Good morning and welcome to the CEVA, Inc. Q4 and Year-end 2017 Earnings Conference Call. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Richard Kingston, VP of Market Intelligence, Investor and Public Relations. Please go ahead.

Thank you. Good morning everyone and welcome to CEVA's Fourth Quarter and Annual 2017 Earnings Conference Call. Before we begin, I would like to inform you that the prepared remarks for this conference call will be filed as an exhibit to the current reports on Form 8-K at the conclusion of the 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 highlights from the fourth 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 and qualitative data for 2018. 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 and full year 2018, market data from Gartner, ABI Research and GSA, optimism about our prospects associated with AI based devices, the smart and connected devices, the RAM sector, LTE penetration and non-handset baseband segment, the strength of our licensing as a precursor for a lucrative future royalty stream, projected customer ramp-up schedules and optimism about the success of growth in the non-handset space. The risks, uncertainties, and assumptions include the ability of the CEVA signal processing IPs for smarter connected devices 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 LTE and 5G networks, AI, LTE-IoT, and the IoT space generally, our ability to execute more broad portfolio license agreements, customers' 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.

Good morning everyone, and thank you for joining us today. CEVA delivered another year of record results with outstanding execution in licensing and solid progress in royalties. We ended 2017 with a stronger-than-ever foothold in the vibrant smart and connected universe, which progress I will elaborate shortly. Total revenue for the fourth quarter of 2017 came in above the upper range of our guidance at $21.6 million. The licensing environment continues to be healthy, with revenue of $9 million and 13 new agreements signed. All of the agreements were for non-handset baseband products, and five were with first time customers. Target markets for the new agreements include cellular IoT, which was particularly strong during the quarter with three new agreements; autonomous driving, 5G cellular backhaul, vision for mobile and consumer electronics, smart speakers, voice enabled headsets, and a variety of Bluetooth connected products. With respect to autonomous driving, I would like to highlight that we concluded a strategic development agreement with a top tier car OEM for next generation AI processor of our NeuPro product line. This revolutionary AI technology is targeted for levels four and five autonomous driving systems, the most advanced, yet complex AI application in cars and in the embedded world in general. It is our first engagement directly with a car manufacturer, which grants us an intimate access to future AI-based applications in autonomous cars. The NeuPro technology, which we unveiled at CES, is a new family of optimized AI processors, enabling processing of varieties of AI applications on the device rather than in the cloud. This approach allows a faster response time and ensures better security and privacy. NeuPro is the world leader in performance and software for device-based AI applications among which are face recognition, object classification, automatic speech recognition, workflow management, malware detection,…

Thank you Gideon, I'll start by reviewing the results of our operations for the fourth quarter of 2017. Revenue for the fourth quarter was $21.6 million, as compared to just over $21.2 million for same quarter last year. The revenue breakdown is as follows, licensing and related revenue was approximately $9 million, reflecting 42% of total revenues, 9% higher as compared to the fourth quarter of 2016. Royalty revenue was $12.6 million, reflecting 58% of our total revenues, just below the $12.9 million for same quarter last year. Quarterly gross margin was 91% on a GAAP basis and 92% on a non-GAAP basis. The non-GAAP quarterly gross margin excluded approximately $0.1 million of equity-based compensation expenses. In general, cost of revenue was higher this quarter than prior quarters of 2017 due to expenses associated with the narrowband IoT product line in the neighborhood of $400,000. Total operating expenses for the fourth quarter was at the high range of our guidance at $16.5 million. OpEx also included an aggregated equity-based compensation expense of approximately $2.3 million, and $0.3 million for the amortization of acquired intangibles of RivieraWaves. Our total operating expenses for the fourth quarter, excluding equity-based compensation and amortization of intangibles, were $14 million, also at the higher range of our non-GAAP guidance. U.S. GAAP net income and diluted EPS for the quarter decreased 39% and 42% to $3.2 million and $0.14, respectively, over the fourth quarter of 2016. Non-GAAP net income and diluted EPS for the fourth quarter decreased 18% and 22% year-over-year to $5.7 million and $0.25, respectively. Other related data. Shipped units by CEVA licensees during the fourth quarter of 2017 were 285 million, up 14% sequentially and down 17% for the fourth quarter of 2016 reported shipments. Of the 285 million units shipped, 205 million units,…

[Operator Instructions]. Our first question comes from Gary Mobley with Benchmark.

Congrats on a strong complete year. Yaniv, am I doing the math right, 4G LTE units in the fourth quarter were 94 million roughly?

4G were 82 million units.

Apologies. So much from a math. You said what 311 million for the full year?

Yes, but taking into account that there is a new segment of the feature phone based LTEs, so some of that still falls into the future phone as a phone segment, but overall it's part of our LTE modems.

Okay. Regarding 5G LTE radio access networks, do you still feel that, that ZTE will be the primary contributor to royalty revenue in 2018? Can you share with us what 5G LTE base station related royalty revenue was in the fourth quarter, and can you comment on Nokia's recent launch, ReefShark, if that's what you're eyeing as it relates to your second half 2018 or 2019 additional contributor to 5G related royalties?

Gary, it's Gideon. Let me -- because we were in the last few years a bit tightlipped in what we are doing or what our customers are doing in the RAN market, RAN market is an umbrella of all the different use cases in a base stations for DSP processing. I mean we are not just doing the -- we are not in just one place, we are in macro cell, we are in the small cells, we are in the cloud RAN, we are doing remote radio head. So our DSP is in several places there. Now we spoke about the customer which is already in production, not in full scale. The scale is going up this year, I would say, even significantly. And there is another customer that is going to get into production and this is on track. I don't see any stumbling issue in terms of not doing it this year. The question is how -- the magnitude of this initial ramp that -- and also the first time, we have to see. Now our entry point with these two customers that will be in production the second half of this year is what is called LTE-Advanced and LTE-Pro. Only one third of the LTE base stations today have been upgraded to the faster LTE which is LTE-Advanced and LTE-Pro. So our entry point is with this product line to the LTE-Pro, there is a software upgrade, they can do a software upgrade and go to 5G, the 5G which is already certified, not the envelope. The highest 5G, the most advanced 5G that we made to go the XC12 and this will be more toward 2020. So overall things are on track. There is in the last two years, lower investment, CapEx investment in this…

Okay. Last question for me. Could you just speak about the nature of your North American automotive OEM relationship, the phases of this relationship? Is this the first phase with NeuPro, really just kind of a discovery phase and then perhaps at some point during the year maybe 2018 or 2019, it goes into sort of implementation stage?

Yes. Obviously I cannot speak about this engagement and cannot elaborate on this one. First of all, it's not necessarily a U.S. base. We speak about Tier 1 OEM companies. So it's a car manufacturing company. They take next generation of our NeuPro. We announced in CES the NeuPro for different product lines, but we speak about the next generation, something that is revolutionary and take us to the fully autonomous car space, and it's a journey where we are today, but it's a good engagement. If all things will go in the right direction, we see 2020, 2021 [indiscernible].

[Operator Instructions]. Our next question comes from Suji Desilva with Roth Capital.

Congratulations on a strong '17 here. Just a quick housekeeping question, Yaniv, on the accounting change. Yaniv, when you report revenues going forward, will you have all the customer reports to accurately report the royalties or will you be making adjustments you think?

That's a good question. We will do our best. Usually we close the quarter and get the reports 30 days after that. Taking into account that nine days after those 30 days, we need to report our 10-Qs. It's going to be a challenge. And therefore, most likely you'll see two things happening. One, we will try in the future to probably have our earnings call around this time, the 6, 7, 8 of the following month and not necessarily 30 days of immediately after like we have done in the past, which the royalty reports would just be an easier indicator for the guidance in the next quarter. And second, we'll try when we do our earnings also to file our 10-Q together so there won't be any differences between, at least the reporting and the 10-Q. And by then if there will be another report that we will receive and we did not know when we closed the books, which is going to be tighter than in the past then there will be some adjustment going forward. We'll try our best to get a good idea when we actually report for the real numbers as much as we can. I am sure that like we have seen in the past some reports will be arriving later. And then we will have adjustments, hopefully not material ones because of that new system. So I don't think it changes a whole lot other than that this tactics of when you get the report and when you know the actual numbers and report them, it doesn't really change a whole lot from a business perspective. Just makes our lives a little bit tougher.

Okay. Appreciate the colors or walking-throughs, yes. And then on the royalties here, specifically on computer vision and smartphones, where are we in that ramp versus where you expected? And how many customers do you think might be ramping that product in the smartphone area in '18? What's the magnitude of the opportunity there?

So, there are two things about smartphone. One is the baseband side of it. And in the basement side of it as we said, we are taking kind of a cautious view, not because we know something, but because we see the market data. I mean, Q4 is usually high season in shipments and it was down. And people speak about the dynamics in China and there is this big customer in the U.S. that guide this down. So first and second quarter -- by these new revenue recognition rules, first and the second quarter are the low seasons as opposed to the past that in the first half of this year one quarter which was the high season and another it was the low season. So it's more like first half is low season, second half is the high season. So in terms of base -- smartphone in general -- so I mean we see some weakness at the beginning of the year. I think things will be better in the second half. We don't know exactly how it feels but still there are all sorts of things, speculation about our share gains and of course there is the emerging markets that if you take a place like India, you have LTE penetration of 11%. And the top point to present the base stations cover 90% of the coverage. So everything is set for growth in India and it's a matter of maybe pricing. So now in the terms of non-handset, I don't really recall -- I don't have it out of my head how many customers will get into production. There will be a few that goes into production. And in general this computer vision/neural network it's a very good business. Last year we did 11 deals. And I don't see any reason that this will not continue.

Okay. And then--

--volumes that I think you also have to mention -- I think last year was a very successful year for us from getting from just the design and the licensing to actual products in the market. And we've all shared with you throughout the year -- by the way only mostly in the second half of the year we've shared with you new cell phones using our vision technology, DSLR and mirrorless cameras, action cameras and just even at the later part of the year has grown in new markets. So for the first time around vision, we have reached just about 7 million units for the year from essentially zero the year before and that was a very impressive growth both in royalties and in units for us. That number should increase when we have the full year in front of us and not part of the year. And top of that, Bluetooth we shared the numbers. We had 45% growth from 139 million to 200 million. Bluetooth devices, we don't see any reason for that to stop. The volume in Bluetooth and Wi-Fi this year around should start to ramp up. And on the newer things that Gideon mentioned and we talked about earlier, the sound and narrowband IoT and our next in line and of course the base station point. So I think all the non-baseband we have seen for the first time that '17 was the breakthrough in the royalty for the non-baseband for us. From now on we want to see that ramp up significantly into 2018.

Okay. And then one last quick question from me. On the licensing side looking at your pipeline into '18 which area do you see the most opportunity in amongst the areas you're targeting?

So I would say the following. Now the higher bandwidth product, which is vision and Bluetooth and I mentioned Bluetooth dual mode on these earbuds, a lot of companies are looking to develop AirPod like earbuds or headsets. And narrowband IoT started last quarter, I think it was an amazing quarter in this respect. I think LTE IoT in general will come out. One thing that I also anticipate is the movement to 5G in the handset space. I see we have two customers already working with us in 5G and I see a lot of activities that could come out in 5G because it's a new game change. It's a new ballpark, I would say, in terms of company. You cannot rely on legacy in 5G when you start the development of 5G. So I think as we have already and we will make something in the upcoming MWC some announcement in this respect but I'm optimistic about the 5G handset.

[Operator Instructions]. Our next question comes from David O'Connor with Exane.

Maybe first one, Yaniv, on 2018 guidance, just to clarify how many quarters of base station ramp up are you assuming within your revenue guidance from your European OEM? That's my first question. And then maybe one on the NeuPro. So for the automotive licensee for autonomous driving, is that a smartphone type chip? Is that how we should think of it? Or is it more of a base station type chip and I have a follow up?

Let's start with the first question. We're looking either at Q3 or Q4. So we will wait in those in Q3 and then more masses in Q4 for now. That's what we have in line -- in the guidance, in our forecast. And as soon as we get a bit close and we'll get a little bit more color from our customers, we will know and guide accordingly, but anywhere between 1 to 2, I'm not sure full two, but maybe 1, 1.5-ish quarters. On the royalties on the NeuPro, I think it's still in the early parts of it. It's not a chip that costs like a chip in a base station. That's for sure. It may be closer to a vision or anything between a vision to a slightly higher than that type of a chip. I think that's how I would price it or look at it. So it's a new category that's higher than our vision. I think it's a bit premature to share yet ASPs around it. We will do it as it matures a little bit more and a few days will be behind us.

Let me add a color about the NeuPro because as Yaniv pointed out, and I think it's important to understand that this is a new incremental product line. It has nothing to do we as a company we are doing so many DSP. The NeuPro is not a DSP. It's a different process. It's not by the way a CPU, it's a different category. It's an architecture or a design that works for AI work load. In our view in the future and any configurable device in the world, any configurable semiconductor will have some kind of AI engine inside to do things that you cannot do in typical structure. And this is the reason that we are investing and coming out with this product line. So I would say that this year will have -- because when we announced this product we said that in the second half this product will be for board licensing. So I believe that in the year we're going to have a few license -- this year we're going to have a few license agreements. As Yaniv pointed out, it's a separate product line, separate ASP, incremental to all other products that we have. So we have a few licenses this year, significantly more licensing activities next year. And second half of this year we will start seeing -- next year, excuse me, second half of this year, I think we will start seeing royalties coming from this product.

And maybe just one follow-up on the kind of split first half versus second half for 2018. It appears from your commentary that most of the revenue levers are going to come primarily in the second half of the year. What type of revenue levers have you got to pull on in the first half?

Sure. Our type of reporting Qualcomm as well, all the IP -- related IP companies reported one quarter in the rears. So our seasonality was really off a bit from the rest of the semiconductor industry. And maybe this is what the FCC had in mind when they changed or came out with this new interesting 606 rule. So if you take into consideration that in Q1 is the post-Christmas and after Christmas, the decreases in consumer electronics and cellphone, you saw the numbers from that Apples and their related food chain, of course Q1 is down. That's not a surprise to anybody or should not be. And for us, instead of reporting that in Q2 historically, we report that in the same Q1. So this is the reason that, if you look at last year, our first half, second half was maybe 50-50 mainly because of the shift in the seasonality that only started for us in second quarter. But in the first, we were in line with the whole market, they now mix around cellphones consumer and the like and therefore much slower Q1, builds into the spring and summer sale in Q2 and then the massive ramp up in the semiconductor space and in the handset and of course, the base station, which is key to our growth. And on revenue guidance, it will happen in the second half of the year. So I think these are the 2 or 3 items that have the most influence. The timing of being in line with the seasonality this time around from day one, from the first quarter on one hand, and in the fourth or third quarter new ramps up around pre-Christmas and handsets. Does that answer the question?

Yes.

This concludes our question-and-answer session. I would 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 in and support of CEVA. As a reminder, the prepared remarks from this conference call are filed as an exhibit on current reports on Form 8-K and accessible through the Investors section of our website at investors.ceva-dsp.com. With regard to upcoming events that we will be attending, these include Mobile World Congress in Barcelona from February 26 to March 01 and the 30th Annual ROTH Conference in Dana Point California March 12 and March 13. Please visit the Investors section of our website for further information on these events and other events that we will be attending. Thank you and goodbye.

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