CEVA, Inc. — Q3 2017 Form 10-Q Summary
Business context and reporting period
CEVA licenses signal-processing intellectual property and software used in semiconductor products for mobile, connectivity, imaging, audio, automotive and IoT applications. This unaudited filing covers the three and nine months ended September 30, 2017; comparisons are with the corresponding 2016 periods. CEVA operates as one reportable segment.
Key financial metrics
| Metric (USD millions, except per share data) | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | 24.0 | 17.8 | 65.9 | 51.5 |
| Gross profit | 22.3 | 16.4 | 60.9 | 47.0 |
| Gross margin | 93% | 92% | 92% | 91% |
| Operating income | 6.2 | 3.8 | 12.7 | 8.3 |
| Net income | 5.9 | 3.4 | 13.9 | 7.9 |
| Diluted earnings per share | $0.26 | $0.15 | $0.62 | $0.37 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | 17.7 | 2.0 |
Revenue increased 35% in Q3 and 28% year to date. Q3 licensing and related revenue rose 88% to $14.0 million, while royalties declined 4% to $10.0 million. For the nine months, licensing revenue increased 44% to $33.9 million and royalties increased 15% to $32.0 million. The filing attributes Q3 royalty softness to weaker handset conditions, including excess low-cost smartphone inventory in China and slower LTE migration in India; growth in non-handset royalties partly offset the decline.
Research and development expense was $10.0 million in Q3 and $30.4 million year to date, up from $7.3 million and $23.1 million, respectively. Management cites lower government grants, higher compensation and headcount, and accelerated strategic R&D and customer collaboration programs. R&D personnel numbered 224 versus 202 a year earlier. Nine-month equity-based compensation expense was $6.3 million, compared with $4.6 million.
Liquidity, cash flow and capital structure
At September 30, 2017, cash and cash equivalents were $22.9 million, short-term bank deposits $41.0 million, marketable securities $74.5 million and long-term bank deposits $39.2 million, totaling $177.6 million, versus $156.5 million at December 31, 2016. Current assets were $155.8 million and current liabilities $18.5 million. The balance sheet lists no interest-bearing debt. Stockholders’ equity was $239.0 million.
For the first nine months, operating cash flow was $17.7 million, investing cash flow was negative $20.2 million and financing cash flow was positive $6.9 million. Investing activity included purchases of property and equipment and placements in bank deposits and marketable securities. Cash increased $4.5 million to $22.9 million. Approximately $134.5 million of cash, deposits and marketable securities was held by foreign subsidiaries; CEVA said it intended to permanently reinvest foreign earnings and that repatriation could trigger taxes.
Material changes, outlook and risks
- Q3 included eight new licensing deals, all for non-handset-baseband applications; three were with first-time customers. Management said non-handset royalty revenue approximately doubled year over year to more than $2 million in the quarter.
- Management reported 871 million customer-reported chipset shipments incorporating CEVA technology in the first nine months, versus 726 million a year earlier. Non-handset-baseband shipments were 184 million versus 131 million.
- A completed foreign tax audit generated a $1.8 million tax benefit during the first nine months. This contributed to lower reported income-tax expense year over year for that period.
- Management expects R&D costs in 2017 to be higher than in prior years, partly because of lower IIA grants and increased strategic programs. It believes available cash, deposits, marketable securities and operating cash flow are sufficient to fund operations for at least 12 months. No specific revenue or earnings guidance is provided.
- CEVA plans to adopt the new revenue-recognition standard on January 1, 2018, using the modified retrospective method. Management expected most revenue to continue being recognized at a point in time, while certain customized licenses may be recognized over time; its impact assessment was ongoing.
- Key risks include dependence on a small number of customers and the handset-baseband market, variable timing of licensing deals and customer shipments, royalty-rate and pricing pressure, competition, reduced R&D grants, foreign-exchange exposure, and international and tax risks. Two customers represented 38% of Q3 revenue; the five largest represented 75%. Asia Pacific contributed 90% of Q3 revenue and 79% year to date.
- CEVA reported no material litigation and no material change in internal control over financial reporting; disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether the Q3 handset-related royalty weakness and reported inventory conditions persist, and how customer shipment trends translate into subsequent royalties.
- Whether new non-handset licensing deals and higher non-handset shipments convert into sustained royalty and revenue growth.
- Customer concentration, particularly the exposure to major royalty-paying customers and the handset-baseband market.
- Actual R&D grant levels and spending, and the resulting effect on operating margins and cash generation.
- The eventual financial and disclosure effects of adopting the revenue-recognition standard, and any tax cost or access constraints associated with foreign-held funds.