Good day, and welcome to the CEVA, Inc. Q1 2018 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, today’s event is being recorded. I would now like to turn the conference over to Richard Kingston, Vice President of Market Intelligence, and Investor & Public Relations. Please go ahead sir.

Thank you, Rocco. Good morning, everyone, and welcome to CEVA's first quarter 2018 earnings conference call. I am 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 first quarter and provide general qualitative data. Yaniv will then cover the financial results for the first quarter and also provide qualitative data for 2018. I will start with the forward-looking statements. Please note that today's discussion 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 second quarter and reaffirmation of the guidance for the full year 2018, optimism about the LTE smartphone demand and a gradual return to normal inventory levels during the second quarter and thereafter. Optimism about our licensing prospects associated with 5G, cellular IOT, AI on Bluetooth products, as well as market acceptance of our PentaG, ClearVox and NeuPro products and projected customer ramp up schedules. For information on the factors that could cause the difference in our results, please refer to our filings with the Securities and Exchange Commission. These 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, and maintaining our market position in existing markets; the ability of new products incorporating our technologies to achieve market acceptance and offset the maturity of the handset markets; 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…

Thank you, Richard, and welcome, everyone. The results of the first quarter of the year reflects continued strength in our licensing business and a stronger than anticipated seasonal decline in royalty revenue, which is attributable to access channel inventories in the low-end smartphone and feature phone segments. Total revenue came in at $17.6 million, a 17% lower on a year-over-year basis. License revenue came in at $10.1 million based on fourteen agreements signed during the quarter, eight of which were for DSP and AI products, and six for connectivity IPs. Three of the agreements were first-time customers and the rest were with existing customers which are expanding their existing business or upgrading to newer products. In particular, we are proud to reveal that we signed two lead customers for new CEVA-NeuPro AI processor line and two customers for a new CEVA-ClearVox noise suppression and beamforming software technologies. Customers target application includes ADAS equipment in two OEMs. Smart camera and vehicle-to-vehicle communication, cellular IOT, surveillance camera, voice-enabled wireless headset, car entertainment, and advanced consumer cameras. Royalty revenue under ASC 606 came in at $7.5 million. Yaniv will elaborate on the comparable metrics under ASC 606 and ASC 605 later during the financial section of this call. Baseband shipments were below our expectations primarily due to excess channel inventory in the low-tier smartphone and feature phone markets. However, we believe there is a secular demand for low-cost LTE smartphone and feature phone in highly populated geographies like India and Africa, which would likely to return to normal inventory level and gradual shipment increase starting from the second quarter of 2018. Non-handset shipments in Q1 continued to expand nicely with approximately 58% unit growth and 39% revenue growth over Q1 2017 extra shipments. Also, during Q1, Nokia, a tier-1 OEM in base station…

Thank you, Gideon. Good morning everyone. I'll start by reviewing the results of our operations for the first quarter of 2018. Revenue for the first quarter based on ASC 606 was $17.6 million. The revenue breakdown is as follows: licensing and related revenue was $10.1 million, reflecting 57% of our total revenues, 6% higher as compared to the first quarter of 2017. Royalty revenue was $7.5 million, reflecting 43% of our total revenues, a decrease of 27% on a year-over-year basis compared to $10.2 million for Q1 2017 based on actual shipments that we reported in the second quarter of 2017 following the revenue rules under 606. Quarterly gross margin was 89% on a GAAP basis and 90% on non-GAAP basis. Our non-GAAP quarterly gross margin was approximately $156,000 on equity-based compensation expenses. Total operating expenses for the quarter were just below the high-end of our guidance of $18.5 million. OpEx included an aggregated equity-based compensation of approximately $2.8 million and $2.4 million for the amortization of acquired intangibles of RivieraWaves and our investment in the narrowband IOT technology. Our total operating expenses for the first quarter excluding the two items were $15.5 million, also below the high-end of our guidance. U.S. GAAP loss and diluted loss per share for the first quarter was $2.2 million and $0.10 respectively. Our non-GAAP net income and diluted EPS for the first quarter was $0.9 million and $0.04 respectively. Our first quarter 2018 financial results under 605, the old rule for direct comparison for Q1 2017 financial results were as follows: total revenue was $19.5 million, U.S. GAAP loss and loss per share was $0.5 million and $0.02, and our non-GAAP non-income and EPS for the first quarter of 2018 under the old 605 reporting standard was $2.5 million and $0.11 respectively. Other…

Thank you. [Operator Instructions] Today’s first question comes from Gary Mobley of Benchmark. Please go ahead.

Hi guys. Thanks for taking my question. I want to start out with a question about your royalty guide for fiscal year 2018. Just to be clear, you are maintaining the assumption that royalty revenue in total grows 10% this year?

Yes, that’ correct. Good morning, Gary.

And does that – just to be clear, as well, you are taking ZTE out of your forecast and you still get the 10% growth and that obviously puts a heavy weight on the second half of the year. How much of that strength in the second half of the year do you expect to be fueled by mobile handsets? And how much do you expect to be fueled by base station licensees like Nokia?

The one correction is without the ZTE. ZTE, we have taken the number out only for the second quarter and in the third, we will monitor the developments of the different discussions going on between the U.S. and China and they are trying to resolve it. So, if this continues, we may need to update our annual guidance. For now, we are only taking the hit in the second quarter, maybe a limited hit, we don’t know yet. But we have taken that out from our speculation, only for the second quarter.

Hi, Gary, I want a bit – you go ahead.

No, I am sorry, go ahead, Gideon.

I want to expand on the cellular thing because this is going beyond our expectation. I should say that, we thought this at least internally we gave ourselves between in Q1 and keep in mind that Q1 is the low season according to the new rule that we report, we came out with a – came ourselves to provide between $1.2 million to $1.5 million and this is accretive to the cellular. I mean, all other parts of the business there were revenue on a yearly basis and then a seasonal decline on the non-handset side. Now in the non-handset side, the so-called seasonal decline in this space was between 10% to 15% in we had an event in Q2, 2015 of about 25%. This quarter, the seasonal decline and it relates to inventory that was built up in the high season, industry-wise; it was 30%, seasonal decline. We came out with – in the smartphone space about 32% and the future phone about 40% and when you are in the low tier side so you have all those shoot, because of those shoot, then the industry in general. But this is we are hearing declines so first that inventory now getting to a normalized rate and now they are in Q2 is going to be kind of a set up operation for the high season and Q3, Q4 should be relatively good quarters.

Okay. Last question I have relates again to ZTE. Can you share with us approximately how much you were hoping to get from ZTE royalty revenue or the base station SSE market in general if you don’t want to be too specific? And your assumption that ZTE may rebound in the second half of the year, is that predicated on the definition of a clear licensee is and whether it’s U.S.-based or is it predicated on the appeal that ZTE has filed with the U.S. Commerce Department and the political ramifications?

Yes, let me start with the later part, the ban here is associated with components made in the U.S. sold to ZTE. So it’s not necessarily only our chip, the chips that are embedded in our technology, but different components that go into a base station that ZTE had many years vendors, mainly chip vendors suppliers against. So, they don’t have the full amount of – sort of, they cannot build base station, they are not in that segment even though maybe they have less of a family, the one chip that is not U.S. based or at least U.S. based. So, they will hold every shipment of base stations and get resolved and they have all device components to make the design more. So, our problem is mainly with other vendors in the space that if you don’t have enough components still to build a car, you cannot sell a car without the motor or without the wheels and you are just stuck and you are not going to get royalties on those amounts of that are sold. So that maybe put ourselves some of the chip vendors incorporating our technology into ZTE U.S. base and that’s probably next problem. But the bigger problem is that they don’t have all the ingredients and they are in a hold position and as you said, you don’t know - exactly know the inventory levels that they have going into the second quarter. That’s the second part of the question. The first part of the question is as you know, the base station market is a very large royalty contributor to us going forward. And I would say the first part that we are building with ZTE for example, can be even handful of millions of dollars for this year. So, that’s the magnitude more or less maybe $1 million for the second quarter. This is what we all trying to be prudent with and for now we are hitting out of our guidance and we haven’t taken more about for the rest of the year with hope that they get resolved over time.

Very good. Thank you guys.

Sure, thank you.

And our next question today comes from Mike Walkley of Canaccord. Please go ahead.

Great, thanks. With success in your 5G base station licensing, do you believe you can add another top-five OEM that’s currently developing an in-house? And then, also just switching gears to the 5G smartphone baseband licensing opportunity, how should we think about your strategy there with different processor engines? Is this open opportunity to new CEVA customers that currently don’t use your baseband technology today? Thank you.

Yes. I mean, the answer to question, both yours, when it comes to base station and 5G it is – because it’s the started technologies and you then cannot rely on incumbencies there. We are a very big shot there to expand our presence in this market, companies didn’t use a mobile phone chip or developed them in-house. So we are in active discussions there and on progress. Eventually, these are very strategic agreements and one size does not fits all, so it takes time, but I am optimistic about the progress in this respect. When it comes to handset and I said in my prepared remarks mentioned other used case like fixed wireless and autonomous driving. Here, the way we do the PentaG modern technology that we built it in a modern way that even to people that - in-house or with other incumbencies that can take advantage of portion of this technology. And this technology offers several new ways and attractive methodologies to implement. As I mentioned AI, and so, software-defined radio, I think we are the only company in the industry goes in the semi side and definitely IP side that offer software-defined radio platform that are efficient enough, the people can take advantage of. So, when it comes to 5G handset and within an equipment, with see some of the people really don’t - not the whole platform, but a portion of it and we are fine with it.

Okay, thank you. And just it’s nice to see the reiteration of the 10% year-over-year royalty revenue. Can you maybe break it down for us a little bit? You seem to be getting success in the non-handset market, do you see non-handset market up much more than that and the handset market down year-over-year. Can you maybe give us some rough parameters kind of how you see non-handset related basebands versus handset-related basebands royalty revenue for 2018? Thank you.

Hi, good morning. I think it’s a bit early and premature to build a model, of course, we have our expectations, but there is so many moving parts as demand about the ZTE brand which our estimate just few weeks ago now is different than what it was and we are still, as Gideon said, we are still waiting for the first launch of the Nokia ReefShark chip in the third quarter and we need to see the magnitude and their design cycles, although they are quite optimistic about the efforts of ZTE mobile and thirty other design wins that they have that’s going on for them around that deployment. There is so many people, the inventory issues of many of the semiconductor and component layers in the wireless handsets popped out and reported in the last couple of weeks in earnings season. It was not something that would built in the models earlier in the year. So, I think we have to take it step-by-step. If we take all those for example, the older calculation, it looks about revenue at $10 million which is the Q4 shipment and when compared to last year we are only down 15% in an apples-to-apples basis. And somewhere about the starting point into the year without these rest of the moving parts. So, we are happy to add more color of the need as we go along, but that’s all very basic data points like the recovery like the base station and other non-handsets products that you want to see ramping up and then we will share the breakdown and the information around it.

Let me just add, maybe this explains why we are not changing our annual guidance at this case. The reason that we are not changing because the fundamental or the underlying assumption that we had at the beginning of the year did not change. Keeping the side of the ZTE because it does continue and this go along, we will have to change. But, right now, it’s one quarter we feel sort of we have lot of progress that was made to appeal and stuff like those. So, maybe things will go in the right direction sooner, but you should take them on hand straight forward when you look just the year-over-year you are looking at on the transition for high season which is the fourth quarter and the first one and in the first quarter we are supposed to be the post-Christmas season, there is barely a seasonal decline and one of the reasons that our new shippers coming into the market starting from this year. When you take, at the beginning of the day, we didn’t speak about Nokia, now it’s public and they by themselves including the fear, is going to be positive about the second half of the year. When we see, the mobile, we were initially conservative about this space. The inventory is it’s an issue that usually go back, because the demand is there. So, when – if you look on the fundamental, this is our underlying assumption. They are not changing again assuming that ZTE will be resolved shortly.

Great. Thank you. Last question for me and I’ll pass it on, as you look at some of the catalysts for the royalty growth in the second half of the year, what are some of the more important factors? Is it ZTE getting settled? Is it the Nokia timing of their ramp? Is it maybe Intel share gains in iPhone platforms? Can you maybe just help us think about some of the areas you see if the bigger drivers for second half improvement over first half besides the seasonal aspects? Thank you.

It’s all of the above. The base station, it’s a trend, it’s ingredient and I think it’s the first time we can get into production with this customer. ZTE of course is, if it’s there, we know more or less what we expect, because this customer is shipping already. Smartphones, more or less mentioned with all the things and there are – currently small handsets baseband products starting from Bluetooth, vision, different markets and all of them are showing the progress. I mean, we are monitoring the customer progress. We are monitoring the pattern of the shipments and at this stage things are on the right direction.

And I would say, still today products issued that which was distributed earlier today has a lot of new products drones and a lot of that Gideon mentioned, you could see some of these examples that are ramping up, because they are in production now all round the year. So, we see have them on a full year basis, but that’s all the new contributions to our non-baseband royalties.

Thank you.

Thank you.

And our next question today comes from Joseph Wolf of Barclays. Please go ahead.

Thank you. I was hoping to get a little bit more color, I guess on some of the – you talked about the seasonality of the handset market, expecting that to come back, but the feature phone markets fell significantly compared to where we thought it was going to fall. And I am just wondering as you think about the recovery, what kind of mix do you expect in the handset market? Is it transitions in the lower cost markets to better handsets? Are we calling them feature phones? Are we calling them smartphones? And what kind of ASPs are we looking for as you think about that second half recovery?

Yes, hi, Joseph. Let’s start with the feature phone. I mean, feature phone, we are all asking ourselves how long do this market continued to generate hundreds of millions of new phones a year and in the last couple of years, we – supplies how existing it is and how long it’s still around. Maybe this is the first change, because this is a dramatic decrease, as Gideon said, sequentially at 40%. We have not seen that magnitude before. Not a 100% sure if this is a demand issue or more of an inventory issue because of the high end and maybe you have here a deck of cards that everybody was assuming that Apple will have different results and actually we had and from thereon, the lower smartphones, they are prudent and they are very low-end feature phones also even took more aggressive approaches as Gideon mentioned earlier and this is how we got to the level. About a year ago, I think we introduced something that you saw in a call, something called an LTE feature phone. So, a very simple phone, it’s still very inexpensive that it starts to use the LTE network and of course our ASPs are twice of lead times – than a feature phone device. It did pick up for a while. There was some soccer. There were some of the carriers reduced prices or gave different discounts just to people to use them. But we haven’t seen a year after, we haven’t seen that is a key driver of the new market evolving from the feature phone. The next step-up and this is something we have been saying for a couple of years, if the prices rise, if the smartphone – low-cost smartphone pricing is raised and I am not sure what…

Okay, that’s helpful. As you think about the baseband opportunity specifically, the ReefShark product and you hope – I know it’s too early to tell exactly what’s going on, but can you remind us if hear about certain rollouts in certain geographies, how many – like how does that flow through? Is it per base station, how many DSPs are there? How much – what’s the ASP content? What can we be thinking about there in terms of that? And then, I am assuming you are going to account for that in the non-handset revenue or how should we be thinking about that?

Well, let me start and Gideon will help with last year and yes, to pursue with the non-handset components in our business, everyone is already breakout and you are seeing the 10-Q that we have the vision, we have connectivity, assuming this becomes big enough contributor for us, it may open up in a different line item. Right now, other baseband devices and it’s an expensive shift. And we’ve got one of these very sophisticated chips in a base station, this could be an $100 to $150 device and in general with that being too specific on one customer or another, if you look at the market size or the number of chips that are deployed in that market, I think all will – let us go public, more than $3 billion of semiconductor content in this market. If we get our 1% or so, we are talking about a pretty significant ASP for chip for us. It’s a sizable opportunity in royalties from the overall market having today maybe 50% market share, design-wise and as we mentioned, as Gideon mentioned earlier, it’s a different question, maybe we could win more of that market as time goes by. I think these are some of the parameters that I would make to define the opportunity and we mentioned the exit in royalties from ZTE already and Nokia was just around the corner and hopefully the second half of this year starts to and then basically the way we see the first royalty as such.

Okay, and then just finally one more granular question about the mix. You mentioned the voice-enabled Bluetooth is a big opportunity. I am just wondering within the units that you talked about for the non-handset opportunity, which I think was $74 million, Bluetooth grew in the non-seasonal way, is it any of the new Bluetooth. And I guess, by my math, I still assume that the baseband or the handset product is still 65% to 70% of the royalty revenue. Is there going to be a quick – if the second half develops the way you think is it fair to think about that mix is closer to 60-40 or even 55-45 by the end of the year with some sort of reasonable mix of non-handset or maybe I am starting the year as well?

No, you are maybe running a bit fast. We cited back a year or two years ago for many years the non-handset is centered there. Last year, for the first time, we went through from 9%, 10%, to 18%, just shy of 20%. Eventually, when these things kick in, it should help us get to 30%, 40% and 50%. I am not sure yet to tell you if it’s this year or next year and we have for the full year basis or new customer shipping base stations. Again, lot of moving parts, but there is no doubt, but we are still – this is - Q1 is an abnormal season, quarter for us, because of the seasonality and we had 62% handsets in volume and the rest went to non-handsets. And this is a – we are almost here with 40%, but this quarter is not a typical quarter. So, I think if you go back anywhere between 20 something percent, and the more and more handsets bigger percentage of the contribution you could get from the new markets. Bluetooth is up by the way, units 61% year-over-year. So, we are seeing more headsets. We are seeing more connected devices. We are seeing more bracelets and hearing aids and hearing – and headsets, a bunch of different Bluetooth devices. As we remind it’s, maybe lower ASPs, but the volume opportunity is quite big. One last thing and that we could move on, just in the last quarter we signed four deals of Bluetooth audio type of applications, just in Q1. So, these are very interesting in-house markets for us.

Perfect. Thank you.

Okay, thank you.

And our next question today comes from Suji Desilva of ROTH Capital. Please go ahead.

Hi guys. First question on the smartphone markets. Just on the high-end our customers are waiting new models and do you still breakout LTE units or is LTE really kind of the bulk of the units now and not worth breaking out?

No, we are happy to break it out. We have 67 million units shipped in Q1 versus 71 million a year ago, on a year-over-year basis.

Okay. And the high-end markets, do you see customers waiting for new models? I know at the low-end just sounds like inventory correction, but any color there would be helpful?

On the high-end smartphones, not sure, I mean the timing every OEM comes at different timings these days. The normal one is in September and earlier in the year, but those are the high-end. I think the volume, just – there would be couple of ones we could find and then the question is more not the timing but how successful they are, if we are aiming of other vendors that are in the – that’s in that maybe they are moving parts.

Yes, again the way it works in mainstream, but Q2 basically a kind of a set up quarter. So there are big gains – big, big channels to do in Q3, Q4 all the ones that you are going to see the high volume. So, as I said, the inventories, we don’t know exactly how, call out the inventory but we understood that it’s a entry-level and they need to rebuild it, because the demand – there is no change in the demand from – in a structural way. Q4 was a bit slow. High season and they have to go through their adjustment. But they have got nearly in an P&L review. And there are new models and on those things that we heard of still in place.

Okay. And then another quick housekeeping question. Did you give the Bluetooth unit numbers in the quarter?

Bluetooth was 16 – we are looking in a second and we have made this long ago, $57 million this quarter.

$57 million, great. Okay, thanks. What are the royalty rates we should expect with some of the newer products like NB-IOT, ClearVox, NeuPro, just understand the magnitude of the ASP there versus the traditional royalty units?

It’s important to see that the ClearVox, the royalty that we are getting is between two to three times of the hardware, so. This is the first time, and it don’t, yes, when we make, this is the first time though as we are giving this software which is a bit moving higher on the future and the pure IP or as a percentage of the chip. So, we will add on that OEMs do use a lot after they have already the chip in order to get it to work and have the access to that technology. We are trying to boycott that need to provide it for our technology. So, again, when this goes into production, we could give a bit more color and show you those devices, but if we had to add on, it is on top of the DSP core that’s in the chip itself.

Okay. And then, lastly, can you talk about the imaging products and the voice products, what kind of year-over-year we’ve seen in those non-baseband sub segments?

I am not sure if I have here the breakdown of the different markets, but seriously more business, much of them you have seen a year or two years ago. If you remember, last year in 2017 on an annual basis, not in a quarterly basis, we powered for the first time from zero to 7 million units of vision-related products in 2017. Our hopes can grow for this year is to have a two-digit number and hopefully, few two-digit of units, it is just starting. So I don’t remember what it was in Q1, but from here it’s 7 and plan to take it much further higher.

Okay. Great. Thanks guys.

Thank you.

And our final question today comes from David O'Connor with Exane. Please go ahead.

Good morning gentlemen. Thanks for taking my question. Maybe, you can get in firstly, can you talk about the competitive dynamics around the AI processor IP in smartphones? And I see Huawei and also Mediatek are using competitor IPs for their newer engine. Just help me how we should think about your ability to capture some of this newer engine markets in smartphones? That’s my first question. And then a follow-up on Nokia. So, just to understand it better, how aggressive a ramp up are you assuming for Nokia in the second half of the rollout of ReefShark. Is that based on Nokia inputs or is it more based on the RAN market forecast? Thanks.

Okay. So, starting with AI, we have a few competitors, by the way you mentioned Huawei company is kind of hybrid company. They are a semiconductor company and not going to – and IP company that got initiatives they do. Our advantages are improved state one is the comments we showed highest performance and there are reports for microprocessor reports that so many stated and the other advantage that we have is our software. Our software – because we started earlier, our software, what we call as CDNN is the only – this is the only software that show maturity and features to what a video is showing with their software that is called [Indiscernible]. So, these are two relatively high entry to barrier for people to compete with us in this stage. So when it comes to Nokia, of course, we cannot discuss our discussion with Nokia. But, our assumption is a combination of parameters. We are yet to see, because this is something that base of the ramp up is something that I am not so sure that Nokia knows at this stage.

That’s helpful. Thanks guys.

Thank you.

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 everyone 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. The CEVA Annual Stockholders Meeting will be held next week and we encourage all shareholders to participate through casting their proxy votes or attending the event. We will also be attending the Oppenheimer 19th Annual Israeli Conference in Tel Aviv on May 13, the Cowen 46th Annual Technology Media and Telecom Conference in New York on May 30, Jefferies Israel Tech Trek in Tel Aviv, Israel on June 5, The Stifel 2018 Cross Sector Insight Conference in Boston on June 13th, the 10th Annual Credit Suisse Semiconductor Supply Chain Conference in Boston on June 14, and the ROTH London Conference in London on June 18 through 20. Please visit the investor section of our website for further information on these events and other events we will be attending. Thank you and good bye.

Thank you. Today’s conference has now concluded. We thank you all for attending today’s presentation. You may disconnect your lines and have a wonderful day.