CEVA, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Unaudited results; amounts below are U.S. dollars unless otherwise noted.
Business context
CEVA licenses wireless connectivity and smart-sensing intellectual property and provides chip-design and NRE services, including through Intrinsix. Its markets include mobile, IoT, automotive, industrial, and aerospace and defense. The company reports one operating segment.
Financial results and liquidity
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $33.7m | $32.8m | $101.2m | $88.6m |
| Licensing, NRE and related revenue | $22.3m | $21.6m | $66.8m | $51.5m |
| Royalties | $11.4m | $11.2m | $34.5m | $37.1m |
| Gross profit / gross margin | $25.7m / 76% | $28.0m / 85% | $80.1m / 79% | $77.7m / 88% |
| Operating income (loss) | ($4.0m) | $1.7m | ($3.8m) | $2.0m |
| Net income (loss) | ($22.3m) | ($0.2m) | ($25.1m) | ($3.5m) |
| Operating cash flow | Not provided quarterly | Not provided quarterly | $3.5m | $14.8m |
- Q3 revenue grew 3% year over year; nine-month revenue grew 14%. Licensing/NRE increased 3% in Q3 and 30% year to date, while royalties increased 2% in Q3 but fell 7% year to date.
- Cash and cash equivalents were $29.5m at September 30. Cash, short- and long-term bank deposits, and marketable securities totaled $144.4m, down from $154.9m at December 31, 2021. The filing says $135.3m was held by foreign subsidiaries.
- Current assets were $171.2m and current liabilities $28.1m. The filing reports no borrowings; operating lease liabilities totaled $7.2m, including current and long-term amounts.
- Available-for-sale corporate bonds had $7.1m of gross unrealized losses, principally attributed to rising interest rates. No material credit-loss allowance was recorded.
Material changes and unusual items
- Margins fell as cost of revenue rose, reflecting impairment charges, higher Intrinsix-related costs and other expenses. The company recorded $3.6m of impairment on Immervision technology after deciding to cease development of that product line, plus $2.0m of prepaid-asset impairments in cost of revenue related to Immervision and NB-IoT assets.
- Income tax expense was $17.9m in Q3 and $19.8m for the nine months. It included a $15.6m valuation allowance against certain Israeli deferred tax assets, based on uncertainty about future taxable income.
- Remeasurement of marketable equity securities generated losses of $0.5m in Q3 and $2.3m year to date. Other comprehensive loss included investment and hedge-related effects; accumulated other comprehensive loss was $6.8m at quarter-end.
- Operating cash flow declined to $3.5m from $14.8m year to date. The filing cites the net loss and a $5.1m reduction in deferred revenue among the drivers.
- CEVA repurchased 218,809 shares for $6.8m during the first nine months; 278,799 shares remained available under the program at September 30.
Management commentary, outlook and risks
- Management highlighted demand for wireless connectivity and Edge AI licensing. Eleven of 18 Q3 licensing and NRE agreements were for wireless connectivity; five were with first-time customers.
- Management cited strength in 5G RAN and growth in shipments of base-station and IoT products, while noting lower handset baseband royalties associated with inventory adjustments and weaker consumer demand. It expects royalty growth from base-station and IoT applications over the next few years, but provided no numerical revenue or earnings guidance in the supplied filing text.
- Management believes cash, investments and operating cash flow should fund operations for at least 12 months, while cautioning that revenue and expense assumptions may not prove accurate. It intends to reinvest foreign subsidiary earnings; repatriating funds to the U.S. could trigger taxes.
- Key risks include customer and royalty concentration, cyclical semiconductor and handset demand, pricing pressure, long and unpredictable licensing and government-contract sales cycles, reliance on international markets—especially Asia Pacific and China—foreign-exchange movements, competition, and uncertainty around COVID-19, supply chains and geopolitical or trade restrictions.
- The company said it was assessing the potential effects of October 2022 U.S. export-control restrictions on China. It reported no litigation expected to have a material effect and concluded disclosure controls were effective as of September 30, 2022.
Important facts for investors to verify
- Whether the Israeli deferred-tax-asset valuation allowance changes, and what supports management’s future taxable-income estimates.
- How much of royalty performance reflects underlying shipments versus royalty-audit resolutions: Q3 and nine-month 2022 revenue included $1.0m and $1.2m, respectively, from resolved audits.
- Exposure to concentrated customers and China: Asia Pacific contributed 71% of nine-month revenue, and China alone contributed 57%.
- Whether lower handset demand and inventory adjustments persist, and whether expected 5G RAN and IoT royalty growth materializes.
- Liquidity quality and accessibility, including foreign-held funds, potential repatriation taxes, and the recoverability of unrealized losses on marketable securities.
- Further costs or impairments associated with Immervision, NB-IoT, Intrinsix integration, and the company’s development programs.