Good day and welcome to the CEVA, Inc. Third Quarter 2023 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, Market Intelligence, Investor and Public Relations. Please go ahead.

Thank you, Rocco. Good morning everyone and welcome to CEVA's third quarter 2023 earnings conference call. Joining me today on the call are Amir Panush, CEVA CEO; and Yaniv Arieli, CEVA CFO. Before handing over to Amir, I would like to remind everyone 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. Forward-looking statements include statements regarding the benefits and future financial impacts of the divestment of the Intrinsix business and related refocusing our core strengths of IP development and licensing, market trends and dynamics, our market position, strategy and growth drivers, including with respect to WiFi 7, demand for and benefits of our technologies, plans with respect to CEVA's share repurchase program, and expectations and financial guidance regarding future performance. CEVA assumes no obligation to update any forward-looking statements or information, which speak as of their respective dates. In addition, following the divestment of Intrinsix's business to Cadence, financial results from Intrinsix were transitioned to discontinued operations beginning in the third quarter of 2023, and all prior period financial results have been recast accordingly. We will also be discussing certain non-GAAP financial measures, which we believe provide a more meaningful analysis of our core operating results and comparison of quarterly results. A reconciliation of non-GAAP financial measures is included in the earnings release we issued this morning and in the SEC filings section of our Investor Relations website at investors.ceva-dsp.com. With that said, I'd like to turn the call over to Amir, who will review our business performance for the quarter and provide some insight into our ongoing business. Amir?

Thank you, Richard. Welcome everyone and thank you for joining us today. Before I begin, I would like to address the situation in Israel following the horrifying attacks took place a month ago. This has been an extremely difficult and hard breaking time for all of us, and I would like to thank the many of you who have reached out to us for your support. Our priority at this time has been for the safety and well-being of our employees and their families, and we are doing everything we can do and to ensure we provide them with the support they need. In the midst of these adversities, our operation in Israel remain largely unaffected and we continue to drive our business and support our customers globally. I want to thank our employees in Israel and Board for all their efforts during this difficult time. Turning our attention to the business. Since being appointed CEO of CEVA at the beginning of the year, however, emphasize our need to focus our efforts on our key IP pillars, where we have built strong leadership with differentiated offerings and that are best suited to drive scale and synergies across our technologies globally. In the quarter, we took an important step in this strategy with our decision to strategically exit the US aerospace and defense design services industry and divest the Intrinsix business. When we acquired the Intrinsix business in 2021, our thesis was that it would help increase our presence in the US aerospace and defense industry and expand our offering to co-create IP SoC designs, leveraging the Intrinsix team. However, what became clear to me after joining is that the A&D industry doesn't offer product volumes that align with the IP royalty business model. And while the Intrinsix team has a…

Thank you, Amir and good day to all. Before I start reviewing the results of our operations for the third quarter of 2023, I want to explain that revenues, cost of goods and operating expenses for the third quarter do not include Intrinsix numbers, reflecting the Intrinsix business and the held for sale discontinued operation unless otherwise noted. Revenue for the third quarter was $24.1 million as compared to $30 million for the same quarter last year. The revenue breakdown is as follows; licensing and related revenue, reflecting 58% of total revenues were $13.9 million as compared to $18.7 million for the third quarter of 2022, but up 3% sequentially. The royalty revenue, reflecting 42% of total revenues, was at $10.1 million as compared to $11.4 million for the same quarter last year. However, this is the second sequential increase for the first quarter and second quarter of 2023. This supports the recovery we have seen in handsets and general IoT product demand in the third quarter. Quarterly gross margin on CEVA standalone basis, without the discontinued operation came in at 90% on GAAP and 92% on non-GAAP basis due to the lower service-related expenses. Non-GAAP quarterly gross margin excluded equity-based compensation expenses of $0.2 million and the amortization of acquired intangibles of $0.1 million. Total GAAP operating expenses for the third quarter was $24.4 million, lower than our guidance because of the exclusion of the Intrinsix business cost, actions taken by management to reduce costs and lower employee-related expenses. Our total non-GAAP operating expense for the third quarter, excluding equity-based compensation expenses and amortizations of intangibles were $20.4 million, also below the lower end of our guidance due to the same reasons I just explained. GAAP operating loss for the third quarter was $2.7 million, up from GAAP operating…

Yes, sir. [Operator Instructions] Today's first question comes from Kevin Cassidy at Rosenblatt Securities. Please go ahead.

Yes, thanks for taking my question and congratulations on a good quarter in a tough market. And what we're hearing through this earnings period, it's a lot of slowing in demand from the IoT market, but here you are saying that you're shipping the second highest units in the company history. Can you explain why you're outperforming these markets?

Yes, definitely. I would say several things related to that. One is that overall, we have really progressed well with our basically licensing of our Bluetooth and WiFi and the other wireless connectivity technology. So we have larger and larger customer base that are basically keep ramping their volume. So, that provides us the tailwind to keep increasing the volume. But also, we believe that our customer base, generally speaking, on average, are doing better than the rest of the market. We have -- they are positioned more competitively and are able to gain market share. So, that's overall for the phenomenon of this quarter, I would say. And the restocking that has happened in this quarter as well.

Okay, great. And maybe as a follow-up, just on your licensing business, can you say how much the US sanctions could be hurting your licensing deals in China?

So, for now, they've not for two main reasons. One is the end markets. We target the consumer market, mainly automotive, industrial, medical and less of supercomputers, no business with the fabulous the fab industry and building fabs and no business in supercomputers. So most of the sanctions are targeting those markets. If you look at some of the other players in the EDA in the IP space that are similar to ours or they're seeing more or less the same things at this time. And for the time being, China is still an important market for us. It's a big market for us. And we haven't seen any specific restrictions for the markets and the technologies that we play in.

And to add on that, we have really been a very clear incumbency with our technology and previous licensing with a very broad customer base in the consumer markets in China. And actually, we see those customers coming back after a very good support and very competitive technology, asking for either an upgrade of this type of technology to the next basically standalone -- the next step in technology or asking for additional technology that previously we haven't provided them. As I shared previously, like some of our Bluetooth customers asking for WiFi, we see then some of them asking for UWB and then for AI capabilities and other type of technologies that we can offer.

Okay, great. Thank you.

Thank you, Kevin.

And our next question today comes from Chris Reimer with Barclays. Please go ahead.

Hi. Thanks for taking my question. You mentioned the gross margin benefit from the sale of Intrinsix and a bit of reduction in costs relatively speaking. Can you give a little color on what other benefits you might be seeing in terms of changing the business in terms of sales and marketing, in terms of headcount that might change also because of the discontinued business?

Yes. Of course. I mean it's a completely different business model with a completely different customer base. Amir talked in the prepared remarks about what drove us to get into that, both the US market and the size of the customers in that space -- but the lead times to close the deal with the A&D is a very long process, getting new technologies or a new project agreed upon and then getting it funded through Washington is a long, long process. And it's completely different than the lead time to license the Bluetooth or WiFi or a modem for us that we just talked about and mentioned the different markets and life technologies. So first, the design cycle is shorter than the design itself. And of course, the end market is high volume compared to the AMD that is a very lucrative and high-end market, but the volumes there for royalties as our business -- the core business is an IP licensing and royalty business, that is something that we haven't seen and doesn't exist in the service business. So, from all different businesses together with the fact that if you have services, you record those cost of services in the cost of goods, and that reduces the margin of an IP business that is now back to the 90%, that's probably the combination lead-time, customer base, the magnitude of royalties that that we could generate from the -- from our existing customers and new ones in our space is a few of the benefits that I could highlight. Amir, anything here?

I would say overall, the IP business model is much more leverageable and with that we can drive also better gross margin. We don't need basically so-called to have the people charging to cost of goods sold in order to develop the technology. We are more developing, innovating with R&D to build the IP and then we leverage that across a large number of customers that can also ship in high volume. Which is a better basically more for us has been and moving forward, even more focus.

Got it. Thanks. And just in relation to the combo deals that you mentioned earlier. Is this something that you're pitching as something that's already available together? Or is it strictly from a customer perspective, if they want two or three things, then they'll ask for it? I'm just trying to gauge the potential in terms of larger sales regarding combo deals. If you can give any color on that and what the potential is there.

Sure, it's actually both. We have this quarter three business like that. We see customer demand buying more for different type of combos, especially specifically more WiFi-Bluetooth combo, but also we organically internally basically developing these technologies and offering at something available to -- for people to take advantage with fast time to market with a different type of combination of our core wireless technologies between WiFi Bluetooth 15.4 UWB and our Benet.

I would add to that, Chris, that we power to remind us all how the a billion devices do to last year is only about 100 million-ish WiFi. So one of the potentials in royalties is to catch up because WiFi came later to the consumer market. They are much more focused on residential and enterprise. And today, lots of consumer devices, automotive, almost everything around us has also WiFi and bots, connectivity and the volume opportunity for us with combo chips and standalone WiFi is a magnitude larger with higher ASPs. So, that's one of the advantages of these candles.

It's definitely helped us with both licensing and what is moving forward as a Bluetooth customer asking for combos with WiFi and vice versa.

Okay, great. Thanks. That’s it for me.

Thank you, Chris.

[Operator Instructions] Next question comes from David O'Connor with BNP Paribas. Please go ahead.

Yes, good morning. Thanks for taking my question. One or two on my side. Maybe firstly, Amir, you talked about the revenue growth this year progresses in 2024. Can you just give us a sense of what those drivers are specifically from kind of end markets as you look into 2024? That's my first question.

Yes, definitely, David. So, first, we really established a very strong leadership in wireless communication overall. As we just discussed on the previous -- related to the previous question, we see a lot of our customer base that have used our Bluetooth technology or WiFi are coming in asking for the other technologies. We see potential very good increase in UWB activities as well as some in urban IoT. We also see our five gene IoT in terms of the proliferation of 5G outside handsets and micro-based stations with significant opportunities happening in 2024. And last but not least, we have announced this year our new point products for edge AI. This product is basically becoming available in the market. We're engaging with multiple customers in terms of early qualification. And this is a growth engine for us as we go to next year. Overall, I will provide more details and explanation of all that in the coming Investor Day, and we really like to see everyone, and welcome, everyone.

Thanks for that. And maybe a follow-on just on the WiFi side of things. Clearly, Bluetooth massively successful. Yaniv, mentioned $1 billion last year. I kind of watch the stage or what do we need to happen for kind of WiFi to reach that hockey stick where we're really talking kind of significant upward kind of shipments on the WiFi side of things. Is that revenue growth you talk about next year? Or is that kind of further out to kind of hit those of shipments?

Yes. So, we started with our WiFi meaningful penetration with WiFi four generation, but that was really the early stage of the penetration and a much more successful and broad-based penetration came with the transition to WiFi 6, and that's where we really started establishing our de facto leadership as an IP provider. Those licensing activities has been in the last two years. So, we are expecting the royalty growth to really pick up nicely in 2024 and then with that into 2025 and six even further. So I don't know exactly when the hockey stick will starts, but definitely we'll see a meaningful ramp in 2024, and that will continue into the next two years very, very strongly. The number of licensing that we have right now more than 40 and really across pretty much all the consumer and market segments as well as some automotive and other places. And considering it's across the different configuration of station and access points with much higher ASP on average than Bluetooth. That will be a very strong royalty growth for us in 2024 and moving forward.

[Technical Difficulty]

David, I'm sorry, this is the operator. You're breaking up pretty badly, sir.

Can you hear me now?

A little bit better. Yes, sir, please proceed.

Just one quick one on the M&A, given the Intrinsix divestments, any change really on the strategy on the M&A side of things? Thank you.

Yes, David, we will discuss it more on the Analyst Day. But generally speaking, I would say is that my focus with the team is really on IP business model and how we are going to leverage that. We have established in the last several years and more recently, a very, very well on machines of how to drive a good success of licensing and then from the royalty. And we strongly believe that are out there, very good assets related to that business model that we can go and create synergy and long-term success for our companies moving forward. So definitely, this is an important priority for me and the team.

Thank you.

Thank you. And our next question today comes from Suji Desilva with ROTH Capital. Please go ahead.

Hi Amir, Yaniv. I echo my thoughts and hoping you and your families are staying safe. Can you talk about the licensing activity in China, the update there and whether there is a recovery there or pause or whether it's tracking as it has in the past?

Yes, I would say that if you compare to last year or during the hype of COVID, it's definitely slower, and we shared it already last quarter and discussed it to some degree over the last few months. But I would say right now, from our perspective, that has stabilized. We see right now the demand stabilizing. As I mentioned, we really have a strong incumbency of customer base, and we see a strong demand from there to basically go to the next generation to add more technologies and investments in China, while it slowed down versus last year overall now it has stabilized. And companies are coming back to basically go to the next product that they want to deliver to market and go and ask for the IP that they need. We also see in China, the demand for not only connectivity, but also for edge AI and other technologies that we have. So, overall, it has stabilized and we have an opportunity to create growth as we go and progress in 2024.

Okay. Very helpful. And then I apologize if you already discussed this sometime late, but the wireless infrastructure opportunity, are there any tailwind opportunities into calendar 2024? I know that market is a little bit softer now in the demand perspective, but curious if that can recur or kind of revisit that in the calendar 2024 timeframe?

The market again, Suji?

Wireless infrastructure, sorry.

Yes, this is a market that -- for years we've monitored. We have two of the biggest players in that industry. And that market is driven by orders and operators demand of the networks in a certain town, city, state, country, it varies. It started off with pretty strong investments in 5G in the last couple of years because of the hype and the demand and the advantages of the latency and much more bandwidth. And recently, they realized that there is no new killer 5G application that is needed for 5G networks. And we've seen maybe two quarters or some slowdown, especially in Q3, and we saw the report by the different players in the industry that the demand has softened with also different comments that it may be ramping up again to a better extent in Q4. So, it was never a seasonal market. It was ever cyclical market. It was based on demand every time or every year, it could be a different quarter that we had a very strong peak and we talked about the strong deployment of 5G base stations. Q3 was muted compared this year compared to Q3 last year, by the way. That was super strong. And it could change the quarter after and because there's still deployment of 5G worldwide for different use cases. We're not talking just macro base station, but also small cells and the market is there, the needs are there, but it varies from quarter-to-quarter and from operator-to-operator. And Q3 was very muted, and we hope that Q4 could be more and stronger. And we have other 5G players that not just in the baseband market that Amir also talked about in licensing that could -- and will start contributing royalties going forward.

On a new basis comparison, definitely, we see a potential for growth in 2024. One that has been very muted this year. Second, as Yaniv mentioned, we see -- we have more customers that are going to ramp in 2024 outside the macro base station for 5G IoT technologies.

Thanks everybody.

Thank you.

Thank you. And ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to Richard Kingston for closing remarks.

Thank you, Rocco and thank you everyone, 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. With regards to upcoming events, we will be participating in the following conferences the Wells Fargo's Seventh Annual TMT sellers taking place November 29th in Rancho Palo Verde, California. Teva is hosting its Investor Day taking place on December 6th in New York and all investors are welcome to attend in person or via webcast. And finally, we'll be attending the Oppenheimer 4th Annual 5G Summit taking place virtually on December 11th. 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 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.