CEVA, Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014. Unaudited interim results; amounts below are in U.S. dollars unless stated otherwise. CEVA licenses DSP intellectual property and platforms to semiconductor and equipment manufacturers.
Financial performance
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Revenue | $9.2m | $12.8m | $22.9m | $24.9m |
| Licensing and related revenue | $4.4m | $6.1m | $12.3m | $11.2m |
| Royalties | $4.9m | $6.7m | $10.6m | $13.8m |
| Gross profit / margin | $7.8m / 85% | $11.7m / 91% | $20.4m / 89% | $22.3m / 89% |
| Operating income (loss) | $(2.3)m | $1.8m | $(0.1)m | $3.1m |
| Net income (loss) | $(1.5)m | $2.2m | $0.5m | $3.9m |
| Diluted EPS | $(0.07) | $0.10 | $0.02 | $0.17 |
| Operating cash flow | Not provided separately | Not provided separately | $1.3m | $1.4m |
Q2 revenue declined 28% year over year, while first-half revenue declined 8%. First-half licensing revenue rose 10%, but royalties fell 23%. Q2 operating expenses were $10.1m, versus $9.9m a year earlier; first-half operating expenses were $20.5m, versus $19.1m.
Financial position and liquidity
- At June 30, cash and cash equivalents were $22.9m, short-term bank deposits $57.6m, marketable securities $42.9m and long-term bank deposits $16.0m: $139.4m combined, compared with $151.6m at December 31, 2013.
- Current assets were $134.7m and current liabilities $11.5m; stockholders’ equity was $181.4m. The balance sheet reports no borrowings or debt.
- First-half investing cash flow was positive $10.2m, reflecting investment maturities and sales alongside new deposits and securities purchases. Financing cash flow was negative $12.8m, principally due to $14.3m of share repurchases.
- CEVA repurchased 929,685 shares in the first half at an average $15.35 per share. 297,463 shares remained authorized for repurchase at June 30.
Material changes and management commentary
- Management attributed lower royalties to reduced 2G/3G feature-phone shipments, particularly following Intel’s strategic shift away from those chips, and Broadcom’s exit from handset baseband. Intel expected its LTE volume ramp to be delayed until late 2014 or early 2015, potentially affecting royalties. CEVA expected other customers’ newer chips at Samsung to partly offset Broadcom-related losses.
- Licensees reported shipments of 198m CEVA-powered chipsets in Q2 and 410m in the first half, down from 281m and 564m, respectively, in the comparable 2013 periods. Five largest customers represented 65% of revenue in both Q2 and the first half; royalty revenue remained highly concentrated.
- CEVA signed 11 Q2 license agreements; ten of eleven deals signed during the quarter targeted non-baseband applications. Management highlighted audio, vision, LTE-Advanced, connectivity and IoT as expansion opportunities.
- In July 2014, after quarter-end, CEVA acquired RivieraWaves, a Wi-Fi and Bluetooth connectivity IP company, for approximately $19m: $12.0m paid at closing and the balance subject to milestones. A separate employee retention plan is expected to cost approximately $3.4m over two years. Purchase-price allocation was not final at filing.
- Management’s stated acquisition objectives included 400m annual royalty-bearing connected-device shipments, excluding handsets, by 2018, and 2015 licensing revenue 25% above its historical $22m–$24m range. These are targets, not assured results. Management expected additional RivieraWaves operating costs of about $1.2m per quarter, plus retention costs beginning in Q3 2014.
- Management said existing cash, deposits, securities and operating cash flow should fund operations for at least 12 months. The filing cautions that revenue and expense assumptions may not prove accurate.
Risks, contingencies and unusual items
- Customer and product concentration, licensing deal timing, unpredictable customer shipment schedules, semiconductor competition and pricing pressure make results volatile. Handset baseband generated 60% of Q2 revenue and 58% of first-half revenue.
- Research and development expense increased; management cited higher staffing, salaries, currency costs and project expenses. R&D staffing was 143 at June 30, up from 125 a year earlier. Grants from Israeli and EU programs were $1.4m in the first half and depend on continued eligibility.
- Foreign-currency exposure, especially to the Israeli shekel, euro and pound, may affect expenses; CEVA hedges some anticipated foreign-currency payroll. Deposits at financial institutions may exceed insured limits, and marketable securities carry market-value risk.
- Israeli tax benefits are conditional and scheduled to begin expiring in 2017; failure to satisfy requirements could increase taxes or require repayment of benefits. The filing also cites regional instability and potential employee military service as risks.
- No material legal proceedings were reported. Management reported disclosure controls effective as of June 30, 2014 and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether royalty declines from Intel’s product transition and Broadcom’s exit are offset by new customer shipments and LTE adoption.
- Whether the concentrated customer base and falling chipset shipments continue to pressure revenue and profitability.
- Whether RivieraWaves integration delivers the stated licensing and shipment targets, and whether acquisition and retention costs stay near management’s estimates.
- Whether CEVA sustains liquidity after the acquisition and continued share repurchases, while generating adequate operating cash flow.
- Whether grant eligibility, foreign-exchange exposure and Israeli tax benefits materially affect future expenses or cash flows.