CEVA, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; financial statements are unaudited. Unless stated otherwise, dollar amounts are U.S. dollars. CEVA licenses programmable DSP cores and related intellectual property to semiconductor and equipment companies. Its revenue comes primarily from licensing and royalties.
Key financial results
Amounts in millions, except per-share data and margins.
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Licensing and related revenue | $5.034 | $6.006 |
| Royalties | $7.082 | $9.106 |
| Total revenue | $12.116 | $15.112 |
| Gross profit / margin | $10.541 / 87% | $14.242 / 94% |
| Operating income / margin | $1.309 / 10.8% | $4.598 / 30.4% |
| Net income / net margin | $1.705 / 14.1% | $4.857 / 32.1% |
| Diluted earnings per share | $0.08 | $0.20 |
| Cash from operating activities | $0.670 | $5.616 |
- Revenue declined 20% year over year. Licensing and related revenue fell 16%; royalties fell 22%.
- Operating expenses were $9.232 million, down from $9.644 million. R&D was $5.039 million; sales and marketing was $2.355 million; general and administrative expense was $1.838 million.
- Cash, short-term bank deposits, marketable securities and long-term bank deposits totaled approximately $156.9 million at March 31, versus $158.0 million at December 31, 2012. Cash and cash equivalents alone were $10.0 million.
- Current assets were $147.1 million and current liabilities $14.2 million. The balance sheet reports no borrowings or other debt; the filing does not separately discuss a debt facility.
- Net cash used in investing activities was $7.846 million; net cash used in financing was $1.176 million. The company repurchased 128,960 shares for $2.002 million.
Material changes and management commentary
- Lower royalty revenue reflected lower average per-unit royalty rates, declining 2G baseband volumes, chip-price erosion and lower consumer-electronics shipments. Higher 3G shipment volumes partly offset these effects. Customers reported shipments of 283 million CEVA-powered chipsets, compared with 278 million a year earlier.
- Higher customization and subcontractor costs contributed to cost of revenue rising to $1.575 million from $0.870 million, reducing gross margin to 87% from 94%. Operating expenses declined, but not enough to offset lower revenue and gross profit.
- Operating cash flow dropped to $0.670 million from $5.616 million. The filing cites increased receivables and prepaid expenses, lower deferred revenue and other working-capital movements.
- CEVA signed eight license agreements during the quarter, including three new CEVA-XC4000 licensees, and a strategic agreement with a tier-one mobile-infrastructure company for next-generation products.
- Management said available cash, deposits and marketable securities, together with operating cash flow, should fund operations for at least 12 months, while cautioning that revenue and expense assumptions may prove inaccurate. No specific revenue or earnings guidance is provided.
Risks, contingencies and unusual items
- Customer and market concentration is significant: three customers represented 17%, 14% and 12% of revenue, and handsets and mobile broadband generated 81% of revenue. Five largest customers accounted for 59% of revenue.
- Management highlighted unpredictable licensing deal timing, limited visibility into customer shipments, royalty-rate and pricing pressure, competition, product-cycle and semiconductor-market volatility, and dependence on customer product acceptance. The filing notes that Q2 is usually the weakest royalty quarter, though the decline varies.
- Foreign-exchange exposure includes expenses denominated mainly in Israeli shekels, with some euro and pound exposure. CEVA hedges portions of forecast non-U.S.-dollar payroll; it cautions that hedging may not fully offset currency movements.
- Marketable securities had $248,000 of gross unrealized losses at quarter end. Management considered these losses temporary, reported no other-than-temporary impairment, and said it did not intend or expect to need to sell the securities before recovery or maturity. Bank deposits exceed applicable insured limits, exposing the company to financial-institution risk.
- Israeli tax benefits are scheduled to begin expiring gradually in 2014 and depend on continued compliance with program requirements. CEVA also reported receiving $273,000 in Israeli government R&D grants for the quarter; grants could be reduced, withheld or repayable if conditions are not met.
- The company reported no legal proceedings believed likely to have a material effect. Management stated that disclosure controls were effective and that no material change in internal control over financial reporting occurred during the quarter.
Important facts for investors to verify
- Whether subsequent quarters show stabilization in royalties, licensing revenue and gross margin, especially given the quarter’s lower revenue and operating cash flow.
- How customer concentration, handset/mobile-broadband exposure and royalty-rate or chip-price pressure affect future revenue and cash generation.
- Whether the large investment portfolio remains liquid and recovers any temporary unrealized losses, and how uninsured bank deposits are managed.
- The timing and impact of Israeli tax-benefit expirations, and CEVA’s continued eligibility for tax benefits and government R&D grants.
- Whether the new license agreements and mobile-infrastructure opportunity convert into customer shipments and recurring royalties; the filing does not quantify expected future revenue from these agreements.