Good morning and welcome to the CEVA, Incorporated Third Quarter 2018 Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Richard Kingston, Vice President of Market Intelligence, and Investor & Public Relations. Please go ahead sir.

Thank you, Rocco and good morning everyone, and welcome to CEVA’s Third Quarter 2018 Earnings Conference Call. Good morning everyone and welcome to CEVA’s third 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 third quarter and provide general qualitative data. Yaniv will then cover the financial results for the third quarter and also provide qualitative data for the remainder of 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 fourth quarter and full year 2018; optimism about a strong momentum and CEVA’s ability to capitalize on trends associated with wireless-based connectivity and NB-IoT products and 5G, healthy licensing environment and demand for CEVA’s products; optimism about sustained growth in non-handset basebands product lines and customer production ramp ups; and positive forecasts from IC Insights and Ericsson Mobility. 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…

Thank you Richard and welcome everyone. Our third quarter revenue came in-line with our expectations, demonstrating strong royalty revenue recovery and solid execution in licensing. Total revenue was $21.4 million of which licensing and related revenue was $9.8 million and royalty revenue was $11.6 million. Royalty revenue reflected strength across the board, with a step up in contribution from the wide deployment of our advanced DSP technologies within recently launched flagship smartphone, and the continued growth of shipments in the non-handset category as new and existing customers roll out new products into the market. The strength of our technology portfolio led to another quarter of sustained licensing revenue with 13 agreements executed across multiple end markets including in the two strategic ADAS space. China in particular showed good dynamics with nine agreements out of the 13 deals concluded in the quarter with vibrant Chinese semiconductor companies targeting a variety of IoT devices for consumer and industrial applications. According to recent analysis form research firm IC Insights, China-based fabless IC firms are expected to account for 19% of the global total of pure-play foundry sales in 2018, up from about 9% in 2016 and from about 13% last year. We are experiencing in particular, strong demand for our Wi-Fi, Bluetooth and cellular products as wireless IP expertise is scarcest in China and a must have for IoT products. Let me take the next few minutes to provide you with foresight on the licensing landscape elaborating in particular on the wireless space. The opportunities and customer engagements we have experienced, are authentic indicators of product trends and the precursor for new royalty revenue streams. According to the latest Ericsson Mobility report, short range connected devices are expected to increase from six billion in 2017 to 17 billion in 2023 and long range…

Thank you Gideon, I will start by reviewing the results of our operations for the third quarter of 2018. Revenue for the third quarter based on ASC 606 was $21.4 million. The revenue breakdown is as follows: Licensing and related revenue was $9.8 million, reflecting 46% of total revenues, 30% lower as compared to the third quarter of 2017’s all-time record high. Royalty revenue was $11.6 million, reflecting 54% of total revenues, a decrease of 8% on a year-on-year basis compared to $12.6 million for third quarter actual shipments that were reported in the fourth quarter of 2017 following the revenue rules under ASC 606. As a reminder $12.6 million record high included a one-time catch up fee of $0.9 million due to customer audit. Quarterly gross margin were 91% on a U.S. GAAP and 92% on a non-GAAP basis. Total operating expenses for the quarter were below our guidance at $17.3 million, due to lower SG&A costs associated with marketing activities and comp related provisions. OPEX included an aggregate equity-based compensation expense of approximately $2.3 million and $0.2 million for the amortization of acquired intangibles of RivieraWaves. Total operating expenses for the third quarter, excluding these were $14.7 million, also below our guidance. U.S. GAAP net income and diluted EPS for the third quarter were $2.5 million and $0.11, respectively. Non-GAAP net income and diluted EPS for the third quarter of 2018 were $5.2 million and $0.23, respectively. Other related data: Shipped units by CEVA licensees during the third quarter of 2018 were approximately 263 million, up 19% sequentially and down 8% from Q3 2017 actual shipments reported in the fourth quarter of 2017. Of the approximately 263 million units shipped, 165 million units, or 63%, were for handset baseband chips, reflecting a 24% sequential increase and a 19%…

Good morning, guys, or good afternoon, whatever the case is. Want to start with a question about the China mobile handset market. What is your sense of your market position in China through your largest license relationship in particular with Spreadtrum?

So, Gary, when it comes to China in the last few - in the last two or three quarters, we iterated, we said that there is softness within this specific customer. This is not over, although we saw improvement in this quarter. The target market for this customer is the low-tier in China, in India, and so, so far, we see some - I mean, the bottoming is over, it's behind us. But we would like to see much better.

Okay. But my sense is that you saw a nice contribution or at least some contribution from 5G cellular base station SoCs in royalty contribution and can you share with us what the unit contribution was, what is your non-mobile handset baseband royalty unit rate was in the quarter with that contribution, and what your outlook is for contribution from your two main 5G base station SoC licensees?

So about the SoC, I will let Yaniv used to comment about the - we don't see today a meaningful 5G base station royalties. As I said, when it comes to ZTE, the cost is at a very advanced stage, which will allow them to start commercializing, meaning installing their base station in a more substantial way. Up till now, they were in testing, the deployment with customers like Nokia. As we said and they are saying, the ReefShark and this is where - our entry point there is a key for their operating margins there. And so far, they are not installing. It's not just dependent of the products, it depends as you know in many parameters, operator deployment. To me it looks like more 2019, you will start to see a few things and to more extent 2020.

Okay. And with respect to your license pipeline, can you share with us what has been recently made generally available in your new product development such as NeuPro? Is that generally available and thus you are able to recognize some license revenue? And I noticed that your accrued revenue of $16.5 million was up substantially on a quarter-over-quarter basis, does that have to - is that an indication of the license revenue backlog?

Hi, Gary, let me start with the technicalities. No, not necessarily. Two things increased this. One is higher royalties and because of the new rules, all the $11.6 million that we recorded were all recorded after the quarter, and we did not invoice our customers in September, but in late October and November and this is why they improved. So that number of course is higher than the first two quarters of the year. And on top of that we had few deals that were very back-end loaded and we only invoiced in October after the quarter ended. So this is just the technical number. It will continue to follow with us on the royalty side. On the licensing, it's just a question if the invoices, the timing of the invoices, in this case, it was just a bit of a back-end loaded quarter from that aspect. So it has nothing to do with the newer technologies that Gideon mentioned in the prepared remarks and we are developing them, we are offering them, and we have licensed already few agreements around those technologies. And we continue to be quite excited about their opportunities both in the licensing and later on, on the royalty side.

Okay. Alright. Thank you, guys.

Thank you.

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

Great, thank you. Congratulations on the strong sequential royalty growth. My question is just on the Q4 for kind of flattish royalty growth. Can you kind of walk us through your thought process and the puts and takes with Nokia expected to have a very strong shipment for new base stations with ReefShark? I would have thought that might have helped along with maybe the seasonality for the new iPhones. Can you just walk us through puts and takes why you see Q4 flattish with Q3 for royalties?

Yes, sure. So in our expectations for the fourth quarter, surprisingly enough, we do not take into consideration any revenues from Nokia yet. Yes, they have a lot of interesting opportunities, pipeline deals close, as we follow them, but we do not know yet to specifically estimate how many chips translate on a quarterly basis. And even at this point, on an annual basis, and we are waiting for these new royalty reports to kick in. So I’m not sure if we answered Gary in the prior question, this also implies for the third quarter. So we are still waiting for that ramp up, we believe it is going to come. We don't know the magnitude and we don't know exactly the timing of these ReefShark chips. And as soon as we get those reports, or the first report, of course, we will be happy to share that and to add it our either numbers or estimates going forward. So Q4 is really built on the existing interesting dynamics that happened this year for us. Some on the positive side, like the well-known US high-end devices that were launched recently with Intel and CEVA powering them. On the other hand, the softness in the - some of our largest customers in China, not necessarily to the Chinese market, but to the [Technical Difficulty] world, India that they shipped into and other parts. Then they continue to be out there with some improvement, but not to the same level that we had experienced over the last couple of years. So we hope that that will again kick in at the latest stage. For now, we have bundled those out, we do add into consideration, I think, as Gideon mentioned, ZTE. ZTE is already in production. It is very fast and it's our initial report and we have shown now that Q4 will have base station revenue coming from them. We don't have that same indication yet from a Nokia standpoint. So we are very happy that after two quarters of $7.5 million and different explanations around that, we are back to how we started the year with different allocation of royalties. Second half is probably much stronger than the first half and we believe that that level could be even stronger than in Q3, but not yet with the full engines in royalty kicking in for us. That is not happening yet in Q4, but with better estimates for non-baseband from base stations now is back to business or partially back to business, and from the handset side to some degree.

Thank you. And just as a quick follow-up question for me. How do you see maybe the annual base station opportunity into 2019 and 2020 from your current licensees? Thank you.

So it's hard to answer these kind of questions at this state, because it's not dependent - it depends on primarily the deployment, the investment that the operators are going to make in commercializing. Lot of operators are speaking about 5G and signing contract, but the question is when they will do it and to what extent, how far it's going to be. So what we have today is basically the revenue that we are collecting Yaniv mentioned with 4G. We know better, in my opinion, in 2019, it could be first half we start seeing things, but when this ball will start rolling, it will roll and it could roll fast.

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

Hey. This is Josh Burkhalter on behalf of Matt. Thanks for taking my question and congrats on the results. I guess, I will try to ask the previous question in a slightly different way. If we think about some of the qualitative commentary you have heard on 5G this quarter, it seems like there is a lot of activity picking up. Can you maybe help us understand how you view the cadence of your customers products on how they would ship versus some of the things we have seen built so far? Thank you.

Sorry, could you repeat that again?

Hi, I'm sorry. So, I basically was just asking, given some of the commentary of pickup on builds this recent quarter, could you help us understand like the cadence and how your customers' products would ship in relation to those maybe where some of the long-haul infrastructure being laid down?

I hope I understood your question, but I believe you refer to 5G, right?

Sorry.

Yes, That is correct?

Yes, That is correct.

Okay. So the playing - outlay in 5G is in those earnings in base station side and in their handset and device sales. Now, what we see today is - in the base station side, they are more advanced. They have the product, they sign contract and now it's a matter of the pace of commercial deployment, because our technology is going into commercial deployment. When you have all those testing and initial deployment, these are not where our products are going. Our products are providing power efficiency and cost efficiency, and people are putting in when they get their commercial deployment. At this stage, we don't get royalties from this pattern of deployment. And we believe we are going to see this coming in 2019, based on what we are discussing with customers, based on what we see from public announcements. From the device side, I think they are behind us. We do have customers that use our 5G technology for 5G. Whether it is going to be a meaningful deployment 2019, I saw just recently an analysis that they see only 1% of the total handset market will be 5G next year and will be 20% in 2020. So that I believe give you colors of what to expect from 5G on the handset side.

Okay, that was helpful. And sorry for the confusion. And then my follow-up, if we sort of back into the royalty per unit number in your royalty revenue this quarter, it looks like there was a nice sequential step up. Could you maybe talk about some of the drivers of that and how we should think about that going forward? Thank you.

Yes, that could change of course one quarter to the other and we continue and explain that we look at the total dollar value, they are strong and the key indicator of the healthiness of our royalty and as long as the dollar increases, That is a good - we are very happy with that. With that said, this quarter specifically is a different mix between high-end phones and newer technology versus lower-end devices with some lower speed. And with the weakness in the beginning of 2018, which will continue throughout the year is low ramp volume shipments from our key customers in - one key customer specifically in China. And this is more lower mid range type phones. This is a very strong pickup from September this year and the pre-order for that segment, which had newer technologies inside, higher speeds and higher comfort from our point of view. So the mix is favorable this time around. Bluetooth of course have much higher volumes, the highest we ever had. Offset that is an average, but on the other hand, add more dollars to the dollar - the content of the royalty. So I think we are going to have mixed numbers or calculations around it and as soon as the 5G stuff and the base station stuff that Gideon talked about kicks in and as we said, the ball is rolling, not just starting to roll, but it's rolling down. Until then those ASPs are much, much higher, because we are talking about much more expensive type of chips that we will be in that have the selling price of $100, $155 and That is a much different ASP than what we have been used to in the past.

[Operator Instructions] Today's next question comes from Suji Desilva of Roth Capital. Please go ahead.

Hi, Gideon and hi, Yaniv. Can you help us, first of all, in terms of looking ahead to 2019, perhaps the royalty growth, what the opportunities are, how you would rank smartphone versus wireless infrastructure versus IoT connectivity, video imaging voice, just to give a sense of where you think the pockets of growth would be in 2019?

Hi, Suji, good morning. So when it comes to 2019, of course, we cannot - we will not quantify it. We still need to do the work, but we are not firing in all the cylinders that we can in terms of the product that is coming. So base station we expect to see ramp next year, again the timing and the pace is something that we will have to see, but That is waiting for prime time, I should say. Then we have the non-handset baseband and you mentioned computer vision, you mentioned, I mean there will be AI, Bluetooth, Wi-Fi, I mean, the way we see it is, one big basket that the good news is, they are all different industries, different customers and we are not biased to one trend or one crisis in the market. The idea is to [Technical Difficulty] as many industry importance of licensing and the fact that we have 13 agreements means that we have more than 13 new projects starting, some of them could be in nine to 12 months in the market. And so basically we are going to see new SKUs coming from existing ones, whether it's going to be consumer, the industrial Bluetooth, I mean all of them should come together and continue, I mean, like the nice ramp that we see almost every quarter. So this will continue at the pace whether it's stronger pace than today or what pace we will have to see and we will do the work by the end of the year. And then the flagship model that we do we are there and that is an important contribution for us and the fact that it's basically - it's one supplier there, that is a dramatic change for us and we will have to see, because they have different order pattern than others, but that is a dramatic change for us and we hope to capitalize it.

Okay. And then specifically on the wireless infrastructure, I recall you had a third customer as well, just remind me if That is correct and if so, what is the status of that third customer relative to ZTE and Nokia?

It's a 5G design. Suji, good morning. As we talked about earlier, That is not yet in introduction or in deployment. So That is little bit of later on, not even sure 2019, but could be in that 2020 type of event for us. And back to the original question about the 2019 royalties, I think what Gideon explained on a product-by-product basis is that we have all the interest in licensing activity that we had over the last year working well for us. I don't think we have done yet the homework for 2019 and we will do it in the next earnings call and try to give more color of how this all plays out, in what quarters, and what product lines. So I think we just line them up and gave each one the explanation, the opportunity, but it's a bit early to quantify the contribution from each one at this point.

And our next question comes from David O'Connor of Paribas. Please go ahead.

Yes, good morning, guys. Thanks for taking my question. Maybe, Gideon, firstly one on China and Spreadtrum, in particular. When China rebounds from the softer handset trends you are seeing currently, do you expect customers like Spreadtrum to have a similar market share or do you think they could be losing share as well and the dynamics of any rebound could be different to what we have seen in the past? Thanks.

The handset market is very dynamic. But one thing I can tell you, Spreadtrum is a very powerful company and they are in a position to compete with MediaTek and Qualcomm and almost all the peers there other than of course the high-end stuff. So they had customer loss and they are now in a way - we see all those new announcements, so they are recovering, but we will have to see. Now, overall, we cannot ignore and we cannot - the overall handset market, the growth there is muted, so they are fighting or the fight is, it's all about gaining share, to give us some gain. But as I said, Spreadtrum is extremely determined and very powerful to win larger share than they have today.

That is clear. Thanks for that. And maybe just a follow-up on NeuPro. Can you talk a small bit about the licensing pipeline of NeuPro in particular and has that changed from the last quarter? What type of customers you are engaged with there, please?

That is a good question, because when people - I believe when people are looking on the AI investment in general, they get confused, so many players, so many [indiscernible] different unique architectures. Now, the way we see it, there is the first wave of AI customers and those AI customers or those companies that are vertically integrated, meaning they can develop not just the chip, but also can develop the applications that run the AI application. They are not that many and I'm talking about the Edge side, the embedded side, not the cloud. The cloud, it's a completely different and we don't play in the cloud for now. So there are companies in the automotive space, there are companies in the digital camera, there are companies in the drones. I mean, these are - those companies that are - they know how to develop application. In this space, meaning AI, vertically integrated, they know and they understand, they - or not understand, but can develop AI application. CEVA position is very strong. People that were using our technologies, not just the context of the NeuPro which is hardware-based technology, but also in our DSPs. So we gain with this customer lot of experience especially on the software that we call CDNN. Just to give you example, what does it mean. One of our competitors announced in a recent technology event performance metric about its AI engine and our performance is 3 times better than this competitor [technical difficulty] software. So That is the first wave of customers we are engaging with and some of them are basically upgrading from the initial DSP base to the NeuPro area. And now - we are now seeing lot of newcomers people that see AI as just a block in their chip which they rely on - anybody else and this customer could develop their application feels the expectation that 90% of the SoC in the world will have this kind of AI engines. So those companies are a bit slow in their decision-making, but they are catching up. And we see, going forward, when it comes to NeuPro developing, we see all those companies, that see AI as the engine and don't see themselves developing the application. And if you ask me how the pipeline is composed, you see all those newcomers coming and here again our software becomes very critical because without having the software, their customers cannot develop such applications.

And ladies and gentlemen, this concludes your question-and-answer session. I would like to turn the conference back over to Richard Kingston for any closing remarks.

Great. Thank you for joining us today everybody and for your continued interest in and support of CEVA. We will be attending the following upcoming events and invite you to meet us there. The Benchmark Discovery One-on-One Conference in Chicago on November 29 and Barclays Global TMT Conference in San Francisco on December 5. 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.

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