CEVA, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Unaudited results are presented against the corresponding 2019 periods. CEVA licenses wireless connectivity and smart-sensing intellectual property to semiconductor and device companies.
Financial performance
| Metric | Q2 2020 | Q2 2019 | H1 2020 | H1 2019 |
|---|---|---|---|---|
| Revenue | $23.6m | $18.4m | $47.2m | $35.4m |
| Licensing and related revenue | $13.5m | $10.8m | $28.0m | $21.8m |
| Royalties | $10.1m | $7.6m | $19.2m | $13.6m |
| Gross profit / margin | $20.6m / 87% | $15.9m / 86% | $41.5m / 88% | $30.9m / 87% |
| Operating loss | $(1.5)m | $(2.2)m | $(3.2)m | $(5.1)m |
| Net loss | $(1.1)m | $(1.5)m | $(2.3)m | $(3.8)m |
| Net loss per diluted share | $(0.05) | $(0.07) | $(0.10) | $(0.17) |
Revenue rose 28% in Q2 and 34% in H1. Royalty revenue increased 33% and 42%, respectively; licensing revenue increased 25% and 28%. Management attributed growth to connectivity licensing, including 5G, base-station and Bluetooth technologies, and royalties from handset baseband, base-station and IoT products. Customers reported shipments of 231 million chipsets incorporating CEVA technology in Q2, up 6%, and 492 million in H1, up 25%.
Operating expenses were $22.1m in Q2 and $44.6m in H1, up from $18.1m and $36.0m. R&D expense was $15.0m in Q2 and $30.1m in H1. Higher staffing and Hillcrest Labs costs, lower Israeli research grants, greater credit-loss allowances and equity compensation contributed to expense growth. Hillcrest-related and Immervision-related intangible amortization also increased.
Cash, liquidity and balance sheet
- Cash and cash equivalents were $30.0m at June 30; short-term bank deposits were $58.8m, marketable securities $67.3m and long-term bank deposits $1.3m. These totaled $157.4m, versus $150.0m at December 31, 2019.
- Operating cash flow was $12.6m for H1, compared with $1.3m in H1 2019. Cash and cash equivalents increased $7.2m to $30.0m.
- Net cash used in investing was $2.0m; net cash used in financing was $3.4m. CEVA repurchased 202,392 shares for $4.8m during H1; no shares were repurchased in Q2.
- Total liabilities were $43.9m, including $9.8m in operating lease liabilities. The balance sheet reports no borrowings or other debt.
- CEVA reported $252.4m of stockholders’ equity. $141.4m of its cash, deposits and marketable securities was held by foreign subsidiaries; repatriation could incur taxes.
Changes, outlook and risks
- Q2 gross margin improved to 87% from 86%; H1 margin rose to 88% from 87%. Operating and net losses narrowed versus 2019 despite higher operating expenses.
- Management said the pandemic’s effect on Q2 and H1 results was relatively insignificant, but it could not estimate the full-year 2020 impact. It cited possible near-term softness in consumer electronics demand and uncertainty in royalty revenue, while noting ongoing customer design activity.
- Management expects R&D expenses to increase in 2020, partly due to a full year of Hillcrest Labs expenses. It believes available liquid resources and operating cash flow can fund operations for at least 12 months, subject to revenue and expense assumptions.
- CEVA completed eight Q2 licensing deals: five connectivity and three smart-sensing agreements. It highlighted automotive powertrain, wearables, earbuds and IoT applications, and expects base-station and IoT royalties to grow over the next few years; these are management expectations, not quantified guidance.
- Key risks include COVID-19-related demand and operating uncertainty, revenue and royalty dependence on a limited number of customers, handset-market exposure, competitive and royalty-rate pressure, long licensing sales cycles, international and trade risks, foreign-exchange exposure, and reliance on grants and tax benefits. Five largest customers generated 61% of Q2 revenue and 48% of H1 revenue. No material litigation was reported.
Investor facts to verify
- Whether royalty growth and chipset shipments continue, particularly in handset, base-station and IoT markets.
- Customer concentration and the sustainability of revenue from major licensees and royalty payers.
- The pandemic’s effect on consumer demand, customer shipments, collections and full-year royalties.
- Drivers of higher operating costs, credit-loss allowances and the expected R&D spending increase.
- Availability and investment risk of cash held abroad, including any repatriation tax implications; the filing states marketable-security losses were considered temporary and no impairment was recorded.