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CEVA > SEC Filings for CEVA > Form 10-Q on 12-Nov-2013All Recent SEC Filings

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Form 10-Q for CEVA INC


12-Nov-2013

Quarterly Report


Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion together with the unaudited financial statements and related notes appearing elsewhere in this quarterly report. This discussion contains forward-looking statements that involve risks and uncertainties. Any or all of our forward-looking statements in this quarterly report may turn out to be wrong. These forward-looking statements can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. Factors which could cause actual results to differ materially include those set forth under in Part II - Item 1A - "Risk Factors," as well as those discussed elsewhere in this quarterly report. See "Forward-Looking Statements."

BUSINESS OVERVIEW

The financial information presented in this quarterly report includes the results of CEVA, Inc. and its subsidiaries.

CEVA is the world's leading licensor of DSP cores and platform solutions. Our technologies are widely licensed and power many of the world's leading semiconductor and original equipment manufacturer (OEM) companies. In 2012, our licensees shipped more than one billion CEVA-powered chipsets targeted for a wide range of diverse end markets. To date, more than 4.5 billion CEVA-powered devices have shipped, illustrating the strong market deployment of our technology.

Our DSPs power nearly every leading handset OEM in the world today, including HTC, Huawei, Lenovo, LG Electronics, Motorola, Nokia, Samsung, Sony and ZTE, as well as dozens of local handset manufacturers in China and India. Based on internal data and Strategy Analytics' worldwide shipment data, CEVA's worldwide market share of cellular baseband chips that incorporate our technologies was approximately 34% of the worldwide shipment volume based on preliminary data for second quarter 2013 worldwide shipments. This lower-than-normal quarterly market share figure is due to lower than expected shipments of 2G and EDGE feature phones during the second quarter of 2013, and we expect that our market share will return to normalized levels of approximately 40% for the third quarter of 2013. Revenues derived from the handset and mobile broadband markets accounted for approximately 82% of our total revenues for the first nine months of 2013.

We believe the adoption of our DSP cores and technologies in the handset, mobile broadband and base station markets continues to progress. Specifically, we believe the emergence of low cost smartphone platforms integrating 3G and EDGE cellular connectivity from companies such as Broadcom, Intel and Spreadtrum, all of whom are our customers, are strong positive drivers for our market share expansion. We believe that the majority of this growth will come from the increased adoption of low cost 3G and EDGE smartphones in developing countries, especially China, the broader adoption of 4G LTE-based advanced smartphones in mature markets further down the road, as well as the introduction of feature set enhancements in audio, computational photography and embedded vision in smart devices. In addition, we are well positioned to capitalize on our success in handsets to expand into heterogeneous cellular base station networks composed of small cells and macrocells.

Beyond products enabled by our technologies for cellular baseband, we continue to strategically target growth in non-baseband applications, such as broadband communications, audio, voice, computational photography, embedded vision and connectivity. As a testament to this, during the third quarter we signed five new license agreements, four of which were with first-time customers for CEVA. All five license agreements target the new growth areas that we discussed above.

We believe the following key elements represent significant growth drivers for the Company:

CEVA is firmly established in the largest space in the semiconductor industry - baseband for mobile handset-as well as the other evolving cellular markets, such as mobile computing and machine to machine. Our competitive edge in software-defined radio technology for the next generations of LTE and Wi-Fi in base stations and broadband satellite communications, and the inherent low cost and power performance balance of our technologies, puts us in a strong position to simultaneously capitalize on mass market adoption and address all of the growth vectors of the space.

Our proven track record in baseband technologies, in particular our pioneering position in software-defined radio, allows us to expand into the base station market, both in small cells and macrocells.

The market potential for advanced audio and voice processing across mobile, automotive and consumer devices offers a new growth segment for the company. Our CEVA-TeakLite-4 DSP was specifically designed to address the increasingly complex processing and stringent low-power requirements of advanced voice pre-processing and audio post-processing algorithms, including always-on voice activation, voice trigger, noise elimination and audio rendering. Many companies are looking to replace their older in-house DSPs due to the power and performance requirements outlined above. Furthermore, the programmable nature of our audio/voice DSP combined with a large ecosystem of audio partners developing software enables our customers to significantly differentiate their products and feature sets, Our proven track record in audio/voice, with more than 2.75 billion audio chips shipped to date, puts us in a strong position to power audio roadmaps across this new range of addressable end markets.


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The market potential for computational photography and vision analytics in cameras offers a new growth segment for the company. Our CEVA-MM3101 platform is the only one in the industry today that offers a unified computational photography and vision platform that can support these future developments. Per ABI Research, one billion cameras were shipped in 2012, and this number is predicted to grow to 2.7 billion in 2017. 80% of this volume is attributable to smartphones, where we already have a strong foothold through our other technologies. Mobile OEMs are looking for new DSLR features such as smarter autofocus, best picture using super resolution algorithms, and better image capture in low-light environments. Furthermore, with the addition of video analytics support, cameras will enable new services like augmented reality, gesture recognition and advanced safety capabilities in cars. We see this new revolution as an emerging opportunity for us to significantly expand our footprint in smartphones and further into tablets, PCs and automotive applications.

Notwithstanding the various growth opportunities we have outlined above, our business operates in a highly competitive environment. The maintenance of our competitive position and our future growth are dependent on our ability to adapt to ever-changing technologies, short product life cycles, evolving industry standards, changing customer needs and the trend towards cellular connectivity, and voice, audio and video convergence in the markets that we operate. Competition has historically increased pricing pressures for our products and decreased our average selling prices. Royalty payments under our existing license agreements also could be lower than currently anticipated for a variety of reasons, including decreased royalty rates triggered by larger volume shipments, lower royalty rates negotiated with customers due to competitive pressure or consolidation among our customers. Moreover, some of our competitors have reduced their licensing and royalty fees to attract customers and expand their market share. In order to penetrate new markets and maintain our market share with our existing products, we may need to offer our products in the future at lower prices which may result in lower profits. In addition, our future growth is dependent not only on the continued success of our existing products but also the successful introduction of new products, which requires the dedication of resources into research and development which in turn may increase our operating expenses. Furthermore, since our products are incorporated into end products of our OEM and semiconductor customers, our business is very dependent on their ability to achieve market acceptance of their end products in the handset and consumer electronic markets, which are similarly very competitive. In addition, macroeconomic trends may significantly affect our operating results. For example, consolidation among our customers may negatively affect our revenue source, increase our existing customers' negotiation leverage and make us more dependent on a limited number of customers. Also, since we derive a significant portion of our revenues from the handset market, any negative trends in that market would adversely affect our financial results.

However, the semiconductor and consumer electronics industries remain volatile, which makes it extremely difficult for our customers and us to accurately forecast financial results and plan for future business activities. Our license arrangements have not historically provided for substantial ongoing license payments so revenue recognized from licensing arrangements vary significantly from period to period, depending on the number and size of deals closed during a quarter, and is difficult to predict. Moreover, our royalty revenue is based on the sales of products incorporating the semiconductors or other products of our customers, and as a result we do not have direct access to information that will help us anticipate the timing and amount of future royalties. We have very little visibility into the timetable of product shipments incorporating our technology by our customers. As a result, our past operating results should not be relied upon as an indication of future performance.

RESULTS OF OPERATIONS

Total Revenues

Total revenues were $10.0 million and $34.9 million for the third quarter and first nine months of 2013, respectively, representing a decrease of 17% and 14%, respectively, as compared to the corresponding periods in 2012. The decrease in total revenues for both the third quarter and first nine months of 2013 reflected lower licensing and related revenues and lower royalty revenues.

Five largest customers accounted for 59% and 66% of our total revenues for the third quarter and first nine months of 2013, respectively, as compared to 70% and 65% for the comparable periods in 2012. One customer accounted for 26% of our total revenues for the third quarter of 2013, as compared to four customers that accounted for 24%, 14%, 12% and 11% of our total revenues for the third quarter of 2012. Two customers accounted for 31% and 13% of our total revenues for the first nine months of 2013, as compared to three customers that accounted for 27%, 12% and 12% of our total revenues for the first nine months of 2012. Generally, the identity of our customers representing 10% or more of our total revenues varies from period to period, especially with respect to our licensing customers as we generate licensing revenues generally from new customers on a quarterly basis. With respect to our royalty revenues, four royalty paying customers each represented 10% or more of our total royalty revenues for the third quarter and first nine months of 2013 and 2012, and collectively represented 82% of our total royalty revenues for both the third quarter and


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first nine months of 2013, and 73% and 74% of our total royalty revenues for the comparable periods of 2012. We expect that a significant portion of our future royalty revenue will continue to be generated by a limited number of customers. The concentration of our customers is explainable in part by consolidation in the semiconductor industry. The loss of any significant customer could adversely affect our near-term future operating results.

Our total revenues derived from the handsets and mobile broadband markets represented 79% and 82% of our total revenues for the third quarter and first nine months of 2013, respectively, as compared to 75% and 78% for the comparable periods in 2012.

Licensing and Related Revenues

Licensing and related revenues were $3.9 million and $15.1 million for the third quarter and first nine months of 2013, respectively, representing a decrease of 20% and 11%, respectively, as compared to the corresponding periods in 2012. The decrease in licensing and related revenues for the third quarter of 2013 was due to not executing a significant license agreement during the quarter, which principally reflected lower revenues from our CEVA-X DSP core family of products and lower revenues from our CEVA-TeakLite core family of products. The decrease in licensing and related revenues for the first nine months of 2013 principally reflected lower revenues from our CEVA-TeakLite core family of products, partially offset by higher revenues from our CEVA-X DSP core family of products.

Licensing and related revenues accounted for 39% and 43% of our total revenues for the third quarter and first nine months of 2013, respectively, compared to 41% and 42% for the comparable periods of 2012. During the third quarter of 2013, we concluded five new license agreements, including four first-time licensees to our comprehensive customer base. In total, we have signed more than twenty DSP license agreements in the past two years with customers who are targeting new markets and applications, including communication, audio, digital photography and embedded vision. Four agreements executed during the third quarter were for CEVA DSP cores, platforms and software, and one agreement was for CEVA Bluetooth IP. Target applications for customer deployment are LTE base stations, satellite communications, smart meters, automotive and connectivity. Geographically, two of the agreements concluded were in Europe and the other three were in Asia Pacific.

Licensing and related revenues include IP licensing fees, support and training for licensees and sales of development systems. As post contract support, training and sale of development systems are directly associated with licensing revenue and none of them separately is significant in relation to our total revenue, starting in the first quarter of 2013, we consolidated licensing revenue and other revenue into one revenue line titled "licensing and related revenue" for the sake of simplicity.

Royalty Revenues

Royalty revenues were $6.1 million and $19.8 million for the third quarter and first nine months of 2013, respectively, a decrease of 14% and 17% from the third quarter and first nine months of 2012. Royalty revenues accounted for 61% and 57% of our total revenues for the third quarter and first nine months of 2013, respectively, compared to 59% and 58% for the comparable periods of 2012. The decrease in royalty revenues for both the third quarter and first nine months of 2013 reflected mainly lower volumes of 2G and EDGE products shipped that incorporated our technology, a decrease in the average per unit royalty rate, especially in legacy and consumer electronic products, offset by higher volumes of shipped 3G and LTE powered devices that incorporated our technology. Our customers reported sales of 200 million chipsets and 764 million chipset incorporating our technologies for the third quarter and first nine months of 2013, respectively, compared to 254 million and 779 million for the comparable periods of 2012. The five largest royalty-paying customers accounted for 86% and 87% of our total royalty revenues for the third quarter and first nine months of 2013, respectively, compared to 79% and 82% for the comparable periods of 2012.

As of September 30, 2013, 29 licensees were shipping products incorporating our technologies pursuant to 36 licensing arrangements. As of September 30, 2012, 28 licensees were shipping products incorporating our technologies pursuant to 37 licensing arrangements.


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Geographic Revenue Analysis



                                   Nine months                Nine months                Third Quarter         Third Quarter
                                       2013                       2012                        2013                 2012
                                                              (in millions, except percentages)
United States                    $  4.7        13 %    $  8.7       21 %    $ 1.5          15 %     $ 2.5           20%
Europe and Middle East (1)       $ 10.7        31 %    $ 10.4       26 %    $ 3.3          33 %     $ 3.3           28%
Asia Pacific (2) (3)             $ 19.5        56 %    $ 21.6       53 %    $ 5.2          52 %     $ 6.2           52%
(1) Germany                      $  4.4        13 %    $  5.0       12 %    $   * )         * )     $ 1.6           14%
(2) China                        $ 15.2        44 %    $ 13.7       34 %    $ 4.4          44 %     $ 4.4           36%
(3) Japan                        $    * )       * )    $  4.3       11 %    $   * )         * )     $   * )         *)

*) Less than 10%

Due to the nature of our license agreements and the associated potential large individual contract amounts, the geographic split of revenues both in absolute dollars and percentage terms generally varies from quarter to quarter.

Cost of Revenues

Cost of revenues were $1.1 million and $3.8 million for the third quarter and first nine months of 2013, respectively, compared to $1.0 million and $2.9 million for the comparable periods of 2012. Cost of revenues accounted for 11% of our total revenues for both the third quarter and first nine months of 2013, compared to 9% and 7% for the comparable periods of 2012. The slight increase for the third quarter of 2013 principally reflected higher customization work for our licensees allocated from research and development expenses. The increase for the first nine months of 2013 principally reflected higher customization work for our licensees and higher sub-contractors cost. Included in cost of revenues for the third quarter and first nine months of 2013 was non-cash equity-based compensation expense of $73,000 and $223,000, compared to $73,000 and $177,000 for the comparable periods of 2012.

Gross Margin

Gross margin for both the third quarter and first nine months of 2013 were 89%, compared to 91% and 93% for the comparable periods of 2012. The decrease for the third quarter of 2013 mainly reflected lower overall revenue and especially royalty revenues which have higher gross margins. The decrease for the first nine months of 2013 mainly reflected lower royalty revenues which have higher gross margins and higher cost of revenues.

Operating Expenses

Total operating expenses were $10.0 million and $29.1 million for the third quarter and first nine months of 2013, respectively, compared to $8.8 million and $27.8 million for the comparable periods of 2012. The increase in total operating expenses for the third quarter of 2013 principally reflected higher project related expenses, lower research grants received from the Office of Chief Scientist of Israel and higher non-cash equity-based compensation expenses. The increase in total operating expenses for the first nine months of 2013 principally reflected higher project related expenses, lower research grants received from the Office of Chief Scientist of Israel and higher non-cash equity-based compensation expenses, partially offset by lower salary and related costs, mainly as a result of lower bonus provisions.

Research and Development Expenses, Net

Our research and development expenses, net were $5.6 million and $16.3 million for the third quarter and first nine months of 2013, respectively, compared to $4.6 million and $15.5 million for the comparable periods of 2012. The net increase for the third quarter of 2013 principally reflected higher project related expenses, higher non-cash equity-based compensation expenses and lower research grants received from the Office of Chief Scientist of Israel. The net increase for the first nine months of 2013 principally reflected higher project-related expenses, higher non-cash equity-based compensation expenses and lower research grants received from the Office of Chief Scientist of Israel, partially offset by lower salary and related costs partially as a result of cost allocation to cost of revenues for customization work and lower bonus provisions. Included in research and development expenses for the third quarter and first nine months of 2013 were non-cash equity-based compensation expenses of $634,000 and $1,489,000, respectively, compared to $468,000 and $1,327,000 for the comparable periods of 2012. Research and development expenses as a percentage of our total revenues were 56% and 47% for the third quarter and first nine months of 2013, respectively, compared to 39% and 38% for the comparable periods of 2012.

The number of research and development personnel was 131 at September 30, 2013, compared to 125 at September 30, 2012.


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Sales and Marketing Expenses

Our sales and marketing expenses were $2.4 million and $7.3 million for the third quarter and first nine months of 2013, respectively, compared to $2.2 million and $6.6 million for the comparable periods of 2012. The increase for the third quarter of 2013 principally reflected higher non-cash equity-based compensation expenses. The increase for the first nine months of 2013 principally reflected higher salary and related costs, mainly due to higher headcount, and higher non-cash equity-based compensation expenses, partially offset by lower commission expenses. Included in sales and marketing expenses for the third quarter and first nine months of 2013 were non-cash equity-based compensation expenses of $393,000 and $1,021,000, respectively, compared to $284,000 and $723,000 for the comparable periods of 2012. Sales and marketing expenses as a percentage of our total revenues were 24% and 21% for the third quarter and first nine months of 2013, respectively, compared to 19% and 16% for the comparable periods of 2012.

The total number of sales and marketing personnel was 29 at September 30, 2013, compared to 27 at September 30, 2012.

General and Administrative Expenses

Our general and administrative expenses were $2.0 million and $5.6 million for the third quarter and first nine months of 2013, respectively, compared to $1.9 million and $5.7 million for the comparable periods of 2012. The slight increase for the third quarter of 2013 principally reflected higher non-cash equity-based compensation expenses, offset by lower professional services cost. The slight decrease for the first nine months of 2013 principally reflected lower salary and related costs mainly as a result of a lower bonus provisions and lower professional services cost, offset by higher non-cash equity-based compensation expenses. Included in general and administrative expenses for the third quarter and first nine months of 2013 were non-cash equity-based compensation expenses of $660,000 and $1,691,000, respectively, compared to $541,000 and $1,461,000 for the comparable periods of 2012. General and administrative expenses as a percentage of our total revenues were 20% and 16% for the third quarter and first nine months of 2013, respectively, compared to 16% and 14% for the comparable periods of 2012.

The number of general and administrative personnel was 23 at September 30, 2013, compared to 25 at September 30, 2012.

Financial Income, Net (in millions)



                                   Nine Months          Nine Months         Third Quarter          Third Quarter
                                      2013                 2012                 2013                   2012
Financial income, net             $        2.05        $        2.65       $          0.62        $          0.73
of which:
Interest income and gains and
losses from marketable
securities, net                   $        2.15        $        2.64       $          0.63        $          0.75
Foreign exchange gain (loss)      $       (0.10 )      $        0.01       $         (0.01 )      $         (0.02 )

Financial income, net, consists of interest earned on investments, gains and losses from marketable securities, accretion (amortization) of discounts (premiums) on marketable securities and foreign exchange movements.

The decrease in interest income and gains and losses from marketable securities, net, during the third quarter and first nine months of 2013 reflected less combined cash, bank deposits and marketable securities balances held and lower yields, offset by higher gains on sale of marketable securities.

We review our monthly expected major non-U.S. dollar denominated expenditures and look to hold equivalent non-U.S. dollar cash balances to mitigate currency fluctuations. This has resulted in a foreign exchange loss of $0.01 million and $0.10 million for the third quarter and first nine months of 2013, respectively, and a foreign exchange loss of $0.02 million and a foreign exchange gain of $0.01 million for the comparable periods of 2012.

Provision for Income Taxes

Our income tax benefit was $0.2 million and our income tax expense was $0.5 million for the third quarter and first nine months of 2013, respectively, compared to income tax expenses of $0.3 million and $1.7 million for the comparable periods of 2012. The decrease for the third quarter of 2013 primarily reflected less income before taxes on income. The decrease for the first nine months of 2013 primarily reflected less income before taxes on income, partially offset by a withholding tax income for which we obtained a refund from a certain tax authority in the first nine months of 2012. We have significant operations in Israel and operations in the Republic of Ireland, and a substantial portion of our taxable income is generated there. Currently, our Israeli and Irish subsidiaries are taxed at rates substantially lower than U.S. tax rates.

Our Irish subsidiary qualified for a 12.5% tax rate on its trade. Interest income generated by our Irish subsidiary is taxed at a rate of 25%.


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Our Israeli subsidiary is entitled to various tax benefits by virtue of the "Approved Enterprise" and/or "Benefited Enterprise" status granted to its eight investment programs, as defined by the Israeli Investment Law. In accordance with the Investment Law, our Israeli subsidiary's first five investment programs were subject to corporate tax rate of 25% for the first nine months of 2013, and our Israeli subsidiary's sixth, seventh and eighth investment programs were subject to corporate tax rate of 10% for the first nine months of 2013. However, our Israeli subsidiary received an approval for the erosion of tax basis with respect to its second, third, fourth and fifth investment programs, and this resulted in an increase in the taxable income attributable to the sixth, seventh and eighth investment programs, which were subject to a reduced tax rate of 10% for the first nine months of 2013. The tax benefits under our Israeli subsidiary's active investment programs are scheduled to gradually expire starting in 2014.

To maintain our Israeli subsidiary's eligibility for the above tax benefits, it must continue to meet certain conditions under the Investment Law. Should our Israeli subsidiary fail to meet such conditions in the future, these benefits would be cancelled and it would be subject to corporate tax in Israel at the standard corporate rate and could be required to refund tax benefits already . . .

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