CEVA, Inc. — Q2 2018 Form 10-Q
Business context and reporting period. CEVA licenses signal-processing, connectivity, imaging/vision and AI intellectual property to semiconductor companies and OEMs. This unaudited filing covers the three and six months ended June 30, 2018; financial amounts below are U.S. dollars in millions unless stated otherwise.
Key financial results
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Revenue | $17.5 | $20.6 | $35.1 | $41.9 |
| Licensing and related revenue | $10.0 | $10.3 | $20.1 | $19.9 |
| Royalty revenue | $7.5 | $10.2 | $14.9 | $22.0 |
| Gross profit / margin | $15.5 / 89% | $19.0 / 92% | $31.1 / 89% | $38.6 / 92% |
| Operating income (loss) | ($2.7) | $2.2 | ($5.6) | $6.5 |
| Net income (loss) | ($2.1) | $3.9 | ($4.3) | $8.0 |
| Diluted EPS | ($0.09) | $0.17 | ($0.19) | $0.36 |
- Revenue declined 15% in Q2 and 16% in the first half year over year. Royalties fell 27% and 32%, respectively; licensing revenue was down 3% in Q2 but up 1% for the half.
- Operating expenses rose to $18.2 million in Q2 and $36.7 million in the first half. Management cited higher personnel, foreign-exchange and equity-compensation costs, partly offset by higher R&D grants.
- Operating cash flow was $3.8 million for the first half, versus $10.6 million a year earlier. Investing activities used $5.4 million and financing activities used $9.4 million, including $10.4 million of share repurchases. Cash and cash equivalents fell to $10.7 million from $21.7 million at year-end.
- At June 30, cash, short- and long-term bank deposits, and marketable securities totaled $172.8 million, down from $183.3 million at December 31, 2017; $134.5 million was held by foreign subsidiaries. Current assets were $149.9 million and current liabilities $20.9 million. The balance sheet reports no borrowings or other debt.
Material changes and accounting comparability
- Royalty weakness from a large Chinese handset-baseband customer was the principal revenue pressure. Management also cited the disruption and uncertain royalty timing associated with the U.S. export ban affecting Chinese base-station customer ZTE.
- CEVA adopted ASC 606 on January 1, 2018 using the modified-retrospective method. Adoption increased opening retained earnings by $8.6 million. It increased Q2 revenue by $0.9 million but decreased first-half revenue by $1.1 million. Prior-year figures were not restated; 2018 royalties reflect estimated sales in the current quarter, whereas prior-year royalties were reported one quarter in arrears.
- Revenue concentration remained significant: five largest customers generated 62% of Q2 revenue and 53% of first-half revenue. Three royalty-paying customers together represented 78% and 76% of royalty revenue, respectively, in those periods.
Outlook, commentary and risks
- Management lowered 2018 royalty guidance to approximately 10% below 2017 royalty revenue and projected total 2018 revenue of approximately $80 million. It expected second-half royalties to be substantially stronger than the first half and to grow year over year, while anticipating continued weakness from the Chinese handset customer.
- Management pointed to growth opportunities in non-handset applications, including Bluetooth/Wi-Fi, 5G, vision and edge AI. CEVA reported 23 licensing deals in the first half, 22 for non-cellular-baseband applications, including three NeuPro AI deals; non-cellular-baseband shipments grew approximately 44% year over year in Q2.
- Management said available liquid resources and operating cash flow should fund operations for at least 12 months, but noted the forecast depends on revenue and expense assumptions. Most liquid resources were held outside the U.S.; repatriating foreign earnings could incur taxes.
- Key risks include customer and royalty concentration, handset-market and semiconductor cyclicality, pricing pressure, customer shipment and product-launch uncertainty, competition, foreign-exchange exposure, international and trade restrictions, and reliance on R&D grants and tax benefits. Management reported no material legal proceedings and no material change in internal control over financial reporting; disclosure controls were judged effective.
Important facts for investors to verify
- Whether the Chinese handset customer’s weakness and the ZTE-related royalty disruption improve as management expected, and whether the $80 million revenue outlook is achieved.
- How royalty trends compare under ASC 606’s current-quarter shipment estimates, including the effect of estimates and later customer sales reports.
- Whether licensing growth and non-handset shipments translate into sustained royalty revenue and reduce customer and handset-market concentration.
- Liquidity availability and location, operating cash generation, and the impact of continuing share repurchases, foreign-exchange movements and R&D grant levels.