CEVA, Inc. — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013. Financial statement amounts below are in U.S. dollars; income and cash-flow figures are unaudited. CEVA licenses DSP cores and related IP to semiconductor and equipment companies.
Financial performance
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Revenue | $12.8m | $13.6m | $24.9m | $28.7m |
| Licensing and related revenue | $6.1m | $6.0m | $11.2m | $12.0m |
| Royalties | $6.7m | $7.6m | $13.8m | $16.7m |
| Gross profit / margin | $11.7m / 91% | $12.6m / 93% | $22.3m / 89% | $26.8m / 93% |
| Operating income / margin | $1.8m / 14% | $3.2m / 24% | $3.1m / 13% | $7.8m / 27% |
| Net income | $2.2m | $3.5m | $3.9m | $8.3m |
| Diluted EPS | $0.10 | $0.15 | $0.17 | $0.35 |
| Operating cash flow | Not separately provided for Q2 | $1.4m | $9.9m |
Liquidity and capital
- At June 30, CEVA reported $7.5m cash and equivalents, $39.4m short-term bank deposits, $79.3m marketable securities, and $28.2m long-term bank deposits: $154.4m combined, versus $158.0m at year-end 2012.
- Total assets were $218.1m and stockholders’ equity $198.5m. The balance sheet reports no borrowings or other debt; liabilities consisted principally of $12.9m current liabilities and $6.7m accrued severance.
- Cash and equivalents fell $10.9m to $7.5m in the first half. Investing activities used $8.8m and financing activities used $3.4m, including $4.9m of share repurchases.
- The board authorized an additional 2.0m-share repurchase in July 2013. At June 30, 179,414 shares remained under the prior authorization.
Changes and management commentary
- Q2 revenue declined 6% year over year; first-half revenue declined 13%. Royalty revenue fell 12% in Q2 and 18% in the first half, reflecting lower average per-unit royalties, price erosion, and reduced consumer-electronics shipments. Higher 3G volumes partly offset these pressures.
- First-half licensing revenue was down 7%, while Q2 licensing revenue rose 2%. CEVA signed six Q2 license agreements, including two for its MM3101 imaging and vision platform and one for TeakLite-4 audio technology.
- Operating income and net income declined substantially. Lower royalty revenue and higher cost of revenue reduced gross margin; operating expenses were nearly flat for the half, but increased 6% in Q2.
- First-half operating cash flow fell to $1.4m from $9.9m, with a $3.0m increase in receivables among the main uses of operating cash. Management cited timing variability in customer receipts and payments.
- Management said available cash, deposits, marketable securities, and operating cash flow should fund operations for at least 12 months, subject to revenue and expense assumptions. No numerical revenue or earnings guidance was provided.
- Management highlighted potential growth in lower-cost 3G smartphones, LTE, imaging, vision, audio, and small-cell networks. It cited a preliminary estimate of about 44% share of worldwide cellular-baseband shipments incorporating CEVA technology in Q1 2013.
Risks, contingencies, and unusual items
- Customer concentration is significant: two customers represented 47% and 14% of Q2 revenue; five largest customers accounted for 82%. Four royalty customers together generated 86% of Q2 royalty revenue. Loss of a major customer could materially affect results.
- Handsets and mobile broadband generated 85% of Q2 revenue and 83% of first-half revenue. CEVA identified competitive pricing, royalty-rate reductions, product shipment volatility, long sales cycles, and limited visibility into customer shipments as key risks.
- Israeli tax benefits are scheduled to begin expiring in 2014 and depend on continued compliance with program conditions. Reduced Israeli government R&D grants could also raise expenses; $499,000 of grants was received in the first half.
- Available-for-sale securities had $775,000 of gross unrealized losses at June 30, all reported as less than 12 months old. Management considered the losses temporary and recorded no impairment charge.
- Foreign-currency exposure arises mainly from payroll and other costs in NIS, euros, and pounds. CEVA hedges portions of anticipated foreign-currency payroll; hedging may not fully offset currency movements.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. The company reported no legal proceedings expected to have a material effect.
Important facts for investors to verify
- Whether royalty trends, per-unit rates, and customer shipments stabilize, particularly as 3G/LTE adoption offsets 2G and consumer-electronics weakness.
- Whether the Q2 MM3101 and other licensing agreements convert into product launches and recurring royalties, and how concentrated future revenue remains.
- Why operating cash flow weakened and whether receivables and other working-capital movements reverse.
- The sustainability of the $154.4m cash, deposits, and securities balance, including investment valuation and counterparty risks.
- The timing and financial impact of Israeli tax-benefit expirations beginning in 2014, and continued eligibility for government grants.
- The terms and execution of the additional July 2013 share-repurchase authorization and its effect on capital allocation.