CEVA, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Unaudited results are compared with the corresponding 2018 periods. CEVA licenses wireless-connectivity and smart-sensing intellectual property to semiconductor and OEM customers.
Financial performance
| Metric | Q2 2019 | Q2 2018 | H1 2019 | H1 2018 |
|---|---|---|---|---|
| Revenue | $18.4m | $17.5m | $35.4m | $35.1m |
| Licensing and related revenue | $10.8m | $10.0m | $21.8m | $20.1m |
| Royalty revenue | $7.6m | $7.5m | $13.6m | $14.9m |
| Gross margin | 86% | 89% | 87% | 89% |
| Operating loss | $2.2m | $2.7m | $5.1m | $5.6m |
| Net loss | $1.5m | $2.1m | $3.8m | $4.3m |
| Net loss per share, diluted | $0.07 | $0.09 | $0.17 | $0.19 |
Amounts are U.S. dollars; losses and loss per share are shown as negative in the filing. Revenue grew 5% in Q2 and 1% in H1. Higher licensing revenue drove growth, while H1 royalties declined 9%, mainly reflecting weaker smartphone shipments and customer channel inventory, partly offset by non-handset shipments. Q2 gross margin fell principally because of higher customization and third-party IP costs.
- Cash flow: H1 operating cash flow was $1.3m, down from $3.8m. Investing activities provided $4.7m, compared with $5.4m used in H1 2018. Financing used $3.7m, including $4.9m of share repurchases.
- Liquidity: At June 30, cash and cash equivalents were $24.5m, short-term bank deposits $50.4m, marketable securities $76.1m, and long-term bank deposits $14.7m—$165.7m combined, versus $167.7m at year-end 2018. Management said available funds and operating cash flow should fund operations for at least 12 months.
- Debt and leases: The balance sheet lists no conventional borrowings. Operating lease liabilities totaled $9.4m, including $1.8m current and $7.6m long-term.
- Other balance-sheet facts: Total assets were $284.8m and stockholders’ equity $244.6m. $136.1m of cash, deposits, and marketable securities was held by foreign subsidiaries; management said it intended to permanently reinvest foreign earnings.
Changes and operating developments
- Licensing revenue increased 8% in both Q2 and H1; Q2 included nine new licensing deals, four with first-time customers. CEVA reported 17 deals in H1, including deals in connectivity, AI, computer vision, audio, and 5G-related applications.
- Non-cellular baseband shipments powered by CEVA grew 8% year over year to 95 million units in Q2, based on reported or estimated shipment data. Customers reported 217 million chipsets incorporating CEVA technology in Q2, down 2%, and 392 million in H1, down 6%.
- Operating expenses were $18.1m in Q2 and $36.0m in H1, slightly below 2018 comparable periods. R&D expenses rose to $12.4m in Q2 and $24.7m in H1; sales and marketing and general and administrative expenses declined.
- Five largest customers generated 55% of Q2 and 50% of H1 revenue. Spreadtrum contributed 14% and 15%, respectively. Three royalty customers together accounted for 76% of Q2 and 73% of H1 royalty revenue.
- CEVA repurchased 194,316 shares for $4.9m in H1; 160,864 shares remained authorized for repurchase at June 30.
Outlook, commentary, and risks
- Management forecast royalty revenue to increase substantially in H2 2019, including more than 60% sequential growth in Q3, which it expected to be one of the company’s highest royalty quarters. This is forward-looking guidance, not a reported result.
- Management’s 2022 targets, relative to 2018, were licensing revenue growth of approximately 10%–20%, royalty revenue at approximately twice the 2018 level, and non-GAAP net income at approximately three times the 2018 level.
- Management anticipated approximately $5m of additional R&D expense in 2019 and up to $2m of higher cost of revenues. Hillcrest Labs was expected to add approximately $1.5m of quarterly operating expense from Q3, excluding amortization.
- Subsequent events: In July, CEVA acquired Hillcrest Labs for $11m, including $10m paid at closing and $1m held in escrow. In August, it invested $10m in Immervision for exclusive licensing rights to specified imaging technology and agreed to pay $0.2m for a 19.9% stake in a China joint venture. Purchase-price allocations were not final at filing.
- Key risks include dependence on a limited number of customers and handset-related royalties, semiconductor and handset market weakness, royalty-rate pressure, long and unpredictable licensing cycles, competition and in-house alternatives, international and China-related exposure, foreign-exchange movements, and reliance on Israeli research grants and tax benefits. Management also cautioned that quarterly results may fluctuate and that forecasts depend on assumptions.
- CEVA reported effective disclosure controls as of June 30 and no material change in internal control over financial reporting during the quarter. It reported no legal proceedings believed likely to have a material effect.
Most important facts for investors to verify
- Whether the forecast Q3 royalty rebound and broader H2 recovery materialized, and how much depended on handset versus non-handset shipments.
- Whether licensing growth and the announced 2022 targets remain supported by deal volume, design wins, and customer commercialization.
- The subsequent financial contribution, integration costs, and final purchase accounting for Hillcrest Labs, Immervision, and the China joint venture.
- Exposure to major customers, particularly the concentration of royalty revenue, and changes in customer shipments or royalty rates.
- Cash availability and investment risks, including the substantial foreign-held balance and lease commitments; the filing states no conventional debt balance.
- Whether R&D spending, cost of revenues, grant funding, and Israeli tax benefits develop as management anticipated.