CEVA's (CEVA) CEO Gideon Wertheizer on Q2 2016 Results - Earnings Call Transcript

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CEVA, Inc. (NASDAQ:CEVA) Q2 2016 Results Earnings Conference Call August 3, 2016 8:30 AM ET


Richard Kingston - VP, Market Intelligence and IR

Gideon Wertheizer - Chief Executive Officer

Yaniv Arieli - Chief Financial Officer


Joseph Wolf - Barclays

Matt Ramsay - Canaccord Genuity

Gary Mobley - Benchmark

Matt Robinson - Wunderlich

David O'Connor - Exane BNP Paribas

Suji DeSilva - ROTH Capital Partners


Good day and welcome to the CEVA Inc.’s Second Quarter 2016 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Richard Kingston, Vice President, Market Intelligence and Investor Relations. Please go ahead.

Richard Kingston

Thank you, and good morning everyone. Welcome to CEVA's second quarter 2016 earnings conference call. I'm joined today by Gideon Wertheizer, Chief Executive Officer of CEVA; and Yaniv Arieli, Chief Financial Officer of CEVA. Gideon will cover the business aspects and the highlights from the quarter and general qualitative data. Yaniv will then cover the results for the second quarter and provide guidance for the third quarter of 2016.

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 our financial guidance for the third quarter of 2016, optimism and about the licensing pipeline, the drivers of our business and our ability to capitalize on emerging market opportunities, including Bluetooth 5, Machine Vision and deep learning technologies, wireless connectivity, LTE and 5G.

The risks, uncertainties, and assumptions include the ability of the CEVA signal processing IPs to continue to be strong growth drivers for us, our success in penetrating new markets specifically non-baseband markets, and maintaining our market position in existing markets, the ability of new products incorporating our technologies to achieve market acceptance, the speed and extent of the expansion of the 3G, LTE and 5G networks, Bluetooth 5 and the IoT space, the effect of intense industry competition and consolidation, global chip market trends 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, and welcome everyone. Before going through the highlights from the quarter I would like to draw your attention to development, it will have a positive impact on our financial guidance for the remainder of 2016. As we had weakness from the first half of 2016 and based on the initial work reports we received for the third quarter, we are now experiencing royalty trajectory that exceed our initial expectations and as such are raising our full year growth range royalties. Yaniv will elaborate more on this when he reviews the financial result for the quarter later on.

Turning back to our second quarter results, we are very pleased to report another robust quarter with all time record high revenues derived from strong growth in royalties and solid execution in licensing. Total revenue came at a record high of $17.1 million up 28% year-over-year. Royalty revenue came at $9.6 million up 69% year-over-year primarily as a result of strong LTE unit shipment which grew more than 400% year-over-year to reach a record quarterly shipment total of 56 million units.

Licensing and related revenue came at $7.5 million on the back of good licensing demand for our Bluetooth IP as customer expedited product design based on the next generation Bluetooth 5 standard.

We also ended the quarter with stronger than normal licensing pipeline due to a number of comprehensive agreements with key customers that are in process. This agreement involves broad access to our entire technology portfolio and customization of certain technologies for their product lines.

We perceive this new engagement as an acknowledgement to our unique technology portfolio in addressing some of the most exciting areas of growth in the semiconductor industry and as an opportunity to solidify long term collaborative relationship with key industry players.

During the second quarter we concluded 10 new licensing deals, four of which were for CEVA DSP cores and platforms and six for connectivity products. Of the deals signed three were with first time customers and all were for non-handset based - include a first time customer intending to use our vision solution for virtual reality product, 5G base stations, Bluetooth's low energy for I-T including the upcoming Bluetooth 5 standard voice processor and storage drives.

Geographically, four of the deals signed were in the U.S., four in the APAC region and two in Europe.

The second quarter achievement in licensing emphasizes four key market drivers that we are capitalizing on. First, the domain for very sophisticated baseband ASPs and platforms technologies for handset and base stations is the cellular industry is looking for increased data rates and overall capacity is part of LTE advanced growth and 5G standard.

Second, the proliferation of connector devices enabled by short range wireless connectivity, such as Bluetooth and Wi-Fi, along with emergence of voice as they primarily – as primary user interface within these devices. Third, the growing number of products and applications that are centered around embedded vision and machine learning.

Fourth, the expedited and [indiscernible] deployment of cellular machine-to-machine on the heels of the 3GPP finalizing the specs for ultra low power LTE for the Internet Of Things. Ericsson predicts in its latest mobility report that IoT will although take mobile phones as the largest category of cellular connective devices by 2018. These four big industry drivers are the foundation of our product portfolio strategy and will lead to new royalty streams in the near and the longer term.

Our recent achievement in licensing, as well as ongoing customer discussion, give us high confidence in our ability to capitalize on these opportunities and in our long term growth prospects.

As I mentioned, we are seeing industry-wide demand for connectivity IP and in particular the new Bluetooth standard, Bluetooth 5, which was formally announced by the [indiscernible]. Bluetooth 5 also substantial features announcements versus its predecessor Bluetooth 4.2 including higher data rate of 2 megabit per second and longer range of up to 300 meters. It expands the Bluetooth's market reach from device like smartphone and PC to the Internet of Things where it will be used for the smart home, connected home networking, automotive and more.

We have already signed five customers that are early adopters for the Bluetooth 5 technology. We have never had that many early adopters for technology that is yet to be ratified.

In Vision, the potential of machine learning and deep viewer network was the highlight in all recent events conducted by Google, Amazon, Facebook, Apple, Microsoft, Baidu, and others. The data provided at the recent conference, half of the internet searches in 2020 will come from image and voice.

In conjunction with this, much more intelligence will be required at the Edge of the network in devices such as smartphones, surveillance cameras, autonomous cars, VR and AR devices, robots and more. This is where we see CEVA benefiting and leveraging its competency in computer vision and machine learning.

A few weeks ago, we announced our second generation of software framework for the deep network called CBNN2 [ph]. CBNN2 essentially frees up the customer from the burden of embedded software programming on the vision processor. It therefore allows customers, partners, researchers and even students to innovate deep network based application in the cloud and seamlessly get outright views of it on product based on CEVA vision processor.

In the second quarter we signed up first time customer, a widely known player in the imaging space that uses our vision DSP and deep learning software for the chip to power virtual reality products.

On royalties, we continue to gain share in the LTE space. According to the latest market data from Market Research Firm Strategy Analytics our market share in LTE is 19% in Q1 2016 compared to just 5% a year earlier. LTE is the primary reason for the huge year-over-year royalty revenue growth of 69%. Moreover, this momentum more than offset the traditional seasonal weakness we normally experienced in Q1 royalties which are based on the post holiday season Q1 shipment. For the first time in a number of years we recorded a sequential increase in royalties of 23%.

Also in other segments of the cellular space, we continue to maintain high market shares. In 2G we power about two thirds of the market and in 3G our market share has grown to 39% based on Q1 shipments. We aim to continue to capitalize on LTEs smartphone shipments where we are consistently gaining market share and growing unit shipments and where we benefit from higher work ASP than we get from 2G, feature phone and 3G smartphones.

Looking ahead, as the Internet becomes increasingly wireless, we are experiencing greater diversity of products and suppliers that take advantage of LTE and 5G to connect to the Internet. These include products like car, wheel [ph] based security and surveillance camera, drones and smart city infrastructures. We continue to invest in new technologies addressing this space and plan to introduce new products in the coming months that will be specifically designed to cover LTE IoT space.

So in summary, our good traction in LTE smartphones in 2016 compared to prior years and our diversified product line targeting intelligent and connected devices provides us solid foundation for prolonged growth. I am very pleased by the resilience of our financial model this year, despite the known market challenges and the maturity of the smartphone space. We will continue to innovate and work closely with our customers with our mutual success as the industry expands to new classes of products and services.

With that said, let me turn the call over to Yaniv to discuss our financials and guidance.

Yaniv Arieli

Thank you, Gideon. I'll start by reviewing the results of operations for the second quarter of 2016. Revenue for the second quarter was $17.1 million, an all-time record high. This was 28% higher on a yearly basis and the second consecutive quarter that we have reached the milestone of all time record high revenues.

The revenue breakdown is as follows. Licensing related revenue was $7.5 million, reflecting 44% of our total revenue, 3% lower as compared to the comparable quarter of 2015. Royalty revenue was $9.6 million reflecting 56% of our total revenue an impressive increase of 69% on a year-over-year basis and this would be sixth successful quarter that we delivered year-over-year royalty growth.

Quarterly gross margin was 92% on both U.S. GAAP and non-GAAP basis. The non-GAAP basis excludes approximately $53,000 of equity-based compensation expense. Our total operating expenses for the quarter were flat as compared to the first quarter at $13.1 million below the midrange of our guidance.

OpEx also includes an aggregated equity-based compensation expense of approximately $1.6 million and $0.3 million for the amortization of acquired intangibles of RivieraWaves. Our total OpEx for second quarter excluding these two items were $11.2 million also below the mid range of our guidance and slightly lower than the first quarter. U.S. GAAP net income for the quarter increased 16 fold from $0.2 million to $2.7 million in the second quarter of 2015 and 2016 respectively.

Diluted EPS increased 13 fold from $0.01 to $0.13 for the same period. Non-GAAP net income and diluted EPS for the second quarter of 2016 increased 263% and 250% year-over-year to reach $4.6 million and $0.21 per share respectively. Non-GAAP net income and diluted EPS for the second quarter of 2015 were $1.3 million and $0.06 respectively. These figures for the second quarter of 2016 and 2015 exclude equity-based compensation expenses of $1.6 million and $0.8 million respectively and the impact of the amortization of acquired intangibles of RivieraWaves of $0.3 million for both years.

Other related data. Shipped units by CEVA licenses fees during the second quarter were 225 million units, down 2% sequentially but up 9% from the second quarter shipments of 2015. Of the 225 million units shipped, 191 million units or 85% of the volume were for basebands shipped, reflecting a sequential increase of 4% from 185 million baseband shipped last quarter and 14% decrease from 167 million basebands shipped a year ago.

Non-baseband volume shipments decreased 26% sequentially and 12% year-over-year. The decrease can be attributed to an industry-wide decline in Bluetooth shipments in Q1 which was partly offset by increase in shipments of [indiscernible] processors in smartphones and wearables. The quarterly handset baseband royalty ASP continues to increase. It was up 18% sequentially and 53% on a year-over-year basis due to the growing product mix of LTE devices. Our overall corporate branded royalty ASP increased 26% sequentially and 54% on a year-over-year basis.

As for the balance sheet items, as of the end of June our cash, cash equivalent balances, marketable securities and bank deposits were approximately $138 million. Our DSOs for the second quarter were 67 days, back to normal levels up from the first quarter or lower than normal level of the 37 days. During the last quarter we used $1.5 million of net cash in operations, depreciation with six assets were $0.3 million each. And at the end of June, our headcount was 273 people of which 216 were engineers.

Now for the guidance. As Gideon noted earlier, we continue to benefit from good momentum in the smartphone market and expect further expansion as the smartphone space gets ready for the holiday season with ramps of new flagships and skews. In the non-baseband shipments we expect a new record high in terms of unit volume for the year. And as such, we are raising our full year guidance from an earlier range of 20% to 40% growth in royalties to a higher range of 35% to 45% growth in 2016.

Our guidance for the third quarter of 2016 is as follows. Revenue for the third quarter is expected to be in the range of $17.2 million to $18.2 million. This is the highest quarterly revenue guidance in the company's history. Gross margin is expected to be approximately 92% on both GAAP and non-GAAP basis. Overall expenses should be quite similar to the expense level we recorded in the first two quarters of the year.

U.S. GAAP operating expenses are expected to be in the range of $12.5 million to $13.5 million. Of the anticipated total OpEx for the third quarter $1.6 million is expected to be attributed to equity based compensation expenses and $0.3 million to the amortization of the acquired intangibles. So our non-GAAP OpEx is expected to be in the range of $10.6 million to $11.6 million.

Net interest income is expected to be approximately $0.5 million. Tax rate for the quarter on a non-GAAP basis approximately 14% and the share count for the third quarter is expected to be approximately 22.2 million shares. U.S GAAP fully diluted EPS is expected to be in the range of $0.14 to $0.16 per share and our non-GAAP EPS excluding aggregate compensation expenses of $1.7 million and $0.3 million for the amortization of expenses is expected to be in the range of $0.21 to $0.23 per share.

Andrew, you may now open the floor for Q&A please.

Question-and-Answer Session


[Operator Instructions] The first question comes from Joseph Wolf of Barclays. Please go ahead.

Joseph Wolf

Thank you. I have a couple of questions on the licensing side, there were no handset deals, but then Gideon you referenced some large engagements that you're expecting in the second half of the year, are those for the handset business or is there a refresh cycle going on in the handset business or is most of the licensing in the second half going to continue to come from the non-handset side of the business?

Gideon Wertheizer

Hi Joseph, thanks for the question because usually we don’t refer or elaborate in earnings call about the pipeline. But the reason we mentioned it is a unique situation that we are – as you know in the last few years we've become more and more specialized in our product line, including the handset which is our bread and butter, but we went rapidly to more software and system architecture and modern architecture.

Now same goes to the vision, same goes to the connectivity to offer total solutions and so it looks like customers acknowledged this specific specialization and they are coming to us with suggestions to have more, I would say, exclusive relationships, not in terms of not allowing this product to be licensed to others, but new customizations and in some cases offering a portfolio in the internet.

So this kind of – these are our prospective customers, it’s in process. One of them by the way was closed very late and I referred to it in my prepared remarks for 5G base stations. So, I mean these are in work and we're going to conclude and exclude also handset baseband type of applications because the market is going into now to 5G.

So overall it’s a unique situation. It’s in process. It’s in work, but we're very happy over this kind of suggestions, because it solidifies the relationship that we have with customers and these are all lead customers in this space.

Joseph Wolf

Okay. On the LTE side which has been strong, I am assuming you expect that to continue, could you give us a geographic spread of that business right now, or what is right now, where you see strength and how you see that continuing into the second half based on what you're seeing right now?

Gideon Wertheizer

Well, in the LTE space in particular, it is known that the active areas are in the low mid range type of phones and this in China where they stronger operators to subsidies to convert people from 3G to LTE and to go to a more powerful LTE phone. In India where LTE penetration now is just 1%. So these are the areas that we see activities and where we see unit growth.

Keep in mind also that CEVA is not just in this space. We are expanding also in the flagship models and in our appearance is all around the areas in the flagship models it's more like penetration and market and expanding market share. In the low mid range it is just an handset failure and you will see lot of unit growth there.

Joseph Wolf

All right, perfect. I will let other people ask some questions. Thank you.

Gideon Wertheizer

Thanks, Joseph.


The next question comes from Matt Ramsay of Canaccord Genuity. Please go ahead.

Matt Ramsay

Thank you very much for taking my questions. I have a couple. I guess Gideon the guidance for Q3 and obviously raising the full expectation for the year and there is a lot of moving parts within the LTE market right now, obviously this quarter that you're guiding to will be the first quarter that reflects, I guess the redistribution of share at Samsung with Qualcomm getting back in there for the S7 and looks like for the note as well.

But given you guys are raising the outlook for the full year, it would suggest to me that there is some strength that you're going to see in LTE numbers outside of Samsung in particular for the fourth quarter. Maybe you could talk about some of the ramps there potentially, I don’t know if that Xiaomi or at other guys in China that are going to be and with Spreadtrum ramping as well, it seems like there is an inflexion coming in the non-Samsung business in the fourth quarter and going into next year?

Yaniv Arieli

Hi, Matt, so this is Yaniv. I will try to add on to what Gideon talked about a minute or two ago is with the LTE penetration that is where we have to, if you look back to last year we powered about 70 million LTE phones at the time and this took us few years to get there and of course we started this small with less customers shipping their products and the engine started as we went throughout the year. And when we started this year, we are seeing more and more players and not just necessarily Samsung kick in and start pushing their LTE designs in mass production.

So one thing that is completely different this year and this is the guidance of almost three times the volume from last year is that we have more players, it is not only Samsung, it is coming from Spreadtrum, it is coming from Leadcore, it is coming from Intel, it is coming from a bunch of our existing customers that have the products for a while, but couldn’t get into mass production and today they are much more successful in that.

So I think that is one strong element to mention and the way we see the LTE today is more of a structural growth going forward and not necessarily seasonal and not necessarily one core difference from the other. It is a lot about the timing of new skews, it is about the timing of product management by different OEM and chip vendors there.

So it is a mix, but I think if you put it all together that gives us the confidence in some new models that we have introduced close to the holiday season, some will have effect this year in Q4 for example, some will have effect in 2017, but I think to answer your question, it's the variety of all these factors, not just the market, but also the players that are pushing those LTE sockets into phone that are helping us to give the guidance and be optimistic about future growth in LTE for us.

Matt Ramsay

Got it. Thank you. That is really a helpful perspective and it is good to see the new growth engine there in the baseband side diversifying. If we flip over to the non-baseband business, I think you talked about in the prepared remarks and a bit of an inventory correction industry-wide in the Bluetooth space and still being up for the year in non-baseband units, maybe you could talk about that dynamic a little bit?

And then secondly from some work we have done on the opportunity for base stations, I mean to me it seems like a pretty large potential for you guys, maybe not huge in terms of units, but from some work we have done I mean that could be $5 million, $10 million long-term in royalties for the company on an annual basis. And I just wanted to know how that business was progressing and what kind of visibility you see to when that just starts to deliver some real royalty to the company in terms of revenue? Thank you.

Gideon Wertheizer

Yes, hi Matt, this is Gideon. So let me address your two questions one by one. When it comes to non-handset baseband application and start, as you know this composed of a variety of products and markets that should be as a result of deals that we signed in the last I would say two years. So at this time, I think what we put focus and there is and if we mentioned unit is to see that we are progressing in terms of units, we are monitoring it by royalty reports, we are monitoring customers' progress specifically.

So in summary, this progress is according to our expectation. The fact that we going to have another or expect to have another record year in units, it’s according to our expectation and that’s makes us satisfied for the situation.

Base station, indeed as you mentioned, if I look up the space the timeline is different, but we expect a noticeable royalty is coming today or it could be more toward the end of 2017, early 2018, but it is moving. I mean, we are working closely with two key customers that we have there and they are - one thing that I want to mention maybe you can take it?

Yaniv Arieli

Yes, one more thing I wanted to add is to give and Gideon has commented that we expect and I think he mentioned that in the prepared remarks, we expect Q3 to bounce back with the Bluetooth volume specially, but on the non-baseband to a new record high where probably we didn't get all the royalty for it, but we’re probably looking at about 60 million devices in the next quarter. So that’s going to be the highest and that is yet before the seasonal strong quarter of Q3 which we report in Q4 over the pre holiday type of ramp up. Thanks.

Matt Ramsay

Thank you guys, I think that does it for my questions. I'll get back in the queue. That color was really helpful, thank you.


The next question comes from Gary Mobley of Benchmark. Please go ahead.

Gary Mobley

Hi, guys, let me extend my congratulations on another solid quarter and some good execution over the past couple years. I want to start with the question about your ASPs, specifically on 4G/LTE royalty units. If my math is correct, it looks like you might have actually had a boost in your average 4G/LTE royalty rate, and I was wondering though if I'm correct in that assumption and if so, what is the diversity of the royalty contributors that drove the increase?

Gideon Wertheizer

Yes I think, good morning first and thanks for the kind words. If you look at the overall ASP of the company, it is very high this last quarter and a great achievement. They wanted take into consideration that it does have less handsets like Bluetooth, because of the seasonality we just talked about and much more LTE units and then the overall ASP of course improves just mathematically. I think we've always said that the ASP is not the target there for us, but it's a nice thing to grow what you can. But the mix towards due this quarter because of much, much higher volume in LTE which have the high royalty rates there.

I think for the first time in the information we've got from Richard and Infographic which showed that first time in our history that smartphone shipments last quarter were higher than feature phones, this not by far, but I think we talked about 102 million versus 98 million, the 98 is still 100 million a quarter which we are powering feature phones.

So as soon as these guys whether some of that are completely all over a year or two timeframe we will moved to smartphone, you could either double or maybe even triple that royalty contents to these 100-ish million units a quarter, and that’s going to continue to improve the overall ASP. So I don't think that anything special happened in LTE other than just product mix and then what I just explained.

Gary Mobley

Okay, extending the question, it has just been some speculation that one of your licensees may get some traction with the CEVA based thin modem and flagship smartphone and so I'm not asking for confirmation on that front, you probably don't even know if it's true or not, but can you tell me if there's a notable royalty rate per unit difference between a thin modem versus when it's integrated?

Yaniv Arieli

Not sure if we could go into that much of specific details about the specific customer. I think we'll all wait and see how this progresses. We usually don't try or try not to guess before one gets into production with the specific skew or our flagship model. As soon it happens we will have more color and could look at the royalty contribution if that happens and give then a little bit more color. It’s a bit premature, and for now I think the right way to look at it is just the whole basket of LTE devices versus the 2G devices, the Internet of Things device and I would think that is easier to model and to comment on to at this point of time.

Gary Mobley

Okay, fair enough. Actually I did have one additional follow-up question. In your prepared remarks you talked about a few comprehensive deals in the pipeline. And it sounds a lot like a subscription license agreement in the way perhaps ARM Holdings, bundles, its intellectual property. Am I thinking about that correctly and could you be entering an era in which you are ratably recognizing license engagements over a prolonged subscription period?

Yaniv Arieli

Let me try to help you. First of all as Gideon said it is not done yet. It’s an idea or it’s a deal that is in the works. I don't think from the revenue recognition it is going to be a model of a subscription, but it is going to have the same idea as Gideon explained that that specific customer, there may be more in the future will have a much more flexible capability to choose different technologies for different markets or different product cycles for them and not come back on each special deal, standalone deal that we'll have a variety of that IP that they could use. So it has some type of that idea behind the subscription with much more flexibility to use our IPs, but we're not going to recognize the revenue based on that, but based on the actual usage of the different technologies that they will take over time.

Gary Mobley

All right, that's it from me. Thanks guys.

Yaniv Arieli

Thank you.


The next question comes from Matt Robinson of Wunderlich. Please go ahead.

Matt Robinson

Hi, thanks, nice quarter. Gideon, I was hoping you could maybe talk a little bit about vision and I guess there's two areas. I'm curious if you can kind of characterize the licensing you have done and so the mix of applications between ADAS specifically automotive and other types of vision usage? And then usage has been a bit of controversy in the topic on the automotive side. How do you see things unfolding with new entrants, especially on the sensor processor portions with licensees and the time frame you think you might see some of these guys getting into the market, and where they are in terms of were they Tier 1 or more traditional semiconductor licensees or something else?

Gideon Wertheizer

Hi Matt, first of all when it comes to vision the way I see it is the educated - vision it’s a relatively new market, relatively new use case in the industry overall. So far the most educated market to use vision processor like we all share and the basket of things that we offer there is surveillance.

Surveillance is a big market and its around the world with security cameras, surveillance cameras, either at home or enterprises looking to put intelligence into this camera. Coming next is smartphone, today only Qualcomm has a processor that do vision, but other field using all sort of other as you say bypasses, but they are getting into things.

Applications like the Google AR and what we labeled game, Pokémon GO, these are the things that show how to use vision, how we can take advantage of the camera in the smartphones. We believe the next in line in terms of adopting vision and all of the license technologies are in the smartphone and that is good because we are speaking here on huge amount of volume and a lucrative space.

On top of it you have a market that are less in sizes, but still when you accumulate them they becomes sizable, virtual realities, action cameras, robots down the line I think will be. Now when it comes to robots it is definitely vision is a part of the space. I mean [indiscernible] will have to have multiple cameras and no doubt about it, they are more advanced in adopting this network and computer vision in general.

With that said, it is a market that has its different timelines and what we are doing in this space is that we have an action plan that we are following and we have still one customer that we are discussing and we have sensor guys that we are evaluating and forming and we have the few things that we signed so far and there are few things that are in the short term.

And if you summarize, there is a perception that people have about our technology it is the right technology. It is a viable technology and we are basically today the only viable alternative, they are mobilized with CEVA consoles, they are on chip and software and [indiscernible].

So overall, when it comes to ADAS we have to adhere to the timeline and the milestones people ask us, but we are I think we are on the right track now.

Matt Robinson

Thanks, Gideon.


The next question comes from David O'Connor of Exane. Please go ahead.

David O'Connor

Great, thanks for taking my question guys. The question from my side, we are hearing some chatter China telcos that they may begin to push LTE Cat-7maybe in the latter half of this year. Just wondering how well just you guys are positioned in China if the market begins to shift from say in the LTE Cat-4 to kind of LTE Cat-7. That is my first question.

The second question again on the significant licensing opportunity you mentioned again in your prepared remarks. What type of applications are we seeing there. So second question and the last question is on the, you mentioned 5G license for base station, is this new customer and how does it tie in as different to your existing two kind of base station customers? Thanks.

Gideon Wertheizer

Okay, so let me address one by one. When it comes to Cat-7 LTE all our customers also this one, so I don’t see any stumbling issue there when it comes to Cat-7. This is one thing. The second question, just remind me what it was, because the third one was base station, can you remind me the second question?

David O'Connor

Yes, the second question was the significant licensing opportunity that you mentioned in your prepared remarks, just wondering what type of applications are we talking about?

Gideon Wertheizer

Yes, okay, so that's across all the product lines and I mean it is not a specific product line that we are speaking about. We speak about multiple customers that [indiscernible]. They came to us with different strategic suggestions and it is across all the product lines.

Your third question is the base station, it is the deal that we that I spoke about in the prepared remarks is with existing base station customer, a key customer. The prior deal was 4G LTE advanced and this is next generation which eventually will require different DSP for 5G and it is more like toward 2020 or 2021 timeline.

David O'Connor

Okay great, and if I could squeeze in one more, sorry about this, but you mentioned there was a question previously on the LTE and the kind of some moving parts there and you also spoke about having multiple LTE customers which you flagged before the second half of the year. Will the LTE ASPs that could have moved up or down given the mix when you look at the second half? Thanks.

Yaniv Arieli

Hi it is Yaniv. You know, I think we are looking at more or less the same kind of ASPs that we have talked about for this year and we're in the neighborhood of $0.08 to $0.09 in the LTE space is a good number to use for different models and we don’t see a change. Of course we would like some more volume and therefore higher royalty revenues that are derived from that.

David O'Connor

Okay, great, thank you.

Gideon Wertheizer

Sure, thank you.


And the last question today will come from Suji DeSilva of ROTH Capital. Please go ahead.

Suji DeSilva

Hi good morning, congratulations on the cellular results, I can see the hard work paying off there. On the large customer comprehensive deals I am curious if you could be more specific on the number of opportunities you have there and whether those deals might represent the largest in the company's history, just trying to understand the magnitude here?

Yaniv Arieli

It is of course a nice deal. The ideal is that we are offering the same technology that we have today, but because that is a major and how we will be doing that for many years, these are large customers. We were trying to simplify the engagement with these types of players, this is for one we are dealing with actually right now, may be others will follow. And given an access to different technologies, I think Gideon mentioned that, it could be connectivity, we are talking about Bluetooth technologies, Wi-Fi, it could be DSPs for our deal.

In vision it could be different software packages for complete solution. It could be LTE, it could be Internet of Things and a very small flowing factor for these devices like we've announced a new product just a few months ago. So, the idea is to have the best, to have a basket of these IPs with much easier access to large companies to choose. They just need to choose and pick and that started the volume, of course the royalties will be similar to what we have today from any customers.

That does not change, but the licensing engagement with multiple type of technologies across every market it just depends what they want to use and what we could convince them to use because it makes sense for them, that will enrich the relationship and hopefully the use of our technologies across not just one division or one product line, but potentially many more because of the easier access. That is the idea.

Dollar wise, it is not eat as much as you can, but it depends what they want to use. The more they want to use us the bigger the deal could be. So we have a basic platform for that. Again, I think we will be more comfortable to talk about it after the deal is actually closed, which is not the case but the idea that there is some basis usage and then on top of that they could add much more as they go along and then the deal could increase as well, involvement.

Suji DeSilva

That's helpful clarity Yaniv. And then with the 4G market and upgrade cycle being so strong on the premium to 2G phone being smaller, is the 3G phone unit market still a growth market, is it stable or is it trying to decline?

Yaniv Arieli

I don’t know what the – the 3G is declined market but in more modest rate than 2G. Our operators market share gain. I mean we have a customer who is focused on this market and gaining share. In the last quarter and if you look on a sequential basis it was about 5% market share gain and we expect to get to the level. So it is a sizable market and in places India and Asia and Europe there is still 3G network and we want to benefit out of it.

Suji DeSilva

That's great and then one last quick question on the full year range updated 35% to 45% is that just the range there or just general market demand or are there any customer specific events that might tilt you towards the high end versus the low end? Thanks guys.

Yaniv Arieli

No, I think it is the sections in the market of different phones. If there are suddenly more appealing and the volume increases because of good marketing positioning or good phone or it is the low cost it is the ramp up, I don’t see the one specific driver for being in the higher end alone, the lower it is represented by one Tier 1 customer, but a whole bunch of different go to market and players like we alluded earlier to this question, but I don’t think it is a one off type of event, but a combination.

Suji DeSilva

Thanks guys, congrats again.

Gideon Wertheizer

Thanks Suji.


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 and for your continued interest and supporting CEVA. We will be attending the following upcoming conferences and invite you to join us there. The Oppenheimer Annual Technology, Internet & Communications Conference on August 09, in Boston; the Canaccord Genuity Global Growth Conference on August 10, in Boston; the Drexel Hamilton Telecom, Media & Technology Conference on September 07 in New York; Deutsche Bank 2016 Technology Conference on September 14, in Las Vegas; and Dougherty & Company Institutional Investor Conference on September 28, in Minneapolis.

For further information on these events including webcasts and a complete of other conferences we will be attending you can visit our website at investors.ceva-dsp.com. Thank you and good bye.


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

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