEVA DSP IP. The market opportunity for the connectivity IP is enormous. According to recent data forecast from ABI Research, the number of connected devices will exceed 45 billion units by 2020 underpinned by broad range of products such as smartphones, tablets, small cells as well as the emergent usage model for smart home, connected cars, and generally the Internet of Things.

The addition of RivieraWaves connectivity technology allow us to extend our licensing and royalty base for our targeted markets on top of our existing DSP offerings for communication audio and vision.

Furthermore, the acquisition also substantially extent CEVA addressable market into new lucrative areas where Wi-Fi and Bluetooth are the predominant means to connect between machine such as routers, remote home monitoring, smart appliances, lighting and more.

Over the past two years, CEVA and RivieraWaves have successfully partner to win joint customers where CEVA DSP and RivieraWaves Connectivity IP has been selected for software based Wi-Fi solution and for a unified integrated solution for audio and connectivity.

There is a proven track record of partnering of the two companies. Furthermore, this successful experience of working together will prove invaluable as RivieraWaves joined the CEVA family.

From product standpoint, CEVA new connectivity IP technology is vertically integrated combining both the physical and the MAC layers along with system and [ph] [RF] support both for Wi-Fi and Bluetooth. This will result in shorter design cycle and lower product development risk for our customers.

We will offer our connectivity IP product in different form factor of both low cost hardware based design and in software form in conjunction with our CEVA DSP cores, which is applicable for multi purpose platform combining both LTE and Wi-Fi such as in small cells.

In summary, we believe the acquisition of RivieraWaves is an ideal strategic move for CEVA, which add on to our value proposition within our existing market and customer base and enable us to penetrate into the huge market of connected devices and Internet of Things.

I’ll now turn the floor over to Yaniv for financial aspect of the transaction.

Yaniv Arieli

Thank you, Gideon. As Gideon mentioned, we’re delighted to welcome the RivieraWaves team to the CEVA family. Under the terms of the agreement, CEVA has agreed to pay approximately $19 million to acquire RivieraWaves. CEVA made an initial payment of approximately $12 million at closing with the rest payable upon satisfaction of certain performance and other milestones as well as a two-year retention plan for the current RivieraWaves’ employees.

RivieraWaves generated approximately $4 million in annual revenues last year and operated more or less at operating -- in breakeven point for the last four years. We believe that the acquisition of RivieraWaves carries significant strategic value for us in the long-term by increasing our addressable market.

Moreover, in the short-term, we expect to increase our historical licensing revenue base by 25% on an annual base starting in 2015 as a result of this acquisition. The fact that RivieraWaves have signed 25 licensing agreements in the last four years with a very limited sales and marketing capacity is an indicator of strong execution and the potential of this business for CEVA.

With regards to royalty, our mid term strategic goal is to exceed shipments of 400 million units of royalty-bearing CEVA powered connectivity chips by 2018. We will provide more financial commentary on our upcoming second quarter earnings call scheduled for the July 31st, later this month.

Now we will be happy to open the floor for questions.

Question-and-Answer Session

Operator

We will now begin the question-and-answer session. (Operator Instructions) Our first question comes from Gary Mobley with Benchmark. Please go ahead.

Gary Mobley - Benchmark

Hi, guys. Congratulations on your first acquisition in quite some time.

Gideon Wertheizer

Thank you.

Gary Mobley - Benchmark

I wanted to delve little more deeply into your general commentary about the revenue contribution from RivieraWaves. Yaniv, you mentioned you expect a 25% increase in license revenue from your historical base and that historical base has been running -- it used to run at $4.5 million to $5 million per quarter. But I think, if I’m correct, you’ve raised sort of your quarterly license revenue expectation long-term to $5 million to $5.5 million. So is it 25% above that $5 million to $5.5 million for fiscal year ’15 as we should model the contribution from Riviera?

Yaniv Arieli

Sure. Good morning. So if you look at the last four years, our licensing line has been somewhere between $22 million in the peak, I think 2011 at $24 million. I would take that as what we call the historical base somewhere between the $22 million to $24 million and add on top of that at least 25% for 2015.

Gary Mobley - Benchmark

Okay. That’s clear enough. What is the mix in revenue for RivieraWaves between license revenue royalties?

Yaniv Arieli

You know RivieraWaves is relatively a young company. So the majority almost all are coming from licensing deals for now when royalty should kick in at a later stage. It will take time and for a company that is in a greater start in the first few years will usually will try to get up front more to have enough operating resources and deal with the longer term which are the royalties at a later stage. So right now we’re pretty much starting from almost no royalty revenue, but quite interesting perspective with some of their 25 licensees.

Gary Mobley - Benchmark

Okay. This license revenue does it carry a typical gross margin of licensee revenue for design IP company somewhere in the neighborhood of 80% gross margin?

Gideon Wertheizer

Yes, correct. Even higher revenue, it’s very similar to our business. So in most of the revenue is really licensing of IP and some portion of it is services. On the licensing front other than direct sales costs and commission we don’t really have any other costs. That’s the interesting or the beauty in the IP model. On the services we do have somewhere around 40%, 50% margin, so the combination is pretty high. As you mentioned it is very, very similar to our business model with most of it coming from normal type of licenses.

Gary Mobley - Benchmark

Okay. And last question for Gideon. What is the R&D focus for RivieraWaves, and I guess to ask somewhat differently, what do you expect to be the next wave of licensing activity for this company on the Bluetooth and Wi-Fi front?

Gideon Wertheizer

Well the Wi-Fi and the Bluetooth are very active areas. In the Wi-Fi we have the 802.11ac, and there are other derivatives like 802.11ah, there is 802.11p which goes to automotive. So it's all areas that we want to cover. In Bluetooth, you have the Bluetooth Smart, Bluetooth Smart Ready. These are all areas that -- and along the way we’re speaking about Bluetooth 5.0. So overall I -- what we will focus our R&D in these two areas. We are going to offer them, as I pointed out in my prepared remarks, in two form factor. One is for the mass market, the hardware based solution. And when you go to the high-end access point small cells, we’ll put out DSPs on the opposite and provide the software base solution.

Gary Mobley – Benchmark

Okay. That’s it for me. Thanks guys.

Gideon Wertheizer

Thank you.

Operator

The next question comes from Suji De Silva with Topeka. Please go ahead.

Suji De Silva - Topeka Capital Markets

Good morning, guys. [Ph] [I’d let to know my] congratulations on the transaction here.

Gideon Wertheizer

Thank you.

Suji De Silva - Topeka Capital Markets

Can you talk about the Connectivity IP Market, I know its early days, but are there any merchant competitors out there for RivieraWaves and what's the addressable market today and their share if that is something you can calculate this early?

Gideon Wertheizer

Suji, this is Gideon. In general the Connectivity IP has very high and it's a complicated technology. You have to offer not just the hardware. You have to offer the hardware, the software. You have to have a competency in the hardware side. You have to have competency in the system understanding. So eventually there are not that many company allowed. There are companies in the -- specializing in the Bluetooth. There are few companies that were in the Wi-Fi. Imagination recently entered into this space, and I would consider them the main competitor. They are not as broad as ours in terms of offering both hardware base and software base. They don’t have the traction and the experience and the licensee that we have in Bluetooth. So, as for now, I think we’re having -- we're showing much stronger value proposition.

Suji De Silva - Topeka Capital Markets

Okay. And then also in terms of the use of IP vendors versus in-house. What do you think makes connectivity well timed for that transition to begin happening now, and do you expect it to be more integrated connectivity chips or with the DSP in the baseband or more discreet units out of the gate?

Gideon Wertheizer

No, it's an integration base in the main market, and I mentioned IUP smartphone, tablets. This will be integrated into the main SOC. And that’s the reason that we need a hardware base. When it goes to the more advanced and the more complicated Wi-Fi or the higher performance line like in access point or in a small cell then you need the software base solution? Here you need to integrate some other stuff like in small cell LTE and software based. And we are capable to offer, to cover those markets.

Suji De Silva - Topeka Capital Markets

Okay. And last question for me. What’s the overlap in the Riviera licensee base versus CEVA’s? Thanks.

Gideon Wertheizer

There is no any overlapping customer base.

Suji De Silva - Topeka Capital Markets

Oh, none. Okay, great. Thank you.

Gideon Wertheizer

Just to Suji to finalize -- to answer you, as I mentioned in the prepared remarks, Riviera has had very, very small team. I would say that only one individual dealing with sales and marketing. So with our quite extensive worldwide sales and marketing team, we believe that this is a huge opportunity for us to take their technology into a wider base and a wider customer market.

Suji De Silva - Topeka Capital Markets

Thank you. Best of luck with that.

Gideon Wertheizer

Thank you.

Operator

(Operator Instructions) The next question comes from Joseph Wolf with Barclays. Please go ahead.

Joseph Wolf - Barclays Capital

Thanks. I guess as a follow-up to that answer, Yaniv, if they are a small sales and marketing team but you've got some joint design wins together. Could you talk about how those played out? And then I'm curious how this product fits in, because we've talked about some Wi-Fi and Bluetooth developments that CEVA has been working on. I'm wondering how this integrates with your internal designs or whether most of the things you've been talking about have actually been with Riviera in the past? And then if you could just talk about the breakdown of their licensing so far between traditional handset CEVA business and newer opportunities outside of mobile handsets.

Gideon Wertheizer

Okay, Joseph let me try and take most of your questions, and then maybe Yaniv will jump in and add. First of all with regard to the common design wins that we had with RivieraWaves. This relates to what I said, the most advanced Wi-Fi; I would say used case like access points and small cells. Basically they take their algorithm, their Wi-Fi algorithm and do it in a software base over our CEVA DSPs. And that’s one of type of design win. Another type of design win is that customer wants to use our DSP not just Wi-Fi, but also for audio. So we are offering basically a single plug point again to support both areas together. So that’s one question. The second question, it will be helpful for me if you can remind me what was it? I think it's something that I can answer, but I forgot what it is.

Joseph Wolf – Barclays Capital

I'm just wondering if you look at -- I mean, you guys have been talking about Bluetooth and Wi-Fi and I've actually seen some demonstrations of some non-mobile and talk about, I’m wondering how much of that was with Riviera and how much of that was internal?

Gideon Wertheizer

We have activity in Bluetooth. And our activity in Bluetooth is complementary to what RivieraWaves offers in Bluetooth. We are offering what is called a dual-mode Bluetooth Smart Dual mode will basically support both the low energy type and the classical Bluetooth, and RivieraWaves more specializing in the low energy type of things. So basically we’ll combine the two offering and offer to the customer the two choices. Going forward, we will starting for lets say, Bluetooth 5.0 we will have one offering that will combine the competencies of both. In Wi-Fi, we don’t have public. We didn’t show any activity for any public demonstration with Riviera. But there are customers, and they are in the low design and it is a very successful relationship.

Yaniv Arieli

One more thing to add Joseph to your question, the company that we mentioned like Dialog and Renesas they have been using RivieraWaves technologies in Bluetooth. So in this sense our recent developments in the Bluetooth area and announcement do not compete, but are incremental for us. The joint developments that we mentioned and that Gideon talked about are really coming from the DSP area not from Bluetooth or Wi-Fi. But we’re provided to those joint customers, the DSP portion, they’ll provide the connectivity, now we could do it altogether. And as Gideon explained more Bluetooth capabilities has really become the factory standard in the Bluetooth IP space with almost no competition in the market these days.

Joseph Wolf - Barclays Capital

Okay. And then just finally, if you think about the traditional handset versus non-handset, is all of this non-handset business or some of it is still handset business where you’re perhaps handing off [ph] [on to] cellular?

Gideon Wertheizer

It's all over the place. As we have opportunities in the handset side, we have opportunities in the tablet side, and we have opportunities in non-handset what we call IUP and infrastructure. It’s all over the place. The need for what as I said, there is high entry barrier to get the competency on Bluetooth and Wi-Fi, and those companies that are doing SoC are looking to get this one as ready to use IP.

Joseph Wolf - Barclays Capital

All right. Thank you.

Gideon Wertheizer

Thanks, Joseph.

Operator

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

Thank you all for joining us today on the call. As a reminder we will be reporting our second quarter earnings on the 31st of July. I’ll invite you to join us on this conference call to discuss the quarter. This call will take place at 8:30 AM Eastern in that day. For more details of the call, IR can be found on our investor relation section of the CEVA website. Thank you and good bye.

Operator

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

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