Good morning and welcome to the CEVA, Inc. Second Quarter 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, this event is being recorded. I would now like to turn the conference over to Richard Kingston, VP of Market Intelligence, and Investor & Public Relations. Please go ahead sir.

Thank you, Brandon. Good morning, everyone, and welcome to CEVA's Second Quarter 2018 Earnings Conference Call. I'm joined today by Gideon Wertheizer, Chief Executive Officer of CEVA; and Yaniv Arieli, Chief Financial Officer of CEVA. Gideon will cover the business aspects and highlights from the second quarter and provide general qualitative data. Yaniv will then cover the financial results for the second 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 revised financial guidance for full year 2018 revenues, third quarter and annual royalty revenues; optimism about a healthy licensing environment and demand for CEVA’s products; optimism about the distinguishing features of CEVA’s AI edge technology; positive forecasts from Tractica forecasts and SIG forecast, and optimism about CEVA’s technologies being adopted by ZTE at a later time. For information on the factors that could cause a 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; the traction with edge technology for AI; 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 market; the speed and extent of the expansion of the LTE and 5G networks, AI, LTE-IoT and IoT space generally; our ability to execute more broad portfolio license agreements; and customers’ ramp-up…

Thank you, Richard, and welcome, everyone. Our second quarter revenue came in at $17.5 million. Licensing and related revenue was $10 million, similar to last year and a quarter ago, reflecting a healthy environment for our AI, computer vision and Bluetooth technologies. Royalty revenue under ASC 606 came in at $7.5 million, similar to last quarter but below our expectations, attributable to continued unexpected weakness of one of our large Chinese handset baseband customers, which I will elaborate on later in the call. We did however experience seasonal unit growth in both handsets and consumer products, with non-handset baseband shipments reaching a new record level of 88 million units in the quarter. During the second quarter, we concluded nine deals, of which three were for our DSP cores and platforms, one for our NeuPro AI platform, and five for our connectivity IPs. Three of the agreements were with first time customers and the rest were with existing customers that are expanding their existing businesses or upgrading to newer product. Customers’ target applications include advanced cameras, drones, smart speakers, smartphones, wireless earphones and IoT verticals. We continue to experience good interest in our AI and Bluetooth products, with five of our deals in the second quarter being for those two product categories. Let me take the next few minutes to highlight the success factors that distinguish CEVA in the crowded landscape of AI processors and in the cost-driven Bluetooth market. On AI, while most of the AI applications are currently cloud-based, there is widespread acknowledgment that AI workloads are destined to move to the devices themselves, or what is referred to as the Edge. AI at the Edge ensures faster response time and greater privacy by keeping the intelligent processing on the device rather than in a public cloud. Market research…

Thank you, Gideon. I'll review the operations for the second quarter of 2018. Revenue for the second quarter based on ASC 606 was $17.5 million. The revenue breakdown is as follows: Licensing and related revenue was $10 million, reflecting 57% of our total revenue, only 3% lower as compared to the second quarter of 2017. Royalty revenue was $7.5 million, reflecting 43% of our total revenues, a decrease of 26% year-over-year basis compared to $10 million for the second quarter actual shipments that were reported in the third quarter of 2017 following the revenue rules under ASC 606. Quarterly gross margin was 89% on a U.S. GAAP basis and 91% on a non-GAAP basis. Non-GAAP quarterly gross margin excluded approximately $167,000 for equity-based compensation expenses and $183,000 of the impact of amortization of the acquired intangibles of our investment in Narrowband-IoT technologies last quarter. Total operating expenses for the quarter were just below the mid-range of our guidance at $18.2 million. OpEx included an aggregate equity-based compensation expense of approximately $2.7 million, and $0.1 million for the amortization of acquired intangibles of RivieraWaves. Our total operating expenses for the second quarter, excluding these two items, were $15.4 million, slightly above the mid-range of our guidance. U.S. GAAP loss and diluted loss per share were $2.1 million and $0.09, respectively. Our non-GAAP net income and diluted EPS for the second quarter of 2018 were $0.9 million and $0.04, respectively. Those figures exclude equity-based compensation expenses in the amount of $2.8 million, and the impact of amortization in the amount of $2.3 million. Our second quarter 2018 financial results under the old 605 rules compared to the second quarter of 2017 were as follows: Total revenue was $ 16.6 million. U.S. GAAP loss $3 million and $0.13 loss per share. And non-GAAP…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Gary Mobley with Benchmark. Please go ahead.

Good morning, gentlemen or good afternoon. I’m not sure, what is this for guys. But with respect to the 5G infrastructure royalty opportunity based on your existing licensees, Nokia and ZTE, can you give us an update as to your expectations once those guys are up at a full run rate and as well, what’s your outlook for 2019 may look like whether it be an absolute basis or on a delta compared to 2018?

Hi Gary, it’s Gideon. Let me speak in general about it. When it comes to Nokia, we can only echo what they're saying and they're speaking about Q3 and Q4 deployment, starting Q3, with larger extent, in Q4, I believe, it's going to be on the T-Mobile network. We'll have to see how this looks like, but from our standpoint, just wait and see. When it comes to ZTE, I elaborated. They are coming out of the ban, I mean, the ban was not just – does not cause just shutting down their operation, basically they are suppliers stock manufacturing chips and – in some cases even the people will move to other project. So this takes time to rebuild. So we are thinking about Q4 to start seeing – and actually recovering and we bring some amount into the Q4 royalty. So, without speaking, waiting, I think when it comes to see a substantial, we need to speak about 2019, when ZTE will be behind it and they will be behind it and Nokia are start leveraging on the wins that they had.

Okay. Based on the size of the market and your share, which I believe 50%, what you think the full run rate for royalty revenue could be?

Hi Gary, I don't think we changed our longer-term forecast. I think we still believe that this is a significant royalty opportunity and based on all the data that you just said, the market size and the number of chips and its base station, it could be north of $20 million. We just want to see those first royalty reports. We – as you know, we did with one or two from ZTE and then the ban kicked in. So we want to see that get back. And an opportunity could be way over $20 million, if they do it right and both of these customers are in full production in the first quarter of 2019.

Okay, as a follow-up question focusing specifically on the mobile handset baseband process insight, it sounds like your royalty rate per unit may increase at the Tier 1 smartphone OEM, its based in the U.S. as you gain share there in the next product cycle. But on – first of all, can you confirm that your 4G royalty rate as a result of that might increase in the second half of the year? And then with respect to overall handset market share, just given the moving pieces – do you think your market share will shrink in 2018? And based on your share gains at the Tier 1, do you think your share can increase in 2019?

Yes, so let's start with the share. The first two quarters of the year, we were 23% and that reflected first, very soft Chinese market overall in the first quarter, if you remember. That caught not just us, but the whole semiconductor market by surprise. What was unexpected for us, was that one of our key customers in that space continued that weakness into the second quarter and didn’t show any seasonal increase like we have seen with other customers in the handset space. So we were stuck in the second quarter with the same 23% market share. The second half of the year – should look different. And right now, we have not baked in growth for that Chinese player for the second half or at least not a significant one because we want to see how they deal with the problems and hopefully, they could get over them and win some new sockets. With that said, when we take the premium handset that it should be launched in the third quarter, we will see those two elements that you mentioned, one is the higher ASP for overall the smartphone space for us, because of that ramp. And second, an improvement in the overall market share that will have – it won't go back to 40%, but it should be better than our 23%, with higher dollar content. So the way we are seeing the models for the second half of the year, that with the softness with the Chinese and the strong volume and ASP increased from the other handset baseband player that is ramping up, we will – we shift our numbers with only maybe $2 million net. So that's part of the reason for reducing our annual royalties but the net effect is not as bad than hopefully we could see some better moving pieces for the – from our Chinese large customer.

Okay, I’ll let others to ask questions. Thank you.

Thanks Gary.

Our next question comes from Mike Walkley with Canaccord Genuity. Please go ahead.

Great, thanks. Just building on that question, can you maybe just walk us through with your lower royalty guidance for the year? Just how much would that related maybe because ZTE, how much to the weaker smartphone market? And then how much to the Chinese OEM weaker than you expected? Thank you.

Sure. Hi, good morning. So let’s talk and look how we started the year and what we wanted to reach. We were talking about $92 million with licensing revenue flattish at the $43 million and about 10% growth in royalties. The first half, we were down from those expectations just in royalties by about $5.5 million. $1 million was the ZTE band in Q2, which we shared with you and the rest of the first half $4.5 million were equally distributed between a very soft Chinese market overall, not just for our customers but for everybody, including Qualcomm in China in Q1. And another half of that $4.5 million, about $2.5 million was associated with the softness with our specific Chinese vendor in the second quarter. So overall, that's $5.5 million, that's behind us, this is the first half of the year and there is not much we could do about it. ZTE, we're happy that the ban has been lifted, it took a while, it took close to four months, if it would be quicker few weeks, we would be – they would be back in production much earlier. So when we start Q3, we're taking into account maybe about $1.5 million associated with that and partially into Q4 as well. And we think that by the end of Q4, maybe the last month of Q4, they will be back in production and we'll see some royalties coming from the Q4. So that by itself, just from the ZTE ban in the second half, you're probably looking at $2 million. If we talk about ZTE, Gideon mentioned that they were also evaluating some of our newer technologies for the next-generation chip design with us. So we are taking offers about $2.5 million on the licensing side and trying to…

Okay, thanks. And my follow-up question, just on licensing deals, absent to ZTE is everything kind of tracking as progressed and maybe, could you highlight some of the growth opportunities you’re seeing in licensing, both the rest of this year and into next year, including any update on automotive opportunities? Thank you.

Hi, it’s Gideon. So the two – you know high runner product in terms of licensing today is ZTE’s AI. Keep in mind that when it comes to AI, we are not in full scale in – in going out to customers until the end of this month. We set a target for the AI to sign up one or two lead customers that help us to polish the product before going out to the market. We were lucky to get three, this is very helpful for us by the end of the month, we going to be there with production where the technology. And I believe, we'll see more customers that have more risk of errors. So that say, I rather think is extremely successful is the connectivity in general. Bluetooth, right now and we see WiFi coming in the same context, every connected device needs a Bluetooth and Wi-Fi. Bluetooth is a huge volume, I – it's a four billion unit this year, lower ASP – royalty ASP and licensing, WiFi is also a very big market and here we get higher license fee, it could be to 2 times, 2.4 times of Bluetooth and of course, higher royalty. So these are the two high runner product for this year. For next year, the way I see it is that we're going to see more 5G coming both in base station run, there are few customers that we would like them to join us. We want to be a monopoly there, we want to dominate the space and we are not far apart from that. And there will be – we see 5G handset making, right now, all 5G designs are more show kind of a concept level design, it's not much production. This is not – in such case, we don't usually participate but when people go to mass production and wants to get the power metrics and the capability that we are offering in terms of software programmability, then they – color. So 5G and – both in base station, I think we're going to see more and more in 2019.

Great, thanks for taking my questions and look forward to seeing you at our conference this week.

Thanks Mike. One more thing I forgot to mention that when we jump from the very low – relatively low first half of the year to Q3, I mentioned that we're going to see like 50% growth – sequential growth in royalties. So we're picking up, of course from a low-level that we didn't want to be there, but it seems that they were back on track to almost the same expectation that we had for the second half of the year. And hopefully, some of these things that talked – we talked about with base stations and even hopefully, the Chinese baseband player could do a bit better than we have – our planning for the second half.

Great, thank you.

Thanks.

Our next question comes from Joseph Wolf with Barclays. Please go ahead.

Thank you. I was hoping you could give a little bit more detail on the units of the non-baseband, $88 million in the quarter, $160 million or so for the first half where does that go in the second half of the year, just in terms of number of units that you guys are in? Is there another big pick up, 25% in Bluetooth and what's in the other right now? In terms of what is exactly – what is shipping that's not Bluetooth, that's given that 70 million unit number?

So it’s a collection of product. We will not see or we'll see minor contribution for the base station that in unit terms the contribution is minor but in dollar terms are high. But when it comes to other, that are non-Bluetooth, it's a collection of different chips, different markets, could be computer vision, could be audio, could be Narrowband-IoT, could be industrial application. We just – it's just a portfolio of things. And many customers – some of them are new and once we start seeing them coming out, we'll analyze more and project the next level. But for now, we want them to go out of the door, go to production, ship units and then help them to get to masters as well.

The first success – Joseph, good morning, is really the Bluetooth that started off, maybe four years ago with us. And if you remember from zero royalties when we got into the space, we are in the run rate of $71 million a quarter just Bluetooth devices, all over the place from hearing aids to speakers, to wire, to sport wristbands, to camera and functionality and then lots of other things. I hope that you will have, this is the plan, as Gideon said, to have other like in the vision, like in the audio follow-up with much higher volumes, the opportunity is there and the design wins are there. For now, the quickest ramp-up after so many designs that we have in the connectivity side, we also – already see two new customers in Bluetooth and WiFi for the second half of this year. So the volumes absolutely should continue to go up, first from seasonality pre-Christmas point of view and second, from the number of customers that are finally, getting into production. And we've been waiting for a while, and the Bluetooth and WiFi working very nice within three years, maybe after the design start, sometimes a bit earlier, we are seeing them deployed into different end markets.

Joseph, just one more thing that I want to shed light on Bluetooth. Bluetooth is huge market. I mentioned in my prepared remarks, four billion units just this year. And I suggest to watch how Nordic and Dialog are doing, they're all in make their money out of Bluetooth and they are speaking about in the chip side, high tens of percentage of growth in year-over-year in unit terms and revenue. So, it's a very big space and if you do it right, you can flourish there.

Okay, that is helpful. And then there was one handset related license work that you guys did in a quarter. Is that a 5G related license? And is there any reason to believe that the 2019 licensing revenue will see a lot of – or a new kind of designs for handsets coming back?

Design for handset could come in from two angles; one is, incumbents and they are people that use us and will continue to use us and there are people that don't use us and we believe, we have a proposition for 5G and entry point for them. And, I wouldn't exclude any incumbent in the cellular market today, in the handset market, saying, no, this guy is MAH and he has everything. The other part and there are newcomers that are into this space. There is one in China, I don't want to mention the name because I'm not sure that we already announced it. But could be a strong contender in this market. And we see few others that are looking into the space, not necessarily because of handset, because 5G spend is beyond this automotive and IoT in general. And that's also a big market. So, in terms of licensing 5G, we are speaking now in a bigger term in terms of available licensees.

Okay, and just finally, with all the buyback, can you just give an update on whether that means that you're seeing fewer M&A opportunities? Or there is not enough appetite? Or you got the right strategy and aren't looking around that much right now?

So let me respond on the M&A strategy and then Yaniv can refer to the buyback. When it comes to M&A, we are prudent, it's not that they are hundreds of companies that we can buy. We did one very successful acquisition and we want to continue using it. So we don't – right now, we don't have something specific that we have in our radar. And we are not rushing to do it. We have an organic strategy that has enough engines to flourish.

Yes, nothing really to add. The buyback is here to support the stock and our belief in the longer term, which is not too long, it's now the second half of the year, which is much better than the first one and much better than any second half we have so far. And, it’s just for the time being, it's a good use of the cash and IP mall should generate cash overall. So, this is just something that we're doing in the, meanwhile, until we find the right M&A target, the right technology that we want to have. So, I don't think those two contradict, we are not talking about a $100 million buyback program but a smaller one, as we go along.

Okay, thank you.

Thanks Joseph.

And our next question comes from Matt Ramsay with Cowen. Please go ahead.

Hi guys, thank you very much. I guess my first question is on the base station market. Gideon you made mention in your comment just now that you guys are looking for eventual full coverage of the base station space with your technology. Obviously, you've announced the couple of big OEMs, maybe you could just give us an update on where you stand with sort of the other big three obviously, Ericsson, Samsung or things that may be you’ve hinted at before that there is some dialogue, but the folks at Huawei do their own DSPs typically. So maybe you could give us a little of update, on just generally where discussions are with the rest of the market? And if there were some royalty deals to get signed or some licenses to get signs rather how long should we think about the timeline for royalties coming out of the rest of the base station players? Thanks.

So, out of the three names that you mentioned, one is already working with us, one is in discussion and one there is no discussion. So, I'm sorry, I cannot elaborate more, but we're have a big shot there, because we are the only guy in town that can provide such complicated technology for 5G. Now beyond that people are speaking about base station and think about the incumbent there, but there are although small sales and fixed wireless and we add into this one all the enterprise, all the WiFi access point. For us, it’s the same technology base. And then you start speaking about different names, you speaking about networking guys in here, the opportunity is huge. And we are here doing three steps and progress with few of the large guys there.

Now thanks for that, I appreciate the sensitivity around some of the ongoing discussions. I guess, as my follow-up questions, I had two questions or topics I wanted to sort of ask about in the smartphone space. I guess, on the more challenging side, obviously, there's something going on with spectrum here. I guess, my question around that is, what was new and different for this quarter’s update and maybe you had updated on three months ago, I think was fairly well known in the industry that MediaTek was pulled into Samsung at the low-end and that was going to be a challenge. So, I guess, maybe Gideon, first of all, what's new and different that's happened with that particular customer? And second, on the positive side, Qualcomm admitted that, that Intel is going to be 100% share of the flagship iPhone going forward. Maybe you guys could talk about what your share has been or what you estimated to have been within the iPhone on the modem side in this last-cycle what kind of an update we could look at and particularly, sounds like you mentioned that ASPs or royalties per unit could be a bit higher with that customer going forward. Any commentary on just magnitude of what we should think about from a royalty shift would be really helpful. Thank you.

So, without going through the specific details that you would like to see, I'll give you just the envelope of that. So, when it comes to the Chinese customers, the first quarter was all around weakness in the market, there was not any – there are different segments, feature phone and 3G and LTE and all of them were ugly. And it was correlated with what's going on the market overall. What I referred in my prepared remark is specific OEM, large OEMs that Chinese customer had certain share and a very large share. And now it's being split between another customer of ours, so with this specific OEM, we're not completely out. We are left with substantial share but not the same share that we do. And that's the sort of the revised, the update in the guidance that we do it. With that said, cellular market is a very dynamic market and this may answer your second question. It work on a one year cadence and if you lose a socket in big socket or small socket, usually its take you out of it for the whole year but then you have another chance to get in next deal. So specific this Chinese customers, where we see some signs of not regaining share, but gaining share with other OEM on the account of the incumbents there. So, it's a big fight and we need to take it – it is what it is. But this company – this Chinese company was a competent company and we'll be a competent company and there is lots of support there in China to not to drag into to fix the problems. It's not – I wouldn't – you lost a design and then you give another shot and you do it, but that it is what it is, that's how this market works.

Got it, thank you. And any update on sort of big base band customer in the U.S. would be really helpful going into 2019. Thank you.

I mean we are waiting for the same data. I think the public information about the ramp-up with T-Mobile is there. We need to either see the sign that is happening on the streets or get the royalty report and then figure out the volumes and magnitude. So this was something that we have been following and updating that we have don’t have any special insights other than the public announcements that these guys are talking. And they have been talking a lot on the base station side in the U.S. The handset side in the U.S. I think we mentioned, higher ASP, higher volume, higher share in that socket from the third quarter, which all are benefiting factors to offsetting almost completely but other than $2 million for the second half of this year.

Thanks guys, appreciate it.

Thank you.

Our next question comes from Suji Desilva with Roth Capital. Please go ahead.

Hi Gideon, hi Yaniv. For the smartphone baseband, folks that typically haven't use CEVA, looking ahead to 5G, what's the likelihood at some of those baseband vendors would consider using CEVA? And if they were to would it be a mixed, some platforms being CEVA, some non-CEVA, I want to understand the handicap there.

If you ask us about OEMs, because when it comes our relationship with the baseband semis, this is our ongoing relationship and our strategy there is to convince them to upgrade to a newer technology and we do have a lot to offer them. When it comes to our customer relationship with OEM and that's what I tell Matt in the other question, it's really very dynamic. And you have to take it on a yearly basis. So in any one of your large customer can win a socket, like it has happened today, this year it was [indiscernible] in other large OEMs to do. It is a big market. Today, it's more fragmented, it's not just Apple and the Samsung. And then you have Oppo and Vivo and Xiaomi and ZTE. And all of them can create tens of millions or get even to hundreds of million units a year. So, if you lose one customer you can go to, you can win another customer and by the way that’s what happens to the Chinese customer. We are seeing them winning sockets, in other customers it will come to – into play in 2019, when this customer will refresh their phones. So we – other than this, we don't know have what to say, other than this specific Chinese customers is viable player and continue to be a viable player, and what we lost today, we’ll win somewhere else.

Okay, and then a question on wireless infrastructure side. In terms of Nokia ramping up here, as you come closer, it's a second half and you're seeing some visibility. Is the linearity playing out as you expected? Is there any difference from what you expected? And how it's playing out? Are the units for the second half 2018 coming in as expected above or below what you had forecast?

No below, for sure below, as we mentioned we still don’t have the visibility for those ramp-up's that Nokia just a week ago, talked about in Q3 and Q4 deployment in T-Mobile. So as soon as we have that data, we'll update. We though it could be a bit earlier, in the beginning of the year, we didn't know anything about ZTE band. From both base station customers, it's been taking a bit longer. But I think, all the obstacles are off. And out of the way and ZTE can now go and continue their manufacture and they already was a royalty contributor. And Nokia is just about to start, so we hope it's a good start for them. And we wish them enough luck, because that's what they are saying, that from Q3, they starting to deploy it in different networks.

Okay, great. And then my last question, sounds like the AI opportunities starting to come in from the lighten side at least, can you remind us, what the royalty opportunity in AI, as it kicks in? What the ranges of the potential royalty there is?

It could be quite significant, it depends really what type of AI, it is a long discussion. I think our time is out, but AI could go into so many different elements. We talked in the past about seeing them with vision, next to audio products, in the automotive, we are talking with few vendors. So it could be anywhere from a vision type of process to anywhere to up to a $1 of ASPs, it depends really on the end market. It's a very lucrative product line for us, both licensing and the royalty potential from it.

Okay, thanks for the answers guys. Thanks.

Thank you.

This concludes our question-and-answer session. I'd like to turn the conference back over to Richard Kingston for any closing remarks.

Thanks Brandon, and thank you everyone for joining us today. And your continued interest and support of CEVA. We will be attending the following upcoming events and invite you to meet is there. Tomorrow we will be at the Oppenheimer 21st Annual Technology, Internet & Communications Conference in Boston. On Thursday we will be at the Canaccord Genuity 38th Annual Growth Conference in Boston. On September 5, at the ROTH Internet of Things Corporate Access Day in San Francisco. Also on September 5 we will be at the Citi 2018 Global Technology Conference in New York. On September 12, we will be at the Deutsche Bank Technology Conference in Las Vegas. Please visit the investor section of our website for further information on these events and other events we will be attending. Thank you and goodbye.

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