CEVA, Inc. — Q3 2013 Form 10-Q Summary
Reporting period: Quarter ended September 30, 2013; comparisons are to Q3 and the first nine months of 2012. Amounts are U.S. dollars. CEVA licenses DSP cores and related IP to semiconductor and equipment companies; it reports one business segment.
Financial performance and position
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $10.0 million | $12.0 million | $34.9 million | $40.7 million |
| Licensing and related revenue | $3.9 million | $5.0 million | $15.1 million | $17.0 million |
| Royalties | $6.1 million | $7.0 million | $19.8 million | $23.7 million |
| Gross profit / margin | $8.9 million / 89% | $11.0 million / 91% | $31.1 million / 89% | $37.8 million / 93% |
| Operating income (loss) | $(1.1) million | $2.1 million | $2.0 million | $9.9 million |
| Net income (loss) | $(0.3) million | $2.6 million | $3.6 million | $10.9 million |
| Diluted EPS | $(0.01) | $0.11 | $0.16 | $0.46 |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $2.7 million | $12.7 million |
- Q3 revenue fell 17% year over year; nine-month revenue fell 14%. Licensing revenue declined 20% and 11%, respectively, while royalties declined 14% and 17%.
- Cash and cash equivalents were $11.6 million at September 30. Cash, short- and long-term bank deposits, and marketable securities totaled $153.9 million, versus $158.0 million at year-end 2012. Current assets were $140.0 million and current liabilities $12.3 million.
- The filing reports no borrowings or debt balance. Total liabilities were $19.3 million, principally current operating liabilities and accrued severance.
- Nine-month investing cash flow was $(4.7) million and financing cash flow was $(4.8) million. Cash decreased $6.8 million; share repurchases used $7.2 million.
Material changes and operating developments
- Lower licensing and royalty revenue drove the decline. Management attributed weaker royalties mainly to fewer 2G and EDGE shipments and lower average per-unit royalty rates, partly offset by higher 3G and LTE shipments.
- Licensees reported shipping 200 million chipsets in Q3 and 764 million in the first nine months, compared with 254 million and 779 million in the corresponding 2012 periods.
- Operating expenses rose 13% in Q3 and 5% for nine months. Higher project costs, lower Israeli research grants, and increased equity compensation contributed. R&D was $5.6 million in Q3 and $16.3 million year to date.
- Five customers generated 59% of Q3 revenue and 66% of nine-month revenue. One customer represented 26% of Q3 revenue; two customers represented 31% and 13% year to date.
- CEVA repurchased 442,938 shares in the first nine months at an average $16.23 per share; 2,041,214 shares remained available under the repurchase authorization at quarter-end.
Outlook, risks, and unusual items
- No formal financial revenue or earnings guidance is provided. Management expected cellular-baseband market share to return to approximately 40% for Q3 2013 shipments, after an estimated 34% share in Q2; Q3 shipment market-share data was expected to be reported in Q4.
- Management cited growth opportunities in low-cost 3G/EDGE smartphones, LTE, audio and voice processing, computational photography, embedded vision, and small-cell/macrocell base stations. CEVA signed five Q3 license agreements, including four with first-time customers.
- Management said available cash, deposits, marketable securities, and operating cash flow should fund operations for at least 12 months, while noting this depends on revenue and expense assumptions. Potential acquisitions or investments could require additional capital.
- Key risks include volatile licensing deal timing, reliance on a limited number of customers and royalty payers, handset/mobile-broadband concentration, competitive and royalty-rate pressure, product adoption and shipment uncertainty, foreign-exchange exposure, and international operations. Israeli tax benefits are scheduled to begin expiring in 2014.
- Marketable-securities unrealized losses were considered temporary; no impairment charge was recognized. The filing reports no legal proceeding expected to have a material effect. Disclosure controls were concluded effective as of September 30, 2013.
Important facts for investors to verify
- Whether the anticipated recovery in baseband market share and shipments materialized, and how subsequent chipset shipments affected royalties.
- Revenue and royalty concentration by customer, including the ongoing contribution and negotiating position of major royalty payers.
- Whether licensing activity and new-market agreements offset continued pressure in 2G/EDGE products and per-unit royalties.
- Cash generation, investment portfolio quality, and the effect of share repurchases and any prospective acquisitions on liquidity.
- The timing and financial impact of the expiration of Israeli tax benefits and any changes in research-grant funding.