CEVA, Inc. — Q2 2012 Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2012; unaudited. CEVA licenses DSP cores and related intellectual property to semiconductor companies and equipment manufacturers. Financial amounts below are in U.S. dollars; millions are rounded unless noted.
Financial performance
| Metric | Q2 2012 | Q2 2011 | H1 2012 | H1 2011 |
|---|---|---|---|---|
| Revenue | $13.6m | $14.4m | $28.7m | $29.4m |
| Gross profit / margin | $12.6m / 93% | $13.5m / 94% | $26.8m / 93% | $27.6m / 94% |
| Operating expenses | $9.4m | $9.5m | $19.0m | $18.7m |
| Operating income | $3.2m | $4.0m | $7.8m | $8.9m |
| Net income | $3.5m | $4.1m | $8.3m | $8.8m |
| Diluted EPS | $0.15 | $0.17 | $0.35 | $0.37 |
| Operating cash flow | Not stated separately | Not stated separately | $9.9m | $13.8m |
Q2 revenue declined 6% year over year and H1 revenue declined 3%. Licensing revenue rose 3% in Q2 and 2% in H1; royalty revenue fell 8% and 4%, respectively, while other revenue fell 31% and 8%. Royalty revenue remained the largest source, at 56% of Q2 and 58% of H1 sales. Q2 operating income declined about 21% and net income about 16% year over year; H1 operating income declined about 13% and net income about 5%.
Cash, liquidity and capital
- At June 30, 2012, cash and cash equivalents were $20.5m, short-term bank deposits $61.6m, marketable securities $54.5m and long-term bank deposits $19.3m: approximately $155.9m in total, versus $164.5m at year-end 2011.
- Total assets were $210.4m; current assets $145.8m and current liabilities $11.8m. The filing reports no borrowings or debt; long-term liabilities included $5.7m of accrued severance pay.
- H1 operating cash flow was $9.9m, versus $13.8m a year earlier. Investing activities provided $14.9m, mainly reflecting investment maturities and sales; financing activities used $19.2m, primarily for share repurchases.
- CEVA repurchased 1,066,742 shares in H1 for $20.8m at an average $19.49 per share; 899,958 shares remained authorized for repurchase at June 30. Stockholders’ equity was $193.0m, down from $200.9m at year-end 2011.
Business developments and material changes
- CEVA signed eight Q2 license agreements: six for DSP cores, platforms and software, and two for Bluetooth IP. Target applications included LTE smartphones, microcells, broadband communications and connectivity. The company reported more than 20 LTE DSP design wins, including its first CEVA-XC4000 win.
- Customers reported shipments of 247m CEVA-powered chipsets in Q2 and 525m in H1, compared with 246m and 482m in the respective 2011 periods. Despite higher reported unit shipments, royalties decreased, principally due to lower average per-unit royalty rates and fewer 2G shipments.
- Revenue concentration increased: the five largest customers represented 73% of Q2 revenue and 67% of H1 revenue, compared with 49% and 59% a year earlier. The five largest royalty-paying customers generated 82% of Q2 and 83% of H1 royalty revenue.
- Asia Pacific generated 54% of H1 revenue, up from 39%; Europe and the Middle East fell to 25% from 39%. China alone contributed 32% of H1 revenue. Handsets and mobile broadband accounted for 80% of Q2 and 79% of H1 revenue.
Outlook, risks and other matters
- Management expected Q3 2012 revenue to be below both Q1 and Q2, while indicating royalty revenue might return to sequential growth in Q4. Management also warned that full-year 2012 revenue could be below 2011; these are expectations, not guarantees.
- Management anticipated lower full-year operating expenses than in 2011 and stated that available cash, deposits, marketable securities and operating cash flow should fund operations for at least 12 months, subject to revenue and expense assumptions.
- Management cited macroeconomic uncertainty, 3G inventory reductions ahead of new smartphone launches, and intense pricing pressure in low-cost 2G phones as factors weighing on results. Key risks include competition and royalty-rate pressure, reliance on handset and mobile-broadband markets, concentrated customers, long sales and design cycles, foreign-exchange exposure, and dependence on customer product adoption.
- Israeli tax benefits depend on continued compliance with program conditions and are scheduled to begin expiring gradually in 2014. Failure to qualify could increase taxes or require repayment of benefits. CEVA received $0.658m of Israeli research grants in H1; future grants depend on meeting conditions.
- Marketable securities had $0.404m of gross unrealized losses at June 30. Management considered the declines temporary and recorded no impairment charge. Deposits with financial institutions may exceed insured limits; currency hedging may not fully offset exchange-rate movements.
- Management reported effective disclosure controls as of June 30 and no material change in internal control over financial reporting. CEVA reported no legal proceedings it believed would materially affect its business or financial condition.
Important facts for investors to verify
- Whether Q3 revenue fell as anticipated and whether royalties resumed sequential growth in Q4; compare actual 2012 revenue with 2011.
- Royalty-rate and shipment trends, particularly 2G versus 3G, and conversion of LTE design wins into licensing and royalty revenue.
- Customer and royalty-revenue concentration, including whether major customers or end-market exposure changed materially.
- Cash, deposits and securities composition, investment quality and unrealized losses, alongside continued operating cash generation.
- Remaining share-repurchase authorization and the effect of further repurchases on cash and share count.
- Changes in Israeli tax benefits and research grants, and any resulting effect on the effective tax rate and R&D costs.