CEVA, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with the three months ended March 31, 2018 unless otherwise stated. CEVA licenses signal-processing intellectual property for connectivity and smart-sensing applications. Financial statements are unaudited and prepared under U.S. GAAP.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $17.0 million | $17.6 million | Down 3% |
| Licensing and related revenue | $11.0 million | $10.1 million | Up 9% |
| Royalty revenue | $6.0 million | $7.5 million | Down 20% |
| Gross profit / margin | $14.9 million / 88% | $15.6 million / 89% | Margin down 1 percentage point |
| Operating expenses | $17.9 million | $18.5 million | Down 3% |
| Operating loss | $2.9 million | $2.9 million | Broadly unchanged |
| Net loss / diluted loss per share | $2.3 million / $0.10 | $2.2 million / $0.10 | Net loss increased slightly |
| Net cash from operating activities | $4.7 million | $1.8 million | Improved |
R&D expense was $12.3 million, up from $12.0 million; sales and marketing was $3.0 million versus $3.2 million; and general and administrative expense was $2.3 million versus $3.0 million. Financial income, net, was $0.8 million, compared with $0.9 million. The filing reports no debt balance.
Liquidity and balance sheet
At March 31, 2019, cash and cash equivalents were $21.5 million, short-term bank deposits $57.8 million, marketable securities $77.6 million, and long-term bank deposits $14.5 million—$171.3 million combined, versus $167.7 million at December 31, 2018. Total current assets were $183.8 million and current liabilities $23.0 million. Total assets were $286.8 million; stockholders’ equity was $245.3 million.
Operating cash flow was $4.7 million; investing activities used $4.1 million and financing activities used $1.4 million. Cash and cash equivalents ended the quarter at $21.5 million, down $0.8 million during the quarter. The company said available funds and expected operating cash flow should fund operations for at least 12 months. About $141.0 million of cash, deposits and marketable securities was held by foreign subsidiaries; management said it intended to permanently reinvest foreign earnings.
Material changes and operating developments
- Lower handset shipments, attributed in part to customers’ excess channel inventory, drove the 20% decline in royalties. Customers reported 175 million chipsets incorporating CEVA technology, down 11% year over year.
- Licensing revenue increased, and CEVA signed eight licensing deals, all for non-cellular handset-baseband applications. Four were with first-time customers; three related to 5G use cases.
- Non-cellular-baseband product shipments were reported or estimated at 86 million units, up 16% year over year. Bluetooth and Wi-Fi IP product shipments reached 68 million devices, up 15%.
- Connectivity products represented 72% of revenue, down from 76%; smart-sensing products represented 28%, up from 24%.
- Revenue concentration increased: the five largest customers contributed 63% of revenue versus 49% a year earlier. Four customers individually represented 10% or more of Q1 2019 revenue. Three royalty-paying customers together represented 70% of royalty revenue.
Outlook, risks and unusual items
- Management forecast 2022 licensing revenue approximately 10%–20% above “current levels,” royalty revenue approximately twice current levels, and non-GAAP net income approximately three times current levels. These are forward-looking targets, not near-term guidance.
- Management expected elevated handset inventories to add to normal seasonal weakness in near-term 2019 royalties, partly offset by expansion among non-handset and base-station customers.
- R&D expenses were expected to increase by approximately $4 million in 2019, mainly from headcount, employee-related costs and EDA tools. Cost of revenue was also expected to increase, including over $1 million of 5G-related engineering customization costs.
- A major automotive OEM selected CEVA’s NeuPro AI processor for an autonomous-driving platform targeting production start in 2024. The commercial contribution and timing depend on customer development and production plans.
- CEVA adopted lease accounting Topic 842 on January 1, 2019. At quarter-end it recorded $9.5 million of operating lease right-of-use assets and $9.2 million of lease liabilities; comparative periods were not restated.
- Foreign exchange movements produced a $0.13 million loss in Q1 2019, versus a $0.05 million gain in Q1 2018. The company uses currency hedges but cautioned they may not fully offset fluctuations. It reported no material litigation and no material change to most previously disclosed risk factors.
- Key risks include customer and royalty concentration, handset-market and inventory volatility, licensing-deal timing, competition and pricing pressure, international and trade exposure, foreign-exchange movements, and reliance on government grants and tax benefits.
Important facts for investors to verify
- Whether handset inventory normalization and shipment trends support a recovery in royalties.
- Whether new licensing wins, including the automotive NeuPro agreement and 5G deals, convert into future royalties and production at expected timing.
- How customer concentration and potential royalty-rate pressure affect revenue and cash generation.
- Whether planned 2019 R&D and cost-of-revenue increases occur as expected, and how they affect operating losses.
- The availability and practical use of foreign-held funds, and the continuation of Israeli tax benefits and government research grants.