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CEVA (NASDAQ:CEVA)

Q1 2011 Earnings Call

April 27, 2011 8:30 a.m. ET

Executives

Richard Kingston – Director of Marketing and Investor Relations

Gideon Wertheizer – Chief Executive Officer

Yaniv Arieli – Chief Financial Officer

Analysts

Suji De Silva -ThinkEquity

Joseph Wolf – Barclays Capital

Doug Whitman – Whitman Capital

Matt Robison – Wunderlich Securities

Gary Mobley – Benchmark

Brian Nugent – William Blair

Daniel Meron - RBC

Daniela Ventrone – Matrix

Operator

At this time I would like to welcome everyone to CEVA’s first quarter 2011 earnings conference call. [Operator instructions.] Thank you. I’ll now like to turn the conference over to Mr. Richard Kingston, director of marketing and investor relations. Please go ahead sir.

Richard Kingston – Director of Marketing and Investor Relations

Thank you. Good morning everyone, and welcome to CEVA’s first quarter 2011 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 of the quarter, followed by Yaniv, who will cover the financial results for the first quarter and will provide financial guidance for the second quarter and fiscal 2011.

I will start with 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 2011, market data from Strategy Analytics, Inc. herein, optimism about our customers’ product pipelines and market penetration; optimism about our products including CEVA XC and MM3000, projections relating to smart phone expansion and trends related to internet-enabled HDTV and 3D TV, optimism about our ability to penetrate new markets beyond the cellular-based band market, as well as the positive impact on our business of these various factors.

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 our products incorporating our technologies to achieve market acceptance, the effect of intense industry competition and consolidation, the possibility that markets for our technologies may not develop as expected or that products incorporating our technology do not achieve market acceptance, our ability to timely and successfully develop and introduce new technologies, and general market conditions and other risks relating to our business, including but not limited to, those that are described from time to time in our SEC filings.

CEVA assumes no obligation to update any forward-looking statements or information, which speak as of their respective dates. With that said, I would now like to turn the call over to Gideon.

Gideon Wertheizer

Thank you Richard. Good morning 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 2011.

Our revenue for the first quarter was $15.1 million, a new record. These results were 42% higher than the first quarter of 2010 and a 16% sequential increase. Royalty revenue for the first quarter of 2011 was an all-time high of $9.2 million, representing an 85% increase over the first quarter of last year and a 23% sequential increase.

Earnings per share on a non-GAAP basis were $0.23, 92% higher compared to last year and 21% higher sequentially.

During the first quarter we concluded seven license agreements. Four of the agreements were for our DSP cores, platform, and software, and three agreements for our SATA/SAS product line. Geographically, three of the license agreements were in the U.S., three were in Asia, and one was in Europe.

Target applications for the licenses completed during the quarter are primarily 3G and 4G baseband processors for handsets and infrastructure, smart grid, and SSD drives.

During the first quarter we [sailed past] our financial targets, driven by market share expansion in the mainstream 2G and 3G segments and new strategic licensing agreements. Shipments during the quarter represented an all-time record high for the company as customers shipped in excess of 234 million units, of which 213 million were baseband processors across all cellular segments including low-cost feature phones, advanced smartphones, and tablets from branded Tier 1 OEMs.

On the licensing front, we signed three new CEVA-XC agreements during the quarter. Two of the agreements we made to two untapped markets for us, base stations and smart grid. Our new base station customer is a Tier 1 OEM in Asia, a well-known leader in multi-mode LTE base stations currently using only merchant chips from PI and other [inaudible] products. The customer aims to transfer its design to be based on our CEVA-XC.

We believe this comprehensive agreement has the potential to replace the incumbent [DSP] the customer other high-volume products, including smartphone networking and wired communications devices. Moreover, we believe this customer endorsement encourages chip companies aiming to do business with this OEM to adopt our CEVA-XC DSP.

The other agreement that we concluded during the quarter was with a key player in the fast-growing [inaudible] market. Our new customer is a pioneer in this space, and already has contracts in place to supply solutions to large utility companies among which are Pacific Gas & Electric Company, Pepco Holdings, and American Electrical Power. The customer plans to use our CEVA-XC for realtime wireless transmission of customer electricity utilization to the utility [back home].

Now let me take a few moments and go through some highlights about our markets, design wins, and customer [interaction]. According to the latest research from Strategy Analytics, the number of baseband chips shipped in the first quarter of 2010 was 526 million units.

As stated earlier, our customers shipped approximately 213 million basebands during the same timeframe, representing a 41% market share for CEVA. It reflects a continued expansion of our DSP across both handsets and non-handset cellular-enabled products, both of which Strategy Analytics account for in their numbers. Please note that we report our royalty revenue one quarter in arrears, so the royalty revenue and shipment volume we report on this call actually relates to the fourth quarter of 2010 shipments.

Our customers continued to gain traction in the cellular space. The following are a few data points from the recent Strategy Analytics report. Broadcom baseband shipments doubled in 2010 compared to 2009, and continued to gain new design wins with Nokia and Samsung.

Spreadtrum shipped approximately 114 million baseband units, showing triple-digit growth in 2010 compared to 2009.

[inaudible] out of Intel showed almost 80% new [inaudible] shipment [inaudible] in 2010, benefitting from multiple high-volume Tier 1 [inaudible] OEM customers such as Apple, LG, Nokia, and Samsung.

ST-Ericsson continued its recovery during the second half of 2010, key contributors being GSM [inaudible] Edge single-chip solution enabled by our DSP being widely used at Samsung and Sony-Ericsson and their new 4 HSPA-class mobile being deployed in Samsung and LG 4G smartphones.

The mobile world congress that took place this past February in Barcelona and the International CTA that took place in March in Orlando, Florida, were a big showcase for new product introductions by our customers. I’d like to mention a few of these best-of-breed products.

Broadcom announced its new [BCM 2157 HSPA and DCM 21 654] HSPA baseband processor with advanced features including Android for mass-market smartphones. Both processors also support [inaudible], which is a growing requirement in emerging markets that allow [migration among carriers for lower rates.]

Broadcom also announced its next-generation Persona ICE application processor family that will be powering new high-performance multimedia tablets from Compal Electronics, a leading ODM. The Persona is also [integrated with] our DSP, enabling Broadcom to support [a large suite] of [audio announcement] solutions for voice, audio, and IP communication solutions, among which [is Skype].

Spreadtrum [and TCMC] and [Anvil] [inaudible] achievement of the first commercialized 40 nanometer TD-SCDMA baseband processor. The processor was a multimode supporting TD-SCDMA as well as other cellular specifications including HSPA, Edge, [inaudible] Edge, and GSM, all supporting using software on our DSP.

T-Mobile launched the Samsung Galaxy S 4G using ST-Ericsson M5720 modem, which is enabled our DSP. The M5720 is the first modem in the industry allowing 21 MB per second smartphones without compromising size and power consumption. T-Mobile and ST-Ericsson are working together to bring even higher data rates to the market including 42 and 84 MB per second for future devices.

Intel announced that its XMM 6260 HSPA+ chip set which is enabled by our DSP-enabled LG 3 and 4G 3D, the first smartphone with 3D display. Intel’s new chip set is also used in the new Samsung Galaxy S 2 smartphone and the Galaxy Tab tablet.

Mindspeed demonstrated the next-generation MP base station product using its Transcede SoC solution. It is the first fully integrated commercially available single SoC base station solution offering LTE and includes 10 of our DSPs.

The recent Mobile World Conference show was a great success for us. In recognition of our advantages and leadership, [inaudible] together with our partner mimoOn, we demonstrated CEVA XC [inaudible] capable of transferring two HD video streams simultaneously.

Also, we demonstrated a full 3D video demo running on our newest video platform, the MM3000. Our MM3000 is the world’s first platform that supports three distinct multimedia features, 3D video, HD video conferencing, and [vision]. This product will be available for licensing later this year.

Before handing the call over to Yaniv, I’d like to highlight a few strategic trends that we believe have the ability to enhance our long-term growth [products]. Though the penetration of LTE handset baseband chips was less than 1% in 2010, there is no doubt that in the coming years LTE will become the mainstay broadband wireless access.

Moreover, the next-generation LTE, LTE Advanced is now a formal standard which requires eight times more performance than the current LTE. In addition to LTE, all handsets and base stations will have to [inaudible] the legacy generation, like 2G, 3G, and its derivatives.

Our [inaudible] technologies tend to benefit from these market dynamics. Our software-based approach and scalable performance provide our customers with the flexibility, [inaudible], and seamless [inaudible] migration to support next-generation cellular products.

In the handset space, it is apparent that the smartphone expansion is accelerating. According to ABA Research, 302 million smartphones will ship in 2010, a 71% growth over 2009 shipping [inaudible]. Within the smartphone chipset, our DSPs are already widely deployed for 3G and 4G modem functions by leading smartphone vendors.

In addition, the increased use of multimedia content, video conferencing, and enhanced voice communication drive the need for DSP as an integral part in the application processors. I mentioned that our DSP is already used in Broadcom Persona ICE and new application processors.

Our new MM3000 video and imaging platform will further extend our presence within the application processor to support video and vision capabilities to be used as a foundation for many exciting applications.

In the home market, the recent CES highlighted two new significant trends, internet-enabled HDTV and 3D TV. A recent report from GigaOM media projects that six out of ten TVs shipped worldwide in 2015 will have network connection.

The 3D TV is still in its infancy. However, Samsung Electronics expects the market will grow six fold to 6 million units this year. We believe this capability and [inaudible] of our MM3000 video and imaging platform enable us to leverage these two untapped, but growing, markets.

So to summarize, our DSP IP portfolio is geared [inaudible] key transitions and trends in the high volume market, which continue to drive new strategic licensing agreements for us. Higher performance, wirelessly connected devices and multimedia-driven products require more-powerful programmable DSP to meet the performance demand and the power consumption expectation of next-generation design.

Our [inaudible] and technical advantage in DSP architecture, clear roadmap, and rich ecosystem enable the migration to our technology. These core strengths, along with strategic relationships with Tier 1 customers, provide us with the opportunity to expand beyond our current primary and lucrative market to baseband processors for handsets.

Smartphones, tablets, [inaudible] HD equipment, and wireless infrastructure are complementary markets that we are penetrating to provide incremental licensing and warranty revenue for our business. We are making the necessary R&D investments to develop competitive solutions for the benefit of our customers.

We are excited about these [inaudible] and are committed to becoming a key player as we already are in the baseband space.

With that said, I will now turn the call to Yaniv for financials and guidance.

Yaniv Arieli – Chief Financial Officer

Thank you Gideon. I’ll now review the results of our operations for the first quarter of 2011.

Revenue for the first quarter was $15.1 million, an all-time record high and above the high end Street guidance. This reflects a 16% sequential increase and a 42% year-over-year increase. The revenue breakdown is as follows.

Licensing revenue was $5.1 million, reflecting 34% of the total revenue, 8% higher than the first quarter of 2010, during which we recorded $4.7 million. Royalty revenue was $9.2 million, the sixth sequential record high, reflecting 61% of our total revenue and 85% higher than the first quarter of 2010, during which we recorded $5 million.

Service revenue was $0.7 million, which accounted for 5% of total revenue, 18% lower when compared to the first quarter of 2010, during which we recorded $0.9 million of revenue.

Our total gross margin was 94%, an all-time record high on both GAAP and non-GAAP basis, compared to 93% for both the first quarter of last year.

As for the quarterly operating expenses, research and development expenses were $5.3 million for the quarter including approximately $380,000 of equity-based compensation expenses.

Our sales and marketing were $2.2 million, including approximately $200,000 of equity-based compensation expense.

Our G&A costs were $1.8 million including approximately $320,000 of equity-based compensation expenses.

Total operating expenses for the quarter were $9.2 million, which included an aggregate equity-based compensation expense of approximately $905,000, approximately 16% higher than the operating expense levels for the first quarter of last year.

Total operating expenses for the first quarter excluding equity-based compensation expenses were $8.3 million, reflecting the mid to upper range of our guidance and approximately 13% higher than the operating expense levels for the first quarter of last year.

The higher op ex is primarily associated with higher sales and commission expenses due to higher first quarter revenue, higher research and development expenses in 2011, and to some extent higher compensation and professional expenses in the G&A costs.

U.S. GAAP operating margins for the first quarter of 2011 increased 78% to a record 32% of sales from only 18% for the same quarter in 2010. Non-GAAP operating margins for the first quarter of 2011 excluding equity-based compensation expenses increased 64% to a record 39% from 24% for the first quarter in 2010.

U.S. GAAP operating income more than doubled in the first quarter of this year compared to last year from $1.9 million to $4.9 million, and our non-GAAP operating income increased 142% from $2.5 million to $5.8 million.

Interest and other income for the first quarter was $545,000, in line with our estimates.

On the tax front, we recorded quarterly tax expenses of $0.8 million on a U.S. GAAP basis and a tax expense of $0.9 million on a non-GAAP pre-tax income basis. This accounts for 14% and 13% of pre-tax income respectively.

Our U.S. GAAP net income for the quarter increased significantly by 126% to $4.7 million and fully diluted net income per share increased by 111% to $0.19. This compares to $2.1 million and $0.09 respectively for the first quarter of 2010.

Our non-GAAP net income increased 109% to $5.5 million compared to the same period in the prior year, an all-time record high. Non-GAAP fully diluted net income per share increased 92%, also to an all-time record high of $0.23 per share, compared to the same period last year.

These figures exclude approximately $0.9 million and $0.6 million of equity-based compensation expenses, net of taxes, for the first quarter of 2011 and 2010 respectively.

As for other related data, shipped units by CEVA licensees during the first quarter of 2011 were a record 234 million units, up 92% and 8% from the first quarter of last year and the fourth quarter of last year respectively. Of the 234 million units shipped, 213 million units, or approximately 91%, are for baseband chips and reflect 20% higher volume as compared to the prior quarter in which 178 million units of baseband chips were shipped.

As of March 31 of 2011, 38 licensees were shipping products incorporating our technologies, the same as the previous quarter, which represents 29 shipping customers.

Some balance sheet highlights. As of March 31, CEVA’s cash and cash equivalent balance, marketable securities, and long-term bank deposits reached a record high of approximately $143 million compared to $131 million as of December 31, 2010.

During the first quarter we generated positive cash flow of approximately $12 million and our DSOs for the first quarter hit a record low of 7 days compared to 42 days for the prior quarter.

As for the guidance, as Gideon discussed earlier, we see a healthy and active licensing environment for our DSP technologies in our traditional baseband markets as well as new markets and applications. As expected, our second quarter royalty revenue will be seasonally lower than the figures we just reported, and they represent the post-Christmas first quarter shipments.

With regard to the full-year guidance, we are adjusting it upwards based on actual first quarter results and our guidance for the second quarter, which I’ll elaborate on in a minute.

Our guidance for the full year. Revenue is expected to be between $55.6 million to $57.6 million. Gross margin is expected to be in the range of 92-94%.

Operating expenses including equity-based compensation expenses are expected to be higher than the 2010 level, as we explained on the prior call. Our overall operating expenses are forecasted to be in the range of $36.6 million to $38.6 million.

Annual equity-based compensation expense is forecasted to be approximately $4.6 million. Annual operating expenses including the equity-based compensation are expected to be a bit higher in the range of $32.3 million to $34.3 million. Interest income net is expected to be around $2 million. Tax rate, as I mentioned earlier, 14% on a GAAP basis and 13% on non-GAAP basis.

Our share counts for this year are expected to be in the range of 24 million to 24.4 million shares, and our U.S. GAAP EPS is expected to be in the range of $0.59 to $0.65. Non-GAAP EPS, excluding the aggregate $4.6 million of equity-based compensation expenses is forecasted to be higher and in the range of $0.76 to $0.82 per share.

As for the guidance for the second quarter of 2011, revenue is expected to be in the range of $12.4 million to $14.4 million. Gross margin is expected to be in the range of 92% to 94%.

Operating expenses including equity-based compensation expenses are expected to be slightly higher than the first quarter on a GAAP basis and in the range of $8.8 million to $9.8 million.

Of the anticipated total operating expenses for the second quarter, $1.1 million are expected to be attributed to equity-based compensation expenses, so our non-GAAP operating expenses are expected to be slightly lower than the first quarter and in the range of $7.7 million to $8.7 million.

Interest income [inaudible] approximately $500,000 for the quarter. Tax rate, same rate as I just mentioned on an annual base.

Share count for the second quarter 24-24.2 million shares. Our U.S. GAAP EPS is expected to be in the range of $0.11 to $0.15 per share and on a non-GAAP basis, excluding in aggregate $1.1 million of equity-based compensation expenses, is forecasted to be in the range of $0.15 to $0.19 per share.

Operator, you can now open the floor for Q&A please.

Question-and-Answer Session

Operator

[Operator instructions.] And your first question comes from Suji De Silva of ThinkEquity.

Suji De Silva -ThinkEquity

Hi guys. Nice job on the quarter. The mix of handset in the units has gone up significantly. When do you expect diversification to bring the non-handset part back into the mix more aggressively?

Gideon Wertheizer – Chief Executive Officer

The mix is changing because we are kind of in a hockey stick when it comes to the baseband. The baseband is growing much faster. We do have designs and even some of them are very encouraging. We have game consoles, new game consoles that just came out to the market and doing very well. We have application processors. I mentioned the Broadcom application processor. This is evolving and expect it to catch up. But the baseband is by far growing faster and that’s encouraging for us.

Suji De Silva -ThinkEquity

And then on the license pipeline, does that continue to grow here and have you seen any impact on closure rates from Japan or impact in the handset unit market?

Yaniv Arieli – Chief Financial Officer

I’ll take that. Overall, as we mentioned on the call, we see a very healthy pipeline of design activity from not just the traditional baseband but rather from new market segments as well. Just last quarter we signed 2 brand-new markets, DSPs to brand-new markets for us. So I think that we are looking at a healthy pipeline, a healthy backlog of deals. I don’t think we’re going to change at this point in time our licensing guidance. We have said in the past, and we’re comfortable with somewhere between the $4-5 million, but I think the environment that we’re in is toward the higher end and it’s a healthier environment than it may have been in the past. So I think this is some flavor that we could add on the licensing environment.

Suji De Silva -ThinkEquity

And any impact from Japan?

Yaniv Arieli – Chief Financial Officer

No, not as much as we know for now. We had some discussions with our key customers. They all claim that the production is progressing as planned today and they were not able to identify any specific issues or concerns. It’s an overall macro concern, but for now we haven’t seen any direct impact, not in the licensing or business opportunities nor from the royalty.

Operator

Your next question comes from Joseph Wolf of Barclays Capital.

Joseph Wolf – Barclays Capital

Just wanted to ask two quick questions. One is sort of maybe a re-do of the first question which is if you look at the royalty revenues as a percentage of sales, does your guidance keep that kind of steady at this all-time rate of about 61%, or do we expect a little bit of movement? Or which way do we expect that movement to be in the annual guidance? And then just Yaniv, if you could give us a comment on the receivables trends? They dropped significantly. Looks like there were very good collections. Are we at a new level of normal? Or how should we look at receivables for the rest of the year.

Yaniv Arieli – Chief Financial Officer

Let’s start with the second. No, I think it was a little bit of abnormal. I think we’ll get back to the 40-day-ish. These are the financial target and be more reasonable. This quarter, specifically, or the first quarter, was not fully back-end loaded like the IT business usually is and therefore some of the deals that we did manage to close in the beginning of the year, a big portion of them also we were able to collect the money within the same quarter. So it was a very nice achievement I believe, but it’s not something that we will see as the model going forward.

With regard to your other question, I think we regressed this sometime in the past. When you look at the more mature IP companies that are out there, which have been much longer than CEVA has, which are a bit longer in age, I think that the thumb rule is probably a third to two-thirds, meaning a third licensing deals which contributed to about two-thirds of overall revenue coming from royalties.

And that’s what we see when the more mature companies are out there. We have done significant growth achievement over the last three or four years, going up from less than 20% to 61% and I think we should be above the 50% going forward. I’m not sure where we’ll end up, but on an annual basis I think we’re looking at a very, very strong year in royalties.

Overall business trends, I would say that probably close to 50% growth on an annual basis from last year. That’s something that I would probably look at as some of our goals for 2011.

Gideon Wertheizer – Chief Executive Officer

Let me shed more light here, elaborate. We are in the baseband space. Our sweet spot is in the handset space. This market was recently consolidated. If you take ST-Ericsson, it’s now a combination of four companies. Broadcom acquired a company just recently. So the market has consolidated and as a result on one hand you are getting a chunk of big names that have the lion’s share of the market, and as a result you have less licensing opportunity.

On the other hand, and that encourages us most, is the fact that we are taking technology like the CEVA-XC and being able to expand beyond the handset baseband space. And just I mentioned in my prepared remarks two CEVA-XC agreements that are on tap for us. That’s the infrastructure, and in this case the base station and base station is not just the big ones, [inaudible] and [inaudible] and [inaudible] and the smartgrid, which is a big chunk.

We are also collecting ideas of where to take the CEVA-XC even further to other applications. We are studying the implication now. The good thing about the CEVA-XC and the [inaudible] and 3000 is it’s like [the cloud], it’s a platform. With minor changes, the CEVA architecture, minor tuning, you can go to markets that are complementary or distinct to where we are in the handsets.

Joseph Wolf – Barclays Capital

Just I guess as a quick add on to that answer, given the strong cash flow generation and these new opportunities to turn this into a broader platform, are there specific areas of spending and exact dollar amounts that have been targeted? Or maybe what’s the right cash flow balance for CEVA right now?

Gideon Wertheizer – Chief Executive Officer

We are investigating, exploring also nonorganic means to enrich what we are doing. This is done intensively. I cannot be specific at this stage. The other things that we discussed in terms of using the cash - we are discussing all the other financial means to use the cash. [inaudible] and regularly and we have now, as you know, we have a buyback in place.

Yaniv Arieli – Chief Financial Officer

Let me add to that. [inaudible] the free cash flow should be very similar on an ongoing model basis to the net income because the cap ex is relatively small in this type of IP business model. And with regard to many of the roadmaps that we discussed in the new market, this is essentially financed by the internal R&D team. So other than the nonorganic, which is always an option, and a valid one as Gideon mentioned, the rest is really done from the internal R&D efforts without any need for additional cash.

Operator

Your next question cash flow Doug Whitman of Whitman Capital.

Doug Whitman – Whitman Capital

Congratulations on the great quarter. I had a question on – when you took over the company you had over 100 days’ accounts receivables and you talked about how as licensing grew receivable days would come down. And obviously you grew the licensing basically close to 100% year-over-year, but you also grew as well on the other side of the business, which is normally typically fairly end of the quarter. Could you touch a little bit on how the receivable days are so low, and what we should expect for the next quarter?

Yaniv Arieli – Chief Financial Officer

Sure, yeah. I was just asked about that. I think that 7 days is out of the ordinary I would say in this specific quarter. Some of the deals, significant deals, were signed in the earlier stage of the quarter and this is why we were able to collect the money. I would presume to look at the last couple of quarters this was around the 40 days to 46, 47 days. I think this was something that we should expect going forward. I would be happy to show a more 7-day type of quarter but I don’t think it’s that realistic. It would be nice not to have back-end loaded quarters but more front-end loaded. But this is really the merits of the cash flow and the accounts receivable and to that add the fact that the more royalty, the easier collection it is, because this is an automatic – somewhere between net-30 to net-45 days payment terms and the bigger the royalty piece is the better payments we have. And as you can see we have no issues with any of our customers on non-payment.

Doug Whitman – Whitman Capital

Okay. We’ll hold you to the new standard. [Laughter.]

Yaniv Arieli – Chief Financial Officer

I won’t take the challenge, not yet at least.

Operator

Your next question comes from Matt Robison of Wunderlich Securities.

Matt Robison – Wunderlich Securities

I’ll throw in my congratulations too. Phenomenal results. Gideon, can we get a feel from you how you gauge your penetration into the traditional industry leaders in the mobile device business? And then talk a little bit about how the non-mobile business, at least from a royalty perspective, was this year versus the last couple years.

Gideon Wertheizer – Chief Executive Officer

Okay. So let me start with the mobile. The recent evolution and progress in standards make the DSP processors much more complex than in the past. When it comes to 2D there were plenty of ways to do it. There were a lot of different DSPs. When you jump and you come to the LTE, and you start dealing, as I mentioned in the prepared remarks, when you need to deal with basically multi-standards, you have to support all the LTE and all the legacy, and going forward, LTE Advanced, you need to have different architecture. And that’s something that we figured out three years ago, and now we come to the customer both in the infrastructure side and on the handset side, and show them that they can use this technology and basically do with one platform things that otherwise they would [inaudible] to do it with two or three different hardware blocks or even chips in their system. So I hope this answers your question about the penetration.

Matt Robison – Wunderlich Securities

Actually, it doesn’t answer it at all. What I’m wondering if you can talk about what percentage of the phones that are shipped by these traditional very large suppliers of phones such as Nokia or Samsung you think you’re in at this point. You can give me a qualitative. I realize that your data may not be very precise, but where do you think you are in terms of the ultimate penetration of their business? Are you half the way, a quarter of the way, two thirds of the way? What would be your gauge?

Yaniv Arieli – Chief Financial Officer

Matt, we never broke it down, so I’m not sure if we have enough data in front of us. This is not something that we have broken down in the past based on OEM. We do have more data on standards like 2G versus 3G or 4G. That’s a bit easier for us. But not the end models. If you look at some of the higher volume opportunities like Nokia, and that’s the big story that has been around from 2008, we know that the first shipments into Nokia replacing TI happened in the last quarter of ’09, probably somewhere between 10-15 million units. Throughout 2010 I believe not more than 100 million units were replaced, and the rest Nokia sells about 100 million a quarter more or less. In the next two years or 18 months would be the rest of the portion, the untaxed portion from TI mainly will move to the CEVA customers. As we know, it’s the Broadcom, it’s the Ericsson, the Intels of the world, and maybe others in the future. So I think this is the way we’d quantify it other than going by SKU by SKU and checking how many Galaxy phones are sold or how many iPhones are sold.

Matt Robison – Wunderlich Securities

Thanks a lot Yaniv, that was very helpful. Just before 2009 you guys would have a pretty substantial bump in your royalty units and also royalty ASP during the March quarter to reflect the December quarter shipments. And of course then the recession years we didn’t see much of that and you also had I believe back in the 2008 you also had a pretty sizable component related to Nintendo. But any rate, can you give us a flavor as to how that behaved? Is it the same for the March quarter as it was in the prior two March quarters? Or did you see more activity from the more traditional kind of consumer space?

Yaniv Arieli – Chief Financial Officer

I think it’s a lot also has to do with just the seasonality with specific product lines as Gideon mentioned, the 3DS, the Nintendo, the new gaming console which was launched a month ago. Close to 4 million units were sold in a single month, doing very well. My kids are playing with it all the time. So it really depends on high volume or high-end products, or low-end products that either the operators sponsor or are just very successful and get traction. So the overall hockey stick we see the market share taking place over the last couple of quarters, from an ASP perspective I think we mentioned that in the last couple of quarters, that’s not the main theme that we are targeting just because there are so many different vectors with low-end and high-end products and 4G with Galaxy and so many different products that are out there that at least for now with this trend of gaining and continuing to gain market share is very difficult to follow. I could just say the highlight, the ASP was slightly up from Q4 of last year to Q1 of this year. But that’s the only flavor that you could maybe look at. The rest, every quarter has a different story whether it’s coming from China or consumer or other type of markets.

Matt Robison – Wunderlich Securities

Yeah, it looks like it went up about a tenth of a penny if I wrote your numbers down right. You went from $0.038 a unit to $0.039. Is that right?

Yaniv Arieli – Chief Financial Officer

Close to that. We tend to not be that specific about the ASPs and what markets and what segments they’re coming from.

Matt Robison – Wunderlich Securities

Can you give us - for keeping track just break down your cash flow between operating, options exercised, and then give us cap ex depreciation and headcount?

Yaniv Arieli – Chief Financial Officer

[inaudible] and 10 are from operating activities. That’s from the cash flow. Headcount is 188 people at the end of March. And the third was?

Matt Robison – Wunderlich Securities

Depreciation.

Yaniv Arieli – Chief Financial Officer

And cap ex depreciation about just north of $100,000 each.

Matt Robison – Wunderlich Securities

And what kind of headcount increases do you expect this year?

Yaniv Arieli – Chief Financial Officer

Well now at least we have several, 5, 6 people still open positions for R&D.

Operator

Your next question comes from Gary Mobley of Benchmark.

Gary Mobley – Benchmark

I just wanted to touch on some of the prepaid dynamics. Are there any residual prepaid royalties in the quarter? And then as well do you still have roughly one prepaid agreement still in place?

Yaniv Arieli – Chief Financial Officer

Yeah, you answered the two questions right. Prepaid is not an issue anymore, so we don’t have any prepay agreements this quarter and as we mentioned last quarter we still have one under prepaid, very old deal, insignificant, which we are not breaking out as you saw any more because this was an old deal, an old [inaudible], no issue anymore.

Gary Mobley – Benchmark

Okay. Of the seven license deals signed in the quarter were any of those with licensees CEVA’s never dealt with in the past?

Gideon Wertheizer – Chief Executive Officer

Of course. Four or five-ish.

Gary Mobley – Benchmark

And last question for me, have you seen any change in the competitive dynamic among various third party DSP intellectual property licensers? And I guess what I’m really specifically pointing to is the deal MediaTek signed with Coresonic. Does that deal in particular preclude CEVA from getting in there and then as well might you see feature competition from third-party IP vendors like Coresonic?

Gideon Wertheizer – Chief Executive Officer

There is competition. I would say [inaudible] competition in the case you mentioned, Coresonic. Coresonic is a startup company with unproven technology. From time to time companies like MediaTek, which has a strong NIH insight, want to take the risk and take technology and try to do something for themselves. Probably they are getting all sorts of benefit for that. We are speaking with MediaTek in different respects and I’m not too much concerned about specific cases where companies take small companies with unproven technologies and try to use it. Could be.

Operator

Your next question comes from Anil Doradla of William Blair.

Brian Nugent – William Blair

Hi, it’s Brian Nugent in for Anil. Just wondering if you can comment on the overall MM3000 design traction, when we might expect some licensees there. And then I guess is there any way to compare that, the level of interest that you’re seeing in the MM3000 to the XC ramp that’s now two years later after XC? You’re starting to see some real volumes there in terms the designs. Is that the kind of timing we should expect for the MM3000?

Gideon Wertheizer – Chief Executive Officer

Yes, we expect to get similar traction for MM3000 as with XC and the early indications that we are getting, both from customers and looking at the competitive landscape, these technologies like XC have a technology advantage. The fact that we are combining 3D video, HD videoconferencing, and vision, and what is called image [inaudible] or processing, in one platform, is appealing and we are supplemented with [inaudible] to make it attractive to customers. The technology is still in late-stage in development. I mentioned that the second half of this year, the release to the market, will make it available. We are already doing quote [inaudible] with customers. We showed it in the recent Mobile World Conference. We showed it in [inaudible]. By the end of the year it would be available for [life] although I wouldn’t say by the end of the year but [inaudible] the second of this year it will be available for licensing and we have to see license income.

Brian Nugent – William Blair

Okay, and on both the XC and MM3000 can we expect, once we start seeing volumes there, a higher royalty rate? And is there any way to quantify maybe the magnitude of what kind of royalty rate increase we could see from those two platforms?

Yaniv Arieli – Chief Financial Officer

Sure, from the financial point of view, it’s very similar to any other new product that comes out. It’s the same. A new core versus an older core will always have a higher licensing price because we invested lots of good dollars there and want to get some return. And as well the ASP is higher because those new cores will be able to handle more, to save a lot of silicon for our customer, or even multiple chips if they can integrate like the MM3000 of multiple [inaudible] on a single core. We save them a lot of money on the chip side and battery life, and this was why we are able to charge slightly higher royalties on newer cores compared to old cores and as you know, when the volume starts based on different step function or a percentage of ASP, then that goes down over time for the next two or three or four years of both shipments. So no different change other than new markets, brand new technologies from our end, brand new customers that we have seen this quarter, more than half of the customers of the licensing deals are with new customers. And I think the traction there is pretty healthy.

Operator

Your next question comes from Daniel Meron of RBC.

Daniel Meron - RBC

Congrats on the very good performance of you guys in this quarter and the last several years. The first question, Gideon I missed earlier the market share that you mentioned that you have right now. Can you just repeat that?

Gideon Wertheizer – Chief Executive Officer

41%.

Daniel Meron - RBC

And then can you break it down for us between the Chinese market versus your share of the overall handset market versus say the Chinese market? Is there a way to segment that?

Gideon Wertheizer – Chief Executive Officer

No, we don’t do it. We never broke it down. I’ll tell you Daniel, it’s a bit of a misconception about the Chinese market. When we say Chinese market we don’t mean that it’s phones that are being done for China. In China there are tons of ODMs. Some of them are pretty large. Some of them even branded like [inaudible] and Huawei that are basically manufacturers like Nokia. They don’t have their brand. Some of them are firms that are formed in China. Some of them are even coming to the U.S. So we don’t break down because for us it’s indifferent. We see the overall market both for handset and mobile broadband and that’s it.

Daniel Meron - RBC

Okay, that’s fair enough. And then maybe just taking a step back and looking at the overall opportunity. Again, I’m sorry if I missed that earlier on the call. But how do you look at the total opportunity on a long-term basis? Can you quantify? Is there a target number that you guys are aiming for in the various end markets that you’re going after? What could be feasible? And when you say that you think that you guys will have a better position in the LTE market, can you provide some quantification to that, or at least provide us with a little clearer view of who else could be playing in that space against you?

Gideon Wertheizer – Chief Executive Officer

If you ask specifically about LTE, currently we have 14 new designs that re running on LTE. The LTE landscape and the fact that you have new form factor that LTE could be integrated in – I’m not saying even tablet, but consumer devices. There could be tons of new players that will use LTE as a feature, meaning integrating their chip. So it’s hard for us at this stage to come and say this is our target. There could be a situation that the market will [inaudible]. There won’t be one Nokia that has now 30%, but in the past was 50%. The landscape will not necessarily be the same. So we are now focusing on getting design wins in LTE. We have built something there and we are getting. Some of them are known to us, customers that are using us already for 2G and 3G. Some of them are relatively new customers, some of them even in [inaudible] market, smartgrid infrastructure. These are also LTE, but the application is different.

Daniel Meron - RBC

And then if you could just relate to the potential or total addressable market that you guys have in various markets, if you can quantify it for us. And how far along that path you are. Are we basically looking for more of those licenses that you’ve gained to get there? Or is it just a matter of those devices getting more traction? Or a little bit of both?

Gideon Wertheizer – Chief Executive Officer

It’s both. It’s getting traction, and I mentioned it. Take Broadcom for example. They are expanding. Last year they basically doubled their volume versus 2009. Spreadtrum tripled their volume. Infinil [inaudible] now. 80% also [inaudible]. They are expanding, and they see – only really Qualcomm that give them a fight or in front of them to expand and that’s a fraction in the existing market, and it will continue. In the licensing, that’s a new cycle. Now we are getting to the infrastructure. This is a brand new customer [inaudible] that we are now getting wins.

Yaniv Arieli – Chief Financial Officer

I think Daniel to summarize this, and we have it in our [inaudible] presentation slide. The addressable market for 2015 is north of 4.5 billion units for us. This is up from 2 billion when you looked a year or two ago, just the potential seller-based only. So the busier the market we’re looking into, the more we get into new markets, the larger the [inaudible] from unit perspective is going to be. That does not take into account machine-to-machine and the smartgrid network, which could be in the hundreds of million if not more.

Daniel Meron - RBC

Okay. And just this last one from me. Can you provide us with a little bit more color on I think it’s been quite a few months ago, almost six months since Intel acquired Infineon’s communication division. Have you seen any changes in the dynamics? Are you seeing yourselves, as Intel intensifies its position in this space, are you able to leverage that opportunity into additional markets beyond baseband? And I think you’ve alluded to that in one way or the other during this call and previous calls as well.

Yaniv Arieli – Chief Financial Officer

Yeah, of course. We’re not Intel’s spokesmen, so in this question you need to ask them and they’ll know what technology they are using for the baseband, because that’s easy. But all in all there’s opportunity for us there as we mentioned, to add to tablets, laptops, and desktops in the future instead of having a 3G or in the future maybe 4G dongles you’ll be able to integrate like Wifi, like Bluetooth, onto the same Intel devices, [inaudible] of the same Intel devices. That is our take on it. And that opens up a new market for us other than just the traditional cellphones that Infinil was active it. So that’s true for the Samsung Galaxy. That’s true for the iPad, many, many other devices. And of course Intel based processor that will be sold to different applications. When and how, this is more for Intel to quantify.

Operator

And our final question comes from Daniela Ventrone of Matrix.

Daniela Ventrone – Matrix

Hi guys. Congratulations for the good set of results. Couple of questions from me. The first one is on ASP trend in royalty shipments. I remember you talking about ASP going down this year and next, so I was wondering whether you could give some clarity. And the second one is the number of CEVA core handset shipments in the quarter. Thanks.

Yaniv Arieli – Chief Financial Officer

The second one is the number of core shipments?

Daniela Ventrone – Matrix

Yeah, just handset shipments.

Yaniv Arieli – Chief Financial Officer

Okay, out of the 234 million, 213 million were for baseband.

Daniela Ventrone – Matrix

Is it just handsets?

Yaniv Arieli – Chief Financial Officer

Oh, I see what you mean. No, out of the 213 million, that’s handsets and connected devices. The fact that a quarter ago we started to add that together is just because from a technical reason that when a chip is sold to a specific phone, we don’t know if it’s going to end in the tablet version or in the phone version, or what have you. So because there’s no specific breakdown of their end product, now everything that is base valuated, whatever market it could go into, it could be machine-to-machine in the future as well, we count that under one basket of connected devices. So we just don’t have any way to break it down anymore because the tablets and the smartphone market are just tied and are essentially the same. That’s from that technical question.

On the ASP, what exactly? You’re right that in the past we said that there will be some shift to lower ASP because of the market dynamics and the new markets which happened the last two quarters for us, which is the local Chinese market specifically. But with that said, we also have new customers, customers that came out from prepaid, customers that are slowly ramping up different consumer or application processors that have higher ASP. It’s a blend and a mix of answers but the bottom line is that we keep it pretty much as in the prior quarter even slightly better, but I’m not sure if this is yet any sign for the future. You just have to monitor it because there are so many moving parts in the royalty payers.

Daniela Ventrone – Matrix

Just one last question if possible. Can you give us the number of licensing agreements at the end of the period and licenses shipping, licensed products? Thanks.

Yaniv Arieli – Chief Financial Officer

Sure, we have 29 different customers, which are shipping a product. This correlates to 38 different licensing agreements. Some of our customers did license, for example, [inaudible] later in [inaudible] and both of these are in production and selling to different markets within this segment, so licensing agreements represented by 29 active shippers.

Richard Kingston – Director of Marketing and Investor Relations

Okay, I think that’s about it then for today. Thank you again for joining us, and your continued interest and support in CEVA. We will be attending the following conferences and events and invite you to join us there: The Benchmark Company Investor Conference on May 12 in Milwaukee, Wisconsin; Oppenheimer’s 12th Annual Israeli Conference on May 15 in Tel Aviv, Israel; the Barclays Capital 2011 Global Communications Media and Technology Conference on May 24 in New York; the Stern AG Tech Conference on May 26 in New York; and the Cowen & Co. 39th Annual Technology and Media Telecom Conference on June 1 and 2 in New York. Thank you and goodbye.

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