CEVA, Inc. — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011; financial statements are unaudited. CEVA licenses DSP cores and related intellectual property to semiconductor companies and equipment manufacturers. Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $14.8 | $10.7 | $44.3 | $31.9 |
| Gross profit | $14.0 | $9.7 | $41.7 | $29.3 |
| Operating income | $4.7 | $2.3 | $13.6 | $6.1 |
| Net income | $4.9 | $3.0 | $13.7 | $7.2 |
| Diluted EPS | $0.20 | $0.13 | $0.57 | $0.32 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $18.0 | $10.8 |
- Revenue grew 39% in both the quarter and nine-month period. Royalties rose 67% in Q3 and 71% year to date; licensing revenue rose 17% and 13%, respectively. Other revenue declined 12% in Q3 and 8% year to date.
- Gross margin was 95% in Q3 and 94% year to date, versus 91% and 92% in the comparable 2010 periods. Operating expenses increased 26% in Q3 and 21% year to date. Equity-based compensation was $1.4 million in Q3 and $3.5 million year to date.
- At September 30, CEVA reported $22.7 million cash and cash equivalents, $34.5 million short-term bank deposits, $80.0 million marketable securities, and $18.4 million long-term deposits: $155.6 million combined. Total assets were $210.7 million; current liabilities were $11.5 million. No borrowings or debt are reported on the balance sheet.
- Nine-month investing cash flow was negative $21.4 million, mainly reflecting investment in deposits and marketable securities; financing cash flow was positive $8.9 million. Cash and cash equivalents increased $5.6 million to $22.7 million.
Changes, outlook, and risks
- Growth reflected higher royalty volume and licensing activity, while the average per-unit royalty rate decreased. Licensees reported 250 million CEVA-powered chipsets shipped in Q3 and 731 million for the first nine months, versus 141 million and 391 million, respectively, in 2010.
- Management said operating expenses would be higher in 2011 than in 2010, citing new option grants, increased R&D investment and employee costs, and foreign-exchange effects. No specific revenue or earnings guidance was provided.
- Management expected cash, deposits, marketable securities, and operating cash flow to fund operations for at least 12 months, while cautioning that revenue and expense assumptions may not prove accurate. Potential acquisitions could require additional financing.
- Management highlighted new licensing agreements for the CEVA-MM3000 video/imaging platform and audio DSP, and cited potential demand from smartphones, emerging-market phones, mobile broadband, and connected devices.
- Key risks include competition and pricing pressure, declining royalty rates, reliance on cellular-related markets and a limited number of customers, lengthy and variable sales cycles, customer product-market acceptance, economic and semiconductor-industry volatility, foreign-currency exposure, and Israeli operations and tax-benefit conditions. Five largest customers represented 78% of Q3 and 62% of nine-month revenue.
- Marketable securities had $1.2 million in gross unrealized losses at quarter-end; management considered the losses temporary and recorded no impairment charge. The filing reports no legal proceedings believed likely to materially affect the company. Disclosure controls were deemed effective.
Important facts for investors to verify
- Whether strong reported chipset shipments continue to translate into royalty growth, and how declining per-unit rates affect future revenue and margins.
- Customer concentration and exposure to handset and cellular markets, including the effect of major customers’ product launches and sales.
- Whether higher planned R&D, compensation, and foreign-currency costs remain consistent with management’s outlook.
- Credit quality, liquidity, and recoverability of the investment portfolio, including unrealized losses and deposits held above applicable insured limits.
- Continued eligibility for Israeli tax benefits and research grants, and the potential impact of currency movements and geopolitical conditions.