Good morning and welcome to the CEVA Inc. Fourth Quarter and Year End 2015 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Richard Kingston, Vice President, Market Intelligence, Investor and Public Relations. Please go ahead.

Thank you and good morning everybody. Welcome to CEVA's fourth quarter 2015 and year end earnings conference call. I'm joined today by Gideon Wertheizer, Chief Executive Officer of CEVA; and Yaniv Arieli, Chief Financial Officer of CEVA. Gideon will cover the business aspects and the highlights on the quarter and general qualitative data. Yaniv will then cover the financial results for the fourth quarter and provide guidance for the first quarter of 2016, and some quantitative data for the full year 2016. I will start with the forward-looking statements. Today's conference call contains forward-looking statements that involve risks and uncertainties, as well as assumptions that if they materialize or prove incorrect could cause the results of CEVA to differ materially from those expressed or implied by such forward-looking statements and assumptions. Forward-looking statements include our financial guidance for the first quarter of 2016, royalty revenue growth and increase of smartphone market share in 2016, high confidence in the licensing business for 2016, optimism about our abilities to capitalize on the continued adoption of LTE, smartphone adoption in India, market opportunities in computer vision, 5G, Bluetooth, and Wi-Fi, as well as the exploration of strategic investments and continuation of our buyback program. The risks, uncertainties, and assumptions include the ability of the CEVA DSP cores to continue to be strong growth drivers for us, our success in penetrating new markets specifically non-baseband markets, and maintaining our market position in existing markets, the ability of new products incorporating our technologies to achieve market acceptance, the speed and extent of the expansion of the 3G and LTE networks worldwide, and the IoT space, and the effect of intense industry competition and consolidation, global chip market trends and general market conditions and other risks relating to our business, including but not limited to those that are described from time-to-time in our SEC filings. CEVA assumes no obligation to update any forward-looking statements or information, which speak as of their respective dates. With that said, I would now like to hand the call over to Gideon at this stage.

Thank you Richard, and good morning everyone, and thanks for joining us today. I'm very pleased to report a strong finish for 2015 with fourth quarter results coming in above the high-end of our guidance range. The licensing performance was once again outstanding on the back of a record five days in a single quarter for CEVA-XM4 imaging and vision DSP. On royalties, we concluded another strong quarter with 24% year-over-year growth, which marked the fourth successive quarter that we delivered year-over-year royalty growth. We are entering 2016 with healthy industry backdrop for royalty growth, stronger than ever licensing pipeline, and compelling product line that is exceptionally well-positioned to the technology trends of our markets. Total revenue for the fourth quarter was $16.1 million, representing 16% year-over-year growth. Licensing and other revenue was $8 million, up 9% year-over-year. Royalty revenue was $8.1 million, up 24% [ph] on a year-over-year basis in our strongest royalty quarter since Q4 2012. We signed 13 new license agreements in the quarter, just one shy of our all-time record quarterly total of 14 deals in the second quarter of 2015. Eight of the agreements were for CEVA DSP cores, platforms, and software; and five for our connectivity product. All of the deals signed were with customer-levering non-handset baseband applications, five of which are first-time CEVA customers. Geographically, one of the deals signed was in Europe, and 12 were in Asia, including Japan. Of the deals signed, the adoption of our imaging and vision DSP platform, the CEVA-XM4 was particularly strong with five deals signed, a record high in terms of number of deals in a quarter for this category of product. The XM4 is a key enabler for many new market categories among which are autonomous car, drones, virtual reality, augmentation reality, intelligent surveillance camera,…

Thank you, Gideon. I'll start by reviewing the results of our operations for the fourth quarter of 2015. Revenue for the fourth quarter was $16.1 million, above the high-end of our guidance, primarily due to strong licensing revenue. Revenue breakdown was as follows. Licensing and related revenue was $8 million, reflecting 50% of our total revenue, 9% higher compared to 2014, royalty revenue was $8.1 million, reflecting 50% of total revenue, up 24% on year-over-year basis and the fourth successful quarter that we delivered year-over-year royalty growth. Quarterly gross margin was 91% on U.S. GAAP basis and 92% on non-GAAP basis, excluding 123R-related expenses. Total operating expenses for the quarter were $12.4 million, just shy on the high-end of our guidance range, due to higher sales commission related to year end revenue target and employee compensation accruals. OpEx also included an aggregated equity-based compensation expense of approximately $1.2 million and $0.3 million for the amortization of acquired intangibles of RiveraWaves. Our total OpEx for the fourth quarter, excluding equity-based compensation and amortizations were $10.9 million, also slightly below the high-end of our range. U.S. GAAP net income for the quarter was $2.2 million and diluted net income per share was $0.10. This compares to U.S. GAAP net loss of $1.9 million and diluted net loss of $0.10 per share for the fourth quarter of 2014. Non-GAAP net income and diluted earnings per share for the fourth quarter of 2015 was $3.6 million and $0.17, respectively, representing a significant increase of 106 and 113% over the $1.7 million and $0.08 reported for the fourth quarter of 2014 respectively. Our non-GAAP net income and diluted earnings per share for the fourth quarter this year excluded equity based compensation expenses, amortization of intangible, and for last year on top of that a cost…

Thank you. [Operator Instructions] And our first question comes from Gary Mobley at Benchmark.

Hi guys, thanks for taking my question. Congrats to a strong finish to the year, and we should all be pleased with the fiscal year '16 guide. But I wanted to just nitpick for a second and just explore why your LTE royalty units were down sequentially in Q4 relative to what seemed to be some pretty robust sequential growth in -- excuse me, non-4G-basedband royalty units?

Okay. So LTE, we are in kind of a transition period. We still have customers that are ramping up production in the -- what we call the mid-range or replacement cycle. This is a market that is transitioning. On the other end, we have great [ph] customers that are bringing up everything.

Okay. If you could just explore that in a little more detail, what are the puts and takes at your largest 4G LTE royalty shipper, Samsung, with respect to maybe some share shifts at the high-end of their product offerings in the upcoming months versus what seems to be some share gains for you in some of their mid-tier and low-end smartphone offerings?

Hi, Gary, good morning, it's Yaniv. Let me try to address it a bit differently because I'm not sure we would want to go specifically in each one of the four large potential players that work with us on LTE, the names I think we all know, are Spreadtrum, Samsung, Intel, and Leadcore. These are the four names that are powering our LTE devices. The guidance we gave for Q1 on royalty and the overall revenue stream looks at about 30% to 35% growth Q1 '16 versus '15 on royalties. That includes about 35 million LTE phones. So if we just closed a record year with 70 million for the entire year, just the first quarter, based on Q4 shipments is 35 million. So I think that it's going to be pretty difficult to go step-by-step or customer-by-customer, SKU-by-SKU to see who ramped up, who had inventory issues, but if you look at the overall picture, Q4 shipments we were up significantly to a record high, 35, and this is just the beginning of the year. So I think we're happy with this type of number.

Okay, well that's helpful. All right, last question, and I'll jump in the queue. This base station licensee, which I assume you've been working with for a while now, who is developing a new ASIC [ph] for 5G baseband processing. You mentioned you closed the deal. I'm wondering if you've received the cash payment entirely upfront already and hence their increase in deferred revenue, or is this backlog from this licensee not fully recognized in deferred revenue, but yet will be recognized over multiple periods throughout 2016?

Yes, good question, and the answer is divided into two. The answer is no for your first part with the baseband provider. Unfortunately it's not that easy. And as Gideon explained, this is almost a year-type project for us, and a lot of new developments around 5G. Usually we don't get paid upfront. We do sometimes get paid upfront on deals that we have off-the-shelf type delivery. And at least one of those are going to take place -- we are in the cut over [ph] period, and will take place in the first quarter, which we'll be able to recognize. So the deferred revenue was a part of a different yield that we got paid earlier than the final delivery and the actual revenue recognition.

All right, great. Thank you, guys.

Thanks, Gary.

The next is from Joseph Wolf of Barclays.

Hi, guys, it's Brian Finneran for Joe. I guess my first question, can you just -- you had touched on it on the call a little, but can you talk a little bit more about LTE momentum heading into 2016 in China and India. And then if you're seeing any impact from the uncertainty in the economy going on in China in particular.

Hi, Joseph, this is Gideon. Specifically, LTE or in a more broad definition, smartphones, as I said in the prepared remark, we see two areas that we are expecting to grow this year. One area is huge amount of community people that don't have today smartphones and they are looking to upgrade to a smartphone. I mentioned -- I gave example in India, but beyond that we have other emerging markets in Africa, and things like this. Just to give you example, even today there are about 600 million to 700 million feature phones that are being sold. And all those eventually will be replaced by smartphone people. And this is what we call first-time smartphone buyer. The other category is more centralized in China, and this is LTE. And these are people that although they own smartphone, it could be 3G, it could be low-cost kind of LTE smartphone that people purchased a year ago, two years ago. And these phones are getting kind of irrelevant because of the performance changes that you have in smartphone if you see it every year. So those people are going to be what we call replacement, and we expect significant growth in China in LTE, and going forward in India. So these are the two segments that we expect things growing in the smartphone space and that will drive our royalty revenue in [indiscernible] basement this year.

Okay, thanks. And then secondly as a follow-up, can you talk a little bit more about the automotive opportunity? I know you guys have signed I think two license agreements with OEMs, but what's the pipeline look like, and how are conversations going? And then as a follow-up to that, just how many years out before we can start to think about those deals contributing meaningfully to the royalty line? I think they take probably a little longer to turn to royalties than the baseband opportunity.

Yes, as people know, the automotive market is working in a different pace, significantly slower pace than other industries. We are approaching the automotive market through our vision technologies. People are speaking about autonomous driving, ADAS, which is safety in car; all the names that you have in car, like adaptive cruise control and automated breaking. So we have our technology, and we approach customers. The market is sizable. Roughly speaking 2020, about 80 million, and between six to 12 cameras in the car for different usage models. And if you take [indiscernible] they're speaking about north of $100-chips. So we -- this is a market that we have our play. We have the technology today in place. We are approaching customers. We are speaking with all sort of partnership. Meaningful royalties, I think you're going to see somewhere between 2019 and '20.

Great, thanks.

Thanks, Brian.

Next question is from Daniel Amir at Ladenburg.

Thanks a lot, and congrats on a good quarter and end of the year here. A couple of questions, first, you mentioned that there's some of the areas of investments, I guess this year, around 5G baseband connectivity and some of the automotive and drones area or imaging and video, excuse me, can you elaborate a little bit more kind of what is the priority in terms of those areas of investment? And how will it change compared to last year, because these are areas of investment that you had last year as well? Thanks.

Yes. You put it right. These are the -- it's not in new areas in terms of things that we didn't address. We have our activities. And three areas that I meant cellular, connectivity, and vision, what we want to do is expedite or what we plan to do is to expedite our next generation product to bring them to the market earlier that we thought if you would ask us this question a year ago. We believe [technical difficulty] we are behind the market. Definitely we are not behind the market. But we see where the market is going at, and we want to be at the forefront. And we know exactly what we want to achieve there. And our objective is to bring this product in the market this year.

Okay, great. And then on the connectivity side, the big success there has been obviously around Bluetooth. Can you elaborate kind of where Wi-Fi stands for you guys, I mean in terms of opportunity. Thanks.

Wi-Fi is a lucrative opportunity. The market size of Wi-Fi is enormous. The opportunity is big for us because you don't have that many integration of Wi-Fi into the larger SoC. In other words there are still SoC companies that understand that they need to integrate Wi-Fi in order to be competitive, and not leave this socket to companies like Broadcom, that are not part of the smartphone space or other areas that are in volumes. So the trend in the Wi-Fi, what is called 802.11ac, and [indiscernible]. These provide significant better user experience. And our approach is to have this ready. We are giving a full solution, not just DSP for that purposes, a full solution. And will address all those companies that plans to integrate into their bigger social [indiscernible], royalty, and all the other stuff that they want to -- that they already have there.

Okay. And the last for Yaniv, any comment off of CES. It seems like you had a pretty successful show there. I mean in terms of opportunities there or in terms of traffic, and with customers here, and potentially for this year. Thanks?

CES was a very intensive event for us, in particular, our vision technologies and the connectivity. Vision, automotive, drones. These are areas that become sophisticated when it comes to vision. Connectivity, although [indiscernible] is area that we met several customers. And that's more or less what we see in CES. We're going to be in this month's, but the end of this month to Barcelona to the Mobile World Congress, MWC. And I believe we're going to see a lot of LTE, and 5G discussions there.

Great. Thanks a lot.

Thanks Daniel.

The next question is from Suji Desilva of Topeka.

Nice job on the quarter and the strong year here. First of all, on the smartphones, and LTE in particular, it sounds like with the first quarter guidance you gave. I know it's a seasonally strong quarter, but if you run-rate that, you have to approximately 2x growth in '15. Is that the right way to think about your LTE opportunity in '16 versus '15?

Sure. Usually Q1, if you look historically is not a great quarter for shipments reported in Q1, it was sequential. And historically has not been the case. On a year-over-year basis, this is going to be the fifth sequential quarter of growth. And we've talked about 30% to 35% of Q1, '16 versus '15 in overall royalties. So that's one point. And on an annual basis we believe that we can at least double the LTE volume from the 70 million that we had last year. The run rate, to start off with was as we said, about 35 million -- we feel that we reported in Q1. And believe we hope that the second half of the year will ramp up, like we have seen in the second half of last year was based on the timing of the new products, and the adoption of new technologies by our customers. So this is the way we see it for now, at least doubling, but hopefully there is a potential for more if the second half of the year will look stronger.

Right, very helpful color, Yaniv, and then also on the imaging product, lots of licenses in this quarter for XM4, can you talk about the timing of the royalty if they're not already heading, when they would be heading? And what the relative royalty rate for the XM4 is versus the traditional average you here there?

I believe we'll see one of our first MM3K. This is the older generation of products in the market. Now in Q1, which we're reporting Q2, and so those are the one -- one of the first customers. Another one is in production with an aftermarket device for the car, that you have pretty neat DVR capabilities of not just recording, but also having a bunch of different safety hazardous like lane detection and pedestrian crossing warning from that aftermarket device. It also has a very interesting back mirror. So if you feel fatigue or fall asleep or try to fall asleep, god forbid, during driving it'll be produces some warning signs. These are already products that we see on the web. And they are starting to promote them now. So it's more apt to them or that specific customer to ramp up its products, and for us to see the royalties [indiscernible]. So these are probably the first two that we have seen. They are still based on the older technologies. The XM4, which was really a great performer in Q4, I would say probably somewhere in the neighborhood of year-and-a-half to two we shall start seeing them, and a bunch of newer applications by the way, as Gideon mentioned. They're all in the automotive, and DSL cameras, and handsets. So it does probably take somewhere between a year to a year-and-a-half to design the chip. And that will have some more than other six months to a year, it depends on how successful the customer is in actually getting that chip into mass production, and into a product.

And the relative royalties in these…

Much higher, we were talking 2x sometimes more coming out of vision. It's very -- it's sophisticated technology, it's very power efficient. Therefore all these devices -- there's unlikely a GPU which will drain your battery, and sometimes will not fit in those types of use cases. And in silicone devices we have a very nice opportunity, a very exciting opportunity from our royalty contribution with a lot of players in this field, and a lot of new markets in the field. But the royalty rate is probably in average 2X.

Great. Thanks guys.

Thank you.

Next question is from Matt Robison at Wunderlich.

Hi, thanks guys. Congrats on the progress and market expansion. The baseband or rather base station there you talked about. Is that -- should we look at the licensing to be somewhat front-loaded or more linear over the course of the year? And should we assume that that's the same customer that you talked about three or four years ago that was strategic? And then I guess the royalty -- okay, go ahead.

Sorry Matt. I mean, both are right. One, it should be pretty linear just because it's work that we're going to be over almost a year. So, yes, unfortunately we cannot finish it in one quarter, and then recognize up all up front. So it's pretty linear. And it is -- we said it's the recurring customers. So it is all the same one that we talked about a few years ago.

Okay. And then on the -- So I guess basically we should probably be thinking about licensed –- modeling the licensing on kind of a run rate [indiscernible]. And on the royalties, should we be thinking about a dip in the second quarter before a back-half inflection?

Not sure. Let's start with Q1. For the last couple of years we stopped trying to guess or to try to guess the market, and the dynamics. I think it's -- you see all around us with much bigger players and it's very, very difficult to do whether it's the Apple or Samsungs or anybody else in the space today; too many moving parts. So with Q1, we are very happy on a year-over-year comparison. I don't think that any of the quarters this year should be lower in royalty than 2015, which is -- I would say one data point, that's what we could give, but then we don't know yet. It's bit too early to guess if Q2 will be flat, higher, or lower. Let's keep that for few months and we'll have a little bit of a better picture when we get the report.

In the last call, there wasn't a lot of contribution from the mid range, or I guess low-end or the high-end range of Samsung for LTE. Was that a factor in the fourth quarter? And should we think of that as being one of the incremental aspects for the first quarter? And then also there was some discussion of in retention incentives throwing off the R&D line for 2016. It sounds like a lot of work ahead in terms of new product development from what Gideon was saying and in terms of your guidance for OpEx. Should we think in terms of that these initiatives just completing dwarfing any effect from retention incentives going up?

Well, gentleman, there were two questions; one is about the shipment side on the royalty. The second question, I don't think I fully understand. I may ask you to repeat it. But the first question, right now we are -- in terms of LTE shipments, we are in different class of sub category. We are in the high-end. We are in the mid range. Phones, you mentioned Samsung, we have another phone categories, and this is ongoing. When I am saying ongoing, it's just a matter of increasing this year due to the [indiscernible] that we mentioned in the call. The second question, I am not so sure about what you asked about investment.

No, is there -- RivieraWaves retention incentives was a factor in R&D looking back, and it was -- those were going to timeout and…

Yes, that's true that part of the [indiscernible] there was a two-year retention scheme that goes on until the middle of the year, but I think when we mentioned retention when we mentioned equity-based compensation. Of course, we want to keep them as well as our other employees in the company got to deal with all these new technologies that Gideon talked about, happy, and onboard, and I think when talked about the incentive for the incentive for them, that's what we meant more of a 123R, and I am not sure if I am answering your question. If not, I'll be happy to refine…

I'll take it offline. Thanks. Appreciate the time on the call.

Okay. Thanks, Matt.

The next question is from Matt Ramsay at Canaccord Genuity.

Thank you very much guys for letting me get on at the end here. Yaniv, the guidance for royalty growth for '16, obviously is a pretty wide range. I guess the question I would ask are two; one, maybe you can just lay out your views of the puts and takes of whether you are in the lower/high end of that range. And second, what contribution do you think ends up being from non-baseband applications for next year versus what it was for 2015? Thanks.

Sure. That's a difficult question, but let's look at it maybe on an annual basis, let me give some history. If you recall, 2015 was the first time we actually agreed and had enough data points and believe that we could grow our royalties after three years of decline. So the guidance that we gave a year ago was 10% to 30% growth, and we did find ourselves in 22% growth for the entire year. And back then we also explained that it's going to be back-end loaded, meaning the second half of the year. And for the same reason, I just answered a different question, I think it's very, very difficult to guess today the beginning of February how the entire year will look like. What we could do is look at the entire market, look at the players, look at what has happened pricing wise in this industry over the last two years. And some of the problems that the bigger players are facing whether they are OEMs or chip vendor in the handset space, we realize that low cost smartphones are the next big thing on a worldwide basis. It's not necessarily related to the U.S. or the Western Europe or some of the more -- in other regions, but much more to the bigger market of India, Latin America, Eastern Europe, and lot of the emerging economy. Those prices and those phones over there will be in the range of $40, even $30 to $60. That's the sweet spot for smartphone. And that smartphone will have all the [indiscernible] of a Galaxy or an iPhone. At those price points I don't think Qualcomm has -- at least didn't have historically any success whatsoever, and that puts us [indiscernible] to compete on that front. Our customers are four very large players in the industry, with lots of capabilities, those are Spreadtrum, Leadcore, Intel and of course Samsung. Each one is taking a little bit of a different approach and trying to tackle that market. But we believe that they are coming up with right pricing and right products which they did not have few years ago. And therefore when we look at the market size, when we look at their ramp up, when we look at the additional SKUs that are aligned for the rest of the year, our technology in their own chips at much lower cost than Qualcomm chip that gives us confidence to build 20% to 40%. Yes, it's big, but at least we believe that it could be a pretty significant or nice growth in the market that is not growing on one hand and semiconductors market that is also suffering from lack of significant growth in the last two years.

Now that's helpful. And just to follow-up on the dynamics from outside of the smartphone market. You guys have set some milestones long term, right, to be 700 to 900 million units. I think the numbers where we see lots of really good licensing activity, I guess relative to that longer term target, how do you feel like the market setting up and ecosystem is setting up there to hit those targets longer term? I think the licensing is doing is great, but it's hard for us on the visibility for unit shipped side and you guys might have more visibility to that. So, if there is an update that will be great. Thanks.

Yes. First of all, I think we are above 25% through this number -- this number of 700 million to 900 million non-handset baseband shipment, and it's growing, we expect additional to grow. The way it's going to work it will be different than in smartphone. In smartphone, as you know it's a consolidated market and each customer is sizeable in volume. In the non-handset based that you speak about tons of customer; each of them between 10 million to 30 million units a year. And all of those -- majority of those customer we started to sign somewhere in 2014 -- late 2013-2014. And also, those customers that will sign up in 2016 will still manage to finish the product and be in the market in 2018. So the pattern of the royalty growth or the unit growth will be in a way that we'll see some gradual growth like we see today when we are in the 25% point. And then, there will be some gradual -- somewhere in 2017 and more noticeable in 2018, all of them will come together, will start ship together. And then, you we see suddenly tons of customers shipping small amount or we'll see tons of customers shipping additional. So if you are asking if we are on track. Yes, we are on track [indiscernible] in 2018.

That's really helpful. Thanks, Gideon. Yaniv, just to sneak one in, the OpEx you outlined areas of investment that was in the Q1 guidance higher than at least I have modeled, is that what we should think about sort of a new run rate going forward, or there are going to be things that move it around a little bit seasonally through the course of the year? I'm just trying to get an idea of OpEx for the year. Thanks.

Sure. I think looking at somewhere around the 11.1 to 11.3 in average for the full quarter, there maybe one a little bit higher, one a little bit lower, but this is probably the new zone that we are at, because of the new investments, again, most of these investments are just positioning our new resources for us to be able to develop and to come to market to supply their customers with the technology they need. So it's mainly around headcount and if we were somewhere in the neighborhood of 10.9-ish in average or 10.8 in average for last year, it's probably going to be somewhere in the 11.1 to 11.3 -- for the year; non-GAAP.

That concludes our question-and-answer session. I would like to turn the conference back to Richard Kingston for closing remarks.

Thank you, and thank you all for joining us today and for your continued interest and support of CEVA. We will be attending Mobile World Congress in Barcelona, February 22 to 26, and the ROTH Conference in Dana Point, California on March 14. Please visit the Investor section of our Web site for further information on these events, and other events we will be attending. Thank you, and goodbye.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.