CEVA, Inc. (CEVA) Q1 2018 Earnings Report, Transcript and Summary

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 more broad portfolio license agreements, and customer ramp-up schedules and the impacts on royalty revenues. CEVA assumes no obligation to update any forward-looking statements or information, which speak as of their respective dates. In addition to the financial results prepared in accordance with Generally Accepted Accounting Principles or GAAP, we will also present certain non-GAAP financial measures today. CEVA’s management believes that in addition to using GAAP results in evaluating our business, it can also be useful to review those using certain non-GAAP financial measures. Investors and potential investors are encouraged to review the reconciliation of non-GAAP financial measures with their most direct comparable GAAP financial measures, which can be found in the earnings press release issued today. A copy of today’s press release for the quarter ended March 31, 2018 and the related financial tables and management commentary which were included in our current reports on Form 8-K filed today can also be found on the Investor Relations portion of our website after this call. Before handing the call over to Gideon, I would like to remind you that CEVA adopted the new revenue accounting standard known as ASC 606 as of January 1, 2018. Under the new standards our royalty revenue represents what our customers shipped during the first quarter of 2018 are our best estimates for such shipments. The numbers stated on this call for the first quarter are based on ASC 606 unless otherwise stated. However, as our Q1 2018 financial results are not directly comparable to our Q1 2017 financial results, which were reported under the old revenue accounting standard known as ASC 605. We will also provide you on today’s call our Q1 2018 financial results as reported under ASC 605 to allow for an apples-to-apples comparison on a year-over-year basis. We will have this new reporting approach throughout 2018 as required by the Financial Accounting Standards Board, With that said, I will now hand the call over to Gideon.

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 RAN market announced its new ReefShark chipset that incorporates CEVA DSPs. This chipset is planned to go into production in the second half of the year. Let me take the next few minutes to elaborate on the underlying dynamics for three of our products for which we see good licensing momentum in the short-term and substantial royalty revenue potential as those licensees enter into production. The first of this is voice-enabled Bluetooth headphone. Last quarter, we signed four agreements with customer targeting this space. Currently, the success of our earbud headphone has paved the way for broad routes of wireless headphones, not just on music streaming and voice call, but also for a seamless communication with voice-assistance services such as Alexa and Siri. The Bluetooth headphone space is a new multi-billion unit opportunity for CEVA that it can advance with both our reputable Bluetooth technology and with our voice DSPs combined with the ClearVox noise suppression software technology. CEVA is one of the very few companies and the only IP company that has expertise and is a one stop shop for low-power Bluetooth connectivity in voice hardware and algorithms which applies to multitude of emerging voice-enabled devices such as headphones, headsets, hearing aids, smart speakers and smartphone devices. The second is the growing cellular IOT market where we continue to – with the recent licensing momentum, with two new agreements for our vertically-integrated CEVA-Dragonfly NB-IOT platform. The climate of NB-IOT sales by network operators continues worldwide. Verizon confirmed its plans to do nationwide NB-IOT network covering 2.6 million square miles by the end of this year and China Mobile reported its MWC that it has launched the NB-IOT network in 346 cities. IOT is expected to be below fastest growing connectivity technology through 2025 supporting 4 billion devices by then according to analysis on ABI Research. We already had eight active customers developing products in this space, five of which licensed the Dragonfly platform in the last quarter. In addition, Ceragon a well known market leader in the wireless market announced that it is extending to cellular IOT with a module that is powered by our DSP technology. As a result of this recent success and our market prospects ahead, we stepped up our investments in the space by acquiring core technologies and licensing rights from our partner ASTRI of Hong Kong. By owning these technologies, we can enhance our cellular IOT value proposition for customers looking to expedite their entry into this beginning market. The third product relate to AI and the EDGE. At the CS event earlier this year, we unveiled our new product line for AI processing GAP NeuPro. It is our first non-DSP product line targeting general AI application into EDGE in devices such as smartphones, surveillance camera, autonomous car and a variety of other devices. NeuPro is a highly optimized processor that supports wide range of neural networks under musical vision, voice assistant and data analytics. The NeuPro hardware is accompanied by reputable CDNN compiler technology which optimizes neural network for processing in low-power encompassed EDGE devices. I am extremely pleased the initiatives of our team to manage to commercialize the product and conclude to its limit in Q1 2018 with customers targeting surveillance camera and ADAS applications. We are in discussion with many other customers on the NeuPro product line and are very optimistic about opportunities for this exciting movement. Before handing the call over Yaniv, let me update you on our strategy and achievement in cellular 5G. The 5G uses more than extend beyond smartphone and includes fixed wireless as an alternative to costlier fiber optic solution. This solution is currently being promoted by Verizon. It’s also a key enabler for robot based fixture on and edge computing. The 5G service rollout continues to extend with the announcement of launch plans and commercial offering as early as next year from T-Mobile and Sprint who are joining AT&T and Verizon. CCS Insight forecasts 2.5 billion subscribers by 2024. Against that backdrop, we came out with MWC, the new 5G product aimed to solidify our position and prospects in the 5G UE space. CEVA-PentaG is a full reference design for 5G mobile that capitalizes on our long and in-depth experience in cellular baseband with more than 8 billion CEVA-enabled phone shipped today. It accelerates 5G new radio design by offering a complete hardware and software modern solution supporting up to 10 gigabit per second download speed and is software continue to the next 5G in our upgrade Release-16. One of PentaG’s unique features is an AI port that addresses the increase in complexity and variability of the 5G communication channel in a highly efficient manner. The PentaG architecture is Mobilong providing customers with a choice to adapt either the complete hardware and software solution for certain processing engines that it can be integrated with its internal mobile design. It therefore extends our serviceable market to large companies that use in-house cores or other incumbencies but still wants to benefit from the advancement that PentaG offers in terms of software-defined radio AI and more. A second 5G announcement we made at MWC was the deployment of our CEVA-X DSP technology within Nokia latest baseband chipset called ReefShark. The ReefShark business unit is 64% lower power consumption compared to the similar units used today in Nokia base business. Nokia stated that its extremely embedded to ReefShark with the network of 30 operators around the world and expect ramp up field deployment during the third quarter of this year. This announcement affirms our statement in prior calls for an upcoming production ramp by a Tier-1 player in the RAN space. To summarize, we continue to experience healthy licensing environment, the key ingredient for our future royalty goal. In terms of our cellular IOT AI and Bluetooth products we are happy with the market acceptance of our latest product PentaG ClearVox cellular product. These products apply to many more industries and extends dramatically our prospects for growth. On royalties, while we remain conservative about the handset space in general, we believe this first quarter focus is primarily an inventory adjustment in preparation for a newer models ramp up during the later part of this year. With that said, let me turn the call over to Yaniv to discuss our financials and guidance.

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 related data. Shipped units by CEVA licensees during the first quarter of 2018 were approximately 196 million, down 26% sequentially based on Q4 2017 shipments under 605 and down 27% from Q1 2017 actual shipments reported in the second quarter of 2017. Of the approximately 196 million units shipped, 122 million units or 62% were for handset baseband shipped reflecting a 35% sequential decline and a 45% decline on a year-over-year basis. The non-baseband volume shipment reached 74 million units, down only 5% sequential and up 58% on a year-over-year basis based on the 605 rule and Bluetooth shipment continues to be stronger. A look on our balance sheet. At the end of March 2018, our cash, cash equivalent balances marketable securities and bank deposits were approximately $183 million. During the first quarter we paid ASTRI’s first payment installment of $0.9 million for the new modern IOT technology as Gideon discussed earlier. Also, we started to become active again on our buyback plan repurchasing approximately 41,000 shares during the quarter at an average price of $35 per share for an approximately $1.5 million. We currently have 270,000 shares that remain authorized for repurchase under the existing plan. Due to the new rule, ASC 606, we also need to record quarter accrued revenue for the full first quarter royalty report that was not received or billed during the quarter. And we obviously exclude those from our DSO calculation. Our DSOs for the first quarter were 62 days, down from 70 days in the prior quarter. During the first quarter, we generated $1.8 million of net cash from operation. Our depreciation was $0.6 million, and purchase of fixed assets was $0.5 million. In the end of March, our headcount was 319 people, of which 255 are engineers. As for the guidance, our licensing and related revenue will continue to experience healthy demand across the entire range of products we offer. Therefore, we maintain our yearly guidance of approximately $43 million. In our view, as Gideon explained, we believe the softness we experienced in the first quarter in the low-tier smartphone and feature phone segment was related to excess channel inventory, rather than demand issues. As such, we expect a gradual improvement starting this quarter with stronger impact in the second half of the year. We are also closely monitoring the implication of the US Department of Commerce ban on components of the ZTE which incorporate our DSP platforms. At this stage, we lack the visibility into the ongoing discussions between the parties nor do we have the visibility into ZTE’s existing inventory levels and production plans for this quarter. Yet, for prudency, we have modified our royalty expectations for the second quarter in this regard. We will update investors in upcoming earnings calls on the developments in this front or divergence from the annual guidance which we provided earlier in the year. Nevertheless, we currently maintain our annual guidance for royalty and forecast that 60% to 70% of our annual royalty revenue included in our guidance will be reported in the second half of 2018. This is based on anticipated base station product schedule, holiday season-related shipments, and return to normal inventory levels in the low-tier handset segment coupled with all the lift and moving parts we discussed today. Efficiency for the second quarter of this year, gross margin is expected to be approximately 91% on both GAAP and non-GAAP basis excluding an aggregated $0.2 million of equity based compensation expenses for non-GAAP. Overall OpEx is expected to be in the range of $17.9 million to $18.9 million, of that GAAP number, $2.9 million is expected to be attributed to equity-based compensation expenses and $0.4 million attributed to amortization of acquired intangibles. Our non-GAAP OpEx is expected to be in the range of $14.7 million to $15.7 million. Net interest income is expected to be about $800,000, tax rate for the second quarter, 19% on GAAP, 13% on non-GAAP. Last, share count for the second quarter is expected to be approximately 23.3 million shares. So with that said, Rocco, you could open the Q&A session please.

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 it is, it could be 40, it could be 30, maybe this could be mid-20 type of phone or have significant subsidies from the operators. That could then jump from those feature phones that we lost in Q1 directly into these low-cost smartphones. Hard to predict, we are seeing a lot of these models out there today we have seen them a year or two years ago, again not in the right priced phones and these are people monitor to see if that is correction, finally for the feature phones and as these smartphones because we have seen operators in India for example sign up just in Q1 more LTE subscribers than they ever have. So, the fundamentals are still there for the emerging markets, we need to see now that the inventory correction that goes into that direction. The high-end I think we mentioned, and we cannot talk more about this about different vendors to other high-end devices and it’s a lot of moving parts. I am not sure if we have the crystal ball for it. The more smartphone with the more LTE, the better off the speeds and at the end of the day we haven’t seen any ASP rolled in any of the segments in terms of year one, in the last couple of years. So I think it’s a lot of more volume, timing of SKUs, the reduction of SKUs, the inventory issues that we had now or didn’t have with the high-end and everybody is expecting to have. And a lot of moving pieces, they just find the market and put it all together and I think that’s what you want to feel, things that will happen, starting from the second quarter. But much stronger in the later part of the year in the second half.

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.