CEVA, Inc. — FY2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. The filing also reports the quarter ended December 31, 2015; figures below are in U.S. dollars unless noted. Annual financial statements are audited, and the auditor issued unqualified opinions on the statements and internal controls.
Business context
CEVA licenses signal-processing intellectual property (IP), including DSP cores and platforms, Wi-Fi and Bluetooth connectivity, and related technologies. Licensees incorporate CEVA IP into chips for mobile, consumer, automotive, industrial and IoT applications. Revenue comes mainly from licensing and related fees and royalties on customer shipments. CEVA acquired Wi-Fi and Bluetooth IP provider RivieraWaves in July 2014.
Financial performance and liquidity
| Metric | FY2015 | FY2014 | Change / context |
|---|---|---|---|
| Revenue | $59.5 million | $50.8 million | Up 17.1% |
| Licensing and related revenue | $32.1 million | $28.3 million | Up 13.4% |
| Royalties | $27.4 million | $22.5 million | Up 21.8% |
| Gross profit / margin | $54.1 million / 90.9% | $45.8 million / 90.2% | Margin improved 0.7 percentage points |
| Operating income / margin | $6.3 million / 10.6% | $1.5 million / 2.9% | Improved from prior year |
| Net income (loss) | $6.3 million | $(0.8) million | Returned to profitability |
| Diluted EPS | $0.30 | $(0.04) | |
| Cash from operating activities | $19.4 million | $9.1 million |
Fourth quarter: Revenue was $16.1 million, versus $13.8 million in Q4 2014, up about 16%. Q4 2015 operating income was $2.2 million and net income was $2.3 million, compared with an operating loss of $2.3 million and net loss of $1.9 million in Q4 2014. Diluted EPS was $0.11.
Liquidity and debt: At year-end, cash and cash equivalents, short- and long-term bank deposits, and marketable securities totaled $139.3 million, up from $129.9 million in 2014. Working capital was $87.0 million, down from $93.8 million. The company reported no long-term debt or capital-lease obligations. Contractual obligations totaled $5.0 million, primarily leases and purchase commitments. Cash used in investing activities was $9.6 million; financing activities used $7.0 million, including $10.1 million of share repurchases, partly offset by $6.7 million from stock-award exercises.
Material changes and operating developments
- Royalties rebounded after declining in 2014, mainly as CEVA-powered LTE smartphone shipments accelerated; customers shipped 70 million LTE chipsets in 2015, up 541% year over year.
- Licensing revenue reached a record annual level. CEVA signed 47 licensing deals, including 21 with first-time customers and 43 for non-handset-baseband applications.
- Connectivity products rose to 18% of revenue from 13% in 2014; DSP products accounted for 82%, down from 87%. Bluetooth customers shipped more than 121 million chips incorporating CEVA IP, up 206% year over year.
- Research and development expense increased to $28.1 million from $25.8 million, partly reflecting RivieraWaves staffing and project costs. Total operating expenses rose 7.7% to $47.8 million.
- Asia Pacific generated 71.7% of revenue; China alone accounted for 50.4%. Spreadtrum represented 31% of total revenue, compared with 25% in 2014.
Outlook, risks and unusual items
- Management gave no specific numerical revenue or earnings guidance. It expects current product lines to remain a significant part of 2016 revenue and projects non-handset royalty-bearing shipments could grow from about 167 million units in 2015 to 700–900 million annually by 2018. These are forward-looking expectations, not guarantees.
- Management said available cash, deposits, marketable securities and operating cash flow should fund operations for at least 12 months, while cautioning that revenue and expense assumptions may not prove accurate.
- Key risks include dependence on a concentrated customer and royalty base, handset-baseband exposure, competitive and royalty-rate pressure, volatile customer shipments and licensing timing, long design cycles, foreign-exchange exposure, and geopolitical or operational risks related to Israel. Spreadtrum was 31% of revenue; five largest royalty-paying customers together represented 87% of royalties.
- Israeli investment-program tax benefits are scheduled to begin expiring in 2017; continued eligibility for government R&D grants and French research tax credits also affects costs and taxes. Research grants were $5.0 million in 2015.
- CEVA paid the remaining $3.7 million RivieraWaves contingent consideration in 2015. RivieraWaves employee retention costs were approximately $3.4 million in total; $1.0 million was paid during 2015.
- The company disclosed a $2.178 million cumulative reclassification between retained earnings and additional paid-in capital relating to prior-period treasury-share reissuances. Management considered it immaterial to prior periods; 2015 net income and total stockholders’ equity were unaffected.
- No material adverse legal proceedings were reported. No goodwill impairment or other-than-temporary impairment of marketable securities was recorded in 2015.
Important facts for investors to verify
- Whether royalty growth and LTE adoption continue, and whether handset-baseband concentration declines as non-handset and connectivity products expand.
- Revenue exposure to Spreadtrum and other major customers, including customer shipment trends, contract renewals and potential royalty-rate changes.
- Execution and commercial uptake of the 2015 licensing wins and management’s non-handset shipment outlook.
- Liquidity composition, investment credit and interest-rate exposure, and the impact of ongoing buybacks and future acquisition spending.
- Timing and potential effects of Israeli tax-benefit expirations, R&D grant eligibility and outstanding uncertain tax positions.