Good day, and welcome to the CEVA, Inc. Fourth Quarter and Year-End 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, Vice President, Market Intelligence, Investor and Public Relations. Please go ahead.

Thanks, Kelly. Good morning, everyone, and welcome to CEVA's fourth quarter and full-year 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 the highlights from the fourth quarter and full year 2018 and provide general qualitative data. Yaniv will then cover the financial results for the fourth quarter and full-year 2018 and also provide qualitative data for the first quarter and full-year 2019. 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 qualitative data for the first quarter and full-year 2019; optimism about CEVA's 60 customers' ability to design new chips and such customer base enabling CEVA to double its annual royalty revenue by 2022; optimism that CEVA can leverage its Bluetooth, NB-IoT and voice recognition technologies, as well as capitalize on the 5G upgrade cycle; optimism about sustained growth in non-handset basebands product lines and customer production ramp ups; optimism that the cellular market will recover in the second half of 2019 and positive forecasts from Ericsson Mobility and Yole Research. 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 market; the ability…

Thank you, Richard. Good morning, everyone, and thank you for joining us today. CEVA had an excellent fourth quarter in licensing with a number of important agreements with premier customers. The resilience of our licensing business despite the softening macro environment demonstrates that our comprehensive technology portfolio is valued by a broad base of companies addressing the smart and connected world. Our fourth quarter royalty revenue reflects above-seasonal weakness in the handset space due to higher inventory levels, primarily attributable to China and emerging markets. However, we see continued expansion of our non-baseband customers, in particular with Bluetooth, and the recovery with ZTE's base station business. Total revenue for the fourth quarter of 2018 came in at $21.4 million. The licensing landscape continues to be healthy and we managed to record $10.5 million of licensing and related revenue, and to sign 13 new agreements, of which six were with first time customers. During the quarter, we signed one of the largest license agreements in the company's history with a customer targeting the 5G market. The customer licensed a customized next-generation processor for a 5G use case, which we will design over the next few quarters, and we will recognize part of the revenue associated with this deal during that timeframe. We also signed an important agreement with a well-known U.S.-based semiconductor company that will strategically capitalize on our Bluetooth audio technology to expand into the fast growing market of smart audio devices. Our narrowband-IoT technology also continued to gain traction with two new agreements. NB-IoT continues to show good dynamics and prospects as many semiconductor companies with no cellular background turn to us for an IP solution that can reduce the high entry barriers of cellular. The space poses a huge volume opportunity, with the market expected to reach 4.1…

Thank you, Gideon. Good morning. I'll start by reviewing the results of our operations for the fourth quarter of '18. Revenue for the fourth quarter was $21.4 million, as compared to $21.6 million for same quarter last year. The revenue breakdown is as follows; Licensing and related revenue was approximately $10.5 million, reflecting 49% of total revenues, 17% higher as compared to the fourth quarter of 2017. Royalty revenue was $10.9 million, reflecting 51% of total revenues, down from $12.6 million for the same quarter last year, that also included $0.9 million royalty catch up following an audit of a customer. Gross margins were 91% on a GAAP basis and 92% on a non-GAAP basis. Our total operating expense for the fourth quarter was at similar level as the prior quarter and just below the high-range of our guidance at $17.2 million. OpEx also included an aggregate equity-based compensation expense of $2.2 million, and $0.2 million for the amortization of acquired intangibles of RivieraWaves. Our total operating expenses for the fourth quarter, excluding these items were $14.8 million, also similar to the third quarter level and at the high-end of our non-GAAP OpEx guidance. US GAAP net income and diluted EPS for the quarter decreased 27% and 29%, respectively, to $2 million and $0.10, over the fourth quarter of 2017. Our non-GAAP net income and diluted EPS for the fourth quarter decreased 9% and 8%, respectively, year-over-year to $5.2 million and $0.23, respectively. Other related data. Shipped units by CEVA licensees during the fourth quarter of 2018 were 249 million, down 5% sequentially and down 13% for the fourth quarter of 2017 reported shipments. Of the 249 million units shipped, 134 million units, or 54%, were for handset baseband chips, reflecting a sequential decrease of 19% from 165 million units…

We will now begin the question-and-answer session. [Operator Instructions] The first question will come from Gary Mobley of Benchmark. Please go ahead.

Good morning, gentlemen. Just asking a question or clarification about your non-baseband royalty revenue in 2019, did you say that was $9 million you need?

Hey, just shy of $9 million, yes, Gary.

And that compares to what, in 2017?

About 8.

And with respect...

Gary, in line that we had posted base station revenue this year as a result of the [indiscernible].

Okay. And, I'm sorry, getting you -- you're a little bit hard to hear on your commentary about the 5G licensees, that's for base station SoC, correct?

No. We didn't say that. We said about 5G and we cannot further elaborate on what exactly, but as you know, we have, our offering we have for both end, both on the handset side and the base station side, I mean, it's applicable to incumbents and new one.

Okay. But since there's some customization involved, we have to assume it's on the infrastructure side, right?

No, it doesn't necessarily the case. You're right about customization, that's what we say. The new customer decided to take an enhanced version of what we offer, and that's what we're going to do in the next few quarters.

Okay. That should keep us guessing. All right. With respect to Spreadtrum, obviously, you had some market share struggles in 2018, how do you feel about that royalty payer and licensee with some upgraded modem technology and how that may translate into share preservation or share gains in the calendar year 2018 timeframe?

So Spreadtrum had a share gain loss, they lost a key customer, which is often, in some cases happen in this market because it's extremely competitive and that to refocus their strategy. And they're playing in the low tier of the LTE business and they have big advantages there in terms of cost. And they have a strong relationship with Reliance in India, this will, in 2017, they have some up in LTE, in 2018 some Reliance thing saw a bit, they consumed a bit of this one. So going forward, I think they will refocus in this space and keep in mind, and we said that also in the Analyst Day, the mobile broadband, which is LTE basically is still unfit when it comes to emerging market. And what we see in the low-end, 2G is going down, 3G is going down. This will eventually will transform to a new LTE, as people are not buying 2G phone, or they're not buying 3G phone, so their next move will be for LTE, like in all of us. We were in the same situation two years ago in the [indiscernible]. So Spreadtrum is, in my opinion, in a good shape to expand in this space.

The next question will come from Matt Ramsay of Cowen. Please go ahead.

Thank you very much. Good morning and good evening. A couple of things, guys, I guess, following on, on the base station market, it's interesting to hear some of the commentary it seems that you're hearing from your customer base around base station volumes and deploying those for 5G, and then juxtapose that again some of maybe the early our stronger commentary out of a company like Xilinx that they'd be using FPGAs for some of those baseband products instead of ASICs. So, maybe you could talk broadly about is the -- is it delays in deployment of modem ASICs that your technology is in within the base stations? Or do you feel like most of it is just a little bit slower rollout of base stations in total from the vendors in that market and if you could distinguish between those two, that would be helpful. Thank you.

So I think there are two elements in -- to answer your question. One is the deployment itself. We're coming into the base station with ASICs, FPGA is for some customers -- for some customers could be a temporary solution. For other customers, it could be more a permanent solution, but when it comes to our customers, at least in VPN term, they are going into ASICs, but the 5G deployment itself is going to be stable. And if they're not -- the expectation was that in 2019, it will be the point of no return. And everybody will deploy, one will be in a smaller pace, one will be at a faster pace in some regions. So we are not in this position as we thought in last year. The initial deployment is now, they will not install it everywhere, they will install it in certain cities. There are some -- as I said in the prepared remarks, there are some leftover interoperability issues. So the way our customers are saying that Nokia is pretty open about it, they say second half of the deployment and reshuffle. And by the way the issues that are there with interoperability, the issues is not with the part that we are there, it's more on the upper spectrum, so we just need to wait for that to happen. And we have enough room for everybody FPGAs, ASICs, that's the two options there.

Matt, to highlight on that maybe, what we have done this year versus last year that we got this timing wrong is that we did not bake in best growth yet in the second half of the year and we want to see more data and maybe the first royalty report before we come out with that. So I think that's a bit of the difference there this year and then just trying to understand better that market and when that opportunity kicks in. So we don't miss the -- don't miss our guidance.

Got it. Thank you both for that. As a follow-up question, I guess, going back to the handset market, it seems like we're going to get some announcements from some OEMs potentially of early 5G or, I guess, quote unquote 5G handsets in Barcelona here in a month or so. And I would imagine Qualcomm will feature in the majority of those and your customers seem to be coming on the EOs maybe more quickly on 5G than they did when 4G deployed a number of years ago. I guess, maybe you could talk about how you're seeing the path of your customer based on 5G baseband for handsets. And then secondly, what that might mean for per unit pricing on a relative basis to where you're at right now with the 4G mix? Thank you.

So, when it comes to 5G, I believe the first wave of forms that you're going see, the number of them you see, would be all a Qualcomm-based and a lot, as far as I can see it, it would be also operator. So it would be very localized, meaning operators will decide to promote [indiscernible] and it will be 5G and like I said, it's fully interoperable just to underpin. Our customers are working on 5G and we have several customers, when they come out into the market late 2020, maybe 2021, depending on how the markets will evolve, and there is something that we will know better when we see the base station because they need the base station to put them to install them first. So we'll see. The one thing for 5G and we have a new platform as you know, 5G it will be higher than an LTE, by the way and when it comes to mobile broadband LTE, and if you take for example Q4 quarter-over-quarter data, so Qualcomm went down in 20%, we went down 11% in a smartphone 3G and LTE. So in a way when it comes to the mainstream market, at least, we are doing better. And I think that's the mass market for us to focus in the, this year and may be first half of next year.

The next question will come from Mike Walkley of Canaccord Genuity. Please go ahead.

Great, thanks. Just a kind of a question on, on the overall royalty growth of about 2 million you expect per calendar '19. Can you walk us through some of the, the puts and takes you, you look at? Intel maybe gaining better share year-over-year and iPhone, even though volumes are weak; Spreadtrum, obviously, going through some issues, but then ZTE should be recovering, Nokia should be something versus nothing in the year, so can you kind of just walk us through your thought process of just slightly up year-over-year royalties and where maybe we're seeing declines in the business because it seems like a lot of your customers should be slightly up year-over-year? Thank you.

Sure. Thanks Mike. I think I got, you got all the points right, you know, mainly one thing that you will miss the allocation of those throughout the year and I think we mentioned that earlier. Last year we saw the first two, the first two quarters quite low for different reasons that will continue into next year in 2019. We talked about the inventory, we talked about the overall matureness of the handset space that we've all seen in Q4 and that will probably spill into Q1 or Q2, so we'll have very similar levels to where we were a year ago. And we believe that that will start picking up from the second half for all the right reasons from, from the Apple volume being much stronger in the second half, especially around the September launch, with Spreadtrum gaining more and more sockets and over the last two weeks, we've seen maybe five or six different SKUs that were published all over that they've won. So now we just need to see the volume and the timing of these new SKUs by lot of different OEMs, different OEMs. And in ZTE we hope that there will not be any holes like we mentioned earlier and you see, you saw last year of the quarter and a half of not reporting and not working. So I think with this, that should be more linear throughout the year with potential. When 5G picks up and that we did not bake in the numbers yet. We will see potentially a much stronger second half compared to this second half with ZTE and Nokia on board. For now that's not included in our models. We did take some increase for ZTE and hope to see something from Nokia, but not to the full extent that that could happen and we just want to wait and see. All those other pieces and we talked about, this is the third year in a row, our non-handset baseband, both units and royalties are going up year-after-year, that should continue into 2019 unharmed. Yet lot of new markets that we're not in, automotive space is still pending and no volume yet. But we have a couple of design wins, we're talking about sound that is relatively new opportunity for royalties. We're talking about narrowband IoT with a dozen deals in the last two years. But not royalties yet and we just saw probably the first chip out there that could hit the markets in early 2019. So lot of these other parts are all looking very good and we should continue a biggest dollar contributor, of course, the, non-handsets business is coming from base station and that, for now we've taken a pretty prudent approach in growth on a year-over-year basis.

Okay, that's helpful and my follow-up question. Just, just on clarification, for, for research and development, did you say up about 4 million year-over-year? Is that exclusive of the extra costs going to cost of goods sold? So you have the extra R&D and cost of goods sold plus another 4 million or is that include that 1.7 million expected in cost of goods sold?

It's plus, you're right, 4 million on the R&D line. That is mainly to split rather than ongoing project that we talked about and Gideon explained, it's really to support our customers. In the last four years we signed 200 deals and 81 new customer that has never worked with us, that, that causes a much more pressure for us. If we want to make them successful and those customers are a big portion of them to get into production, we realize that it needs a bit more of a R&D level support and that's part of the reason for that increase. So it's both on the OpEx that 4 million and on top of that you have the allocation of cost of goods for that specific 5G design win.

Great. Thank you and look forward to seeing you at Mobile World Congress in two weeks.

Great. Thank you.

The next question will come from Suji Desilva of Roth Capital. Please go ahead.

Hi, Gideon. Hi, Yaniv. A question on the, the large multi quarter license agreement for the 5G there, why didn't deferred revenue go up? Is that because there's customization milestones you have to achieve to collect the revenue, the cash? Is that the reason?

Yes, that's correct. It's a, it's a pretty big deal. I think we said probably the biggest deal we've ever signed and you have the technology milestones over five or so, or six quarters, so we, we're starting to work on it and we'll recognize an invoice as we go along.

Okay, that helps. And then is that customer a new customer to CEVA or an existing customer?

I mean, we did not speak to give you any clue to this one.

Fair enough. Okay.

[Indiscernible]

And then, more broadly on wireless infrastructure as you ramp up here. Are you guys more levered to macro cell or small cell, I mean, I have a perception that you guys might have an even better content and upgrade small cells of those take off in 5G, but is that a misperception? Is it really just, you know, you're in the core macro and you have opportunity in small cells, which -- which of the two is it really?

We're all over the place of the [indiscernible] is scalable and we address both the macro and the small cell and the fixed wireless by the way and that's the beauty about 5G because the usage mobile and where we can be there is much more diverse and big build LTE. Right now the deployment that we have is in the LTE market. But when it comes to 5G, we are going to be in all those places and then that's the plan so for the customer.

Okay, that’s very helpful. One last quick question on the non-baseband, you talked about '19 growth. Can you rank order the sub segments of non-baseband that would support that growth the best in your opinion in '19?

So dollar wise as I mentioned early, base stations is strong and probably the biggest contributor in dollars. After that we're seeing the vision that's picking up. By the way, we started three years ago with no vision products and the last three years year-after-year that specific segment of the cameras and then sport devices like the GoPros and the drones of different kinds have been using more and more CEVA devices, so volume wise and dollar wise that has been moving up the last three years, not yet significant amounts, but we are scratching the million dollars from that. Then goes the sound devices, a few million dollars less than a handful of Bluetooth. We talked about 50% unit growth from 200 million to 300 million in just one year. The opportunity, as we said earlier are hundreds of millions of units, if not more for us. And we don't see that volume decreasing in the near future. We're winning more and more. This is the -- the best licensing year for our connectivity, both Wi-Fi and Bluetooth that we have ever had so far. And so we anticipate those volumes to continue to increase. So I think we're seeing from every front a contribution, but the biggest dollar amount is in the base station I would say, then after that the connectivity, vision and sound.

Fair enough.

Narrowband IoT is not there yet. And that's a new segment on top of that.

Very helpful, indeed. Thank you.

Sure. Thank you.

The next question will come from Tavi Rosner of Barclays. Please go ahead.

Thanks for taking my question. When looking at a non-baseband unit, we did see a -- we did see some growth, although the unit didn't grow, I guess as fast I -- as I would have expected, you know, in emerging opportunities since the license shift become -- began a few years ago. So I guess in the growth that you guided for royalties in 2019, what kind of growth are you expecting for non-baseband and to the same extent, are there any areas that could outperform significantly from this guidance?

Of course, we'll start with the late, the second part of the question and I think we're quite clear on that that we did not want to make the same mistake we had last year, which was not in our control. So we try to note that a prudent role to forecast not taking into account potential ramp up of Nokia or at least very small amounts there because we don't have yet the exact date and quantity to quantify. So that's for now most of that is out of the, of the equation. And quite a few new design wins that we talked about, 60 companies that we have or customers that we have today in design phase, we do expect anywhere between 10 to 20 to go into production in 2019. We don't know to what, exactly to what extent and that's something that we are still working on and we'll see how that evolves. But there is no doubt that overall units, volume growth for 2000 in, of '19 versus where we are today, we're looking at 15%, 20% growth in units. So that should be still significant tens of millions of units of new products. Of course, for a dollar perspective, again, we need the baseband devices to be there and that will help overall.

Yeah I will, I will add probably two things, first of all regarding your question, how things can go better? It would go better all over the place. Keep in mind that when it comes to the non-handset minus base station, and call it IoT, we have so many design in process that, we don't have that exact visibility when exactly and what pace they will go in the market. So we just took those that we know and we know that they're, how they're going to progress this year. In base station, Yaniv, already covered on this 5G, we're taking very prudent both for Nokia and ZTE. So ZTE is right now just LTE, and the 5G in China will get boost even faster than US, so then it's a class. And then comes the base, the baseband. The baseband, you know, our concern is in the macro, not the cell, not the potential for us to expand and I gave example in one of the question, what happened, I mean, we are doing relatively good, if you put aside the macro. In the macro, in the, the trade dispute that implies into the handset market, the macro improves and you see they have so many 2G, 3G that we're not both [indiscernible] will come to LTE. So when you speak about magnitude or strength that would come in very short period. So these are still unknown problems, we didn't want to be optimistic about it, but again the potential is there.

Our last question today will come from David O'Connor of Exane BNP Paribas. Please go ahead.

Great. Thanks for squeezing me in guys. Maybe a question again on the 5G, maybe you can give us an idea of where are we in the 5G licensing cycle? What's your expectation in 2019, how many 5G license and deals do you expect to close? And then maybe going back to the deal you signed in the quarter, what, what exact aspect of that deal made that the biggest one today's? And I have a follow up, thanks.

So let me take the second question first because I see that people are curious about this 5G. When a customer signs a big deal and take so called risk of waiting for us to finish what they want, what the customer wants, it's a serious player, serious customer. It's the only thing that we can say as soon as we can give more clarity we'll give. So that's, when it comes to this specific deal. When it comes to the 5G in general, we, what I said in the prepared remark that we're expecting 2019 to expand our footprint in 5G, first of all, base station, because we have started, we're targeting few more customers and believe we have the shutter to license our new technologies and same goes for the handset. The technology that we're also, we call it PentaG and we announced it last year end in MWC. The thing about these technologies is that it sees a platform. And you don't necessarily take, take it or leave it, but you can take, if you are an incumbent and you, you believe there is a portion that you miss, in your 5G you can take this portion of PentaG, and if you're a newcomer and if there are newcomers into 5G, you can take it out. So the reason I would say very hectic and dynamic engagement that we have all 5G customers, for handsets and the other fairly future equipment stuff that we are addressing. And I cannot give you any commitment how, how many weeks, I don't know exactly how many is signed, but the only thing which I can tell you it's a very dynamic, we have a very dynamic engagement.

Okay, got it. Thanks for that and then maybe a follow up for Yaniv. Within the 2019 royalty growth, what's the assumption around handset baseband ASPs across 3G and 4G? Thanks.

In 3G we, in 2G we didn't see any, any change over the last year. It's just because there are not too many players and competition in that space as much. In 4G when we added the high-end U.S. OEM that helped with the overall speed and I think they should continue to stay. The, the higher elevation. Again the mix here is important, if we, if we have Spreadtrum coming in and the low-end LTE like we discussed earlier suddenly picks up to a more healthy environment, we will be happy that. Maybe the ASP will be pushed back a bit, but the dollars and the royalty contribution would be much higher. So I think a combination somewhere of the flattish ASP which we are more or less the same versus lower ASP, if the volume will pick up, and not that, that's what we see here today. But nothing out of the ordinary as much as we could tell for now.

Okay. Got it. And maybe just one final one, the LTE shipments in Q4?

75 million.

Sorry, what was that?

75 million in Q4.

Got it. Thanks, guys.

Great. Thank you.

Now this concludes our question-and-answer session. I would now like to turn the conference back over to Richard Kingston for any closing remarks.

Thank you. And thank you all for joining us today and your continued interest in and support of CEVA. As a reminder, the prepared remarks for this conference call are filed as an exhibit on current report on Form 8-K and accessible through the investor section of our website at investors.ceva-dsp.com. With regards to upcoming events we will be attending, these include Mobile World Congress from February 25th through the 28th in Barcelona, Spain; the Susquehanna Technology Conference on March 12th in New York and the 31st Annual Roth Conference March 18th and 19th in Dana Point, California. 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 is now concluded. Thank you for attending today's presentation. You may now disconnect your lines. Have a great day.