Good day, and welcome to the CEVA, Inc. Second Quarter 2021 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'd now like to turn the conference over to Richard Kingston, Vice President, Market Intelligence, Investor and Public Relations. Please go ahead, sir.

Thank you, Rocco, and good morning, everyone. Welcome to CEVA's second quarter 2021 earnings conference call. I’m joined today by Gideon Wertheizer, Chief Executive Officer; 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 the third quarter and full year 2021. 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 statements regarding demand for and benefits of our technologies and related deal flow, including increased revenues from our Chinese wireless customer; expectations regarding market dynamics, including growth in the 4G and 5G handset space and True Wireless Stereo earbuds space; beliefs regarding benefits and impacts of the Intrinsix acquisition; and guidance and qualitative data for the third quarter and full year 2021. 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 scope and duration of the pandemic; the extent and length of the 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 and IoT markets; our ability to execute more base station & IoT license agreements; the effect of intense industry competition and consolidation; global chip market trends, including supply chain issues as a result of COVID-19 and other factors; and our ability to successfully integrate Intrinsix into our business. CEVA assumes no obligation to update any forward-looking statements or information, which speak as of their respective dates. Now, with that said, I would like to now hand the call over to Gideon.

Thank you, Richard. Our second quarter results were exceptional and demonstrate the momentum in our business. Our customers place high value on our products in conjunction with their 5G and IoT roadmaps, and we’re continually experiencing successful rollouts of new CEVA-enabled products. Our revenue and earnings came in significantly ahead of our expectations on the back of a solid overall business environment despite industry-wide challenges with respect to the semiconductor supply. Revenue in this quarter also incorporates a royalty payment owed to us after we constructively resolved a disagreement on royalty rates with a customer on past shipments. Late in the quarter, we concluded the acquisition of Intrinsix, a leading chip design specialist and security IP, which expands our market reach to the large aerospace and defense space and enable us to offer a compelling proposition of optimized IP solutions to our customers. Total revenue for the second quarter of 2021 was an all-time record high $30.5 million, up 29% year-over-year. The licensing environment continues to be strong with good diversity of IP adoptions and targeted markets. Licensing revenue came at $15.5 million, up 15% year-over-year and included for the first-time, non-recurring engineering or NRE revenue from the Intrinsix business after we finalized the acquisition late last quarter. We signed 17 new agreements, of which 6 were with first-time customers. Customer targeted markets reflect a brisk design activity in the True Wireless Stereo or TWS earbuds space, the growing adoption of Wi-Fi 6 and 5G in telecom, enterprise and industrial markets and a range of applications for IoT, consumer and medical. In addition, we signed a SensPro2 computer vision and AI DSP license agreement with a key customer that recently won designs with one of the largest China-based surveillance camera OEM, displacing Huawei HiSilicon with a CEVA-based solution. Also, at…

Thank you, Gideon. I’ll start by reviewing the results of our operations for the second quarter of 2021. Revenue for the second quarter was up 29% to $30.5 million, a new all-time high, as compared to $23.6 million for the same quarter last year. The revenue breakdown is as follows. Licensing, NRE and related revenue was approximately $15.5 million, reflecting 51% of our total revenues, 15% growth from $13.5 million for the second quarter of 2020. This is the first quarter we recorded NRE revenues, which resulted from the acquisition of Intrinsix in June. NRE revenues totaled approximately $1.2 million for the second quarter. Royalty revenue was up 48% to $14.9 million, reflecting 49% of our total revenues, compared to $10.1 million for the same quarter last year. Second quarter 2021 royalties included a royalty payment owed to us of approximately $3.3 million after we constructively settled a dispute on royalty rates with a customer. Quarterly gross margin was 88% on a GAAP basis and 89% on a non-GAAP basis, both slightly lower than what we projected, as we integrated Intrinsix’s NRE costs into the cost of revenue. Non-GAAP quarterly gross margin excluded approximately $0.1 million of equity-based compensation expenses and $0.2 million of the impact of the amortization of acquired intangibles. Total GAAP operating expenses for the second quarter was over the higher-end of our guidance at $25.2 million, due to the integration of the Intrinsix’s expenses for the month of June, ahead of our expectations and prior quarter’s guidance, as well as $0.9 million associated with Intrinsix’s deal costs. OPEX also included an aggregate equity-based compensation expense of approximately $2.8 million, and $0.8 million for the amortization of acquired intangibles, including Intrinsix’s. Our Non-GAAP operating expenses for the second quarter, excluding equity-based compensation expenses and amortization of intangibles…

Thank you, sir. [Operator Instructions] Today's first question comes from Matt Ramsay at Cowen.

Yes. Thank you very much. Good morning, good afternoon, everybody. I guess, my first question, Gideon, it's taken the industry a little bit of time to adjust to the fact that HiSilicon from Huawei has been unable to make chips at TSM because of some of the political situations. And no doubt, many of HiSilicon's customers had built up quite a bit of inventory, and we've taken a few quarters to work through that. But my observation from your prepared comments is the new equilibrium with HiSilicon out of the market has provided quite a bit of momentum for your customers, whether that be [Technical Difficulty] would be really helpful. Thank you.

HiSilicon, which is a semiconductor that is -- people think that it is linked to Huawei, but they are -- as a standalone company, they are extremely powerful in different verticals in China and all over the place. And what you say, it's what we are seeing is that more and more OEMs that used HiSilicon in the past understand that they cannot be served to the same extent that they do from supplier also for road map and turn to customers. So, in specific, what we refer in the prepared remark is surveillance markets. Surveillance market is a huge market. It's about 400 million units a year, very advanced. And we have, in the last few years, got prepared with a few customers of us to approach this market. And we are happy that this quarter, it becomes -- we are getting there. I mean, we are already collecting royalties from a few models. This quarter, we signed a more comprehensive and more future licensing agreement that hopefully will take us to higher presence in this key customer in this space.

Got it. Thank you. I guess, as a follow-up question, real quick in China. We've been watching from afar as I guess, the Tsinghua Unigroup has been a bit teetering towards bankruptcy in China, and I know they're the owner of Spreadtrum and of RDA in the wireless space in China. I wonder, Gideon, if you're confident that that situation, however it resolves itself, is not going to have any impact on your royalty business? Thank you. And I have one follow-up.

Yes. So Matt, we did ask the same question, the customer. We don't see any fingerprints of this bailout. Their owner has -- Unisoc is doing very well recently, as we alluded in the call. And I read somewhere that they are now becoming the real number 3 after MediaTek and Qualcomm. And that's a new era. And they also take advantage of the fact that HiSilicon is not pushing any more. They have 5G. They are shipping now 5G technologies. So, this company is doing well and -- at least from what we see from their report and their business.

I would add one more thing that even if you look at our DSO for the quarter, which is one of the lowest we ever had and the AR balance, we haven't seen in recent months, any change or negative change in the payment schedules or any liquidity issues that we encountered. So, so far, it's a very positive sign.

Thank you, Yaniv. Just real quick follow-up for you. Could you just go through the gross margin guidance again? And if there was any change because of the Intrinsix acquisition that we should expect on a more sustained basis? Thank you.

Sure. So, historically, the IP licensing and royalty business, we were around the 90ish percent gross margin on GAAP for a long time. When you're adding the Intrinsix capabilities and design and IPs, we're starting off with design services, which their cost is not located in the R&D line, but in cost of goods. So, all these costs that they are doing, the design work that they are doing for their customers are allocated to cost of goods. And we talked about being in the 80ish percent gross margins for the time being, 81 on GAAP, 82 on non-GAAP. As Gideon explained, the business model and the trends with them, we are looking to add much more IP offerings. And as soon as that happens and that kicks in, first in licensing, later on in royalties potentially, then those margins will probably crawl up to the mid-80s as we add more. And every quarter, it may shift a bit anywhere from the low-80s to the mid-80s based on the revenue mix of services versus IPs that we are able to add to their business and CEVA's overall numbers.

Thank you very much…

…just to take from the R&D line and allocate some of these costs to cost of goods. Thank you.

And our next question today comes from Kevin Cassidy of Rosenblatt Securities. Please go ahead.

Thank you for taking my question, and congratulations on the results. Can you say a little more detail on where your first-time customers, where are they located geography wise?

Hi Kevin, it's Gideon. The diversity of the application and the geographies that we are experiencing is very wide. But in general, China is -- it's very strong, in particular in wireless. And this could be -- we are seeing booming in TWS. We have substantial amount of agreement in this space that this is not just the TWS, as I referred in the prepared remarks, is not going to be just an audio device. It's going to be an AI device. It's going to be a medical. It's going to be on hearing aids. And Apple just recently came out with a software add-on to make it, let's call it, [indiscernible] hearing aid. Wi-Fi 6 is extremely strong all over the place. And there are other IoT device in the consumer and things that customers that don't want to talk about the application because they have something unique that they want to surprise everybody. So, to answer your question, it's the application, spend and the geography is all over the place. Specifically to wireless, it's -- a lot of it relates to China.

By the way, the count is one in the U.S. and five in China from all these different markets that Gideon explained.

Okay. Thank you for that. And on the Intrinsix, you had given a forecast for the end of the year. Has there been any change to that now that you have taken ownership?

No, not yet. The ownership is just very new and just happened a month or so ago, too. We are still looking at $10 million to $11 million coming from Intrinsix. On top of that, a very strong Q1 enabled us to take -- first half, not just Q1 but also Q2, enabled us to take the new guidance to be $119 million to $121 million.

Your next question today comes from Suji Desilva with ROTH Capital. Please go ahead.

Congrats on the progress here. Maybe you can talk about the wireless infrastructure market a little bit. And obviously, the dynamics maybe with CT and Huawei in place, but just the overall underlying demand, whether that looks like it's sustained recovery in China spending there. And the customers you're ramping now, how many customers are you ramping, so we understand the opportunity there?

Yes. Suji, thank you for the question. So, I'll try to give you a wide perspective of the 5G RAN, radio access network, and the infrastructure. So, what we saw in the second quarter is a step in the royalty compared to what we saw, what we experienced in Q4 and Q1. And that relates to two factors you mentioned I think in your question. One is market share. Our customer is getting now on all this new contract where they used to get about 9% to 10% of the overall tender budget that is signed for the project, now they are more like 30 -- range of 30%. And the second thing is the investment in 5G. Now, the investment in 5G as we see it is not just the big macro base station. It's about going into the industrial, what is called private networks going into small cells for millimeter wave. So, it could be all over the place. It's going to be gradual. It's not -- the demand is there, but it's not like consumer, but the -- there is consistency, market share capture and new use cases. Regarding who is shipping, so we have another customer that ramp up production is very vocal and explained it. And that started, and we see those movements there. And there are a bunch of companies that are doing similar approach like Qualcomm. Some of them are Chinese. They do standard products for the small cells, for millimeter wave. And some of them just started, but they're all in a, I would say, tall position. They have the silicon, they need to qualify, they need to run the certification. But, you're going to see -- or we are going to see ASSP chips going into the base station RAN, not to the macro, not to the big base stations, but more into the more compact one.

Okay. That's very encouraging. Gideon, thanks for that color. And then, on the TWS market, you said that would be as big as -- not as big as, but as meaningful as smartphone over time. What's the time frame for that to be a meaningful set of units? And then, how is the non-air -- airpod market developing to your opportunity and the mix of kind of low-end versus edge AI, TWS? Those dynamics would be helpful to understand.

Yes. First for TWS is, as I said in the prepared remarks, is going to reshape and become much beyond than audio device. Now, you can see from the reduction of market share of airpod that the market is growing. And the Apple market share is -- to some extent, declines. It's because there are many companies that are getting into the market. These are -- I would say all the smartphone OEM have today their own brand, TWS. And there are tons of other audio companies and people that are growing into white box TWS. Now, we are getting already substantial amount of shipments into TWS. But I think the impact will be seen sometime next year when all those deals that we have signed, and we -- just this quarter, we had 8 out of the all agreements that we signed 17, 8 were ear-related technologies, could be hearing aid, it could be TWS, it could be somebody to take it to a medical approach. These are -- I believe you're going to see these companies getting to mass market, not just to our Bluetooth. And we have substantial amount of it already, but you're going to see next year when all those people get into the markets in the new form factor of TWS.

And for us TWS [indiscernible] also it includes the DSP and not just the Bluetooth, like we know from the prior model.

Our next question comes from Martin Yang at Oppenheimer. Please go ahead.

I have a follow-up from previous analyst’s question. So, can you give us an ASP implication of -- for the TWS customers when you compare winning just the Bluetooth versus having additional features such as DSP or any other sensor features?

Yes, sure. Partially, our business model mainly is either percentage of a chip price or cents [ph] per chip based on volumes to come up with not only a Bluetooth chip, but add more functionality to it, our customer is able to charge more for it, usually improves the margin, and then we enjoy that as well. So obviously, it could be 2x, 3x what our offerings is in just standalone Bluetooth because we're adding more content and more technology. And the chip price, at the end of the day, is also more expensive because it replaces another component on a single chip device and a system on a chip. So, that's part of the big benefits of running an IP company and adding more offerings, and that's what we are going to see also in the ASP royalty, ASP and the deal size as well. When you license, you don't license one of the two technologies, but you combine them. And there is an advantage for us and for the customer.

Yes, I would say -- yes, I would just want to say about this market perspective. We mentioned in the call the BlueBud, our technology, where we uniquely can do the audio and the connectivity and the sensor. We can combine them both on the hardware side and in the software side. What happened with this platform is number one, as Yaniv mentioned, the ASP that we are charging and deserve is higher than just licensing those components separately, like Bluetooth or just DSP. But what it does, it enables many other companies that miss enhance their value. So, think about medical company that has technology for glucose measurement. With the BlueBud, this enabled them to go into the market because they can integrate their sensor into this platform and don't really be bothered of the complexity of the audio and the connectivity. So, with this -- that's our approach. It's not just going and provide to the same customer high-value products, but to enable many companies into the second wave of TWS when you have an AI and when you have medical to get into the market. And for those companies, the value that we are adding is substantial.

Got it. Thanks for the insight. And on the overall market, I know you don't break out Bluetooth from the others -- or TWS from the rest of the products yet. Do you plan to do that? And right now, is any way to provide us with more context on how big TWS as a percentage of your total revenues or shipments? Any context would be helpful. Thank you.

Yes. I could start. Yes, sure. I could start. We don't have yet specific breakdown within the base station and IoT. The first one that we broke out was Bluetooth -- start to be meaningful, and we are every quarter supplying the data. Second in place maybe Wi-Fi going forward. We had record volumes there with tens of millions of units for the first time, really significant and record high. So, we don't -- as soon as any of these adjacent markets are today part of our base station and IoT will sound meaningful, we'll open it up. It's a trend. It's a trend that we have talked about [Technical Difficulty] strong for us [Technical Difficulty]. They were close to [Technical Difficulty] devices just here. And obviously, the full solution of adding DSPs are -- have started in the last year or so the licensing when we introduce these newer products. So, the royalties for them will be much more meaningful as we go along. I hope this covered a bit your question.

Yes, it did.

Martin, just -- this is Richard here. I can add one more element here. So not all of our customers break out which Bluetooth chips are shipping for which applications. But we do have customers, for instance, Best Techniques [ph] in China who previously we've seen has about 30% of the non-Apple earbud market today. So with guys like Best Techniques, Beacon [ph] and so on, we have some very strong prominent players in the business. But, as I said, in some cases, they're shipping many different types of chips and different end sockets. They don't actually break out what the end application is in most cases. So, guys like Best Technique, [ph] is a very good indicator of our presence in the market, but I don't think it's possible to actually break out the units just to TWS versus other.

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

Most of my questions have been asked. So, maybe just on Intrinsix. I got disconnected for a second. So, were there any revenue contribution in the second quarter? And I guess, just looking through remaining of the year, if you can go over the strategy, you mentioned last quarter the cross-selling opportunity for the existing customer base and perhaps bringing some of Intrinsix technologies to your current customers. Has the view kind of extended a little bit since you guys talked about it last quarter?

Yes. Let me jump in and explain the overall perspective, because that's a good question about Intrinsix, and then you can refer to the financial. So, with Intrinsix, we are -- we get a very experienced and hard-to-find design team. And they have the capabilities of RF, mixed signal, security, IP. These are things that our customers are looking. And when we get to talk to them and they say, okay, your IP is one thing. Then, we have tons of other things to do beyond it. Now, with that competencies, we can get from Intrinsix two things. Number one is exposure to the very lucrative market, which is aerospace and defense. This is a market that we were not addressing as a standalone company. And the more we get to know this space and the potential and the fact now that the U.S. is really getting their act together and building semiconductor, you see it all over the place. You see it in terms of investment. You see it in terms of new start-ups coming and developing creative team. So, the access to the U.S. in general and the aerospace and defense market, it's incremental to our business. And the other thing, which we discussed briefly in the call is what we want to do with the competency that Intrinsix provides us is to go out to customers and offer what we call integrated IP solutions. Basically, we tell to the customer, you get the IP, but we can do for you the whole design and create the whole basically SOC for you and optimize it to your needs. This is -- what we do, in fact, is we're going up in the value chain not to the level of semiconductor company because we don't want to compete our customer. We don't want to provide chip to do the supply chain, but we're going up in the value chain. When you go up in the value chain, the deal size and the overall return for that investor will be higher to do it. And of course, the relationships with the customer are more sticky, I would say. So that's the approach with Intrinsix. We already reached out customers. I mean, this idea and this approach sounds good to them, I would say. Yaniv, do you want to refer to the financial?

Yes. And just to add the color, we had recorded $1.2 million. This is the first time we recorded that in the licensing NRE and related revenue line. Obviously, next quarter, it's going to be a full quarter, not just one month. So, it's going to be a bigger number. And that falls, as I said earlier, in the $10 million to $11 million add-on that we will -- we plan to add to 2021 model in revenues based on the Intrinsix contributions.

Thank you for the color. And congrats on the strong results.

Thank you, Tavy.

And our next question comes from Gus Richard with Northland. Please go ahead.

Just on -- a follow-up on Intrinsix. It sounds like you're going to move into an ASIC business model, but leave the production of the units to the customer, or is it going to be more of you're going to take Intrinsix capability and create standardized IP? A little bit of more color there would be very helpful.

Yes. Gus, it’s Gideon. Thanks. That's a very good question, and you put your finger where the difference is. So, the idea with the integrated IP solutions seen that we are coming to the customer. And already, as I said, we are reaching out and talk to them about it is to create an optimized solution about IP. So, it's not going to be a standard IP. We're going to take our IP, understand what other problem the customer face in terms of performance, power and take advantage of what we know in the IP and to build an optimized solution. So, as you pointed out, we are not going to manufacture chips. We're not going to the foundry, but we're going to do the whole -- the design steps to create for our customer differentiated solution, the design itself. So, that's what we want to do with our customers. And you can think about what AMD is doing with their semi-custom model. AMD is for when they provide the chip, and they do provide ASIC chips, when they go to a PlayStation or Xbox, they take advantage of graphics IP and processor IP and create something unique for PlayStation and something that plays very well for Xbox. So, we do the same thing, but on the IP space. So, we do all the perfections of the performance, but don't -- we don't manufacture chips or do supply chain.

Got it. And then, you talked about getting the blended gross margin up to mid-80s. Is this part of that, or is this mix? Can you just, again, sort out how much of an improvement of Intrinsix gross margin profile you're going to get out of this new strategy?

Yes. This is again an important question because right now, Intrinsix is doing what they do without our IP [ph] in the mix, meaning as a standalone company to do. So with the IP solution, what we're going to do is to go to the customer and offer them an -- our IP and to optimize our IP. So, from that point, the amount of optimization, customization out of the overall deal will be less because it will be based on our IP, which is...

Yes, one more color. This is not for the next quarter or two. This is -- we are just starting to integrate the team and build the road map. So, the idea here is this is for the next two or three years. This year, for sure, with 80s, and that model will evolve as soon as we can. That's the plan. But it's not an overnight next quarter or the quarter after.

Our next question today comes from David O'Connor at Exane PNB Paribas. Please go ahead. David O’Connor: Maybe just one or two follow-ups to previous questions on my side. Maybe, Yaniv, going back to the base station IoT unit shipment, 330 million in the quarter, very strong. You called out Bluetooth as 189. I'm just wondering about incremental 120 million order in there. It seems like a big jump up, well, certainly from our model. So, just help us to try and get there. Maybe you could rank, for instance, the other shipments and there across Wi-Fi, maybe the wireless earbuds as well to kind of help us model that? That's my first question. Second question is just anything on seasonality on Intrinsix that's worth calling out? And third one, just a follow-up on the question previously on the RAN side of things. In the 2021 guide, does it assume both, big RAN customers, I'll say, the shipping and volume in the second half?

Sure. So, let's start with the beginning. The volumes that I think I said this earlier, the biggest volume or number 2 after the Bluetooth volume is Wi-Fi. This is new, hasn't been in these levels. And I would say, maybe even half of that delta is Wi-Fi, which is tens of millions of units. The other ones are cellular IoT, which is a nice ramp-up, again, record high. This would be the third. And then, the others are still smaller. So, I think the very interesting ones to highlight this quarter would be the Wi-Fi number 2. And the sensor fusion is also a nice number that has been with us for a while now, two years and cellular IoT, which is ramping up the fastest after Wi-Fi. So, that's that from the volume perspective. The second question was, sorry, remind me? David O’Connor: Yes, just on the Intrinsix seasonality, anything to call out there for the model.

Yes. I would say one thing, in general, for now, these are the chip design services because the big portion is the aerospace and defense, which is a lucrative new market for CEVA. The cycle is there, the government approvals, DARPA, DoD, just the timing of different projects and different customers to get everything squared away and signed SOWs, the new deals and new projects. That's, I think, the more critical timing aspect that we'll be dealing with. But, it's not one project. It's multiple projects running in parallel. So, those are the things that probably could take longer or shorter for things to start kicking in and revenues to be recognized. The revenue is pretty simple. It's based on the time and material and IP blocks that we'll start adding as soon as we can, and that's what we talked about earlier. That's from the seasonality perspective, so less than a typical licensing type of model, which either a deal gets signed or doesn't get signed. And if it does, you need to deliver and recognize it immediately. It's a little bit more allocated over the different quarters. Third, David? Sorry about that. David O’Connor: Yes. Just the last one, just on the -- within the 2021 guide, does it assume both of your big RAN customers shipping volume?

Correct. I think, we're seeing all the news around us from both customers doing well, if you follow their public announcement, and that is the case.

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

Thank you, Rocco, and thanking all of you for joining us today and for your continued interest in CEVA. As a reminder, the prepared remarks from 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. With regards to upcoming events, we will be participating in the following conferences: the Oppenheimer 24th Annual Technology Internet and Communications Conference, August 11; the Rosenblatt Securities Technology Summit, the Edge of AI from August 24 to August 26; Jefferies 2021 Semiconductor IT Hardware and Communications Conference from August 31st and September 1st. And full 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 goodbye.

Thank you, sir. This concludes today's conference call. We thank you all for attending today’s presentation. You may now disconnect your lines, and have a wonderful day.