CEVA, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Unaudited results; amounts below are U.S. dollars unless noted. CEVA licenses signal-processing intellectual property for wireless connectivity and smart-sensing applications, including 5G, Bluetooth, Wi-Fi, AI, imaging, audio, and sensor fusion.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $25.0 million | $23.5 million | $72.2 million | $58.8 million |
| Licensing and related revenue | $12.4 million | $11.3 million | $40.4 million | $33.1 million |
| Royalties | $12.5 million | $12.2 million | $31.7 million | $25.8 million |
| Gross profit / margin | $22.5 million / 90% | $20.7 million / 88% | $63.9 million / 89% | $51.6 million / 88% |
| Operating income (loss) | $0.002 million | ($0.3 million) | ($3.2 million) | ($5.4 million) |
| Net income (loss) | ($0.7 million) | $0.8 million | ($3.0 million) | ($3.0 million) |
| Diluted EPS | ($0.03) | $0.03 | ($0.14) | ($0.14) |
- Revenue increased 6% in Q3 and 23% for the first nine months year over year. Nine-month growth came from both licensing and royalties.
- Q3’s return to a net loss despite higher revenue primarily reflected income tax expense of $1.8 million, versus a $0.4 million tax benefit a year earlier. Management cited nonrefundable withholding taxes and a prior-year tax-audit benefit.
- Research and development expense rose to $15.6 million in Q3 and $45.7 million year to date, including higher headcount and Hillcrest Labs-related costs. Nine-month equity-based compensation was $10.1 million, up from $7.8 million.
Cash, liquidity, and balance sheet
- Cash, cash equivalents, short-term bank deposits, and marketable securities totaled $141.7 million at September 30; adding $11.4 million of long-term bank deposits brings total cash and investments to approximately $153.1 million, versus $150.0 million at December 31, 2019.
- Operating cash flow was $8.3 million for the first nine months, compared with $4.3 million in 2019. Investing activities used $7.3 million and financing activities used $1.9 million. Cash and cash equivalents ended at $22.1 million.
- Total assets were $301.6 million and stockholders’ equity was $256.6 million. The balance sheet reports no borrowings; operating lease liabilities totaled $10.5 million, including $2.5 million current.
- Approximately $134.2 million of cash, deposits, and marketable securities was held by foreign subsidiaries. Management says it intends to permanently reinvest foreign earnings; repatriation for U.S. use could entail additional taxes.
- CEVA repurchased 202,392 shares for $4.8 million in the first nine months; no shares were repurchased in Q3. A further 497,608 shares remained authorized for repurchase.
Business developments and material changes
- Q3 licensing revenue increased 10% year over year; royalty revenue increased 3%. For the first nine months, licensing revenue rose 22% and royalties rose 23%.
- CEVA signed 13 Q3 licensing deals—five in connectivity and eight in smart sensing; six were with first-time customers. Twelve deals were for base-station or IoT applications. A deal with an automotive semiconductor company targeted ADAS.
- Base-station and IoT royalties reached a quarterly record of $7.9 million, up 105% year over year; shipments in that category reached a record 200 million devices. Total reported shipments of chipsets incorporating CEVA technology were 349 million in Q3 and 841 million year to date.
- Handset royalties benefited from a recovery in low-tier 4G smartphone shipments to India and other developing markets. Premium-tier smartphone royalties declined year over year: Apple’s new 5G smartphone series uses a modem supplier that does not incorporate CEVA technology.
- Asia Pacific accounted for 67% of nine-month revenue; China alone contributed $37.7 million, or 52%. Five largest customers contributed 52% of Q3 revenue and 46% year to date. UNISOC contributed 18% of Q3 revenue.
Outlook, risks, and unusual items
- Management expects R&D expenses to continue increasing in 2020, partly because of a full year of Hillcrest Labs costs. No specific revenue or earnings guidance for the full year is provided in the filing.
- Management believes cash, investments, and operating cash flow are sufficient to fund operations for at least 12 months, but says the pandemic’s duration and financial impact remain uncertain. It cautions that prolonged COVID-19 disruption could adversely affect operations, financial position, and liquidity, and that 2020 royalty revenue is less certain.
- COVID-19 had not materially affected reported Q3 or nine-month results according to management, but consumer spending softness and emerging-market handset demand remain concerns. CEVA said customer design activity and interest persisted.
- Key risks include customer and royalty concentration, competitive and pricing pressure, dependence on handset baseband and successful expansion into new markets, long licensing sales cycles, semiconductor-industry cyclicality, international and U.S.-China trade exposure, currency fluctuations, and reliance on government grants and tax benefits.
- Foreign-exchange hedging generated a net gain of $0.5 million year to date. Marketable securities were corporate bonds; management considered unrealized losses temporary and recorded no impairment. The filing reports no material legal proceedings and no material change in internal controls.
Important facts for investors to verify
- Whether record base-station and IoT royalties and shipments continue, and whether growth offsets handset royalty pressure, including the Apple-related loss.
- How customer concentration and reported customer shipments evolve; confirm the effect of large customers and royalty estimates on quarterly results.
- Whether licensing growth converts into sustained royalties and whether new connectivity, sensing, AI, and automotive design wins reach commercial shipments.
- The trajectory of R&D, stock-based compensation, and tax expense, including nonrefundable withholding taxes and the availability of Israeli and French tax benefits or grants.
- The actual duration and business effects of COVID-19, and whether management’s liquidity assessment remains valid given foreign-held funds and possible repatriation taxes.