CEVA, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Unaudited results; amounts below are U.S. dollars. CEVA licenses wireless-connectivity and smart-sensing intellectual property and provides related NRE services. Its May 31 acquisition of Intrinsix added chip-design and NRE capabilities, including in aerospace and defense.
Financial performance
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Revenue | $30.5m | $23.6m | $55.9m | $47.2m |
| Licensing, NRE and related revenue | $15.5m | $13.5m | $29.9m | $28.0m |
| Royalties | $14.9m | $10.1m | $25.9m | $19.2m |
| Gross profit / margin | $26.8m / 88% | $20.6m / 87% | $49.8m / 89% | $41.5m / 88% |
| Operating income (loss) | $1.6m | ($1.5m) | $0.3m | ($3.2m) |
| Net income (loss) | $0.3m | ($1.1m) | ($3.3m) | ($2.3m) |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $8.4m | $12.6m |
Revenue rose 29% in Q2 and 18% in the first half. Royalties increased 48% and 35%, respectively, reflecting higher shipments across connectivity, cellular IoT, 5G RAN and smart-sensing products. Customer-reported chipset shipments incorporating CEVA technology rose 95% in Q2 and 61% in the first half. Q2 royalty revenue included approximately $3.3m from resolution of a royalty-rate disagreement.
Operating expenses increased to $25.2m in Q2 and $49.5m in the first half, driven chiefly by higher employee costs, currency effects, and Intrinsix transaction-related professional fees; lower French research tax credits also contributed. First-half income tax expense was $4.0m, up from $0.8m, primarily because more income was earned in France at its higher tax rate. Financial income declined to $0.4m for the first half from $1.7m, reflecting lower investment balances and yields and foreign-exchange losses.
Liquidity, debt and capital
At June 30, 2021, cash and cash equivalents were $26.7m, short-term bank deposits $25.1m, marketable securities $75.3m and long-term bank deposits $10.2m, totaling $137.3m. This was down from $159.7m at year-end 2020, principally due to the Intrinsix acquisition. Current assets were $161.2m and current liabilities $29.3m. The filing reports no borrowings; operating lease liabilities totaled $7.8m, including current and long-term portions.
First-half operating cash flow was $8.4m, compared with $12.6m a year earlier. Investing cash flow was a $4.2m use, including $30.4m net cash paid for Intrinsix, partly offset by investment maturities and sales. Financing provided $1.6m, largely from stock-award exercises. Management expects available liquid resources and operating cash flow to fund operations for at least 12 months.
Material changes, outlook and risks
- Intrinsix was acquired for stated cash consideration of $33.6m; $30.4m was the net cash outflow reported for the acquisition. Preliminary allocation included $24.9m goodwill and $5.3m identifiable intangibles, and remains subject to final valuation.
- Connectivity represented 72% of Q2 revenue versus 85% a year earlier; smart sensing rose to 28% from 15%. Asia Pacific contributed 76% of Q2 revenue, including China at 63%.
- Management reported record-high revenue for Q2 and the first half, strong demand for connectivity licensing, and record shipments of Bluetooth, Wi-Fi and cellular-IoT-enabled devices. It expects royalty growth from base-station and IoT products to continue over the next few years, but gave no quantified revenue or earnings guidance in the supplied filing text.
- Management cited semiconductor supply shortages and longer manufacturing lead times, pandemic uncertainty, and continued pressure in emerging handset markets. Other key exposures include reliance on a limited number of customers, China and broader international markets, foreign-exchange movements in the NIS and euro, competitive and pricing pressure, and the uncertain integration and returns of Intrinsix. One customer, UNISOC, represented 27% of Q2 revenue and 21% of first-half revenue.
- Management stated that COVID-19 had not materially adversely affected the reported period, but it could not predict the pandemic’s full 2021 impact. No material litigation was reported. Disclosure controls were assessed as effective at June 30, 2021.
Important facts for investors to verify
- Reconcile the share-repurchase disclosures: the financial statements and Note 14 state no repurchases in first-half 2021, while the MD&A financing discussion appears to describe a $4.8m repurchase of 202,392 shares as occurring in first-half 2021; those figures correspond to first-half 2020 elsewhere in the filing.
- Assess the durability of royalty growth after excluding the one-time $3.3m royalty-rate resolution and consider the effect of semiconductor supply constraints on customer shipments.
- Monitor customer and geographic concentration, particularly UNISOC and China, as well as the timing and variability of licensing and NRE contracts.
- Track Intrinsix integration, the final purchase-price allocation, acquisition-related costs and evidence that the acquisition generates expected revenue and synergies.
- Review currency exposure, French tax expense and the concentration of liquid resources in foreign subsidiaries; management says repatriation could trigger taxes.