Good day and welcome to the CEVA, Inc. Second Quarter 2020 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note today’s event is being recorded. I would now like to turn the conference over to Richard Kingston, Vice President of Market Intelligence, Investor and Public Relations. Please go ahead, sir.

Thank you Rocco. Good morning everyone and welcome to CEVA’s second quarter 2020 earnings conference call. I am joined today by Gideon Wertheizer, Chief Executive Officer; and Yaniv Arieli, Chief Financial Officer of CEVA. Gideon will cover the business aspects and the 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 the third quarter and full year 2020. 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. These forward-looking statements includes guidance for the third quarter of 2020 and qualitative data for the remainder of 2020; optimism about 5G opportunities, including expectation of royalty revenue increase in the third quarter associated with 5G base station RAN in China; optimism associated with the CEVA-XC DSP portfolio and PentaG 5G-modem platform; CEVA’s ability to play a pivotal role in the O-RAN space; CEVA’s ability to leverage opportunities that may arise from the pandemic and U.S., China trade tensions and positive market data by GSMA Intelligence and Forrester Research. For more information on the factors that could cause a difference in our results, please refer to our filings with the SEC. These include: the scope and the duration of the pandemic; the extent and the length of the shelter-in place and other restrictions associated with the pandemic, and the impact on customers, consumer demand and the global economy generally; the ability of CEVA’s IPs for smarter, connected devices to continue to be strong growth drivers for us; our success in penetrating new markets and maintaining our market position in existing markets; the ability of new products incorporating our technologies to achieve market acceptance; the speed and extent of the expansion of the 5G, O-Ran, Wi-Fi and IoT markets; our ability to execute more non-handset baseband license agreements; the effect of intense industry competition and consolidation; and global chip market trends. CEVA assumes no obligation to update any forward-looking statements or information, which speak as of their respective dates. With that said, I would now like to turn the call over to Gideon.

Thank you, Richard. Good morning, to everyone and thank you for joining us today. We are living in unprecedented times where we all continue to adapt to the implications of the COVID-19 pandemic. First and foremost, we continue to look out for the health and safety of our employees, customers and partners worldwide. Our employees have stepped up to ensure we meet our customers’ milestones and maintain the development schedules of our new products. I would like to take this opportunity to thank our employees for their hard work under these difficult circumstances. Second, we are closely monitoring the impact of the measures to control the spread of the coronavirus on our ongoing business and also the strategic opportunities the pandemic uncovers. I will allude to this later in the call. Despite this lingering uncertainty, we had a very good second quarter with revenue of $23.6 million, up 28% year-over-year, the highest second quarter revenue we ever recorded. The licensing environment continues to be healthy with $13.5 million in licensing revenue, up 25% year-over-year. We signed eight new agreements, of which three were for smart sensing and five were for connectivity products. One out of the eight deals was with a first-time customer. Target applications of our customers include automotive powertrain, a new growth opportunity for us in the automotive space, wearables, true wireless stereo earbuds, and a range of IoT devices. Royalty revenue came in ahead of expectations at $10.1 million, up 10% sequentially and 33% year-over-year, driven by strength in the base station and IoT product line, formerly referred to as non-handset royalties. This product line posted 77% year over year revenue growth to $4.3 million, comparable to our all-time record high, and driven by record high Bluetooth and Wi-Fi royalties resulting from many new IoT production ramp-ups.…

Thank you Gideon, I’ll start by reviewing the results of our operations for the second quarter of 2020. Revenue for the second quarter was up 28% to $23.6 million, as compared to $18.4 million for the same quarter last year. It was the highest second quarter revenue we ever recorded. The revenue breakdown is as follows: Licensing and related revenue was approximately $13.5 million, reflecting 57% of our total revenues, 25% higher than $10.8 million for the second quarter of 2019. Royalty revenue was $10.1 million, reflecting 43% of total our revenues, 33% higher than $7.6 million for the same quarter last year. Royalty revenue from our base station & IoT product line in the quarter was $4.3 million. This is comparable to the all-time record high we reached in the fourth quarter of 2019. Quarterly gross margin was 87% on a GAAP and 89% on a non-GAAP basis, both slightly better than what we projected. Non-GAAP quarterly gross margin excluded approximately $0.2 million of equity-based compensation expenses and $0.2 million for the impact of the amortization of acquired intangibles. Our GAAP operating expenses for the second quarter was just below the high-end of our guidance at $22.1 million. OpEx also included an aggregate equity-based compensation expenses of approximately $3.3 million and $0.6 million for the amortization of acquired intangibles. Total operating expenses for the second quarter, excluding these two items were $18.3 million, just above the high-end of our guidance. U.S. GAAP net loss for the quarter was $1.1 million and diluted loss per share was $0.05. This compares to net loss of $1.5 million and diluted loss per share of $0.07 for the second quarter of 2019. Our non-GAAP net income and diluted EPS for the second quarter of 2020 increased by 130% and 140%, respectively, to $2.9…

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

Thank you, very much. Good afternoon and good morning, everybody. Gideon, I wanted to start with a question about 5G in general for sort of both sides of the business, the infrastructure side and the handset side. And maybe you can step back and kind of characterize where you guys feel like you are competitively and maybe more important where your licensees are competitively on 5G, it sounds like, things are going to start to materially ramp in the third and fourth quarter on the base station side. But on the flip side, we have seen some share consolidation with Qualcomm and MediaTek and the 5G handset side at the expense of some of your licensees. So, if you could just kind of level set how you are thinking about the 5G opportunity for the company? That would be helpful. Thank you.

. : So, some of the baseband processing improve the antenna. Today it’s done by SGPAprimarily and while it was the first company that managed to built with the peak and now our customer moved and come out with the solution based on our DSP. So this is a pretty sizable market, because for every base station, you are going to have between 3 to 100 antennas. Each of them will have a processing done on the antennal itself on top of what you do on the base station itself. So that’s one area. The other area is in fighting against many more small cells, then you have an LTE because of microwave on mini microwave gradually operator will start rolling out these services. The cell component that you have in 5G RAN is what is called private metro. So, there was an announcement coming from Toyota with our customers and folks, they all installed private base stations in their manufacturing lines for getting this low latencies in their security that they made for their robots in the manufacturing, And the first one I referred in the call is the O-RAN. O-RAN is an initiative that is for a long time now with the polarization between a China DOS it’s stimulated by the government and that’s a very good sweet spot to guys like Intel, like Facebook, they're already active in the cellular. Microsoft made the acquisition in this and all of them more or less will and some others this effect what we offer. So, all those are areas that weren’t an LTE and in 5G we are doing and one of the reasons that we have a step up in China now is the antenna in the first deployment and we sell all those components and we have…

Thank you, Gideon. That’s great perspective all the way around. As a follow-up for me, Yaniv, you talked about in the guidance royalties being higher in the second half of the year versus the first half and it’s notable that I would expect that the revenue you get from the Intel modem would be significantly less in the back half of the year. So, if you could talk about maybe the magnitude that you are expecting out of 5G base station in the back half of the year? Just kind of the moving parts on the royalty side would be helpful. Thank you.

Yes. As you said, there are many moving parts. It was always the case in the CEVA model and this is why in one hand it’s quite difficult to model this out and based on the new rules of the 606, we just wait for the customer report at the end of 30 days after the quarter end and then, we get the real visibility of how the quarter works out. So, in every segment, we have ups and downs. In every segment, we have seasonality. This year, I think, seasonality and COVID-19 has completely changed. We saw vacuum cleaners being very, very strong. Our TVs in the first half of the year something that it’s not commonly – common factors because people wanted to had more time to shop at home or wanted their house to be cleaner or had more kids around different rooms that needed TVs. That’s true for Bluetooth, Wi-Fi devices. We just came out with our strongest royalty numbers ever for Bluetooth and Wi-Fi in the second quarter. And remember, when we stepped into the second quarter, the end of the first, we believe that Q2 will be the low point of the year for us and from there on it’s going to pick up. So, how long will we – just two and a half or three months ago. So, very difficult to predict an answer. The right answer knowing today how Q3 and Q4 are going to look like. We thought that you mentioned correctly. The handset space there is a change there at least with one well known OEM in the 5G aspects, but they came out with a very, very successful low cost version, which is doing extremely well. I think all of us were super surprised by the excellent results…

No. Thanks, very much for that. I’ll jump back in the queue, but much appreciate it.

Thanks.

And our next question today comes from Tavy Rosner with Barclays. Please go ahead.

Hi. This is Peter Zdebski on for Tavy. Congratulations on the quarter. Regarding the continued strength in licensing, I was wondering how we should think about the sustainability of that into 2H? And given that we saw a bit fewer deals in the quarter versus Q1, is that a headwind at all? Or is that that you are just seeing a bit bigger deal size? And then, if I could have a follow-up. I was hoping if you could give us an update on the integration of the Imaging and Sensor Fusion acquisitions both from the operational, more particularly from a commercial point of view?

Okay I will tell you, let me think first the licensing. So, what we see is the momentum continued, don’t look the fact that your light, fan or electronics does not mean, licensing is - it’s a lumpy business. There are peaks and valleys. You have to look different perspectives. The pipeline looks solid. We manage to continue to those deal flow. We have strong interest in our Wi-Fi product. We have strong interest in computer vision product. We have strong interest for Bluetooth. We signed a very important agreement with the power train cars. This is by strength is going to grow 30%, it’s part of the electrification of cars. If it’s going to grow by 30% CAGR between 2020 and 2030. So, I mean, we don’t see any weakness. Again, this is licenses. It’s timing of closing deals. We want to do the complete evaluation with the customer, do the legal negotiation properly, commercial negotiation properly, but we are on a solid ground there. Regarding integration of Sensor Fusion and Imaging, so, the Sensor Fusion, it's part of CEVA already. It's a strong contributor. Yaniv mentioned vacuum cleaners, a by-product of the pandemic, we start seeing significantly royalties there. With our interest in we are at the PC space, with vendors we are much stronger on the TV space. We do cross-sales between the CEVA products as well as Sensor Fusion. So, it was a smooth integration. Like what CEVA is doing. When we acquired a company, we look on the history. We look at this team, know what they do and then based on this we’ll make a decision. So that’s – it’s a group. Did you ask another question? I’ll add you one more thing that we said earlier that on the licensing front, overall, not on a full quarter basis, we are still we are still reiterating our balance from earlier this year which is by $2 million to $4 million on top of the $48 million which was all-time record high last year. And this means that we are looking to cross the $50 million level for the first time and this is for 2020. So, with all that said, this is still our plan. We kept it last quarter. We are still very confident with it for this quarter and this is where we are targeting for the rest of the year.

Very helpful perspective. Thank you.

Sure.

[Operator Instructions] Today’s next question comes from Suji DeSilva with ROTH Capital. Please go ahead.

Hi, Gideon. Hi, Yaniv. Congratulations on the momentum here. So, the second half guidance for an improvement, can you talk about what you are assuming there in the consumer exposed non-smartphone markets, the volume markets? Are you expecting a seasonality, recovery, or kind of still muted demand? A lot of the other areas you commented on, but I am curious just the broader consumer non-smartphone?

This ties a bit to what we try to convey a bit earlier. It’s an excellent question. And historically, Q3 was the season wrong in a lot of these consumer devices. This year, we hope that that’s still the case, especially after in one hand some of the manufacturing was lower and in the beginning of the year and picked up in the second quarter. Demand, as people start going back to normal or sort of normal alongside COVID and continue work. It should – that historically at least it did pickup. Q2 was down in volume in a lot of these IoT devices although we saw new product ramps in new devices for the first time. So, with those in mind and those new products that just hit the shelves in Q2 with relatively lower volumes because of the pandemic, we do believe that they will continue to pick up. The pace of all this, whether it’s in TV or earbuds or vacuum cleaner TV or all of these other devices that we are powering is a lot of moving pieces and from lots of different segments. And you know what, even one of our customers and action camera, the space came out surprisingly with a very strong quarter and increased their guidance for Q3, which is again it’s not the easiest guess for us as people don’t starting taking a bit more vacations, going out to the outdoors. So, even that that’s a good sense and it’s a good sign that Q3 seasonality is – maybe, I don’t want to say back on track, but on the right track. And these are the moving parts. Do you want to see? No. I appreciate the color Yaniv. I mean, it sounds very optimistic in a challenging environment there. And then, the automotive market, you started talking about it, Gideon, but can you talk about how many wins you have now? You have one, you talked about in the press release and what the timing of potential revenue contribution there, as maybe the content per car or things like that?

You need to - as you know, in automotive, you need to take a deep breath until you go to production. I mean, we have activities ongoing with that customer and other customer for all the products. But I think, in late 2021, we see initial product with a lot of processing. I think that specifically from this product, if all goes well, that's 2023 mass production.

Okay. Great. Thanks guys.

Thank you and good luck.

Ladies and gentlemen, this concludes the question and answer session. I would like to turn the conference back over to the management for any final remarks.

Thanks, Rocco. Thank you all for joining us today and for your continued interest in 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 participating in, these are the following virtual events that we will attend in August and September, starting with Oppenheimer’s 23rd Annual Technology, Internet & Communications Conference, August 12th, Jefferies Semiconductor, IT Hardware & Communication Infrastructure Summit, September 1st and 2nd Citi's 2020 Global Technology Conference, September 8th, 9th and 10th. Further information on these events and all events we will be participating in can be found on the Investors section of our website. Thank you and good bye.

Thank you. This concludes today’s conference call. You may now disconnect your lines and have a wonderful day.