CEVA, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2016; filed November 9, 2016. Unaudited interim results. CEVA licenses signal-processing and connectivity intellectual property (IP) to semiconductor and equipment companies, earning licensing fees and royalties.
Financial performance
Amounts below are in U.S. dollars; millions except per-share data and percentages.
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $17.8 | $16.2 | $51.5 | $43.4 |
| Licensing and related revenue | $7.5 | $8.6 | $23.6 | $24.1 |
| Royalties | $10.4 | $7.6 | $27.9 | $19.3 |
| Gross profit / margin | $16.4 / 92% | $15.0 / 92% | $47.0 / 91% | $39.4 / 91% |
| Operating income | $3.8 | $3.5 | $8.3 | $4.1 |
| Net income | $3.4 | $3.3 | $7.9 | $4.0 |
| Diluted EPS | $0.15 | $0.16 | $0.37 | $0.19 |
| Operating cash flow | Not provided separately | Not provided separately | $2.0 | $7.8 |
Quarterly revenue increased 10%; nine-month revenue increased 18%. Royalty growth more than offset lower licensing revenue. Nine-month operating income approximately doubled, while quarterly operating income rose modestly. Higher nine-month taxes—$2.0 million versus $0.8 million—reflected increased pretax income, a tax expense for a prior-year uncertain tax position, and a higher valuation allowance on certain foreign deferred tax assets. Equity-based compensation increased to $4.6 million for the nine months from $2.8 million.
Cash, liquidity and balance sheet
- Cash, short- and long-term bank deposits, and marketable securities totaled approximately $145.0 million at September 30, 2016, versus $139.3 million at December 31, 2015. This included $20.0 million cash and equivalents, $41.0 million short-term deposits, $25.1 million long-term deposits, and $58.9 million marketable securities.
- Current assets were $140.1 million and current liabilities $21.3 million. Stockholders’ equity was $204.7 million. The balance sheet reports no borrowings or other debt.
- Nine-month operating cash flow fell to $2.0 million from $7.8 million, primarily because trade receivables rose $13.2 million. Management attributed the increase mainly to a large customer’s internal reorganization affecting payment timing.
- Investing activities used $6.4 million; financing activities provided $5.6 million, including $9.0 million from stock-award exercises and $3.4 million of share repurchases. Cash and equivalents ended the period at $20.0 million.
- $111.9 million of the company’s $145.0 million in cash, deposits and marketable securities was held by foreign subsidiaries. The company intends to reinvest foreign earnings; repatriation could incur taxes.
Changes, outlook and risks
- Revenue mix and shipments: Royalties rose 36% in Q3 and 44% for the first nine months, driven by smartphone and LTE shipments. Licensing revenue declined 13% in Q3 and 2% year to date, as weaker handset-baseband licensing was partly offset by connectivity and vision deals. Gross margin remained broadly stable.
- Deals and products: CEVA concluded 13 licensing deals in Q3, including a first portfolio agreement with a major semiconductor company covering baseband, vision, audio and connectivity IP. Management said it believes the model could extend to other tier-one customers.
- Management targets: The company anticipated reporting more than 200 million LTE devices powered by its DSPs for 2016. It projected non-handset baseband shipments of 200 million units in 2016 and 700–900 million annually by 2018. These are forward-looking expectations, not reported results.
- Funding outlook: Management believed available liquid resources and operating cash flow would fund operations for at least 12 months, while cautioning that revenue and expense assumptions could prove inaccurate. Potential acquisitions or investments could require additional financing.
- Concentration and execution risks: Spreadtrum accounted for 27% of both Q3 and nine-month revenue. Five largest customers represented 65% of Q3 and 64% of nine-month revenue; royalty revenue was particularly concentrated. Risks include customer consolidation or product changes, licensing deal timing, royalty-rate pressure, handset/baseband competition, cyclical end markets, and dependence on customer product shipments and market acceptance.
- Other exposures: Foreign-currency movements, investment credit and interest-rate risk, and reliance on Israeli government and European research grants and Israeli tax benefits. Israeli tax benefits were scheduled to begin expiring in 2017. Marketable-security losses were considered temporary; no impairment charge was recorded. The filing reported no litigation expected to have a material effect, effective disclosure controls, and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the receivables increase is collected and operating cash flow improves.
- Actual 2016 LTE device shipments relative to management’s 200-million target, and progress toward the non-handset shipment forecasts.
- Whether royalty growth and licensing activity persist, particularly given customer and royalty concentration and pricing risks.
- The amount and timing of any tax effects from prior-year uncertain positions, Israeli tax-benefit expirations, or potential repatriation of foreign-held funds.
- The impact of adopting new revenue-recognition and other accounting standards; the company was still evaluating several standards, including the revenue standard planned for adoption in 2018.