Hello, and welcome to the CEVA Fourth Quarter and Year-end 2016 Earnings Conference Call. [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. Good morning, everyone, and welcome to CEVA's Fourth Quarter and Annual 2016 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 of the quarter and year, and provide general qualitative data. Yaniv will then cover the financial results for the fourth quarter and year and also provide guidance for the first quarter of 2017 and general data for the full year. I will start with the forward-looking statement. 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 2017, including the degree of confidence in guidance and general market outlook and revenue drivers for 2017; expectation of a favorable licensing environment including for vision and imaging, LTE IoT services, Bluetooth and 5G; optimism about the licensing pipeline and customer ramp-up schedule; and our ability to capitalize on LTE migration. The risks, uncertainties and assumptions include: the ability of CEVA signal processing IPs for smarter connected devices to continue to be strong growth drivers for us; our success in penetrating new markets, specifically in 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, LTE and 5G networks, Bluetooth 5 and the IoT space; customer ramp-up schedules and the impact on royalty revenues; 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 turn the call over to Gideon.

Thanks, Richard. Good morning, everyone, and thanks for joining us today. 2016 was an outstanding year for CEVA, with all-time record high revenue of $72.7 million, up 22% year-over-year with great momentum in terms of customers' adoptions and deployment of our advanced technologies. This evidences our successful transformation into a leading one-stop shop IP house for wireless broadband and Internet of Things-related technologies. This impressive execution could not otherwise have been achieved without the relentless work and the perseverance of our 280 employees worldwide. I would like to take this opportunity to thank them for all this great performance. For the fourth quarter, we delivered another quarter with strong financial results, reaching a record-high total revenue, a record-high royalty revenue and record-high non-GAAP EPS. The licensing environment continues to be robust with $8.3 million in revenue reported for the quarter, derived for 15 deals concluded, of which 14 were for non-handset baseband application and 4 of which were with first-time customer that recently joined our more than 60 active customers. Geographically, 4 of the agreements were in the U.S. and 11 were in Asia, including Japan. The fourth quarter was particularly strong for our vision product line with 8 deals concluded with customers targeting next-generation smartphone, automotive ADAS, smart surveillance camera, mirrorless camera and more. We are also extremely happy that ON Semi, a Tier 1 image sensor provider in the automotive ADAS space joined our customer base. We are looking forward to collaborate with ON Semi empowering intelligence camera that surround the car. Our vision portfolio, which incorporate our leading XM4, XM6 DSP with a comprehensive list of vision algorithm and our reputable CDNN2, deep learning software, continues to set new milestones in innovations and customer engagements. We now have more than 30 design wins for imaging and vision…

Thank you, Gideon. I'll start by reviewing the results of our operations for the fourth quarter of 2016. Revenue for the fourth quarter was $21.2 million, as previously announced. This would also be our fourth consecutive quarterly all-time high record revenue achievement. This was 32% higher on a year-over-year basis and 19% higher sequentially. Revenue breakdown is as follows. Licensing and related revenue was $8.3 million, reflecting 39% of our total revenue, 3% higher as compared to the fourth quarter of 2015 and above our plans and expectations. Royalty revenue was $12.9 million, reflecting 61% of total revenue, an impressive increase of 60% on a year-over-year basis, and the eighth successive quarter that we delivered year-over-year royalty growth. Fourth quarter royalties include a one-time catch-up payment of approximately $1.1 million from a handset baseband customer relating to prior quarters. Quarterly gross margin was 92% on U.S. GAAP basis and 93% on non-GAAP basis. Non-GAAP quarterly gross margin excluded approximately $67,000 of equity-based compensation expenses. Our total operating expenses for the quarter were just below the midrange of our guidance at $13.4 million. OpEx also included aggregated equity-based compensation expense of approximately $1.5 million and $0.3 million for the amortization of acquired intangibles of Rivierawaves. Our total OpEx for the quarter including these 2 items were $11.6 million, at the midrange of our guidance. U.S. GAAP net income and diluted EPS for the quarter were significantly up 126% and 118% to $5.2 million and $0.24, respectively. This compares to net income and diluted EPS of only $2.3 million and $0.11 for the fourth quarter a year ago. Our non-GAAP net income and diluted EPS for the fourth quarter of 2016 increased 98% and 88% year-over-year to $7 million and $0.32, respectively. Non-GAAP net income and diluted EPS for the fourth quarter…

[Operator Instructions] Our first question comes from Matt Ramsay of Canaccord Genuity.

This is Logan Bender dialing in for Matt. A couple quick questions. Looking to 2017, licensing growth is diversifying in the pipeline really nicely, but the growth will primarily be driven by baseband in the near term. So how should we think about the moving parts of the 2017 LTE unit growth with a full year of Intel and Apple and some strength in China with Leadcore, but a bit of uncertainty at Samsung with the road map there? So can you talk a little bit about that, please?

Sure. So as we mentioned in the prepared remarks and as we have looked at the business in the last 2 years, today we divide our handset business into 2 segment, the feature phone and the smartphone. Smartphones increased dramatically last year from 300 million to 500 million units. And within those 500 million units, we were able to triple our LTE content from 70 million, if you remember back in 2015, to north of 220 million in last year, 2016. When we look into 2017 first, we believe that those 500 million smartphones will continue to grow for us. And if I -- we open up specifically the breakdown of LTE or 4G within those smartphones, at this point of time, we believe that those 220 million LTEs should grow north of 300 million for the year. So that would be again the positive contributor both from LTE, the higher ASPs, the -- our biggest -- bigger market share as we go along. And that's the positive momentum that we see on the handset space.

Okay, great. Then a really quick question about some of the royalty trends, some positive news there. Is there anything else? Any more granularity we can add to the royalty and the trends into 2017, with the LTE royalty gradually kind of coming down? So could we get a little bit more there, anything else?

Yes, I mean, in our prepared remark, we spoke about the non-handset category of product. And we mentioned specifically 2 product that we believe will get into noticeable production this year, I should say this. One is the vision, and that's a very interesting trend because it's a smart -- it's associated with smartphones. We see OEMs and a few semiconductors like Rockchip that are not the SOC companies but they find the space in the smartphone to provide the chip that its main purpose is to enhance the still and the video quality. And as you know, if you take the iPhone 7 Plus with the dual sensors, so these are the things that people are looking to add into the 2017 model. So vision is an area that we see growth. This is something that we didn't have in 2016. The other area is Bluetooth. And specifically, Bluetooth 4.2 and Bluetooth 5 power the second half of the year. This is something, again, in 2016, the first half was kind of a pause because there was a transition to more advanced Bluetooth technology. So we're going to see a unit grow in 2017. And then, now really, the end of the year, we expect to see base station, and this is a lucrative business, as I mentioned.

The next question comes from Joseph Wolf of Barclays.

Just a housekeeping item of sorts, but also towards the new products and the non-handset. As you announce some of the -- or as you get deployed in some of these vision product, that is going to be reported in the non-handset business? And is that accretive to ASPs versus the handset LTE business that you're selling right now? Or how does that fit into the ASP mix?

So yes, it is going to be reported in the non-handset stuff. As we grow, we probably -- maybe could open it up and give a little more color, but I'm sure we'll give some milestones as we start counting those units. ASP is probably twice as high in vision than the average of the company or up to twice as high, I would say. So it's a nice incremental add-on. We just need to look for those unit volumes. Not all of them are handsets, some are and those specifically could be higher volume. Some could be consumer devices, DSLR cameras and the like, so you don't sell tens of millions of them. So we have to just count the units as they start hitting the markets. And hopefully, that's -- and we are planning for that segment to be an interesting growth driver in royalties for the first time this year.

Okay. And I guess, as you look at the -- you gave guidance, if I heard you correctly for 10% to 20% royalty revenue growth for the year, but the number that you gave for the -- if I'm -- is that correct?

Yes, that's correct.

But the LTE number you just gave is like 36% growth. So was that a conservative number? What are the puts and takes as we think about that revenue number with some of the opportunities here, which all seem to -- which, generally speaking, seem to be pointing towards higher ASPs? Or is the Bluetooth growth at lower ASP going to affect -- going to be good for unit growth but less so for royalty growth?

Yes, that's always the million-dollar question, sort of the mix between all these product lines, one are very high ASPs, the other could be much higher volume but could be $0.005 to $0.01 in the lower ASPs. So it's always difficult for us especially in the beginning of the year to have and manage to guide and build a model from all these moving pieces. We are trying to do it sort of bottoms-up. So we are looking at growth with the higher ASPs. We're looking at growth with more units and lower ASPs. At the end of the day, maybe the average ASP does not move that much, it moves a little bit. It depends again what will be the stronger contributor. But overall, from a dollar perspective, and when we add some of the new markets, which are not only handset, at least at this start of the year, we're looking at 10% to 20% growth in dollar contribution of royalties and another around 10% growth in the licensing part of our business, which is not a common practice for us from just organic efforts.

Okay. And then finally, could you -- are there any -- there's a lot of articles right now about the Alexa product, which would seem to be a product that you guys could be in. Are there any flagship consumer products where CEVA has been designed in that we can talk about? And as you look at some of these devices and some of the auto and the vision, or specifically in the auto market, are the design wins that you have right now integrated product in the manufacture of the auto? Or are they still mainly add-on accessories that customers buy afterward? And does the relationship with ON put you into sort of that long-term design cycle where we won't see revenues for a few years but we'll have a design win before that?

Okay, Joseph, it's Gideon. Let me answer you. You basically asked 2 questions. The category -- the Alexa product is a -- it's a class of product that is called voice assistant. Now the idea with Alexa and as well as with Google is that they enable an interface to their cloud and open up for everybody to develop all sort of product. So I should say that in the quarter, we signed our first deal to this class of product. This is associated not with Amazon, it's associated with Alibaba. As you can imagine, in China, you have similar trend and in much larger scale. So yes, we are involved in the voice assistant area, and we have already customer in this respect. Yes, that your question about the voice assistant. With regard to the ADAS area, we mentioned the deal with Sony and we have other deals. This is not an add-on accessory. We do have another customer that is in the after -- what is called aftermarket. This is what you refer add-on accessory. ON Semi and the other customers that we have are targeting to the ADAS and autonomous driving, what people are calling level 2 and above. 2 and 3 are the near-term and 4 and 5, these are the fully autonomous, and this is still a way to go. But we are speaking here on product. And certainly, the core collaboration with ON Semi will give us even more credibility and entry point into the mainstream of the market. Also at CES, we announced few other players like Rockchip and Novatech, which are also players in the aftermarket devices that is associated with your question. So the design wins are there. We need to see now the volume production kick in.

Our next question comes from Gary Mobley of Benchmark.

Got a question about the continuation of the increase in deferred revenue. So here we sit the end of the fiscal year at $6.3 million, and if I'm not mistaken, that's a 50% sequential increase over what was a pretty substantial increase in Q3. And so I'm wondering if that has to do with the subscription-like license deals that we talked about last quarter? Or if there were additional subscription-like license deals concluded in the fourth quarter? And then as well any other contributing factors, that spike in deferred revenue and backlog?

No. That's a quick answer, because I think you answered your own question quite remarkably well. It mostly has to do with the subscription. The deal that we signed back in Q3. And the other 2 deals that we talked about last quarter are more work related. So sometimes we get the payments ahead of revenue recognition. But this is exactly the reason that here and there, we have these little bit of interesting or different deals. And of course, that helps us also with our guidance, with our confidence that we talked about Q1 in general. And the licensing for the year, which is not trivial for us, it was -- at least in the past was not. And that gives us a stronger confidence. But the reasons are exactly as you described.

Okay. Just a housekeeping question. What kind of tax rate would you expect for the full year '17?

In non-GAAP, a bit lower than the last year, probably around 12%, up to 13%. First quarter is going to be a bit lower than that, and it gradually increases over the quarters.

Okay. So I'm having a hard time sort of dumbing down the royalty expectation for 2017 to be in a range of 10% to 20% growth. And I say that because if you're going to get to 700 million, 900 million non-mobile handset baseband royalty units by 2018, we have to see something offsetting that. And so I'm wondering if you're standing by that 700 million or 900 million royalty forecast for non-mobile handset for 2018? Or any change to that range as we sit here today? Your comments and any insight would be helpful.

Yes, I could start. Yes, it's a good question. I think we're today trying to give qualitative data for 2017. We don't have the model like that 700 million to 900 million. It's not a model but was more of a wishful internal targets for us. I think we're not yet giving out a model for next year from a volume perspective nor from a dollar perspective. This is something that we will probably do throughout the year and maybe for 2018, maybe for 2019, a little bit longer term when we get a little bit more facts. And I think what we're waiting for are 2 things. One is the nonhandsets really to see those units and dollars flow in and the volumes to -- in order to substantiate those 700 million to 900 million units. Or on the other hand, the dollar figures, especially in 2018 from the base station market, which maybe are small units in the overall mix of that 700 million, but in the dollar perspective, it's much, much more significant. So I don't think at this point, we're giving any specific numbers of how many hundreds of millions we want to power in 2 years. But I think throughout the year, we'll try to give a little bit more color and maybe even move out a year, a little bit further out, and as we get more confident from the volume perspective, less from the dollar perspective.

Yes, Gary, I think what we are expecting to see 2017 set the precedence for what we're going to see in 2018, what will be the contributor. So certainly, vision, and I mentioned, I think somebody else asked me about smartphone, this is a market that expected to take volume direction. And Yaniv mentioned base stations. And of course, the Bluetooth 5, and I mentioned the Apple AirPod-type of product, which we are very optimistic about, the trend of moving from wired thereabout to Bluetooth thereabout. So these are products that could -- that are basically -- could be done in designs today and could be in high volume in 2018. Yes, we think -- I mean, so we have good understanding and stand behind our forecast for 2018 in light of the fact that what -- we already see those elements going in or flourishing in 2017.

Our next question comes from Matt Robison of Wunderlich.

Yaniv, nice to see the cash flow and especially since it looks like you've got some room to continue it with further DSO reduction, especially if your quarter is already largely in place on the licensing side. Hopefully, it's front-loaded a bit. I wanted to first ask, you mentioned this ramp of non-baseband this year, that would normally imply lower ASPs, but some of this vision stuff, my understanding is it's higher ASPs. Do you expect that the royalty ASP to go up or stay about the same or go down in '17? And then, Gideon, you mentioned base station. I really wasn't thinking about base station being a factor until 2018. Do you think that's going to come in this year? And then the other, lastly, what should we think about in terms of timing for the vision and other application-oriented functions to start to show up this year?

Hi, Matt. Let me start with the first one. When we said at the beginning that we were not sure what the mix is. It may end up more or less the same. Again, depends on the volume. We ended 2016 with a record-high Bluetooth device. It's 50 million in the last quarter and another 21 million from these other devices, mainly audio related. And it depends how fast with all these new products that Gideon mentioned where it will take us by the end of the year. LTE will add higher ASPs, vision will add higher ASPs, but these may be offset by lower ASPs from connectivity and audio. I don't think the target for us is to increase or decrease the average ASP of the company, but just to be able to tackle many more markets and get royalty revenues from many more customers, which was not the common practice for us, 3, 4 or even 2 years ago, where still the bulk of it is coming from handsets. So I would, for now maybe keep it flat, maybe slightly higher, but not too much. And we'll see how we go with the quarterly ASPs.

Just a quick answer to your base station. So far what we see is a good progress with our base station customer. And we think that by the end of the year, we will start production. The exact amount, we don't know yet, but this is going very well, I should say.

And the last question for today comes from Suji Desilva of Roth Capital.

As we look at the licensing pipeline in 2017, you talked about strong diversification in '16. Do you expect similar new customer interest in '17 to continue to diversify in a similar magnitude or fashion?

Yes, I mentioned the 4 end-care product that will drive in our opinion the 2017 licensing, 3 of them are nonhandset, these are vision, Bluetooth 5 and LTE IoT, which is in China. It is going very well, very fast traction there. And in the baseband side, the way we see it is and we see today is 5G. People are starting pulling the trigger on 5G designs. They understand that it could happen eventually. And these release are usually long cycle. So we had, last year, a 5G customer. And I'm putting aside the base station, because in base station, we already have the customers for 5G. But in terms of handset and what is called user equipment, this is now moving.

Okay, great. That's helpful. And then you talked about vision being a nearer-term opportunity. What -- how would you size the unit opportunity there? And how you talk about the relative ASP of vision for you guys?

Yes, sure. Let's start, the ASP should be probably up to twice the average of the company's ASP, anywhere from 1.5x to 2x, that would be sort of an average norm in high volume. We have few sockets in handsets, which we may set along next to a Qualcomm Snapdragon for example. If we talk about a handset, it's going to be in few SKUs that could be in the millions, 10 million, 20 million, if it's a high runner, if it's a good seller-type of phone. We have 2 or 3 different DSLR cameras. If you look at an annual basis, these are probably up to 1 million or if it's a super camera, slightly more, but in hundreds of thousands. And we have few of them, so that ramps up or potentially ramps up to, again, higher volume. And the third is the surveillance. Surveillance is a bigger market opportunity. But it's the first time for us. So again, we need to -- as soon as we are designed in the product, you will see that they're richer than the month -- quarterly reports, if you look at new products. We'll show it in our IR presentations of course. And we'll count the units as we go along, because I don't think that ahead of time, we have a clear crystal ball how much our customers are planning to shift or at least in the internal part, because this is a relatively new product with us inside. So one step at a time, but we are forecasting quite a few millions of dollars, both from the unit volume as well as the dollar contribution, and we'll add them up as we go along.

And then maybe, lastly, on the vision part. Can you talk about the competitive landscape in the sense of why this functionality wouldn't necessarily be integrated into an application processer? Why you think it's a sustainable opportunity there for you guys?

No, the vision, it's a developed area. And right now, if you take the smartphone, which is now getting a boost in terms of -- and I think it started because of iPhone 7 Plus came out with dual sensor, and it showed the benefit. What makes us optimistic is that the next step should be neural network. Right now, people are speaking on this on roadmap terms, but we have the product and a clear advantage, I mentioned in my prepared remark our software on top of it. I think today in the software side, for neural network, other than Nvidia, no one is having similar core [ph] comprehensiveness in neural network that we are having. And I think this is where we don't think -- we have an edge versus competitors that are more trying to put just in hardware core and less software. And our approach is a more comprehensive one, where we combine hardware and software.

And this concludes our question-and-answer session. I would now like to turn the conference back over to Richard Kingston for any closing remarks.

Thank you. Thank you all for joining us today and for your continued interest and support of CEVA. We will be attending the following upcoming events and invite you to meet us there. We will be at Mobile World Congress in Barcelona from February 27 to March 2, and we will be attending the 29th Annual Roth Conference in Dana Point, California, March 13 to March 15. Please visit the Investors section of our website for further information on these events and other events we will be attending. Thank you, and goodbye.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines. Have a great day.