Good morning, and welcome to the CEVA, Inc., Second Quarter 2017 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, Andrew. Good morning, everyone, and welcome to CEVA's second quarter 2017 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 from the quarter and provide general qualitative data. Yaniv will then cover the financial results for the second quarter and provide guidance for the third quarter of 2017. 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 third quarter and full-year 2017, including the degree of confidence in the guidance, general market outlook and revenue drivers for 2017; optimism about the licensing pipeline and our product portfolio; anticipated benefits of the newly executed portfolio agreement; adoption of new CEVA technologies in the Chinese smartphones; and market opportunities and ability to leverage market trends for vision and imaging, 5G, base station and other strategic opportunities; and projected customer ramp-up schedules, market trends and results in royalty revenues. The risks, uncertainties and assumptions include the ability of the CEVA signal processing IPs for smarter connected devices 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, LTE and 5G networks, Bluetooth 5 and the IoT space; our ability to execute more broad portfolio license agreements, customers' ramp-up schedules and the impacts 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.

Thank you, Richard, and welcome, everyone. The momentum in our business continues through the second quarter deliver strong financial results and exceeded the high end of our guidance. Our licensing business continues to accelerate. And in addition to 12 licensing we have concluded, we signed a second portfolio agreement with a major customer. The visibility in our licensing business continues to strengthen this record-high backlog and solid pipeline. Therefore, we are setting another record high licensing guidance for the third quarter, and we revise upward our annual licensing guidance as well. This licensing performance fuels the value our product portfolio presents, a broad customer base and the potential for CEVA to address this smart and connected world. Revenue for the second quarter came in $20.6 million, up 20% year-over-year. Licensing and related revenue was record high at $10.4 million, up 38% year-over-year. During the second quarter, we concluded 13 deals, of which seven were from DSP cores and platform, five were from connectivity for IoT and one was the portfolio agreement that I just mentioned. 11 of the deals were from non-handset baseband applications, and four were with first-time customers. Customers' target markets for the licenses include smartphones, automotive ADAS, drones, surveillance cameras, wearables, industrial IoT and a variety of Bluetooth and Wi-Fi connected consumer and medical products. On royalties, revenue came as expected at $10.2 million, up 6% year-over-year, primarily driven by new non-handset products, including initial shipments of vision processors in smartphones and base stations chips. Let me take the next few minutes to highlight a few of the new deals signed in the quarter. As I announced earlier, we signed a portfolio agreement with a major customer during the quarter, our second portfolio deal in the last 12 months. This portfolio agreement provides broad access to our…

Thank you, Gideon. I'll start by reviewing the result of our operations in the second quarter of 2017. Revenue for the second quarter was $20.6 million, up 12% on a year-over-year basis. The revenue breakdown is as follows. Licensing and related revenue was approximately $10.4 million, reflecting just over half in total revenues, 38% higher as compared to the second quarter of 2016, a new record high. Royalty revenue was $10.2 million, reflecting just about half of total revenue and 6% higher on a year-over-year basis. Quarterly gross margin was 92% on a U.S. GAAP basis and rose to 93% on a non-GAAP basis. Our non-GAAP revenue gross margin stood approximately at $0.1 million of equity-based compensation expense. Total operating expenses for the second quarter were above the guidance range at $16.8 million. This was primarily due to almost no R&D grant payment in the quarter and high employee-related costs. OpEx also included an aggregated equity-based compensation expenses of approximately $2.1 million and $0.3 million for the amortization of acquired intangibles of RivieraWaves. Total operating expenses for the second quarter, excluding equity-based compensation expenses and amortization intangibles, were $14.4 million, again, over the high end of our guidance due to the same reason I just mentioned. Regarding our last earnings call, the quarterly tax - the second quarter included a tax benefit resulted from the conclusion of a tax audit, following which we recorded an additional one-time tax benefit of approximately $1.8 million on both GAAP and non-GAAP basis. Our U.S. GAAP-based net income and diluted EPS for the quarter increased 44% and 30% to $3.9 million and $0.17, respectively, over the second quarter of 2016. Our non-GAAP net income and diluted EPS for the second quarter increased 38% and 33% year-over-year to $6.3 million and $0.28, respectively. Those figures…

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Matt Ramsay of Canaccord Genuity. Please go ahead.

Thank you very much. Good afternoon guys and good morning, everyone. I guess, I wanted to start with, first of all, obviously, big congratulations on the licensing momentum in the business and the diversification of it. I don't know, for Gideon or Yaniv, either one of you guys, how do we think about the licensing potential long-term being sustainable at these levels versus the amount that you might need to invest in the business and grow operating expenses over that period of time? I'm just trying to look at the relative growth rate of that licensing business and the costs that you're pouring into R&D to develop these new technologies, and how we should think about the two growth rates of those going forward. Thank you.

Thanks, Matthew. It's a good question. No doubt that we have extremely - interest in our product. And the costs on this whole business lines that we have, and it's a market visa. So if you take, for example, the dividend, six months ago, we barely saw interest of use of embedding vision processor on smartphones. I think last quarter, we had two deals in this respect, and they're here in our pipeline. And 5G is an area that even was slow. Now we are hearing Nokia speaking about acceleration, and they're speaking about 2019. So we believe these kinds of things created the math and we are set to support it. So it wasn't fine at this stage. It's hard. We are extremely happy about this 25; basically, we're now valued 25% year-over-year increase in life. You'll see it as we go through next year, but this is now the universe. Now let me add some color on the expense line. I think the increase in expense, some of it is associated with higher headcount and the increase of R&D this last quarter just shy of the engineers on that front. And that's some of the [indiscernible], but the higher expense level in the second quarter is typically, and to some extent and the rest of the year, is more to do with lower R&D grant, specifically for this year compared to prior year. We're still trying to understand why. We're trying to come up with some new different program and to fill the gap. That is something that you were not expecting. And we have higher level in prior years. And a little bit also of contribution to the U.S. dollars not being as strong from an FX perspective and they are perceived to be earlier in the year. And you saw the euro with some other local currency as well being much stronger than the dollar. That's hurting us a little bit on the FX in the second half of the year. So those are the main reasons for the expense there. We're not saying expense [indiscernible].

Got it. Thank you for that color. I much appreciate it. And I guess this is my follow-up, Gideon, there's been a lot of movement in both unit dynamics and in baseband market share within the Chinese handset market over the last - I don't know, couple of quarters. No secrets, some pretty big share gains from Qualcomm and effect. But I wonder if you might talk about that market a little bit more in detail, where we are in terms of an inventory correction and coming out of it, and how the share shifts between two of the big suppliers there that are not typically your licensees might have affected some of the dynamics with the companies that are? I'd appreciate any color there. Thank you.

Yes. First of all, when it comes to Qualcomm, as far as we could see here, Qualcomm's strength in the new high-end space, those companies like Bigelow, Oppo and some targeting global expansion western companies [indiscernible] in Qualcomm is interested. By the way, very interestingly in the conference call, we said that we have the silence of vision is Vivo, so this is a good example of people using a Qualcomm Snapdragon and add a chip with our technology just for the camera performance. By the way, we share the success with Qualcomm is the need for a new high-end competition. Our customers remained in the prepared remarks touched on it about some kinds of softness, I don't think - and this is by the - in the lower end portion of this, I don't think this is the market maturity here on the country. And in terms of India and in the low end is a big opportunity. It's a transition there. They are moving from 2G to LTE what is called LTE feature phones, which are smartphones, but not Android-based. The volume is there 96% of the chip is second LTE smartphone. So the volume is there. So there were some inventories, but [indiscernible] it looked like the post rather than the market's maturity.

Got it. Thank you very much.

Sure. Thank you.

The next question comes from Joseph Wolf of Barclays. Please go ahead.

Thank you and thank you for the detail on some of the non-baseband opportunities, which is what I wanted to start with. If you look at the base station when or the one that's contributing to revenues right now. Can you talk about the technology and the application that you are seeing and the geographic location of that win?

So the Company that started to ship our base station chip are going to ship it worldwide. It's not geography oriented. They say what is called 4.5 to 4.9G, it's not your 5G, but it's the most advanced LTE standout, the provision standout that we have to speak about gigabit still and these are very complicate chip is 20 and more DSP - our DSPs into this chip and royalty is reflected.

Okay. That's helpful. So - and do you expect - if you look out for the next couple of quarters with the guidance that you've kind of given for the second half, there's no seasonality to this base station deployment yet. We are talking about early rollout?

Yes, this industry is not seasonal it's more like infrastructure investment cycles, investment infrastructure. We started to ship - to see shipments there and we are - it's the first time that we get one percentage space we need to learn a bit more about the proxy statement of this business. You'll see that it's not a seasonal type of business. And with that it's also - but next year, we believe that there is magnitude of growth is coming from that market as we've said for a while, should be significantly larger than the initial shipment that we're seeing now hopefully relatively [indiscernible].

Okay. That's helpful. And then on the vision side, so the application right now is more, I guess, advanced camera features, and then you mentioned some drones. So I just wanted to go into a little bit more detail there. So for the vision side, that's also - can you - is that the high end - you talked about that being the high end of the market with the Vivo phone. Are those the ones that are going into the market right now? And again, but that - those shipments it would seem would follow some sort of seasonality or new product introduction with the revenues coming as we see some take rates on higher-priced smartphones. And then with the drone market, can you talk about how many or which segment, how many markets you are in or how - what segment of the market you are in, in terms of the high-end versus high performance or kind of [kicked] away kind of drones?

These are good questions, let me, if I may, to elaborate on the vision addressable market or variable markets. The vision market is, I should say, two times more than what we have in [indiscernible]. Then perhaps we have the ultra-baseband with the trend technology. The lead markets are now all smartphones, which is I think my answer is first question to - which is something that [indiscernible] flourish in the last six months. And here what people are looking is to put a camera, a processor that is capable to run artificial intelligence, a quick network and by this achievement by far more better performance of the camera in terms of lowlight condition, stabilization, this is really - this is what you needed if you want to enable organization reality. So this has value added features that you can do with a processor and capability to align newer network in our groups. The second largest market to-date is volumes market. Trust me China today, I'm speaking about public surveillance, primarily you have $150 million and expect it to grow in 2020 to $450 million, these are just outlook camera, the glass, also the face recognitions that can identify you or anybody else working and then violating traffic [indiscernible] stuff like this. So this is the second largest market if you take these newest phone - smartphone and also the camera has to be smart, with the technology that likely we have. And then comes market data, [indiscernible] asked me about, what volumes are in the market? The primary use of today is growing at least from now standpoint is the industrial and the volume culture, not much to learn in the [indiscernible] and these are also very smart artificial intelligence in the sense [indiscernible]. And then we have a lot of different cameras, consumer camera, viewer less camera, action cameras and also so that [indiscernible] so it's a big market. And the new thing about it is the [indiscernible] we will not come and say when we need seasonality, and things could go ups and downs, it's - the town hall is share of businesses the different verticals. So there's no very, I'd like to say the engine from our point of view. It [indiscernible] only, so the market is like some six and some four of after the question and our [indiscernible] this currently is now very, very intelligent solution that we came out over the [flatness] of this market that we have discussed and [indiscernible] fee income.

Thank you.

The next question comes from Gary Mobley of Benchmark. Please go ahead.

Hi, guys. Congrats on the continuation of strong licensing trends. On that topic, this new portfolio agreement, I'm curious to know is this with a first time licensee or an existing licensee?

Existing significant customer of ours, but right now [indiscernible] would service one segment [indiscernible] in the past, but everything the constant vision, sound, connectivity, Bluetooth, Wi-Fi, base station, handset, really nice diversification of the quality and hopefully that will carry out these new designs with [indiscernible] down the road.

Okay. Did this portfolio agreement contributed all too deferred revenue and relating to deferred revenue is down roughly $3 million sequentially. And I noticed just one component of the total backlog, but...

The $3 million is an overview [indiscernible] hasn't been recorded in the balance sheet and it comes from increased deferred revenue next quarter as we get there. This is a very back-end loaded view. That's the [indiscernible]

Okay. All right, last question for me. You did not disclose this time, the LTE royalty units? Could you give us that number?

LTE was [indiscernible] in unit sale in the second quarter.

Okay. I like that, do have one additional metric question. The non-mobile handset baseband royalty unit growth, I believe, was 39%, I think that was the number you coated, but more than doubling in overall revenue obviously implying a per unit royalty rate increase, probably, fairly substantially. And is it all - is that mix related, is that base station accessory related royalty contribution driving that? And could you give us a sense of what that base station SoC royalty unit contribution might be?

Sure. When we - first time in the LTE count that we answer verbally the question that we talk about, within the first half of the year when you look at then the royalty is possibly fit next quarter, we essentially, although who made may not the annual volume of our future just a year ago [indiscernible] and we talked about Q4 and there extends for base mix line and part of that down the road on the outreach. On the non-baseband royalty, so now that overall number is still relatively small because it depends on two [indiscernible] contributes mass, the big portion of that overall. With that said, it eventually it's more than doubled on the per se, continuous and then [indiscernible] in the base station market has been the very center of the root through our [extinguish] that we have and can carter you to take more than 1% of [AFT], and these are very expensive it's in the $100, $150 type of the devices. So an AFT is much, much higher and of course the [indiscernible] like that and what we have there in many other markets in the past. As to that there is a bit higher vision of royalties then our average and that also has an interesting element to those piece. And there is no one to speak of [indiscernible] and so many moving pieces, some lower, some higher than I missed the point, down with the overall dollars are in large trends, I think we are happy with the [indiscernible] and it probably has some mix doesn't make sort of sense of the overall [indiscernible] volumes.

All right, thanks guys.

Thank you.

Our next question comes from David O'Connor from BNP Paribas. Please go ahead.

Great, thanks for taking my questions gentlemen, and congratulations on the solid results. I have a question about the China smartphone weakness that you're calling out. If I remember back to Q1 call, you mentioned, that your Chinese-base customers were mainly shipping into India where smartphone growth continues to be very strong. I'm just wondering has there been some change in dynamics this quarter versus the last quarter among your Chinese handset customers, that's my first question.

Yes, well, David, good one. That's exactly how it works. The more - the supply in India is coming from Chinese OEMs that specialize in the low cost revenue, because in India it's primarily low-cost bulk. In India if you'll look on the statistics last quarter, Q2 it was flat in overall phones and the focus center smartphone, and this preliminary numbers that [indiscernible] 20%, 25% related costs most significant on phones. So I believe as a result of this market demand and I think the - no believe I forgot related inventory in China and that's the reason that our customers will specialize our chief customers would specialized in China, given [indiscernible] that March that mainly into the market of India. India is a very dynamic market [indiscernible] to a lot of initiatives to move past 20, including fully smartphones, including future phones and the Chinese phones. In the beginning of the call, [we said that], I don't think there is maturity in the market. It's just a [indiscernible], it's a transition from where they are today 3G frankly, and they should recover one way or another whether the partition between Q3, Q4 this is something that we really today we don't know. But I think what's important for us is the kind of market is their and now customers are very established in supporting the market need.

Okay. Thank you for that. That's helpful. And as follow-on as well, looking at your 40% baseband share, when you look at that, how sustainable do you think that level is, I mean can we expect it to still edge upwards when you look at the dynamics among the major players in the smartphone space at the moment. And I have one additional one, a question?

Sure. The 40% [indiscernible] China for mid 30 to 1% or 2% down, so that overall depends on the mix. And today with 2G we have probably more than 85% to 90% in 2G for the major our low-cost value that runs our business and 3G is just [indiscernible] of 60% of the market. And again, sometimes in every quarter we have a little bit of [indiscernible] in the market or less [indiscernible] into that, and royalty is [indiscernible] very well above 20%, last quarter is about 20% more value market share. And going here of course over time if you click this partially by these markets that we even talked about, partially, from high end well known SKUs that will come down every once in a while. So I think we are trying to topple every market segment of royalty shipment was zero to 1%, today it's 20% and tomorrow it further increases expense.

Okay. And as a final question, I have a question on the - your vision in automotive. Are you - the main application you see with your automotive customers or licensees, is it primarily vision or do you think there is other applications in there that's you're discussing with your customers as well as you go forward towards the concept of autonomous car?

When it comes to vision, this is a technology for cameras so the customers who are taking the technology are looking for the results, which means [indiscernible] front facing camera or even smart rear cameras and on the rear side for parking purposes. These are the - in general down the [indiscernible] customers those on the connectivity side, you can start to imagine the car with 5G and your customers are chipping more than simply this space. And also in Wi-Fi and Bluetooth, so Wi-Fi most of the car today have a Wi-Fi access point. So all customers are targeting this space and Bluetooth is for capability to speak with cellphones through the speakers of the car. So these are technologies that came up - with keeping up Bluetooth. So we are addressing the China market [indiscernible] technology.

Very helpful. Thank you.

Thanks David.

And the last question will come from Suji Desilva of ROTH Capital. Please go ahead.

Thank you, congratulation on the strong progress here. The customers that are new to see, but can you talk what areas you're seeing those customers in because you already have a very strong licensee base, I am curious where the new ones are coming in?

Well, the new one - smartphone is such smartphone the SoC camera. We are talking about the camera chips side by side we also see the increased application process, so this moves on at least the [indiscernible] imported. [Indiscernible] camera was a very big customer that licensed this [indiscernible] this quarter. Both I mentioned in my prepared remarks was it's a top-rated company, it's now a bit kind of [indiscernible] product [indiscernible] Bluetooth [indiscernible].

Okay. Great. And then my other question is on the wireless infrastructure that you started ramping here. What kind of linearity you expect to that ramp, will it be lumpy or give a sense of whether it will grow every quarter just to get a understanding how that will play out?

[Indiscernible] it's not the seasonal really [indiscernible] base station and [indiscernible]. So at this stage we don't know exactly at which stage was this base stations stuff going and what are the [indiscernible] 4.5, 4.9G that [indiscernible]. This should not be merged this stage we don't know and we are not wholly sure of this information.

Okay, that's helpful. Great, thanks guys.

Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Richard Kingston for closing remarks. Richard Kingston Thank you, Andrew. Thanks, everybody, for joining us today and for your continued interest and support of CEVA. We will be attending the following upcoming conferences and events and invite you to meet us there. On August 8, we'll be in Boston at the Oppenheimer Annual TMT Conference. On August 9, we'll be in Boston at the 37th Annual Canaccord Genuity Growth Conference; September 6, we'll be in New York at the Drexel Hamilton TMT Conference; September 7, New York, again, for the Citi Global Technology Conference; and September 12, we'll be in Las Vegas for the Deutsche Bank Technology Conference. Please visit the Investor 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.