CEVA, Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. CEVA licenses DSP, connectivity and related intellectual property to semiconductor and equipment companies. Figures below are in U.S. dollars; financial statement amounts are converted from thousands to millions unless otherwise noted.
Financial performance and liquidity
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Revenue | $13.4m | $9.2m | $27.2m | $22.9m |
| Licensing and related revenue | $7.7m | $4.4m | $15.5m | $12.3m |
| Royalty revenue | $5.7m | $4.9m | $11.7m | $10.6m |
| Gross profit / margin | $11.8m / 88% | $7.8m / 85% | $24.5m / 90% | $20.4m / 89% |
| Operating income (loss) | $0.03m | ($2.3m) | $0.6m | ($0.1m) |
| Net income (loss) | $0.17m | ($1.5m) | $0.65m | $0.46m |
| Diluted EPS | $0.01 | ($0.07) | $0.03 | $0.02 |
- Revenue increased 45% in Q2 and 19% in the first half year over year, driven by higher licensing and royalty revenue. Licensing growth included non-handset applications and Bluetooth IP acquired with RivieraWaves.
- Operating expenses were $11.8m in Q2 and $23.9m in the first half, up from $10.1m and $20.5m, respectively. Higher RivieraWaves-related compensation and retention costs, R&D project spending and acquired-intangible amortization contributed; French research tax credits and lower stock compensation partly offset increases.
- First-half operating cash flow was $2.3m, versus $1.3m in 2014. First-half cash and cash equivalents fell by $4.1m to $12.1m. Financing cash outflows included $5.3m of share repurchases and $3.7m of final RivieraWaves contingent consideration, partly offset by $4.5m from stock-award exercises.
- At June 30, cash, short-term bank deposits, marketable securities and long-term bank deposits totaled approximately $126.2m, versus $129.9m at year-end 2014. Current assets were $86.1m and current liabilities $17.2m. No borrowings are presented on the balance sheet.
- Total assets were $207.3m and stockholders’ equity $180.9m. Q2 and first-half operating margins were approximately 0.2% and 2.2%, respectively; net margins were approximately 1.3% and 2.4%.
Material changes and business developments
- Q2 licensing revenue rose 76% year over year; royalties rose 17%. Customers reported 206m chipsets incorporating CEVA technology in Q2, compared with 198m a year earlier. The filing attributes royalty growth to smartphone 3G/LTE shipments, partly offset by lower 2G and feature-phone activity and the lower royalty rates of growing Bluetooth volumes.
- CEVA signed 14 licensing deals in Q2, including six with first-time customers; 13 were for non-handset baseband applications. Handset baseband accounted for 44% of Q2 revenue and 49% of first-half revenue, down from 60% and 58% a year earlier.
- Customer concentration remains material: one customer, Spreadtrum, generated 26% of Q2 revenue and 25% of first-half revenue. The five largest customers accounted for 53% and 49% of revenue, respectively.
- CEVA completed the $3.7m RivieraWaves contingent-consideration payments during the first half. The acquisition also carries an employee retention plan costing approximately $3.4m over two years; $0.329m had been paid by June 30, 2015.
- CEVA repurchased 270,020 shares for $5.3m in the first half; 729,980 shares remained available under the repurchase program at June 30.
Outlook, risks and other notable items
- Management stated that quarterly licensing revenue was expected to be in the range of $6m–$7.5m following the RivieraWaves acquisition and in light of existing DSP products. This is not full-year revenue guidance. Management also said available cash, deposits, securities and operating cash flow were expected to fund operations for at least 12 months, subject to assumptions about revenue and expenses.
- Management cited growth opportunities in smartphone 3G/LTE, connectivity, IoT, audio and vision processing. It estimated non-handset baseband royalty-bearing units at about 86m annually in 2014 and projected 700m–900m annually by 2018. These are forward-looking estimates, not assured outcomes.
- Key risks include intense competition and royalty-rate pressure; dependence on a limited number of customers and handset markets; variable licensing deal timing and limited visibility into customer shipments; technology and product-acceptance risks; foreign-exchange exposure; and potential customer credit losses. Q2 revenue included a large Asia-Pacific contribution, while 82% of first-half revenue came from outside the U.S.
- Foreign-exchange losses were $0.45m in the first half, principally reflecting the stronger U.S. dollar against the euro and euro cash acquired with RivieraWaves. The company hedged portions of foreign-currency payroll exposure; it cautioned that hedging may not fully offset currency movements.
- Management reported no material litigation and stated disclosure controls were effective as of June 30. The filing reported no material change in internal control over financial reporting. Israeli tax benefits are scheduled to begin gradually expiring in 2017; eligibility and continuation remain risks. No other-than-temporary impairment charge was recorded on marketable securities in the first half.
Important facts for investors to verify
- Whether licensing growth and the stated $6m–$7.5m quarterly licensing range persist, and how revenue timing varies with deal closings.
- Whether royalty growth offsets lower feature-phone activity and the comparatively lower royalties on Bluetooth and other non-handset shipments.
- Customer concentration and exposure to Spreadtrum, major royalty payers, and handset baseband markets.
- RivieraWaves-related operating costs, retention-plan payments, and the commercial conversion of connectivity and IoT design wins into royalties.
- Liquidity composition, cash generation, share repurchases, and potential use of cash for acquisitions or investments.
- Exposure to foreign exchange, investment-security values, customer credit risk, and the continuation of research grants and tax benefits.