CEVA, Inc. — Q3 2018 Form 10-Q
Business context and reporting period. CEVA licenses signal-processing and connectivity intellectual property for use in semiconductor and OEM products, including handset baseband, Bluetooth, Wi-Fi, imaging, voice and AI applications. This unaudited report covers the three and nine months ended September 30, 2018; financial amounts below are in U.S. dollars unless noted.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $21.4m | $24.0m | $56.5m | $65.9m |
| Licensing and related revenue | $9.8m | $14.0m | $29.9m | $33.9m |
| Royalties | $11.6m | $10.0m | $26.6m | $32.0m |
| Gross profit / margin | $19.4m / 91% | $22.3m / 93% | $50.5m / 89% | $60.9m / 92% |
| Operating income (loss) | $2.2m | $6.2m | $(3.4)m | $12.7m |
| Net income (loss) | $2.5m | $5.9m | $(1.7)m | $13.9m |
| Operating cash flow | Not separately provided | Not separately provided | $4.1m | $17.7m |
Q3 diluted EPS was $0.11, versus $0.26; nine-month diluted EPS was $(0.08), versus $0.62. Financial income, net, was $0.8m for Q3 and $2.5m year to date. Research and development expense rose to $11.9m in Q3 and $35.8m year to date.
At September 30, cash, cash equivalents, short-term bank deposits and marketable securities totaled $119.6m; including long-term bank deposits, liquid funds and investments totaled $167.0m, down from $183.3m at year-end 2017. Current assets were $149.5m and current liabilities $21.1m. The balance sheet lists no debt. Stockholders’ equity was $244.4m.
Material changes versus the prior comparable period
- Revenue declined 11% in Q3 and 14% for the first nine months. Licensing revenue fell 30% in Q3 and 12% year to date, while royalties rose 16% in Q3 but fell 17% year to date.
- Management attributed the year-to-date royalty decline mainly to weakness at a large Chinese handset-baseband customer in the lower-tier smartphone segment. Q3 royalty growth reflected strong sequential shipments, including adoption in a leading smartphone and growth in non-handset applications.
- Nine-month operating results swung from $12.7m of operating income and $13.9m of net income in 2017 to a $3.4m operating loss and $1.7m net loss in 2018. Higher R&D and other operating expenses, alongside lower revenue, contributed to the change.
- Cash from operations fell to $4.1m from $17.7m. Financing cash flow included $16.7m of share repurchases; 527,212 shares were repurchased in the first nine months at an average $31.76 per share.
Outlook, commentary, risks and unusual items
- No specific revenue or earnings guidance is provided. Management expects available liquid resources and cash from operations to fund operations for at least 12 months, while cautioning that revenue and expense assumptions may prove inaccurate.
- Management reported 13 Q3 licensing deals, all for non-handset-baseband applications, and record quarterly shipments of 98m non-cellular-baseband products. It cited opportunities in connectivity, 5G, voice, vision and edge AI, while noting that licensing deal timing and customer shipments make results difficult to forecast.
- Customer and market concentration remain important risks: five largest customers represented 64% of Q3 revenue and 53% year to date; one customer represented 16% of revenue in both periods. Three royalty-paying customers collectively generated 80% of Q3 royalties and 77% year to date.
- Other disclosed risks include competitive pricing and royalty-rate pressure, handset-market weakness, long sales cycles, international and currency exposure, reduced or delayed R&D grants, and evolving U.S.–China trade measures. The filing added tariffs and other trade measures as a risk factor and noted ZTE-related engagement delays that were expected to reduce 2018 revenue from that customer.
- CEVA adopted ASC 606 on January 1, 2018 using the modified retrospective method. Adoption increased opening retained earnings by $8.6m and reported revenue by $3.9m in Q3 and $2.9m year to date; 2017 comparatives were not restated. The standard also resulted in $10.8m more accrued revenue at September 30, largely reflecting royalties recognized for the quarter of customer sales rather than one quarter in arrears.
- Management recorded no other-than-temporary impairment on available-for-sale securities despite unrealized losses. It reported no material litigation and concluded disclosure controls were effective.
Important facts for investors to verify
- How much of reported revenue and earnings trends reflects underlying business performance versus ASC 606 timing and estimates, especially for accrued royalties.
- Whether handset-baseband weakness at the large Chinese customer continues, and whether growth in non-baseband shipments converts into sustained royalty revenue.
- The durability and timing of new licensing deals, and the degree of ongoing revenue concentration among major customers and royalty payers.
- Whether R&D investment, operating expenses and share repurchases are sustainable given lower operating cash flow and the year-to-date net loss.
- Performance and liquidity of the investment portfolio, including unrealized marketable-security losses, and the availability of foreign-subsidiary cash if U.S. funds are needed.