CEVA, Inc. — Q2 2017 Form 10-Q
Business context and reporting period. CEVA licenses signal-processing intellectual property to semiconductor and OEM customers for use in mobile, consumer, automotive, industrial and IoT products. This unaudited report covers the quarter and six months ended June 30, 2017; financial comparisons are with the corresponding 2016 periods. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q2 2017 | Q2 2016 | H1 2017 | H1 2016 |
|---|---|---|---|---|
| Revenue | $20.6 million | $17.1 million | $41.9 million | $33.6 million |
| Licensing and related revenue | $10.3 million | $7.5 million | $19.9 million | $16.1 million |
| Royalties | $10.2 million | $9.6 million | $22.0 million | $17.5 million |
| Gross profit / margin | $19.0 million / 92% | $15.7 million / 92% | $38.6 million / 92% | $30.6 million / 91% |
| Operating income | $2.2 million | $2.6 million | $6.5 million | $4.5 million |
| Net income | $3.9 million | $2.7 million | $8.0 million | $4.5 million |
| Diluted earnings per share | $0.17 | $0.13 | $0.36 | $0.21 |
| Operating cash flow | Not separately provided | Not separately provided | $10.6 million | $(1.3) million |
Q2 revenue increased 20% year over year and H1 revenue increased 25%. H1 operating income rose 46%; Q2 operating income fell about 18%, as operating expenses grew faster than revenue. Net income benefited from a tax benefit related to the resolution of a prior-year foreign tax audit. Q2 and H1 net income margins were approximately 19%, versus approximately 16% and 13%, respectively, in 2016.
Balance sheet and liquidity at June 30, 2017: Total assets were $256.3 million; cash and cash equivalents were $17.1 million, short-term bank deposits $29.7 million, marketable securities $73.2 million and long-term bank deposits $50.2 million. Together these liquid investments totaled $170.2 million, up from $156.5 million at year-end 2016. Current assets were $135.2 million and current liabilities $17.2 million. The balance sheet reports no debt. Stockholders’ equity was $229.7 million.
H1 investing cash outflow was $17.7 million, primarily reflecting purchases of bank deposits, securities and equipment. Financing cash inflow was $5.7 million, mainly from exercises of stock-based awards. Cash and cash equivalents ended the period at $17.1 million.
Material changes and operating trends
- Q2 licensing revenue rose 38% and H1 licensing revenue rose 23%, led by vision-technology licensing; management called H1 licensing revenue a record. CEVA signed 13 Q2 license deals, 11 for non-handset baseband applications.
- Royalties increased 6% in Q2 and 26% in H1. Customers reported 620 million chipsets incorporating CEVA technology in H1, up from 456 million; non-handset baseband volumes rose to 123 million from 79 million.
- Non-baseband DSP products represented 32% of Q2 revenue, up from 10% a year earlier; handset and other-device baseband represented 59%, down from 63%.
- H1 research and development expense rose to $20.4 million from $15.7 million. Management attributed higher operating expenses chiefly to lower Israeli Innovation Authority grants, higher headcount and compensation, and accelerated strategic R&D and customer collaboration.
- One customer, Spreadtrum, contributed 23% of Q2 revenue and 24% of H1 revenue. The five largest customers accounted for 67% and 61% of revenue, respectively. Two royalty customers together represented 77% of Q2 royalties and 76% of H1 royalties.
Outlook, risks and unusual items
- CEVA gave no specific revenue or earnings guidance. Management expected cash, deposits, marketable securities and operating cash flow to fund operations for at least 12 months, while noting that revenue and expense assumptions may prove inaccurate.
- Management expected R&D costs to rise in 2017 versus prior years, partly due to accelerated programs and customer production-ramp collaborations. The filing says 2017 Israeli Innovation Authority grants approved were substantially lower than in prior years.
- Management cited growth opportunities in vision, audio, wireless connectivity and IoT. It estimated non-handset baseband royalty-bearing shipments at about 210 million units annually in 2016 and projected 700–900 million annually by 2018; this is a company expectation, not formal financial guidance.
- A $1.8 million tax benefit was recorded following completion of a foreign tax audit; the audit also reduced unrecognized tax benefits by $3.0 million. H1 income tax benefit was $0.2 million, compared with $1.0 million of tax expense in H1 2016.
- Key risks include dependence on a limited number of customers and handset baseband royalties, competitive and pricing pressure, variable timing of licensing deals and customer shipments, foreign-exchange exposure, reliance on government R&D grants and tax benefits, and the execution and commercial returns of increased R&D.
- CEVA plans to adopt the new revenue-recognition standard on January 1, 2018 using the modified retrospective method. Its evaluation was ongoing; management expected most revenue to remain recognized at a point in time, with possible changes for distinct deliverables and incremental contract costs.
Most important facts for investors to verify
- Whether licensing growth and the reported record backlog translate into future revenue, given quarterly deal timing variability.
- Whether royalty growth, chipset shipment trends and diversification beyond handset baseband continue, and how customer concentration evolves.
- Whether higher R&D spending and lower grant support affect operating margins and cash generation.
- How much of reported earnings improvement reflects the one-time tax audit benefit rather than ongoing operations.
- Whether the $170.2 million of liquid investments is readily available for planned operations, considering $130.6 million was held by foreign subsidiaries and repatriation could trigger taxes.
- The eventual impact of the 2018 revenue-recognition adoption and the terms and effects of any future acquisitions or investments.