CEVA, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Unaudited results are prepared under U.S. GAAP. CEVA licenses signal-processing intellectual property for wireless connectivity and smart-sensing applications, including cellular, IoT, AI, imaging, audio, and sensor-fusion technologies.
Financial performance
Amounts below are in millions of U.S. dollars except per-share data and percentages.
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Revenue | $23.47 | $21.41 | $58.84 | $56.48 |
| Licensing and related revenue | $11.27 | $9.79 | $33.08 | $29.91 |
| Royalty revenue | $12.20 | $11.63 | $25.76 | $26.57 |
| Gross profit | $20.70 | $19.41 | $51.56 | $50.51 |
| Gross margin | 88% | 91% | 88% | 89% |
| Operating income (loss) | $(0.27) | $2.15 | $(5.38) | $(3.42) |
| Net income (loss) | $0.78 | $2.54 | $(3.03) | $(1.73) |
| Diluted earnings (loss) per share | $0.03 | $0.11 | $(0.14) | $(0.08) |
Q3 revenue grew 10% year over year, driven primarily by licensing growth; nine-month revenue rose 4%. Q3 licensing revenue increased 15%, while royalties increased 5%; nine-month licensing revenue rose 11%, but royalties declined 3%. Operating expenses were $21.0 million in Q3 and $56.9 million for nine months, up from $17.3 million and $53.9 million, respectively. Research and development expense rose to $13.9 million in Q3 and $38.6 million for nine months. Financial income, net, was $0.60 million in Q3 and $2.30 million for nine months.
Cash, liquidity and capital
- Cash, cash equivalents, short- and long-term bank deposits, and marketable securities totaled $147.6 million at September 30, 2019, down from $167.7 million at December 31, 2018. Of the September total, $118.7 million was held by foreign subsidiaries; management said it intended to permanently reinvest foreign earnings.
- Current assets were $174.8 million and current liabilities were $25.7 million. The balance sheet reports no borrowings or other debt; lease liabilities totaled $10.3 million, including $2.4 million current.
- Nine-month operating cash flow was $4.3 million, compared with $4.1 million a year earlier. Investing cash flow was $(9.3) million and financing cash flow was $(2.4) million. Cash and cash equivalents decreased by $7.4 million to $14.9 million.
- Cash outlays included $11.0 million for the Hillcrest Labs acquisition and $10.0 million for Immervision technology rights. The company repurchased $4.9 million of shares in the first nine months; none were repurchased in Q3.
Material changes and notable items
- In July, CEVA acquired Hillcrest Labs for an aggregate stated purchase price of $11.2 million, including contingent consideration and escrow. Its results are included from July 19. The preliminary allocation included $4.5 million of goodwill and acquired intangible assets.
- In August, CEVA invested $10 million in Immervision for exclusive licensing rights to specified image-processing technology; the transaction was accounted for as an asset acquisition.
- Acquisition-related deal costs and a lease write-off totaled $0.85 million and were recorded in general and administrative expense. Newly acquired and invested-in technologies also increased intangible-asset amortization.
- CEVA adopted the new lease standard on January 1, 2019, recording operating-lease right-of-use assets of $9.8 million and lease liabilities of $9.5 million at adoption, without restating comparative periods.
- A completed foreign tax audit resulted in a $1.0 million tax benefit during the quarter and nine-month period. Nine-month net loss nevertheless widened year over year.
Outlook, management commentary and risks
- Management expected Q4 2019 royalties to increase more than 10% sequentially, potentially making it one of the company’s highest royalty quarters. This was an expectation, not a reported result.
- Management’s previously stated 2022 targets were licensing and related revenue approximately 10%–20% above 2018, royalty revenue approximately twice 2018, and non-GAAP net income approximately three times 2018. These are forward-looking targets, not guarantees.
- Management anticipated approximately $5 million of additional R&D expense in 2019 versus 2018, cost of revenue increasing by up to $2 million, and approximately $1.5 million of ongoing quarterly Hillcrest expenses from Q3, excluding amortization and equity compensation.
- Non-cellular baseband shipments were reported at a record 123 million units in Q3, up 29% year over year. CEVA signed 14 Q3 licensing deals, all for non-handset baseband applications, and reported 292 million customer chipsets incorporating its technology for the quarter.
- Management said existing liquidity and operating cash flow should fund operations for at least 12 months, while cautioning that revenue and expense assumptions may prove inaccurate. It also identified possible future acquisitions or investments as uses of cash.
- Key risks include dependence on a limited number of customers and royalty payers, handset-baseband exposure, royalty-rate and shipment volatility, long licensing sales cycles, semiconductor cyclicality, competition and customer in-house development, international and trade-policy exposure, currency movements, and reliance on R&D grants and tax benefits. Five largest customers accounted for 54% of Q3 revenue and 48% of nine-month revenue; one customer represented 15% in both periods.
- The company reported no legal proceedings it believed could materially affect its business or financial condition, and no material change to internal control over financial reporting during the quarter. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether expected Q4 royalty growth and the longer-term 2022 targets were achieved, and the assumptions underlying those forecasts.
- How Hillcrest and Immervision contribute to licensing, royalties, operating costs, and cash generation; also whether the preliminary Hillcrest purchase-price allocation changed.
- Trends in licensing versus royalty revenue, gross margin, operating expenses, and operating cash flow, particularly given nine-month operating and net losses.
- Customer and royalty-payer concentration, handset shipment exposure, and the impact of trade restrictions or customer business changes.
- Availability and location of liquidity, including the foreign-held cash balance, investment credit exposure, and the company’s stated reinvestment intentions.