CEVA, Inc. — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012. Unaudited results; amounts below are in U.S. dollars unless noted. CEVA licenses programmable DSP cores and related intellectual property to semiconductor and equipment companies.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $12.0 million | $14.8 million | $40.7 million | $44.3 million |
| Licensing revenue | $4.2 million | $5.2 million | $14.7 million | $15.5 million |
| Royalty revenue | $7.0 million | $8.8 million | $23.7 million | $26.2 million |
| Gross margin | 91% | 95% | 93% | 94% |
| Operating income | $2.1 million | $4.7 million | $9.9 million | $13.6 million |
| Net income | $2.6 million | $4.9 million | $10.9 million | $13.7 million |
| Diluted earnings per share | $0.11 | $0.20 | $0.46 | $0.57 |
Revenue declined 19% in Q3 and 8% for the first nine months year over year. Nine-month royalty revenue fell 10%; management attributed the decline mainly to lower average per-unit royalties, fewer 2G product shipments, and lower consumer non-baseband shipments, partly offset by growth in 3G shipments. Customers reported shipments of 254 million CEVA-based chipsets in Q3 and 779 million year to date, versus 250 million and 731 million in 2011.
Operating expenses were $8.8 million in Q3 and $27.8 million year to date, slightly below comparable 2011 periods. Lower revenue and gross margin contributed to weaker operating income and net income. Financial income was $0.7 million in Q3 and $2.7 million year to date.
Cash, liquidity and capital
- At September 30, CEVA held $21.7 million in cash and equivalents, $68.0 million in short-term bank deposits, $52.0 million in marketable securities, and $14.2 million in long-term deposits: approximately $155.8 million combined, compared with $164.5 million at December 31, 2011.
- Operating cash flow was $12.7 million for the first nine months, down from $18.0 million in 2011. Investing activities provided $15.5 million; financing activities used $21.4 million, principally reflecting share repurchases.
- CEVA repurchased 1,239,222 shares during the nine months for $23.7 million, at an average $19.09 per share. 727,478 shares remained authorized for repurchase at September 30.
- The balance sheet reports no borrowings or debt. Current liabilities were $12.0 million and stockholders’ equity was $195.3 million.
Material changes, outlook and risks
- Handset and mobile broadband markets generated 75% of Q3 revenue and 78% of nine-month revenue. Five largest customers represented 70% and 65% of total revenue, respectively; the five largest royalty payers represented 79% and 82% of royalty revenue.
- Asia Pacific contributed 53% of nine-month revenue, up from 40% in 2011; China contributed 34%, while Europe and the Middle East declined to 26% from 34%.
- Management expected 2012 annual revenue to be below 2011, while indicating royalty revenue might increase sequentially in Q4 after several quarters of declines. It also anticipated lower annual operating expenses than in 2011. These are expectations, not guaranteed guidance.
- Management cited macroeconomic uncertainty, 3G inventory declines ahead of new smartphone launches, and pricing pressure in low-cost 2G phones as factors weighing on results. Competitive pricing, customer and handset-market concentration, long sales and design cycles, foreign-currency exposure, and dependence on customer product success are key risks.
- CEVA stated available cash, deposits, marketable securities, and operating cash flow should fund operations for at least 12 months. It cautioned that revenue and expense assumptions may not prove accurate and that acquisitions or investments could require additional capital.
- Israeli tax benefits are conditional and are scheduled to begin expiring gradually in 2014. The filing reports no legal proceedings expected to have a material effect. Management concluded disclosure controls were effective as of September 30, 2012.
Important facts for investors to verify
- Whether Q4 royalty revenue rebounded and full-year 2012 revenue was below 2011, as management anticipated.
- Whether shipment growth, especially in 3G and newer markets, can offset lower per-unit royalties and declining 2G demand.
- How customer concentration and handset/mobile-broadband exposure affect future revenue and cash generation.
- Whether cash and investment balances, including bank-counterparty exposure, remain adequate while supporting operations, repurchases, and any acquisitions or investments.
- Whether Israeli tax-benefit conditions remain satisfied and how the scheduled expirations affect the effective tax rate.