Good morning and welcome to the CEVA Inc. First Quarter 2019 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 Market Intelligence, Investor and Public Relations. Please go ahead sir.

Thank you, Rocko. Good morning everyone and welcome to CEVA's first quarter 2019 earnings conference call. I'm joined today by Yaniv Arieli, Chief Financial Officer of CEVA; and Gideon Wertheizer, Chief Executive 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 provide qualitative data for the second quarter and the rest of 2019. I'll start with the forward-looking statement. Please note that today's discussions contain 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. These forward-looking statements include our financial qualitative data for the second quarter and the remainder of 2019 including reaffirmation of CEVA's full year 2019 guidance; optimism about CEVA doubling its annual royalty revenue in 2022; optimism about CEVA's NeuPro technology and the ability of this technology to leverage new market segments; anticipation that Intel's departure from the 5G smartphone modem market would not have any short-term impact; optimism about CEVA's ability to capitalize on 5G; and optimism about sustained growth in non-handset baseband product lines. For information on the factors that could cause a difference in our results, please refer to our filings with the SEC Securities and Exchange Commission. These include the ability of the CEVA's 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 positioning 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 5G network and wireless connectivity AI LTE-IoT and the IoT space generally; our ability to execute more non-handset baseband license agreements; and customers' ramp-up schedules and the impact 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 results 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 results which can be found in the earnings press release issued today. A copy of today's press release for the quarter ended March 31st, 2019 and the related financial tables and management commentary which were included in our current report on Form 8-K filed today also can be found on the Investor Relations portion of our website. With that said, I will now turn the call over to Gideon.

Thank you, Richard. Welcome everyone and thank you for joining us today. Our first quarter results reflect strong licensing performance along with substantial headwinds in handset-related revenue. Total revenue for the first quarter was $17 million, down 3% on a year-over-year basis. License revenue was $11 million, up 9% year-over-year. Royalty revenue was $6 million, down 20% on a year-over-year basis. Our continued focus on bringing leading-edge products to our targeted market and the determination of our team to promote and license these products broadly is clearly paying off. Our first quarter licensing performance further underscores the merit of our growth and diversification strategy beyond handset as we work toward reaching our strategic growth goals of doubling our royalty revenue by calendar year 2022. We concluded eight license agreements during the quarter of which three were for our smart sensor product and five were for our connectivity product. Four out of the eight deals were with first-time customers. To better reflect our growth vector and customer expansion in the smart and connected world, we have updated the classification of how we report the deal count composition each quarter. The smart sensing category includes our technologies and product for AI computer vision and sound. The connectivity category includes our wireless technologies and product for 4G and 5G, cellular IoT, Bluetooth and WiFi. Customer-targeted products are AI processor for autonomous cars, 5G for base station RAN, millimeter wave, small cells, V2X, wireless earbuds, smart speaker and connectivity for IoT devices. I would like to take the next few minutes to recap on numbers of deals that we have concluded in the quarter due to their strategic importance. The first is an AI agreement for autonomous car with a major automotive OEM. It is a comprehensive agreement for our NeuPro AI processor technology…

Thank you, Gideon. Good morning, everyone. I'll start by reviewing the results of our operations for the first quarter of 2019. Revenue for the first quarter was $17 million as compared to $17.6 million from the same quarter last year. Revenue breakdown is as follows. Licensing and related revenue was approximately $11 million, reflecting 65% of our total revenue, 9% higher as compared to the first quarter of 2019. Royalty revenue was $6 million, reflecting 35% of our total revenue down from $7.5 million for the same quarter last year. Gross margins were 88% on GAAP basis and 89% on non-GAAP basis, slightly better than we projected. Total operating expenses for the first quarter came at the mid-range of our guidance at $17.9 million. OpEx also included an aggregated based compensation expense of approximately $2.3 million, and $0.2 million for the amortization of acquired intangibles of RivieraWaves. Our total operating expenses for the first quarter excluding these two items were $15.4 million, just below the midpoint of our guidance. U.S. GAAP net loss for the quarter increased by 5% and diluted loss per share was $0.10 on both first quarters of 2019 and 2018. Non-GAAP net income and diluted EPS for the first quarter of 2019 were $0.3 million and $0.01 respectively. The other related data. Shipped units by CEVA licensees during the first quarter of 2019 were 175 million, down 30% sequentially and down 11% from the first quarter of 2018 reported shipments. Of the 175 million units shipped, 89 million units or 51% were for handset baseband chips, reflecting a sequential decrease of 34% from 134 million units of baseband chips shipped in the fourth quarter of 2018 and 27% decrease from 122 million units shipped on a year-over-year basis. In non-handset baseband volume shipments were down 25%…

[Operator Instructions] Today's first question comes from Matt Ramsay of Cowen. Please go ahead.

Thank you very much. Good morning, good afternoon guys. I guess, we'll just go ahead and ask it and get the elephant in the room out of the way. Gideon, you guys had talked about maintaining the 2022 outlook to double the royalties of the company in light of Intel's bowing out of the 5G smartphone space. Maybe you can give you a little bit of context as to how you're thinking about that? And if you look backwards maybe over the last trailing 12 months if there's any kind of ballpark as to percentage of revenue that Intel's business with Apple gave you just so we can ballpark that that would be really helpful? Thank you.

Hi, Matt. When it comes to the 2022 at the context of the exit of Intel there are still a lot of moving parts. This market swings between ups and downs very fast. So specifically about the cellular, it's yet to be seen how -- it's 2.7 billion units overall, so how the share between the three emerging chips; Qualcomm, Spreadtrum and MediaTek, how they will divide the wealth there? What the ASP looks like? What will be the attach rate of 5G with them? So these are things that it's too early for us to comment. Also keep in mind that by 2022, CEVA will be -- because of our play in the non-handset in particular the 5G and the base stations and the small cell will be much less -- much more resilient through all those ups and downs in the mobile. And we'll have -- it will be more an ASP play than a volume play like we have today. So that's in regard to 2022. So we don't see right now a major change that would make us to change our estimation. There are still a lot of things that we can be independent of this event. Now that's one thing. The other thing before that so for 2019 we are -- we don't change our guidance. We believe as we said in the prepared remarks that, we'll have the high attach rate at this large customer. So 2020 again, it's too early. And in the mobile space specifically the swings are very fast. So you can win design today which we don't know what customer you can get design win and next year we'll be with tens of millions in units shipping. So we -- it's too early for us to say. And the only thing that I can tell you about the mobile in general, the winner does not take all.

Thank you. Gideon. I appreciate the additional color there. As an unrelated follow-up, congratulations to the team on the automotive progress with a large automaker. Gideon, any additional color you could give about what type of applications, what type of potential royalties per car? Any kind of context around -- I mean I know its a few years out before revenues can really start to ramp there, but any kind of context just so we can understand where that business potentially is going with that customer and others would be helpful. Thank you. A – Gideon Wertheizer: So the -- as we say, for us it's a transformative and a dramatic agreement because it puts us for the first time in a production plan and that's one thing. The other thing is that we eventually will see because this is OEM and OEM does not develop the chip. We're going to see downstream adoption. So the other incumbents in the automotive will eventually come to us to license the technology. And from them we'll get the royalties on the shipment. And I don't want to get to the numbers, but as I said going forward '21 -- 2021, 2022 CEVA is going to look more as an ASP play than a volume play. And that makes us -- it's a long-term engagement. It's a sticky engagement and we are moving fast toward this direction. Q – Matt Ramsay: Thank you. I'll get back in the queue. Appreciate it. A – Gideon Wertheizer: Thanks.

And our next question today comes from Mike Walkley of Canaccord Genuity. Please go ahead. Q – Mike Walkley: Great, thank you. Just following up on Matt's questions, just on the handset market, can you talk about your Chinese customer and inventory levels and just overall confidence that you're seeing the inventory-clear market uptick throughout the year? Thank you. A – Gideon Wertheizer: So when it comes to the Chinese customer, the way I see it is this Chinese customer suffer as well as other in the inventory and -- that was built up in end of last year and now have to replenish. Because -- usually those guys, our customer focus on the OEM/ODM side. So not this Vivo and Oppo that is more high end. The ODM sides are more sensitive to volume buildup because they are much faster in the cycles. So eventually, they had to take a more aggressive stand in replenishing their inventory. Going forward for the next year our assumption is that we're going to build -- resume shipments and growth unless there are earthquake there. But it's not a non-typical behavior. If you look backward in the year, it was not aggressive in swing. Q – Mike Walkley: Okay. A – Yaniv Arieli: And so with that if you look at last year's, the handset, we had a similar -- not just CEVA, but the whole handset market had a weaker first half and then in the second half we saw Q3 growing sequentially more than 50%. From very similar reasons, but a different year, we are seeing or at least thinking this is the model that we'll see for 2019 as well, so now projecting the growth from the second to the third quarter to be as big percentage-wise as last year.…

Thank you. I'll jump back in the queue.

Thank you.

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

Hi, Gideon. Hi, Yaniv. Just a housekeeping question, first. How many Bluetooth units were there in the quarter?

We had one Bluetooth design, I believe.

No. The royalty units rather, Yaniv?

Sorry. The units on Bluetooth, I don't recall off the top of my head. I'll get to it in a second.

It's fine. Okay. I'll go to my next question then maybe. On the licensing side, the number of deals was pretty -- the revenue rather was pretty consistent, but the number of deals was lower. So I imputed a higher per license revenue this quarter. Was there one particularly large deal? Or are the deal sizes growing? I noticed connectivity was pretty similar. So curious on the trend there, if that is one of the trends you're seeing.

Yaniv?

Yes. The deal count doesn't necessarily mean that much. We count them -- look on the quarterly basis, we had few very nice sizable deals in the millions-of-dollars. And if you recall, we also have some backlog from a big 5G deal that we had in Q4 and we are recognizing over time. So it was a combination of more larger deals this quarter than smaller deals. I think that the present -- our offerings and some of the markets we talked about, whether it's base station or automotive, are the more lucrative licensing deals that we have, a bit less on the consumer side maybe. Bluetooth was 67 million units, by the way.

Thank you.

So, yes, a solid number. And, yes, I think that's what I have to add on the licensing front, the deal front. Yes.

Okay.

One thing -- Suji, one thing to keep in mind about the units because -- and maybe in the future we will consider it differently, but because we have mixture of very high ASP, like base station and unit play like Bluetooth, so just by looking on the units and then try to infer for rate for the royalty revenue, it's a bit tricky. So the -- we have different mix of ASPs.

Yes.

And that's the reason that the royalty revenue for non-handset grew up 22% and the units are 16%. So it's because of the ASPs.

That helps. And then one last question, if you don't mind. Appointing Michael as COO, congratulations to Michael on that. Gideon, it frees you up to, you said, "pursue new growth engines." You already have put a lot of products out in the last two, three years. So I'm wondering are there other areas you can possibly target. Or is this more digging deeper into the products you've already put in the marketplace?

So, it's all of the same -- it's all of the above, meaning, we have different growth opportunities that we can explore. One is in terms of content. So what we're doing in sound where we're going up in the value chain and also in software. That's one example. We can do a lot of things on the AI side and we do a value chain. So the other opportunity is of course M&A. And these are things that I'm going to look actively and there are a few possibilities and approaches that can give us additional vectors. We did -- last M&A, we did in back in 2014, it was -- it turned out to be successful. I hope we don't fuck up this time.

Great. Thank you, guys

Thank you, Suji.

And our next question comes from Peter Zdebski of Barclays. Please go ahead.

Hi. This is Peter on for Tavy. Back on ASPs on the handset side. Could you give us any color on how those held up versus last quarter given the inventory concerns? Or…

No. There's no changes when you talk about prices on the inventory or cleaning up inventory. That's more on the semiconductor side or front. We don't necessarily see that when we did the royalty report, whether because of $0.06 or it’s predefined deals that don't change on a quarterly basis based on volume or a specific issue with a specific customer. So no, no change whatsoever in the ASP. It's just the volume that was much lower this quarter from all the different reasons -- known reasons that we saw many companies in this space take a hit in Q1, because of the inventory and the situation in the market. And we believe as we said that that will clear out during the year and with no ASP issues, but more of the volume that we've missed indicated from our model.

Okay. Thank you.

Great. Thank you

And ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to the management team for any final remarks.

Okay. Thank you all for joining us today and your continued interest and support of CEVA. As a reminder, the prepared remarks for this conference call are filed as an exhibit to the current report on Form 8-K and accessible through the Investors section of our website at investors.ceva-dsp.com. With regards to upcoming events, we will be attending, these include CEVA's Annual Meeting of Stockholders on May 20 in New York; the Cowen 47th Annual Technology Media & Telecom Conference May 29 and 30 in New York; Jefferies Annual Israel Tech Trek June 4 in Herzliya, Israel; the Stifel 2019 Cross Sector Insight Conference June 11 in Boston; and the ROTH London Conference on June 19 in London, England. Please visit the Investors 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.