CEVA, Inc. — Q3 2015 Form 10-Q
Business context and period. CEVA licenses DSP, cellular, multimedia and connectivity intellectual property to semiconductor companies and equipment manufacturers. This unaudited report covers the three and nine months ended September 30, 2015; comparisons are with the corresponding 2014 periods.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $16.2m | $14.1m | $43.4m | $37.0m |
| Gross profit / margin | $15.0m / 92% | $12.8m / 91% | $39.4m / 91% | $33.3m / 90% |
| Operating income | $3.5m | $1.2m | $4.1m | $1.1m |
| Net income / diluted EPS | $3.3m / $0.16 | $0.7m / $0.03 | $4.0m / $0.19 | $1.1m / $0.05 |
- Q3 revenue rose 15%; nine-month revenue rose 17%. Royalties increased 42% in Q3 and 21% year to date, while licensing revenue was down 1% in Q3 and up 15% year to date.
- Operating expenses were $11.5m in Q3 and $35.3m year to date, versus $11.6m and $32.2m. Higher year-to-date expenses primarily reflected RivieraWaves staffing and retention costs, project costs and acquired-intangible amortization.
- Operating cash flow was $7.8m for the first nine months, versus $6.1m; investing cash flow was negative $1.3m versus positive $0.5m; financing cash flow was negative $6.4m versus negative $16.3m. Cash and cash equivalents ended at $16.3m, up $0.15m from year-end.
- Cash, short- and long-term bank deposits, and marketable securities totaled $129.4m at September 30, compared with $129.9m at December 31, 2014. The filing reports no debt balance.
- Total assets were $208.2m and stockholders’ equity was $183.3m at September 30. Current assets were $98.1m versus current liabilities of $16.4m.
Material changes and business developments
- Royalty growth was attributed mainly to increased LTE chipset shipments. Customers reported shipping 225m CEVA-technology chipsets in Q3 and 664m year to date, compared with 216m and 626m in 2014. Non-handset baseband shipments increased to 46m in Q3 and 117m year to date.
- Handset baseband represented 73% of Q3 revenue and 58% of nine-month revenue, compared with 45% and 53% in 2014. Asia Pacific contributed 69% of Q3 and nine-month revenue; China alone contributed 52% of Q3 revenue.
- Customer concentration remains significant: Spreadtrum provided 45% of Q3 revenue and 33% year to date. The five largest customers represented 76% of Q3 and 57% of nine-month revenue.
- CEVA signed eight Q3 licensing deals: five for connectivity IP and three for DSP cores, platforms and software. The company completed $3.7m of RivieraWaves contingent-consideration payments during the first half of 2015.
Outlook, risks and unusual items
- No specific revenue or earnings guidance was provided. Management said available liquid resources and operating cash flow should fund operations for at least the next 12 months, subject to revenue and expense assumptions.
- Management cited opportunities in IoT, connectivity, LTE, audio and vision processing. It estimated non-handset baseband royalty-bearing shipments could grow from about 86m units annually in 2014 to 700–900m by 2018; this is a management expectation, not formal financial guidance.
- Key risks include dependence on a limited number of customers and handset baseband, competitive and royalty-rate pressure, volatile licensing timing and customer shipment visibility, product-market acceptance, foreign-exchange exposure, and reliance on grants and tax benefits. Management also added customer credit risk as a risk factor.
- Q3 net income included $0.4m of net financial income. The 2014 comparison included a $0.4m loss on the Antcor investment; no such loss was recorded in 2015. The company reported no material legal proceedings and said disclosure controls were effective.
Important facts for investors to verify
- Whether royalty growth, particularly from LTE and handset baseband, is sustainable and how shipment trends translate into royalties.
- Revenue and royalty exposure to Spreadtrum and other major customers, and any changes in customer or product concentration.
- Progress in converting connectivity and other non-handset licensing deals into recurring royalties and shipped products.
- Liquidity composition, investment portfolio valuation and the effect of currency movements, especially the euro and Israeli shekel.
- Whether expected operating cash flow and revenue assumptions support management’s stated liquidity runway and growth projections.