CEVA, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Unaudited results; dollar amounts below are U.S. dollars unless noted.
Business context
CEVA licenses wireless-connectivity and smart-sensing intellectual property and provides chip-design and non-recurring engineering (NRE) services. Its portfolio includes connectivity, DSP, AI and sensor-processing technologies. Intrinsix, acquired in 2021, added chip-design services and aerospace and defense exposure.
Financial performance
| Metric | Q2 2022 | Q2 2021 | First half 2022 | First half 2021 |
|---|---|---|---|---|
| Revenue | $33.2m | $30.5m | $67.6m | $55.9m |
| Licensing, NRE and related revenue | $22.1m | $15.5m | $44.5m | $29.9m |
| Royalties | $11.1m | $14.9m | $23.1m | $25.9m |
| Gross profit / margin | $26.4m / 79% | $26.8m / 88% | $54.4m / 80% | $49.8m / 89% |
| Operating income (loss) | $(0.3)m | $1.6m | $0.2m | $0.3m |
| Net income (loss) | $(1.1)m | $0.3m | $(2.8)m | $(3.3)m |
| Operating cash flow | Not separately presented for the quarter | $1.7m | $8.4m |
- Q2 revenue rose 9% year over year and first-half revenue rose 21%. Licensing/NRE revenue grew 42% in Q2 and 49% in the first half; royalties fell 26% and 11%, respectively.
- Management said Q2 2021 included a $3.3m royalty payment after resolving a customer rate disagreement. Excluding it, royalties would have declined 4% in Q2 and increased 2% in the first half of 2022 versus the comparable periods.
- Lower gross margins primarily reflected higher service and NRE costs, including Intrinsix salaries and design-tool costs. Operating expenses were $26.6m in Q2 and $54.2m in the first half, with higher employee-related and Intrinsix costs among the drivers.
- Q2 included a $0.7m loss from remeasurement of marketable equity securities; the first-half loss was $1.8m. First-half income tax expense was $1.9m, versus $4.0m in 2021, reflecting in part a favorable French IP Box tax rate on qualifying income.
Liquidity, capital resources and balance sheet
- At June 30, 2022, cash and cash equivalents were $19.3m, short-term bank deposits $15.8m, long-term bank deposits $8.1m, and marketable securities $103.0m: approximately $146.1m combined, down from $154.9m at December 31, 2021.
- Cash and cash equivalents decreased by $13.9m during the first half. Operating cash flow was $1.7m; investing cash use was $12.3m; financing cash use was $2.7m. The company repurchased $4.5m of stock.
- Total assets were $319.4m and stockholders’ equity $273.7m. The balance sheet reports no borrowings; operating lease liabilities totaled $7.0m, current and long term combined.
- Management believes available cash, deposits, marketable securities and operating cash flow will fund operations for at least 12 months. It noted that $138.7m of its cash, deposits and marketable securities was held by foreign subsidiaries and that repatriation to the U.S. could result in taxes.
Changes, outlook and risks
- Licensing/NRE growth was supported by Wi-Fi activity and Intrinsix services; 22 license and NRE deals were concluded in Q2, including 14 for wireless connectivity. Device shipments enabled by CEVA Bluetooth, Wi-Fi and cellular IoT IP increased 14% year over year to 309m in Q2, according to the filing.
- Management reported base-station and IoT royalty revenue growth of 6% in Q2 and 14% in the first half. It expects royalty growth from these categories over the next few years, but provided no specific full-year revenue or earnings guidance in the supplied filing text.
- Revenue remains concentrated: UNISOC accounted for 11% of Q2 and first-half revenue. Asia Pacific represented 71% of Q2 and 74% of first-half revenue; China alone represented 56% and 62%, respectively. Two royalty-paying customers together contributed 43% of Q2 royalties and 45% of first-half royalties.
- Marketable securities had $5.2m of unrealized losses at June 30, primarily associated with interest-rate movements; no credit loss was recognized. These losses contributed to first-half other comprehensive loss of $4.2m.
- Principal risks include customer and royalty concentration, competitive and pricing pressure, semiconductor and handset cyclicality, supply-chain and macroeconomic disruption, China and other geopolitical exposure, foreign-exchange volatility, and uncertainty around COVID-19. Intrinsix also exposes CEVA to U.S. government funding, contract, compliance and integration risks. Management said COVID-19 and other global events had not materially adversely affected the reported interim statements, but their future impact remained uncertain.
- The filing reports no legal proceedings believed likely to have a material effect. Management concluded disclosure controls were effective as of June 30, 2022.
Important facts for investors to verify
- Whether licensing/NRE growth can persist and translate into improved operating profitability as Intrinsix-related costs continue.
- Royalty trends excluding the prior-year $3.3m resolution payment, and the performance of handset versus base-station and IoT royalty streams.
- Exposure to major customers, royalty payers, China and the broader Asia Pacific region, including any changes in customer concentration.
- How the $5.2m unrealized securities loss, interest-rate changes and foreign-currency hedges affect liquidity and reported results.
- Whether the stated 12-month funding expectation holds if revenue, customer receipts, acquisition spending or repatriation needs differ from management’s assumptions.