CEVA(CEVA) - 2019 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents CEVA, Inc.'s unaudited interim condensed consolidated financial statements and management's discussion and analysis for the first quarter Item 1. FINANCIAL STATEMENTS This section presents CEVA, Inc.'s unaudited interim condensed consolidated financial statements, including balance sheets, income statements, cash flows, and detailed notes Interim Condensed Consolidated Balance Sheets This statement provides a snapshot of the company's assets, liabilities, and equity at specific points in time | Metric | March 31, 2019 (Unaudited, in thousands) | December 31, 2018 (in thousands) | | :------------------------------------ | :------------------------- | :------------------ | | Total Assets | $286,832 | $277,263 | | Total Current Liabilities | $22,959 | $21,752 | | Total Long-Term Liabilities | $18,561 | $9,632 | | Total Stockholders' Equity | $245,312 | $245,879 | Interim Condensed Consolidated Statements of Income (Loss) This statement details the company's revenues, expenses, and net loss over specific reporting periods | Metric | Three Months Ended March 31, 2019 (in thousands) | Three Months Ended March 31, 2018 (in thousands) | | :------------------------------------ | :-------------------------------- | :-------------------------------- | | Total Revenues | $16,969 | $17,569 | | Gross Profit | $14,946 | $15,597 | | Total Operating Expenses | $17,878 | $18,505 | | Operating Loss | $(2,932) | $(2,908) | | Net Loss | $(2,297) | $(2,182) | | Basic Net Loss Per Share | $(0.10) | $(0.10) | | Diluted Net Loss Per Share | $(0.10) | $(0.10) | Interim Condensed Consolidated Statements of Comprehensive Income (Loss) This statement presents the net loss and other comprehensive income or loss components, leading to the total comprehensive loss | Metric | Three Months Ended March 31, 2019 (in thousands) | Three Months Ended March 31, 2018 (in thousands) | | :------------------------------------ | :-------------------------------- | :-------------------------------- | | Net Loss | $(2,297) | $(2,182) | | Other Comprehensive Income (Loss), net of taxes | $687 | $(602) | | Comprehensive Loss | $(1,610) | $(2,784) | Interim Condensed Consolidated Statements of Changes In Stockholders' Equity This statement tracks changes in stockholders' equity, including net loss, comprehensive income, and stock-based transactions | Metric | As of January 1, 2019 (in thousands) | As of March 31, 2019 (in thousands) | | :------------------------------------ | :-------------------- | :------------------- | | Total Stockholders' Equity | $245,879 | $245,312 | | Net Loss | $(2,297) | $(2,297) | | Other Comprehensive Income | $687 | $687 | | Equity-based Compensation | $2,416 | $2,416 | | Purchase of Treasury Stock | $(2,536) | $(2,536) | | Issuance upon exercise of stock-based awards | $1,163 | $1,163 | Interim Condensed Consolidated Statements of Cash Flows This statement summarizes cash inflows and outflows from operating, investing, and financing activities | Metric | Three Months Ended March 31, 2019 (in thousands) | Three Months Ended March 31, 2018 (in thousands) | | :------------------------------------ | :-------------------------------- | :-------------------------------- | | Net Cash Provided by Operating Activities | $4,668 | $1,783 | | Net Cash Used in Investing Activities | $(4,104) | $(4,757) | | Net Cash Used in Financing Activities | $(1,373) | $(397) | | Decrease in Cash and Cash Equivalents | $(791) | $(3,357) | | Cash and Cash Equivalents at End of Period | $21,469 | $18,382 | Notes to the Interim Condensed Consolidated Financial Statements These notes provide detailed explanations and disclosures supporting the interim condensed consolidated financial statements NOTE 1: BUSINESS This note describes CEVA's core business of licensing signal processing IPs for communication and smart sensing products - CEVA licenses signal processing IPs in two categories: communication products (5G baseband, cellular IoT, Bluetooth, Wi-Fi) and smart sensing products (voice input, advanced imaging/computer vision, AI processors for edge applications)[21] - Technologies are licensed to semiconductor and OEM companies for ASICs and ASSPs in wireless, consumer electronics, and automotive end products[22] NOTE 2: BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This note outlines the basis of financial statement preparation and key accounting policies, including recent standard adoptions - Interim condensed consolidated financial statements are prepared in accordance with U.S. GAAP and include all necessary adjustments for fair presentation[23][24] - The company adopted ASU No. 2016-02, Leases (Topic 842), on January 1, 2019, using a modified retrospective approach, recognizing ROU assets and lease liabilities for operating leases[26] - ASU No. 2017-12, Derivatives and Hedging, was also adopted on January 1, 2019, with no material impact on consolidated financial statements[27] NOTE 3: REVENUE RECOGNITION This note details the company's policies for recognizing revenue from licensing and related services, including contract balances and geographic data - Revenue is recognized when performance obligations are satisfied, either at a point in time (most IP licenses) or over time (significant license customization contracts)[35] Unrecognized Revenue from Contracts with Customers | Revenue Type | Remainder of 2019 (in thousands) | 2020 (in thousands) | | :------------------------- | :------------------ | :----- | | License and related revenues | $8,494 | $4,192 | Geographic Market Revenue | Geographic Market | Q1 2019 Licensing (in thousands) | Q1 2019 Royalties (in thousands) | Q1 2019 Total (in thousands) | Q1 2018 Licensing (in thousands) | Q1 2018 Royalties (in thousands) | Q1 2018 Total (in thousands) | | :------------------------ | :---------------- | :---------------- | :------------ | :---------------- | :---------------- | :------------ | | United States | $1,493 | $286 | $1,779 | $1,360 | $347 | $1,707 | | Europe and Middle East | $1,382 | $1,960 | $3,342 | $1,338 | $1,115 | $2,453 | | Asia Pacific | $8,136 | $3,712 | $11,848 | $7,385 | $6,024 | $13,409 | | Total | $11,011 | $5,958 | $16,969 | $10,083 | $7,486 | $17,569 | Product/Service Line Revenue | Product/Service Line | Q1 2019 Licensing (in thousands) | Q1 2019 Royalties (in thousands) | Q1 2019 Total (in thousands) | Q1 2018 Licensing (in thousands) | Q1 2018 Royalties (in thousands) | Q1 2018 Total (in thousands) | | :------------------------------------ | :---------------- | :---------------- | :------------ | :---------------- | :---------------- | :------------ | | Connectivity products | $6,631 | $5,620 | $12,251 | $6,358 | $6,961 | $13,319 | | Smart sensing products | $4,380 | $338 | $4,718 | $3,725 | $525 | $4,250 | | Total | $11,011 | $5,958 | $16,969 | $10,083 | $7,486 | $17,569 | Contract Balances | Contract Balance | March 31, 2019 (Unaudited, in thousands) | December 31, 2018 (in thousands) | | :------------------------------------ | :------------------------- | :------------------ | | Trade receivables | $11,179 | $9,971 | | Unbilled receivables (licensing) | $2,965 | $6,745 | | Unbilled receivables (royalties) | $5,207 | $9,440 | | Deferred revenues (short-term) | $2,811 | $3,593 | - During Q1 2019, the company recognized $2.621 million from deferred revenues that were part of the January 1, 2019 balance[39] NOTE 4: LEASES This note describes the company's lease arrangements and the impact of adopting new lease accounting standards - The company leases office space and vehicles under operating leases, with terms expiring between 2020 and 2022, and an option to extend one principal office lease until 2028[40] - Adoption of Topic 842 on January 1, 2019, resulted in the recognition of $9.501 million in operating lease ROU assets and $9.200 million in operating lease liabilities as of March 31, 2019[30] Lease Metrics | Metric | March 31, 2019 (Unaudited) | | :------------------------------------ | :------------------------- | | Weighted average remaining lease term (years) | 7.99 | | Weighted average discount rates | 3.95% | Lease Liabilities Maturity | Year | Total Undiscounted Cash Flows (in thousands) | | :------------------------------------ | :---------------------------- | | Remainder of 2019 | $1,338 | | 2020 | $1,733 | | 2021 | $1,365 | | 2022 | $1,164 | | 2023 | $1,086 | | 2024 and thereafter | $4,140 | | Total Undiscounted Cash Flows | $10,826 | | Less imputed interest | $1,626 | | Present Value of Lease Liabilities | $9,200 | NOTE 5: MARKETABLE SECURITIES This note provides details on the company's marketable securities portfolio, including fair value, unrealized gains/losses, and realized gains/losses Available-for-Sale Marketable Securities | Type of Security | Amortized Cost (March 31, 2019, in thousands) | Gross Unrealized Gains (March 31, 2019, in thousands) | Gross Unrealized Losses (March 31, 2019, in thousands) | Fair Value (March 31, 2019, in thousands) | | :------------------------------------ | :------------------------------ | :-------------------------------------- | :--------------------------------------- | :-------------------------- | | Corporate bonds (within one year) | $9,358 | $2 | $(46) | $9,314 | | Certificate of deposits (1-5 years) | $747 | — | — | $747 | | Government bonds (1-5 years) | $501 | — | $(3) | $498 | | Corporate bonds (1-5 years) | $67,541 | $129 | $(642) | $67,028 | | Total | $78,147 | $131 | $(691) | $77,587 | Unrealized Loss Position on Marketable Securities | Unrealized Loss Position | Fair Value (March 31, 2019, in thousands) | Gross Unrealized Loss (March 31, 2019, in thousands) | Fair Value (December 31, 2018, in thousands) | Gross Unrealized Loss (December 31, 2018, in thousands) | | :------------------------------------ | :-------------------------- | :--------------------------------------- | :------------------------------- | :---------------------------------------- | | Less than 12 months | $12,359 | $(141) | $16,580 | $(192) | | 12 months or greater | $51,257 | $(550) | $52,590 | $(1,165) | - Management believes impairments on marketable securities are temporary and recorded losses in accumulated other comprehensive income (loss)[48] Realized Gains and Losses from Marketable Securities Sales | Metric | Q1 2019 (Unaudited, in thousands) | Q1 2018 (Unaudited, in thousands) | | :------------------------------------ | :------------------ | :------------------ | | Gross realized gains from sale of available-for-sale marketable securities | $0 | $4 | | Gross realized losses from sale of available-for-sale marketable securities | $(24) | $0 | NOTE 6: FAIR VALUE MEASUREMENT This note explains the fair value hierarchy and classification of financial instruments based on input observability - Fair value is defined as an exit price in an orderly transaction between market participants, categorized into a three-tier hierarchy (Level I, II, III) based on input observability[50][51][52] - Marketable securities and foreign currency derivative contracts are classified as Level II, while investment in other company is Level III due to unobservable inputs[52] Fair Value Measurements by Level | Asset/Liability | March 31, 2019 (Unaudited, in thousands) | Level I (in thousands) | Level II (in thousands) | Level III (in thousands) | | :------------------------------------ | :------------------------- | :------ | :------- | :-------- | | Certificate of deposits | $747 | $0 | $747 | $0 | | Government bonds | $498 | $0 | $498 | $0 | | Corporate bonds | $76,342 | $0 | $76,342 | $0 | | Foreign exchange contracts (assets) | $56 | $0 | $56 | $0 | | Total Assets | $77,643 | $0 | $77,643 | $0 | | Foreign exchange contracts (liabilities) | $0 | $0 | $0 | $0 | NOTE 7: INTANGIBLE ASSETS, NET This note details the company's intangible assets, their amortization periods, and estimated annual amortization charges Intangible Assets, Net | Intangible Asset | Weighted Average Amortization Period (years) | Gross Carrying Amount (March 31, 2019, in thousands) | Accumulated Amortization (March 31, 2019, in thousands) | Net (March 31, 2019, in thousands) | | :------------------------------------ | :------------------------------------------- | :------------------------------------- | :---------------------------------------- | :------------------- | | Customer relationships | 4.5 | $272 | $272 | $0 | | Customer backlog | 1.5 | $93 | $93 | $0 | | Core technologies | 5.1 | $5,796 | $5,165 | $631 | | NB-IoT technologies | 7.0 | $2,200 | $420 | $1,780 | | Total Intangible Assets | | $8,361 | $5,950 | $2,411 | - During Q1 2018, the company acquired NB-IoT technologies for $2.8 million, with $2.2 million recognized and amortized in 'cost of revenues'[56] Estimated Annual Amortization Charges | Year | Estimated Annual Amortization Charges (in thousands) | | :------------------------------------ | :------------------------------------ | | 2019 | $289 | | 2020 | $289 | | 2021 | $289 | | 2022 | $289 | | 2023 | $289 | | 2024 | $289 | NOTE 8: GEOGRAPHIC INFORMATION AND MAJOR CUSTOMER DATA This note provides a breakdown of revenues by geographic area and identifies major customers contributing significantly to total revenues - The company operates as one reportable segment: licensing intellectual property[58] Geographic Area Revenues | Geographic Area | Q1 2019 Revenues (in thousands) | Q1 2018 Revenues (in thousands) | | :------------------------------------ | :----------------- | :----------------- | | United States | $1,779 | $1,707 | | Europe and Middle East | $3,342 | $2,453 | | Asia Pacific | $11,848 | $13,409 | | Total | $16,969 | $17,569 | | Germany | $2,589 | <10% | | China | $7,243 | $6,152 | | S. Korea | $1,767 | $2,802 | | Japan | $2,647 | $2,624 | Major Customer Revenue Contribution | Customer | Q1 2019 % of Total Revenues | Q1 2018 % of Total Revenues | | :------------------------------------ | :-------------------------- | :-------------------------- | | Customer A | <10% | 21% | | Customer B | 12% | 16% | | Customer C | 12% | <10% | | Customer D | 10% | <10% | | Customer E | <10% | 15% | NOTE 9: NET LOSS PER SHARE OF COMMON STOCK This note presents the calculation of basic and diluted net loss per share, including the impact of anti-dilutive securities Net Loss Per Share Calculation | Metric | Three Months Ended March 31, 2019 (in thousands, except per share data) | Three Months Ended March 31, 2018 (in thousands, except per share data) | | :------------------------------------ | :-------------------------------- | :-------------------------------- | | Net Loss | $(2,297) | $(2,182) | | Basic Weighted-Average Common Stock Outstanding (in thousands) | 21,917 | 22,148 | | Diluted Weighted-Average Common Stock Outstanding (in thousands) | 21,917 | 22,148 | | Basic Net Loss Per Share | $(0.10) | $(0.10) | | Diluted Net Loss Per Share | $(0.10) | $(0.10) | - Outstanding stock options of 1,361,746 (2019) and 1,354,693 (2018) were excluded from diluted net loss per share calculation due to their anti-dilutive effect[64] NOTE 10: COMMON STOCK AND STOCK-BASED COMPENSATION PLANS This note details the company's stock option, SAR, and RSU plans, including activity, unrecognized compensation, and expense allocation - The company grants stock options and Stock Appreciation Rights (SARs) to employees and non-employee directors, vesting over four years (employees) or annually (directors)[66] Stock Option and SAR Activity | Metric | Number of Options and SAR Units (March 31, 2019) | Weighted Average Exercise Price (March 31, 2019) | | :------------------------------------ | :----------------------------------------------- | :----------------------------------------------- | | Outstanding as of December 31, 2018 | 702,817 | $19.88 | | Exercised | (17,963) | $17.09 | | Forfeited or expired | (375) | $24.86 | | Outstanding as of March 31, 2019 | 684,479 | $19.95 | | Exercisable as of March 31, 2019 | 610,513 | $19.22 | - Unrecognized compensation expense for unvested stock options and SARs was $108,000 as of March 31, 2019, expected to be recognized over 1.1 years[69] - Restricted Stock Units (RSUs) are granted to employees and directors, generally vesting in annual installments[70] RSU Activity | Metric | Number of RSUs (March 31, 2019) | Weighted Average Grant-Date Fair Value (March 31, 2019) | | :------------------------------------ | :------------------------------ | :------------------------------------------------------ | | Unvested as of December 31, 2018 | 564,390 | $32.28 | | Granted | 340,050 | $28.57 | | Vested | (220,908) | $29.23 | | Forfeited or expired | (6,265) | $29.63 | | Unvested as of March 31, 2019 | 677,267 | $31.43 | - Unrecognized compensation expense for unvested RSUs was $18.786 million as of March 31, 2019, expected to be recognized over 1.7 years[72] Equity-Based Compensation Expense | Expense Category | Q1 2019 (Unaudited, in thousands) | Q1 2018 (Unaudited, in thousands) | | :------------------------------------ | :------------------ | :------------------ | | Cost of revenue | $136 | $157 | | Research and development, net | $1,362 | $1,269 | | Sales and marketing | $356 | $454 | | General and administrative | $562 | $891 | | Total Equity-Based Compensation Expense | $2,416 | $2,771 | NOTE 11: DERIVATIVES AND HEDGING ACTIVITIES This note describes the company's use of derivative instruments for hedging foreign currency risk and their fair value impact - The company adopted ASU No. 2017-12 on January 1, 2019, requiring derivative instruments to be recognized at fair value on the balance sheet[75][76] - CEVA uses foreign exchange forward or option contracts as cash flow hedges to offset risks from foreign currency fluctuations, primarily for non-U.S. employee payroll[76] Fair Value of Derivative Instruments | Derivative Instrument | March 31, 2019 (Unaudited, in thousands) | December 31, 2018 (in thousands) | | :------------------------------------ | :------------------------- | :------------------ | | Foreign exchange option contracts (assets) | $2 | $0 | | Foreign exchange forward contracts (assets) | $54 | $0 | | Foreign exchange option contracts (liabilities) | $0 | $14 | | Foreign exchange forward contracts (liabilities) | $0 | $63 | Unrealized Gains (Losses) on Derivatives | Derivative Type | Q1 2019 (Unaudited, in thousands) | Q1 2018 (Unaudited, in thousands) | | :------------------------------------ | :------------------ | :------------------ | | Unrealized gains (losses) on foreign exchange option contracts | $16 | $(19) | | Unrealized gains (losses) on foreign exchange forward contracts | $190 | $(5) | | Total Unrealized Gains (Losses) | $206 | $(24) | Net (Gains) Losses Reclassified from AOCI | Derivative Type | Q1 2019 (Unaudited, in thousands) | Q1 2018 (Unaudited, in thousands) | | :------------------------------------ | :------------------ | :------------------ | | Net (gains) losses reclassified from AOCI (option contracts) | $0 | $14 | | Net (gains) losses reclassified from AOCI (forward contracts) | $(73) | $5 | | Total Net (Gains) Losses Reclassified | $(73) | $19 | NOTE 12: ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) This note provides a reconciliation of accumulated other comprehensive income (loss) components, including unrealized gains/losses Accumulated Other Comprehensive Income (Loss) | Metric | Unrealized Gains (Losses) on Available-for-Sale Marketable Securities (Q1 2019, in thousands) | Unrealized Gains (Losses) on Cash Flow Hedges (Q1 2019, in thousands) | Total (Q1 2019, in thousands) | | :------------------------------------ | :----------------------------------------------------------------- | :------------------------------------------------------ | :-------------- | | Beginning balance | $(1,046) | $(68) | $(1,114) | | Other comprehensive income (loss) before reclassifications | $552 | $181 | $733 | | Amounts reclassified from AOCI | $18 | $(64) | $(46) | | Net current period other comprehensive income (loss) | $570 | $117 | $687 | | Ending balance | $(476) | $49 | $(427) | NOTE 13: SHARE REPURCHASE PROGRAM This note outlines the company's share repurchase activities, including shares bought back and remaining authorization Share Repurchase Activity | Period | Shares Repurchased | Average Purchase Price Per Share | Aggregate Purchase Price (in thousands) | | :------------------------------------ | :----------------- | :------------------------------- | :----------------------- | | Q1 2019 | 91,303 | $27.77 | $2,536 | | Q1 2018 | 41,322 | $35.31 | $1,459 | - As of March 31, 2019, 263,877 shares remained available for repurchase under the program[85] - Share repurchases are accounted for as treasury stock, reducing stockholders' equity[86] NOTE 14: IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS NOT YET ADOPTED This note discusses the potential impact of recently issued accounting standards that the company has not yet adopted - The company is evaluating ASU 2016-13, "Financial Instruments – Credit Losses on Financial Instruments," effective January 1, 2020, which requires measuring expected credit losses on amortized cost basis and through an allowance for available-for-sale debt securities[87] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses CEVA's Q1 2019 financial condition, results of operations, business overview, revenue and expense analysis, critical accounting policies, and liquidity BUSINESS OVERVIEW This section provides an overview of CEVA's business, strategic focus, product portfolio, and key growth drivers - CEVA is a leading licensor of signal processing platforms and AI processors for connected devices across mobile, consumer, automotive, industrial, and IoT markets[91] - The company's portfolio includes platforms for 4G/5G baseband, cellular IoT, Bluetooth, Wi-Fi, voice input, advanced imaging/computer vision, and AI processors for edge applications[92] - In Q1 2019, CEVA signed 8 licensing deals, all for non-cellular handset baseband applications, including a significant deal with a major automotive OEM for NeuPro AI processor in autonomous cars (targeting 2024 production)[94] - Shipments of CEVA-powered non-cellular baseband products grew 16% YoY to 86 million units in Q1 2019[94] - Key growth drivers include 5G baseband for various applications, expansion into IoT with Bluetooth/Wi-Fi/NB-IoT IPs (addressable market >9 billion devices by 2022), voice-assisted devices with WhisPro and ClearVox, and imaging/vision platforms (camera-enabled devices >1 billion units by 2022)[96][98][99][100] - NeuPro AI processors for deep learning at the edge represent new licensing and royalty drivers[101] - Forecasted financial metrics for 2022 include licensing revenue growth of 10-20%, royalty revenue approximately two times current levels, and non-GAAP net income approximately three times current levels[103] RESULTS OF OPERATIONS This section analyzes CEVA's financial performance, including revenues, gross margin, and operating expenses for the period Total Revenues This section analyzes the company's total revenues, including changes and customer concentration | Metric | Q1 2019 (in millions) | Q1 2018 (in millions) | YoY Change | | :------------------------------------ | :------ | :------ | :--------- | | Total Revenues | $17.0 | $17.6 | -3% | | Reason for Change | Lower royalty revenues | | | - Five largest customers accounted for 63% of total revenues in Q1 2019, compared to 49% in Q1 2018, indicating increased customer concentration[105] - Spreadtrum's contribution to total revenues decreased from 16% in Q1 2018 to 12% in Q1 2019[105] Revenue by Product Category | Product Category | Q1 2019 % of Total Revenues | Q1 2018 % of Total Revenues | | :------------------------------------ | :-------------------------- | :-------------------------- | | Connectivity products | 72% | 76% | | Smart sensing products | 28% | 24% | Licensing and Related Revenues This section details the trends and drivers behind the company's licensing and related revenue performance | Metric | Q1 2019 (in millions) | Q1 2018 (in millions) | YoY Change | | :------------------------------------ | :------ | :------ | :--------- | | Licensing and Related Revenues | $11.0 | $10.1 | +9% | | % of Total Revenues | 65% | 57% | | - Increase driven by more handset and non-handset baseband licensing deals, including strategic deals for autonomous driving and three 5G applications (base station RAN, mmwave small cells, cellular V2X)[110] - Concluded eight new licensing deals in Q1 2019 (3 smart sensing, 5 connectivity), with four first-time customers, targeting AI for autonomous cars, 5G, Bluetooth earbuds, smart speakers, and IoT devices[111] Royalty Revenues This section examines the factors influencing the company's royalty revenue, including unit shipments and customer concentration | Metric | Q1 2019 (in millions) | Q1 2018 (in millions) | YoY Change | | :------------------------------------ | :------ | :------ | :--------- | | Royalty Revenues | $6.0 | $7.5 | -20% | | % of Total Revenues | 35% | 43% | | - Decrease primarily due to lower handset shipments caused by excess channel inventory of customers[112] - Customer chipsets incorporating CEVA technologies decreased 11% YoY to 175 million units in Q1 2019[113] - The five largest royalty-paying customers accounted for 81% of total royalty revenues in Q1 2019, compared to 85% in Q1 2018[113] Geographic Revenue Analysis This section breaks down revenue by geographic region, highlighting key markets and their contributions | Geographic Area | Q1 2019 Revenues (millions) | Q1 2019 % | Q1 2018 Revenues (millions) | Q1 2018 % | | :------------------------------------ | :-------------------------- | :-------- | :-------------------------- | :-------- | | United States | $1.8 | 10% | $1.7 | 10% | | Europe and Middle East | $3.3 | 20% | $2.5 | 14% | | Asia Pacific | $11.8 | 70% | $13.4 | 76% | | Germany | $2.6 | 15% | <10% | <10% | | China | $7.2 | 43% | $6.2 | 35% | | S. Korea | $1.8 | 10% | $2.8 | 16% | | Japan | $2.6 | 16% | $2.6 | 15% | - Geographic revenue split varies quarter-to-quarter due to the nature of license agreements and large individual contract amounts[115] Cost of Revenues This section analyzes the components and changes in the cost of revenues, including customization work and equity-based compensation | Metric | Q1 2019 (in millions) | Q1 2018 (in millions) | | :------------------------------------ | :------ | :------ | | Cost of Revenues | $2.0 | $2.0 | | % of Total Revenues | 12% | 11% | - Q1 2019 cost of revenues reflected higher customization work for licensees, partially offset by lower payments to the Israeli Innovation Authority[116] - Non-cash equity-based compensation expense in cost of revenues was $136,000 in Q1 2019, down from $157,000 in Q1 2018[116] - Anticipated increase in cost of revenues for 2019 due to over $1 million in engineering customization expenses allocated from R&D for a 5G-related license deal[117] Gross Margin This section discusses the company's gross margin and the factors influencing its changes | Metric | Q1 2019 (percentage) | Q1 2018 (percentage) | | :------------------------------------ | :------ | :------ | | Gross Margin | 88% | 89% | | Reason for Change | Lower royalty revenues | | Operating Expenses This section provides an overview of total operating expenses and their primary drivers | Metric | Q1 2019 (in millions) | Q1 2018 (in millions) | | :------------------------------------ | :------ | :------ | | Total Operating Expenses | $17.9 | $18.5 | | Reason for Change | Lower non-cash equity-based compensation and higher research grants, partially offset by higher salary/employee costs due to increased headcount | | Research and Development Expenses, Net This section details R&D expenses, including headcount changes and anticipated future increases | Metric | Q1 2019 (in millions) | Q1 2018 (in millions) | YoY Change | | :------------------------------------ | :------ | :------ | :--------- | | R&D Expenses, Net | $12.3 | $12.0 | +2.5% | | % of Total Revenues | 73% | 68% | | - Increase due to higher salary and employee-related costs from increased headcount, partially offset by higher research grants[120] - R&D personnel increased to 265 at March 31, 2019, from 231 at March 31, 2018[121] - Anticipated R&D expenses to increase by approximately $4 million in 2019, mainly for headcount, employee-related costs, and EDA tools[122] Sales and Marketing Expenses This section analyzes sales and marketing expenses, including changes in personnel and related costs | Metric | Q1 2019 (in millions) | Q1 2018 (in millions) | YoY Change | | :------------------------------------ | :------ | :------ | :--------- | | Sales and Marketing Expenses | $3.0 | $3.2 | -6.25% | | % of Total Revenues | 18% | 18% | | - Decrease primarily due to lower salary and employee-related costs[122] - Sales and marketing personnel decreased to 32 at March 31, 2019, from 37 at March 31, 2018[123] General and Administrative Expenses This section reviews general and administrative expenses, highlighting factors like salary costs and equity compensation | Metric | Q1 2019 (in millions) | Q1 2018 (in millions) | YoY Change | | :------------------------------------ | :------ | :------ | :--------- | | General and Administrative Expenses | $2.3 | $3.0 | -23.3% | | % of Total Revenues | 14% | 17% | | - Decrease primarily due to lower salary and employee-related costs and lower non-cash equity-based compensation expenses[123] - General and administrative personnel increased to 31 at March 31, 2019, from 27 at March 31, 2018[124] Amortization of intangible assets This section details amortization charges related to intangible assets from past acquisitions | Metric | Q1 2019 (in millions) | Q1 2018 (in millions) | | :------------------------------------ | :------ | :------ | | Amortization Charges | $0.2 | $0.4 | | Net Intangible Assets (March 31, 2019) | $0.6 | | - Charges are related to the amortization of intangible assets from the RivieraWaves acquisition in July 2014[124] Financial Income, Net This section analyzes net financial income, including interest income, marketable securities gains/losses, and foreign exchange impacts | Metric | Q1 2019 (in millions) | Q1 2018 (in millions) | | :------------------------------------ | :------ | :------ | | Financial Income, Net | $0.80 | $0.93 | | Interest income and gains/losses from marketable securities, net | $0.93 | $0.88 | | Foreign exchange income (loss) | $(0.13) | $0.05 | - Increase in interest income and gains/losses from marketable securities due to higher yields, offset by lower combined cash, bank deposits, and marketable securities balances[126] - Foreign exchange loss of $0.13 million in Q1 2019, compared to a gain of $0.05 million in Q1 2018, due to currency fluctuations[127] Provision for Income Taxes This section discusses income tax expenses and the tax rates applicable to the company's international subsidiaries | Metric | Q1 2019 (in millions) | Q1 2018 (in millions) | | :------------------------------------ | :------ | :------ | | Income Tax Expenses | $0.2 | $0.2 | - Israeli and Irish subsidiaries are taxed at rates substantially lower than U.S. rates (Irish subsidiary: 12.5% on trade, 25% on interest; Israeli subsidiary: 23% for first seven investment programs, 10% for eighth)[129][130] - The Tax Cuts and Jobs Act (2017) reduced the U.S. federal corporate income tax rate from 35% to 21% and introduced a one-time tax on cumulative retained earnings of U.S.-owned foreign subsidiaries[132] - The company elected to treat GILTI tax as a period expense rather than providing U.S. deferred taxes on foreign temporary differences[133] Critical Accounting Policies and Estimates This section identifies key accounting policies and estimates, noting any recent changes or adoptions - Critical accounting policies and estimates include revenue recognition, fair value of financial instruments, equity-based compensation, and income taxes[135] - No changes in critical accounting policies compared to the 2018 Form 10-K, except for policy changes in accounting for leases due to Topic 842 adoption[136] LIQUIDITY AND CAPITAL RESOURCES This section assesses CEVA's liquidity position, capital resources, and cash flow activities from operations, investing, and financing Overview of Liquidity This section provides an overview of the company's liquid assets and their changes over the period | Metric | March 31, 2019 (in millions) | December 31, 2018 (in millions) | | :------------------------------------ | :------------- | :---------------- | | Cash and cash equivalents | $21.5 | $22.3 | | Short term bank deposits | $57.8 | $46.1 | | Marketable securities | $77.5 | $77.5 | | Long term bank deposits | $14.5 | $21.9 | | Total Liquid Assets | $171.3 | $167.7 | - Increase in total liquid assets primarily from cash provided by operations and stock-based award exercises, partially offset by $2.5 million used for share repurchases[137] - $141.0 million of total liquid assets held by foreign subsidiaries, with an intent for permanent reinvestment[138] - Invested $8.9 million in bank deposits and marketable securities in Q1 2019, with $5.4 million proceeds from sales/redemptions[140] Operating Activities This section details cash flows generated or used by operating activities, including non-cash adjustments | Metric | Q1 2019 (in millions) | Q1 2018 (in millions) | | :------------------------------------ | :------ | :------ | | Net Cash Provided by Operating Activities | $4.7 | $1.8 | | Net Loss | $(2.3) | $(2.2) | | Adjustments for Non-Cash Items | $3.7 | $3.9 | | Changes in Operating Assets and Liabilities | $3.3 | $0 | - Q1 2019 non-cash adjustments included $1.0 million depreciation/amortization, $2.4 million equity-based compensation, and $0.2 million amortization of marketable securities premiums[142] - Changes in operating assets/liabilities in Q1 2019 included a $6.8 million decrease in trade receivables and a $1.4 million increase in accrued payroll, partially offset by increases in prepaid expenses and other assets ($3.1 million)[142] Investing Activities This section outlines cash flows related to investing activities, such as marketable securities and bank deposits | Metric | Q1 2019 (in millions) | Q1 2018 (in millions) | | :------------------------------------ | :------ | :------ | | Net Cash Used in Investing Activities | $(4.1) | $(4.8) | | Cash outflow for marketable securities | $(5.0) | $(9.5) | | Cash inflow from marketable securities | $5.4 | $6.0 | | Investment in bank deposits | $(3.8) | | - Q1 2018 included a $0.9 million cash outflow for the purchase of NB-IoT technologies license[145] Financing Activities This section describes cash flows from financing activities, including share repurchases and stock-based award exercises | Metric | Q1 2019 (in millions) | Q1 2018 (in millions) | | :------------------------------------ | :------ | :------ | | Net Cash Used in Financing Activities | $(1.4) | $(0.4) | | Purchase of treasury stock | $(2.5) | $(1.5) | | Proceeds from exercise of stock-based awards | $1.2 | $1.1 | - The company believes current cash, equivalents, bank deposits, marketable securities, and cash from operations will fund operations for at least the next 12 months[151] - Potential acquisitions or investments may require substantial capital, possibly necessitating additional debt or equity financing[152] Item 3. Quantitative and Qualitative Disclosures about Market Risk This section details CEVA's exposure to market risks, including foreign currency fluctuations and interest rate changes, and its hedging strategies - Majority of revenues and assets are in USD, but most expenses are in non-USD currencies (NIS, Euro), exposing the company to foreign currency exchange rate fluctuations[153] Foreign Exchange Income (Loss) | Metric | Q1 2019 (in thousands) | Q1 2018 (in thousands) | | :------------------------------------ | :------ | :------ | | Foreign exchange income (loss) | $(133) | $51 | - The company uses a foreign currency cash flow hedging program (forward and option contracts) for anticipated non-U.S. employee payroll, recording $117,000 in accumulated other comprehensive gain (net of taxes) in Q1 2019[154] - Cash and cash equivalents are invested in high-grade certificates of deposits, exceeding FDIC limits, posing minimal credit risk but potential impact if financial institutions fail[155] - Investment portfolio consists principally of corporate bonds; management believes unrealized losses are temporary[156] Interest Income and Gains/Losses from Marketable Securities | Metric | Q1 2019 (in millions) | Q1 2018 (in millions) | | :------------------------------------ | :------ | :------ | | Interest income and gains/losses from marketable securities, net | $0.93 | $0.88 | - Fluctuations in interest rates within the investment portfolio are not anticipated to have a material effect on financial position[159] Item 4. Controls and Procedures Management evaluated disclosure controls and procedures as effective, with no material changes to internal control over financial reporting - Disclosure controls and procedures were evaluated and deemed effective as of March 31, 2019[160] - No material changes in internal control over financial reporting occurred during the most recent fiscal quarter[161] PART II. OTHER INFORMATION This section includes information on legal proceedings, risk factors, equity security sales, and other required disclosures Item 1. Legal Proceedings The company is not involved in any legal proceedings expected to materially affect its business or financial condition - The company is not a party to any legal proceedings expected to have a material effect on its business, results of operations, and financial condition[162] Item 1A. Risk Factors This section outlines various risks, including market competition, operational fluctuations, customer reliance, international trade, and intellectual property challenges, that could affect CEVA's future performance - The markets for CEVA's technology are highly competitive, with direct competition from companies like Verisilicon, Cadence, Synopsys, Arm Limited, Imagination Technologies, Nvidia, and internal engineering teams of major semiconductor companies[166][167] - Quarterly operating results fluctuate due to factors such as customer dependence, sales cycle length, revenue recognition delays, royalty pricing pressures, market acceptance of new technologies, and global economic conditions[169][170] - Significant reliance on a limited number of customers; Spreadtrum accounted for 12% of total revenues in Q1 2019, and three royalty-paying customers represented 70% of total royalty revenues[173] - Royalty rates could decrease due to declining average selling prices, competitive pressures, renegotiations, and changes in product mix (e.g., more lower-royalty products)[176][177] - A significant portion of revenues, especially royalty revenue, is derived from the highly competitive and volatile handset baseband market[178][179] - International operations, particularly in Asia Pacific, expose the company to political, economic, and trade risks, including tariffs and potential disruptions like the 2018 ZTE ban[190][192][194] - Dependence on Israeli government research grants (IIA) and French research tax credits (CIR); reduction or termination of these benefits could increase R&D expenses and tax liabilities[205][210][213] - Product development is time-consuming and expensive ($12.3 million in Q1 2019 R&D expenses), with no guarantee of acceptable return or market acceptance for new products[218][219] - Exposure to currency exchange rate fluctuations, particularly NIS and EURO against USD, impacting expenses and liabilities, despite hedging programs[214] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details the company's share repurchase activities, including shares purchased and remaining authorization under the program Share Repurchase Program Activity | Period | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans | Maximum Number of Shares That May Yet Be Purchased Under the Plans | | :------------------------------------ | :------------------------------- | :--------------------------- | :----------------------------------------------------------------- | :----------------------------------------------------------------- | | Month 3 (March 1-31, 2019) | 91,303 | $27.77 | 91,303 | 263,877 | | TOTAL | 91,303 | $27.77 | 91,303 | 263,877 | - The share repurchase program was approved in August 2008 and extended multiple times, with an additional 700,000 shares authorized in May 2018[239] Item 3. Defaults Upon Senior Securities There are no defaults upon senior securities to report - Not applicable[241] Item 4. Mine Safety Disclosures There are no mine safety disclosures applicable to the company - Not applicable[241] Item 5. Other Information There is no other information to report - Not applicable[241] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including certifications and XBRL documents - Includes Rule 13a-14(a)/15d-14(a) Certifications of CEO and CFO, Section 1350 Certification, and various XBRL Taxonomy Extension Documents[240] SIGNATURES This section contains the official signatures of the Chief Executive Officer and Chief Financial Officer, certifying the report - The report was signed by Gideon Wertheizer, Chief Executive Officer, and Yaniv Arieli, Chief Financial Officer, on May 10, 2019[244][245]