CEVA, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited. CEVA licenses signal-processing and AI intellectual property (IP) to semiconductor and equipment makers for use in mobile, connectivity, automotive, consumer and IoT products. Financial amounts below are in U.S. dollars; millions unless noted.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Total revenue | $17.6 million | $21.3 million |
| Licensing and related revenue | $10.1 million | $9.5 million |
| Royalties | $7.5 million | $11.8 million |
| Gross profit / margin | $15.6 million / 89% | $19.6 million / 92% |
| Operating income (loss) | $(2.9) million | $4.3 million |
| Net income (loss) | $(2.2) million; $(0.10) per share | $4.1 million; $0.19 per share |
| Operating cash flow | $1.8 million | $6.3 million |
Operating expenses rose to $18.5 million from $15.2 million, including R&D expense of $12.0 million versus $9.9 million. Higher headcount, compensation, foreign-exchange costs and equity-based compensation contributed to the increase. Equity-based compensation was $2.8 million, compared with $1.9 million.
At March 31, cash and cash equivalents were $18.4 million, short-term bank deposits $33.3 million, marketable securities $85.2 million and long-term bank deposits $46.0 million: $182.8 million combined, slightly below $183.3 million at year-end. Current assets were $164.3 million and current liabilities $23.5 million. The filing reports no debt balance. Cash and cash equivalents decreased $3.4 million during the quarter. Investing cash outflow was $4.8 million and financing cash outflow was $0.4 million. The company repurchased 41,322 shares for $1.5 million.
Material changes and comparability
- Reported revenue declined 17% year over year, mainly reflecting lower royalties. Licensing revenue increased 6%, while reported royalties declined 36%.
- CEVA adopted ASC 606 on January 1, 2018 using the modified retrospective method. Adoption increased opening retained earnings by $8.6 million, but reduced Q1 2018 reported revenue by $2.0 million and net income by $1.7 million compared with the filing’s estimate of results without adoption.
- ASC 606 changed royalty timing: royalties are recognized in the quarter of the underlying customer sales, using actual or estimated shipment data, rather than one quarter later. On the prior ASC 605 basis, Q1 2018 royalties would have been approximately $10.0 million, down 15% from Q1 2017; this is a more comparable royalty comparison than reported figures.
- The balance sheet includes $6.6 million of additional accrued revenues associated with the royalty-recognition change. Comparisons of reported Q1 2018 with prior periods therefore require care.
- Revenue remained concentrated: two customers represented 16% and 15% of total revenue. The five largest customers accounted for 49%, down from 63% a year earlier.
Outlook, management commentary and risks
- Management said it expects available cash, deposits, marketable securities and operating cash flow to fund operations for at least the next 12 months; this depends on revenue and expense assumptions. No specific revenue or earnings guidance was provided.
- CEVA reported 14 Q1 licensing deals, all for non-cellular-baseband applications, including two NeuPro AI processor deals. It also signed its first two CEVA-ClearVox agreements. Management cited expanding opportunities in AI at the edge, 5G, NB-IoT, Bluetooth, Wi-Fi, vision and voice processing.
- Management reported non-handset-baseband royalty revenue growth of approximately 39% year over year on the ASC 605 comparison basis. It also said a large customer was forecast to begin ramping base-station chip production in the second half of 2018; timing and ramp remain uncertain.
- Key risks include dependence on a limited number of customers and handset-baseband activity, volatile customer shipments and licensing deal timing, royalty-rate and pricing pressure, intense competition, and lengthy product design and sales cycles. International exposure, especially in Asia, foreign-currency costs, Israeli tax incentives and R&D grant availability are additional risks.
- CEVA held $141.1 million of its combined cash, deposits and marketable securities at foreign subsidiaries and stated an intent to permanently reinvest foreign earnings. Repatriation could involve taxes. Marketable securities had $1.4 million of gross unrealized losses; management considered the declines temporary and recorded no impairment.
- The company acquired NB-IoT technology for $2.8 million, of which $0.6 million had not yet been received; $1.35 million of the recognized intangible-asset cost had not resulted in cash outflow by quarter-end. The filing reported no legal proceedings believed likely to have a material effect. Management concluded disclosure controls were effective.
Important facts for investors to verify
- How much of the reported revenue decline reflects underlying shipments and demand versus ASC 606’s change in royalty timing; verify the shipment estimates used for accrued royalties.
- Whether non-baseband royalty growth, new AI and connectivity licenses, and the forecast base-station production ramp translate into sustained revenue and cash flow.
- Future performance and concentration of the largest royalty-paying customers, including handset-baseband exposure and any changes in customer product plans.
- Growth in operating expenses, particularly R&D and equity-based compensation, relative to future revenue growth.
- Potential effects of foreign-currency movements, foreign-held liquidity and tax or grant changes on earnings and accessible cash.