CEVA, Inc. — Q2 2016 Form 10-Q
Business context and reporting period. This unaudited filing covers the quarter and six months ended June 30, 2016, compared with the corresponding 2015 periods. CEVA licenses signal-processing and connectivity intellectual property to semiconductor companies and OEMs; revenue comes primarily from licensing and royalties. Unless noted otherwise, financial amounts below are in U.S. dollars.
Financial results
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Revenue | $17.1 million | $13.4 million | $33.6 million | $27.2 million |
| Licensing and related revenue | $7.5 million | $7.7 million | $16.1 million | $15.5 million |
| Royalty revenue | $9.6 million | $5.7 million | $17.5 million | $11.7 million |
| Gross profit / margin | $15.7 million / 92% | $11.8 million / 88% | $30.6 million / 91% | $24.5 million / 90% |
| Operating income | $2.6 million | $0.03 million | $4.5 million | $0.6 million |
| Net income | $2.7 million | $0.2 million | $4.5 million | $0.7 million |
| Diluted earnings per share | $0.13 | $0.01 | $0.21 | $0.03 |
| Operating cash flow | Not presented by quarter | $(1.3) million | $2.3 million |
- Revenue increased 28% in Q2 and 24% in the first half year over year. Royalties rose 69% and 50%, respectively, driven mainly by growth in LTE chipset shipments; licensing revenue declined 3% in Q2 but increased 4% for the half year.
- Gross margin improved, largely because royalties carry higher margins. Operating expenses rose to $13.1 million in Q2 and $26.1 million in the half year, reflecting higher salaries, share-based compensation and project costs, partly offset by increased research grants.
- First-half cash used in operations was $1.3 million despite $4.5 million of net income. The filing attributes the cash use chiefly to a $6.7 million increase in receivables, alongside increases in prepaid and other assets and reductions in deferred revenue and accrued payroll.
- At June 30, cash and cash equivalents were $18.7 million, short-term bank deposits $51.5 million, marketable securities $52.4 million and long-term bank deposits $15.1 million—$137.6 million combined, versus $139.3 million at year-end 2015. Current assets were $137.1 million and current liabilities $17.8 million. The balance sheet lists no borrowings or other debt; confirm against the full filing if relevant.
- Total assets were $220.1 million and stockholders’ equity $194.1 million at June 30, 2016. First-half share repurchases totaled $3.4 million; no shares were repurchased in Q2.
Material changes and management commentary
- Reported customer shipments of chipsets incorporating CEVA technology were 225 million in Q2 and 456 million in the first half, compared with 206 million and 439 million a year earlier. Reported LTE chipset shipments reached 56 million in Q2 and 91 million in the first half.
- Ten licensing deals were completed in Q2, all for non-handset baseband applications; four were with first-time customers. Management described licensing demand and its deal pipeline as strong.
- Concentration increased: the five largest customers represented 68% of Q2 revenue and 65% of first-half revenue, compared with 53% and 49% a year earlier. Spreadtrum accounted for 29% and 26%, respectively. Two royalty customers together contributed 86% of Q2 royalties and 85% of first-half royalties.
- Asia Pacific generated 71% of first-half revenue; China represented 48%. Management highlighted growth opportunities in LTE, Bluetooth, Wi-Fi, audio/voice, vision processing and IoT.
Outlook, risks and unusual items
- The filing provides no specific revenue, earnings or margin guidance. Management said available cash, deposits, marketable securities and expected operating cash flow should fund operations for at least 12 months, subject to actual revenue and expense levels.
- Management expects continued growth opportunities in licensing and royalties, and stated that non-handset baseband royalty-bearing shipments could reach 700–900 million annually by 2018, from approximately 167 million in 2015. These are expectations, not guaranteed results.
- Key risks include reliance on a small number of customers, unpredictable licensing timing and royalty shipments, competitive and royalty-rate pressure, semiconductor and handset market cyclicality, international and currency exposure, and dependence on successful product development and customer adoption.
- Foreign-exchange exposure is partly hedged, but hedges may not fully offset currency movements. The portfolio is principally corporate bonds; management viewed unrealized losses as temporary and recorded no impairment charge for the first half.
- Israeli tax benefits are subject to conditions and are scheduled to begin expiring in 2017. The company also depends on government research grants and French research tax credits, which may be reduced, delayed or lost.
- No legal proceedings were identified as reasonably expected to have a material effect. Management reported disclosure controls were effective as of June 30, 2016, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the royalty growth and LTE shipment momentum continued after the reporting period, and how much depended on the largest customers.
- Receivables collection and operating cash flow conversion, given the first-half cash outflow and increase in trade receivables.
- Customer and royalty concentration, including the impact of customer product decisions, consolidation or changes in royalty rates.
- The durability of licensing demand and progress converting new deals into shipped products and royalty revenue.
- Potential effects of expiring Israeli tax benefits, grant funding and foreign-exchange movements on future expenses and cash flows.
- The filing’s stated shipment, market-share and market-size projections, which rely partly on company estimates and third-party research and may differ from actual outcomes.