CEVA(CEVA) - 2021 Q3 - Quarterly Report

Forward-Looking Statements This section outlines CEVA's optimistic projections for IP licensing, royalty growth, and market opportunities in AI and IoT - CEVA believes its IP licensing and Intrinsix design services are robust with a diverse customer base and myriad target markets[6] - Strong demand for wireless connectivity IP, especially in China, and progress in adopting wireless connectivity and smart sensing IP beyond handset baseband[6] - Expects significant growth in royalty revenues from base station and IoT applications over the next few years, with varying royalty ASPs[8] - Anticipates cash and cash equivalents, short-term bank deposits, marketable securities, and cash from operations will fund operations for at least the next 12 months[8] - The market opportunity for AI at the edge is expected to drive new IP licensing and royalty revenues[6] - Camera-enabled devices with computer vision and AI are projected to exceed 1 billion units, and voice AI devices to reach 600 million units by 2025 (Yole Développement)[6] - IoT addressable market for Bluetooth, Wi-Fi, UWB, and NB-IoT is expected to exceed 9 billion devices annually by 2022 (ABI Research and Ericsson Mobility Reports)[6] PART I. FINANCIAL INFORMATION This section presents CEVA's unaudited interim condensed consolidated financial statements and management's discussion and analysis Item 1. Financial Statements This section presents CEVA's unaudited interim condensed consolidated financial statements and detailed notes for the specified periods Interim Condensed Consolidated Balance Sheets This section provides a snapshot of CEVA's financial position, detailing assets, liabilities, and equity at specific dates Condensed Consolidated Balance Sheet Highlights (in thousands) | Metric | Sep 30, 2021 | Dec 31, 2020 | Change | | :----- | :----------- | :----------- | :----- | | Total Assets | $317,711 | $306,952 | +$10,759 | | Cash and Cash Equivalents | $34,278 | $21,143 | +$13,135 | | Short-term Bank Deposits | $36,806 | $20,233 | +$16,573 | | Marketable Securities | $74,149 | $88,754 | -$14,605 | | Goodwill | $75,506 | $51,070 | +$24,436 | | Total Current Liabilities | $30,638 | $28,180 | +$2,458 | | Total Stockholders' Equity | $269,742 | $260,889 | +$8,853 | Interim Condensed Consolidated Statements of Loss This section details CEVA's revenues, costs, and net loss for the three and nine months ended September 30, 2021 and 2020 Condensed Consolidated Statements of Loss Highlights (in thousands, except per share) | Metric | 9 Months Sep 30, 2021 | 9 Months Sep 30, 2020 | 3 Months Sep 30, 2021 | 3 Months Sep 30, 2020 | | :----- | :-------------------- | :-------------------- | :-------------------- | :-------------------- | | Total Revenues | $88,649 | $72,181 | $32,790 | $24,960 | | Cost of Revenues | $10,904 | $8,259 | $4,830 | $2,503 | | Gross Profit | $77,745 | $63,922 | $27,960 | $22,457 | | Operating Income (Loss) | $1,952 | $(3,170) | $1,694 | $2 | | Financial Income (Loss), net | $345 | $2,689 | $(47) | $1,020 | | Income (Loss) before taxes on income | $2,297 | $(481) | $1,647 | $1,022 | | Income Tax Expense | $5,779 | $2,533 | $1,814 | $1,761 | | Net Loss | $(3,482) | $(3,014) | $(167) | $(739) | | Basic Net Loss Per Share | $(0.15) | $(0.14) | $(0.01) | $(0.03) | | Diluted Net Loss Per Share | $(0.15) | $(0.14) | $(0.01) | $(0.03) | - Total revenues increased by 23% for the nine months ended September 30, 2021, and by 31% for the three months ended September 30, 2021, compared to the corresponding periods in 2020[19] Interim Condensed Consolidated Statements of Comprehensive Loss This section presents CEVA's comprehensive loss, including net loss and other comprehensive income (loss) components Condensed Consolidated Statements of Comprehensive Loss Highlights (in thousands) | Metric | 9 Months Sep 30, 2021 | 9 Months Sep 30, 2020 | 3 Months Sep 30, 2021 | 3 Months Sep 30, 2020 | | :----- | :-------------------- | :-------------------- | :-------------------- | :-------------------- | | Net Loss | $(3,482) | $(3,014) | $(167) | $(739) | | Other Comprehensive Income (Loss), net of taxes | $(414) | $267 | $(175) | $(72) | | Comprehensive Loss | $(3,896) | $(2,747) | $(342) | $(811) | Interim Condensed Consolidated Statements of Changes in Stockholders' Equity This section outlines the changes in CEVA's stockholders' equity, including net loss, comprehensive loss, and equity-based compensation Changes in Stockholders' Equity (in thousands) | Metric | Jan 1, 2021 Balance | Sep 30, 2021 Balance | Change | | :----- | :------------------ | :------------------- | :----- | | Total Stockholders' Equity | $260,889 | $269,742 | +$8,853 | | Net Loss | — | $(3,482) | $(3,482) | | Other Comprehensive Loss | — | $(414) | $(414) | | Equity-based Compensation | — | $9,507 | +$9,507 | | Issuance of Treasury Stock upon exercise of stock-based awards | — | $3,242 | +$3,242 | Interim Condensed Consolidated Statements of Cash Flows This section summarizes CEVA's cash inflows and outflows from operating, investing, and financing activities Condensed Consolidated Statements of Cash Flows Highlights (in thousands) | Metric | 9 Months Sep 30, 2021 | 9 Months Sep 30, 2020 | | :----- | :-------------------- | :-------------------- | | Net Cash Provided by Operating Activities | $14,836 | $8,340 | | Net Cash Used in Investing Activities | $(4,635) | $(7,344) | | Net Cash Provided by (Used in) Financing Activities | $3,242 | $(1,909) | | Effect of exchange rate changes on cash and cash equivalents | $(308) | $177 | | Increase (Decrease) in Cash and Cash Equivalents | $13,135 | $(736) | | Cash and Cash Equivalents at the beginning of the period | $21,143 | $22,803 | | Cash and Cash Equivalents at the end of the period | $34,278 | $22,067 | Notes to the Interim Condensed Consolidated Financial Statements This section provides 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 and the strategic expansion through the Intrinsix acquisition - CEVA licenses signal processing IPs and integrated solutions in wireless connectivity and smart sensing, including DSPs, AI accelerators, and application software[32] - The acquisition of Intrinsix Corp. expands CEVA's market reach to aerospace and defense, combining CEVA's IP with Intrinsix's NRE design capabilities in RF, mixed-signal, security, and digital design[33] NOTE 2: BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This note outlines the basis of financial statement preparation and significant accounting policies, including the impact of recent accounting standards and COVID-19 - Interim condensed consolidated financial statements are prepared in accordance with U.S. GAAP and apply consistent accounting policies from the 2020 Annual Report[35][36] - The adoption of ASU 2019-12, Income Taxes, did not have a material impact on the consolidated financial statements[37] - Management determined that COVID-19 had no material adverse impact on the interim condensed consolidated financial statements for the period ended September 30, 2021[39] NOTE 3: ACQUISITION OF INTRINSIX This note details the acquisition of Intrinsix Corp., including the purchase price, strategic rationale, and preliminary financial allocations - CEVA acquired 100% of Intrinsix Corp. on May 31, 2021, for $33.096 million in cash[40] - The acquisition aims to extend market reach into aerospace and defense, increase license and royalty revenue opportunities by offering turnkey IP platforms, and expand the IP portfolio with secure processor IP and Heterogeneous SoC interface IP[43] Preliminary Purchase Price Allocation for Intrinsix Acquisition (in thousands) | Asset | Amount | | :---- | :----- | | Net assets (including cash of $600) | $755 | | Intangible assets | $5,300 | | Goodwill | $24,436 | | Total assets | $30,491 | Estimated Fair Value and Useful Life of Acquired Intangible Assets (in thousands) | Identifiable Intangible Assets | Estimated Fair Value | Weighted-Average Estimated Useful Life (Years) | | :----------------------------- | :------------------- | :--------------------------------------------- | | Customer relationships | $4,820 | 5.5 | | Customer backlog | $262 | 1.5 | | Patents | $218 | 5.0 | | Total identifiable intangible assets | $5,300 | | Unaudited Pro Forma Financial Information (in thousands) | Metric | 9 Months Sep 30, 2021 | 9 Months Sep 30, 2020 | 3 Months Sep 30, 2021 | 3 Months Sep 30, 2020 | | :----- | :-------------------- | :-------------------- | :-------------------- | :-------------------- | | Pro forma total revenues | $97,340 | $88,667 | $32,790 | $31,668 | | Pro forma net income (loss) | $(5,170) | $(3,323) | $(167) | $(238) | NOTE 4: REVENUE RECOGNITION This note details CEVA's revenue recognition policies, disaggregated revenue data by geography and product, and contract balances - Revenue is recognized under ASC 606, mostly at a point in time upon IP delivery, or over time for significant license customization contracts[49] Disaggregated Revenue by Geographical Market (in thousands) | Primary Geographical Markets | 9 Months Sep 30, 2021 Total | 9 Months Sep 30, 2020 Total | 3 Months Sep 30, 2021 Total | 3 Months Sep 30, 2020 Total | | :--------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | United States | $19,290 | $13,754 | $8,792 | $3,079 | | Europe and Middle East | $3,435 | $10,017 | $1,430 | $825 | | Asia Pacific | $65,914 | $48,410 | $22,558 | $21,056 | | Other | $10 | $0 | $10 | $0 | | Total | $88,649 | $72,181 | $32,790 | $24,960 | Disaggregated Revenue by Major Product/Service Lines (in thousands) | Major Product/Service Lines | 9 Months Sep 30, 2021 Total | 9 Months Sep 30, 2020 Total | 3 Months Sep 30, 2021 Total | 3 Months Sep 30, 2020 Total | | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Connectivity products | $66,578 | $56,716 | $23,868 | $18,573 | | Smart sensing products | $22,071 | $15,465 | $8,922 | $6,387 | | Total | $88,649 | $72,181 | $32,790 | $24,960 | Contract Balances (in thousands) | Metric | Sep 30, 2021 | Dec 31, 2020 | | :----- | :----------- | :----------- | | Trade receivables | $15,269 | $14,765 | | Unbilled receivables (licensing, NRE) | $2,123 | $5,479 | | Unbilled receivables (royalties) | $9,189 | $10,980 | | Deferred revenues (short-term) | $6,217 | $2,434 | NOTE 5: LEASES This note provides a summary of CEVA's operating lease terms, discount rates, costs, and cash payments Operating Lease Summary (Sep 30, 2021) | Metric | Value | | :----- | :---- | | Weighted average remaining lease term | 5.07 years | | Weighted average discount rates | 1.98% | Operating Lease Cost and Cash Payments (in thousands) | Metric | 9 Months Sep 30, 2021 | 9 Months Sep 30, 2020 | 3 Months Sep 30, 2021 | 3 Months Sep 30, 2020 | | :----- | :-------------------- | :-------------------- | :-------------------- | :-------------------- | | Operating lease cost | $2,305 | $1,883 | $806 | $652 | | Cash payments for operating leases | $2,397 | $1,968 | $799 | $623 | NOTE 6: MARKETABLE SECURITIES This note details CEVA's available-for-sale marketable securities, including fair values, unrealized gains/losses, and realized gains/losses from sales Available-for-Sale Marketable Securities (in thousands) | Metric | Sep 30, 2021 Fair Value | Dec 31, 2020 Fair Value | | :----- | :---------------------- | :---------------------- | | Corporate bonds (within one year) | $5,435 | $12,709 | | Corporate bonds (after one year through five years) | $68,714 | $76,045 | | Total Fair Value | $74,149 | $88,754 | | Gross unrealized gains (Sep 30, 2021) | $491 | | | Gross unrealized losses (Sep 30, 2021) | $(413) | | Gross Realized Gains and Losses from Sale of Marketable Securities (in thousands) | Metric | 9 Months Sep 30, 2021 | 9 Months Sep 30, 2020 | 3 Months Sep 30, 2021 | 3 Months Sep 30, 2020 | | :----- | :-------------------- | :-------------------- | :-------------------- | :-------------------- | | Gross realized gains | $43 | $4 | $0 | $0 | | Gross realized losses | $(30) | $(19) | $(2) | $0 | NOTE 7: FAIR VALUE MEASUREMENT This note describes the fair value hierarchy classification for CEVA's marketable securities and foreign currency derivative contracts - Marketable securities and foreign currency derivative contracts are classified within Level II of the fair value hierarchy[73] Assets Measured at Fair Value (in thousands) | Description | Sep 30, 2021 (Level II) | Dec 31, 2020 (Level II) | | :---------- | :---------------------- | :---------------------- | | Corporate bonds | $74,149 | $88,754 | NOTE 8: INTANGIBLE ASSETS, NET This note provides a breakdown of CEVA's intangible assets, net, and estimated future annual amortization charges Intangible Assets, Net (in thousands) | Asset Category | Sep 30, 2021 Net | Dec 31, 2020 Net | | :------------- | :--------------- | :--------------- | | Intrinsix acquisition related | $4,935 | $0 | | Immervision investment related | $4,660 | $5,488 | | Hillcrest Labs acquisition related | $3,352 | $4,251 | | NB-IoT technologies | $887 | $1,097 | | Total Intangible Assets, Net | $13,834 | $10,836 | Future Estimated Annual Amortization Charges (in thousands) | Year | Amount | | :--- | :----- | | 2021 (remainder) | $918 | | 2022 | $3,661 | | 2023 | $2,826 | | 2024 | $2,772 | | 2025 | $2,483 | | 2026 and thereafter | $1,174 | | Total | $13,834 | NOTE 9: GEOGRAPHIC INFORMATION AND MAJOR CUSTOMER DATA This note presents CEVA's revenues disaggregated by geographic area and the contribution of major customers to total revenues Revenues by Geographic Area (in thousands) | Geographic Area | 9 Months Sep 30, 2021 | 9 Months Sep 30, 2020 | 3 Months Sep 30, 2021 | 3 Months Sep 30, 2020 | | :-------------- | :-------------------- | :-------------------- | :-------------------- | :-------------------- | | United States | $19,290 | $13,754 | $8,792 | $3,079 | | Europe and Middle East | $3,435 | $10,017 | $1,430 | $825 | | Asia Pacific | $65,914 | $48,410 | $22,558 | $21,056 | | China | $54,489 | $37,713 | $18,041 | $16,085 | | Other | $10 | $0 | $10 | $0 | | Total | $88,649 | $72,181 | $32,790 | $24,960 | Major Customer Data as Percentage of Total Revenues | Customer | 9 Months Sep 30, 2021 | 9 Months Sep 30, 2020 | 3 Months Sep 30, 2021 | 3 Months Sep 30, 2020 | | :------- | :-------------------- | :-------------------- | :-------------------- | :-------------------- | | Customer A | 25% | 12% | 32% | 18% | | Customer B | <10% | 13% | <10% | <10% | | Customer C | <10% | 13% | <10% | 16% | NOTE 10: NET LOSS PER SHARE OF COMMON STOCK This note presents the calculation of basic and diluted net loss per share of common stock Net Loss Per Share of Common Stock | Metric | 9 Months Sep 30, 2021 | 9 Months Sep 30, 2020 | 3 Months Sep 30, 2021 | 3 Months Sep 30, 2020 | | :----- | :-------------------- | :-------------------- | :-------------------- | :-------------------- | | Net Loss | $(3,482) | $(3,014) | $(167) | $(739) | | Basic Net Loss Per Share | $(0.15) | $(0.14) | $(0.01) | $(0.03) | | Diluted Net Loss Per Share | $(0.15) | $(0.14) | $(0.01) | $(0.03) | - 830,384 shares related to outstanding equity-based awards were excluded from diluted EPS calculation for both the three and nine months ended September 30, 2021, due to the net loss making them anti-dilutive[94] NOTE 11: COMMON STOCK AND STOCK-BASED COMPENSATION PLANS This note details CEVA's stock option, SAR, RSU, and PSU activities, along with total equity-based compensation expense Stock Option and SAR Activities (9 Months Ended Sep 30, 2021) | Metric | Number of options and SAR units | Weighted average exercise price | Weighted average remaining contractual term (years) | Aggregate intrinsic value | | :----- | :------------------------------ | :------------------------------ | :-------------------------------------------------- | :------------------------ | | Outstanding as of Dec 31, 2020 | 289,069 | $22.42 | 3.6 | $6,673 | | Granted | — | — | | | | Exercised | (158,069) | $24.47 | | | | Forfeited or expired | — | — | | | | Outstanding as of Sep 30, 2021 | 131,000 | $19.94 | 2.8 | $2,978 | | Exercisable as of Sep 30, 2021 | 131,000 | $19.94 | 2.8 | $2,978 | RSU and PSU Activities (9 Months Ended Sep 30, 2021) | Metric | Number of RSUs and PSUs | Weighted Average Grant-Date Fair Value | | :----- | :---------------------- | :------------------------------------- | | Unvested as of Dec 31, 2020 | 842,948 | $29.30 | | Granted | 388,447 | $47.26 | | Vested | (471,870) | $26.72 | | Forfeited or expired | (60,141) | $35.49 | | Unvested as of Sep 30, 2021 | 699,384 | $40.49 | - As of September 30, 2021, there was $21.542 million of unrecognized compensation expense related to unvested RSUs and PSUs, expected to be recognized over a weighted-average period of 1.7 years[107] Total Equity-Based Compensation Expense (in thousands) | Expense Category | 9 Months Sep 30, 2021 | 9 Months Sep 30, 2020 | 3 Months Sep 30, 2021 | 3 Months Sep 30, 2020 | | :--------------- | :-------------------- | :-------------------- | :-------------------- | :-------------------- | | Cost of revenue | $509 | $473 | $247 | $159 | | Research and development, net | $5,435 | $5,115 | $2,007 | $1,770 | | Sales and marketing | $1,185 | $1,496 | $400 | $533 | | General and administrative | $2,378 | $2,986 | $749 | $1,084 | | Total | $9,507 | $10,070 | $3,403 | $3,546 | NOTE 12: DERIVATIVES AND HEDGING ACTIVITIES This note explains CEVA's use of foreign exchange derivative contracts as cash flow hedges to mitigate currency risks - CEVA uses foreign exchange forward or option contracts as cash flow hedges to offset risks from foreign currency exchange rate fluctuations, particularly for non-U.S. dollar denominated payroll[112] Net (Gains) Losses Reclassified from Accumulated Other Comprehensive Gain (Loss) into Income (in thousands) | Metric | 9 Months Sep 30, 2021 | 9 Months Sep 30, 2020 | 3 Months Sep 30, 2021 | 3 Months Sep 30, 2020 | | :----- | :-------------------- | :-------------------- | :-------------------- | :-------------------- | | Foreign exchange option contracts | $0 | $11 | $0 | $0 | | Foreign exchange forward contracts | $(65) | $(525) | $(29) | $(352) | | Total | $(65) | $(514) | $(29) | $(352) | - The company recorded a net gain of $29 thousand and $65 thousand in cost of revenues and operating expenses for the three and nine months ended September 30, 2021, respectively, related to Hedging Contracts[117] NOTE 13: ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) This note details the changes in accumulated other comprehensive income (loss) and reclassifications out of it Changes in Accumulated Other Comprehensive Income (Loss), Net of Taxes (in thousands) | Metric | 9 Months Sep 30, 2021 | 9 Months Sep 30, 2020 | 3 Months Sep 30, 2021 | 3 Months Sep 30, 2020 | | :----- | :-------------------- | :-------------------- | :-------------------- | :-------------------- | | Beginning balance | $478 | $94 | $239 | $433 | | Net current period other comprehensive loss | $(414) | $267 | $(175) | $(72) | | Ending balance | $64 | $361 | $64 | $361 | Reclassifications Out of Accumulated Other Comprehensive Income (Loss) (in thousands) | Component | Affected Line Item in Statements of Income (Loss) | 9 Months Sep 30, 2021 | 9 Months Sep 30, 2020 | 3 Months Sep 30, 2021 | 3 Months Sep 30, 2020 | | :-------- | :------------------------------------------------ | :-------------------- | :-------------------- | :-------------------- | :-------------------- | | Unrealized gains (losses) on available-for-sale marketable securities | Financial income (loss), net | $13 | $(11) | $(2) | $0 | | Unrealized gains (losses) on cash flow hedges | Cost of revenues, R&D, S&M, G&A | $65 | $514 | $29 | $352 | NOTE 14: SHARE REPURCHASE PROGRAM This note provides information on CEVA's share repurchase program, including shares available and repurchases made - No shares of common stock were repurchased during the three and nine months ended September 30, 2021[125] - As of September 30, 2021, 497,608 shares remained available for repurchase under the share repurchase program[125] - During the nine months ended September 30, 2020, 202,392 shares were repurchased for an aggregate of $4.780 million[125] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on CEVA's financial condition and results of operations, highlighting strategic drivers and performance metrics Business Overview This section provides an overview of CEVA's core business, strategic acquisitions, and key growth drivers in various market segments - CEVA licenses wireless connectivity and smart sensing technologies, including DSPs, AI processors, and software for sensor fusion, image enhancement, computer vision, voice input, and AI[130] - The Intrinsix acquisition expands CEVA's market reach to aerospace and defense, offering integrated IP solutions and design capabilities in mixed signal, RF, security, and heterogeneous SoC interfaces[130][133] - Diversification beyond handset baseband is driving significant growth in base station and IoT product categories, with unit shipments up 103% year-over-year and royalty revenues up 6% year-over-year in the third quarter[144] - Key growth drivers include 5G platforms (PentaG for handsets and cellular IoT, 5G RAN), broad IoT IPs (Bluetooth, Wi-Fi, UWB, NB-IoT), TWS earbuds/smartwatches/AR/VR (WhisPro, ClearVox, BlueBud platform), SensPro2 sensor hub DSP family for ADAS/drones/robotics/AR/VR, NeuPro-S AI processors for edge deep learning, and Hillcrest Labs sensor fusion[138][139][140][141][142][143] COVID-19 This section discusses the operational and financial impacts of the COVID-19 pandemic on CEVA, including ongoing uncertainties - CEVA continued operations with precautionary health and safety measures for employees during the COVID-19 outbreak[145] - The impact of COVID-19 on financial results for the nine months ended September 30, 2021, was not material[146] - Prolonged measures to contain the virus, supply chain disruptions (semiconductor demand surpassing supply), and severe pandemic infections in large markets (India, Brazil) pose uncertainties for economic activities and future financial performance[146] Results of Operations This section analyzes CEVA's financial performance, detailing revenue streams, cost of revenues, gross margin, and operating expenses Total Revenues This section analyzes CEVA's total revenues, highlighting growth drivers and contributions from major customers and product lines Total Revenues (in millions) | Period | 2021 | 2020 | YoY Change | | :----- | :--- | :--- | :--------- | | Q3 | $32.8 | $24.96 | +31% | | 9 Months | $88.6 | $72.18 | +23% | - The increase in revenues was attributed to CEVA's continuous success in the digital transformation era and the Intrinsix acquisition expanding market reach and enriching the business model[147] Major Customer Contribution to Total Revenues | Customer | Q3 2021 | 9 Months 2021 | Q3 2020 | 9 Months 2020 | | :------- | :------ | :------------ | :------ | :------------ | | UNISOC | 32% | 25% | 18% | 12% | Products and Services as Percentages of Total Revenues | Category | 9 Months 2021 | 9 Months 2020 | Third Quarter 2021 | Third Quarter 2020 | | :------- | :------------ | :------------ | :----------------- | :----------------- | | Connectivity products | 75% | 79% | 73% | 74% | | Smart sensing products | 25% | 21% | 27% | 26% | Licensing, NRE and Related Revenues This section analyzes CEVA's licensing, NRE, and related revenues, highlighting growth drivers and agreement details Licensing, NRE and Related Revenues (in millions) | Period | 2021 | 2020 | YoY Change | | :----- | :--- | :--- | :--------- | | Q3 | $21.6 | $12.42 | +74% | | 9 Months | $51.5 | $40.445 | +27% | - Growth was attributed to strong IP licensing execution, high demand for Bluetooth, and the full quarter contribution from Intrinsix NRE related services[151] - Twenty-five license and NRE agreements were concluded in Q3 2021 (14 connectivity, 11 smart sensing), with 13 deals from first-time customers[152] - Licensing and related revenues accounted for 66% of total revenues in Q3 2021 (up from 50% in Q3 2020) and 58% for the first nine months of 2021 (up from 56% in 9M 2020)[153] Royalty Revenues This section analyzes CEVA's royalty revenues, detailing changes due to base station, handset, Bluetooth, and sensor fusion product shipments Royalty Revenues (in millions) | Period | 2021 | 2020 | YoY Change | | :----- | :--- | :--- | :--------- | | Q3 | $11.2 | $12.54 | -11% | | 9 Months | $37.1 | $31.736 | +17% | - Q3 decrease due to lower 5G base station RAN visibility and handset baseband royalties, offset by higher Bluetooth shipments[154] - 9-month increase driven by secular growth in Bluetooth and sensor fusion products, offset by lower base station shipments[154] - Customers reported sales of 438 million chipsets in Q3 2021 (up 26% YoY) and 1,231 million for 9 months 2021 (up 46% YoY)[155] Geographic Revenue Analysis This section provides a detailed breakdown of CEVA's revenue distribution across various geographic regions Geographic Revenue Distribution (in millions, with percentages of total revenues) | Region | 9 Months 2021 | % | 9 Months 2020 | % | Q3 2021 | % | Q3 2020 | % | | :----- | :------------ | :- | :------------ | :- | :------ | :- | :------ | :- | | United States | $19.3 | 22% | $13.8 | 19% | $8.8 | 27% | $3.1 | 12% | | Europe and Middle East | $3.4 | 4% | $10.0 | 14% | $1.4 | 4% | $0.8 | 3% | | Asia Pacific | $65.9 | 74% | $48.4 | 67% | $22.6 | 69% | $21.1 | 85% | | China | $54.5 | 61% | $37.7 | 52% | $18.0 | 55% | $16.1 | 64% | Cost of Revenues This section analyzes the cost of revenues, highlighting the impact of service costs and equity-based compensation Cost of Revenues (in millions) | Period | 2021 | 2020 | | :----- | :--- | :--- | | Q3 | $4.8 | $2.5 | | 9 Months | $10.9 | $8.3 | - Increase primarily reflected higher service costs for customers, mainly due to incorporating salary and related NRE costs associated with the Intrinsix business[159] - Non-cash equity-based compensation expense included in cost of revenues was $247 thousand for Q3 2021 and $509 thousand for 9 months 2021[159] Gross Margin This section analyzes CEVA's gross margin percentage and the factors influencing its changes Gross Margin Percentage | Period | 2021 | 2020 | | :----- | :--- | :--- | | Q3 | 85% | 90% | | 9 Months | 88% | 89% | - Decrease mainly reflected higher cost of revenues due to NRE-related Intrinsix costs[160] Operating Expenses This section analyzes CEVA's total operating expenses, detailing the drivers behind increases, including personnel and project-related costs Total Operating Expenses (in millions) | Period | 2021 | 2020 | | :----- | :--- | :--- | | Q3 | $26.3 | $22.5 | | 9 Months | $75.8 | $67.1 | - Increase primarily due to higher salary and employee-related costs (including Intrinsix personnel, Holdback Merger Consideration, and higher currency exchange expenses) and higher project-related expenses[161] - For the nine months, also impacted by higher professional services cost associated with the Intrinsix transaction and lower Crédit Impôt Recherche (CIR)[161] Research and Development Expenses, Net This section analyzes CEVA's research and development expenses, net, and the factors contributing to their changes, including personnel and tax credits Research and Development Expenses, Net (in millions) | Period | 2021 | 2020 | | :----- | :--- | :--- | | Q3 | $18.8 | $15.6 | | 9 Months | $53.8 | $45.7 | - Increase primarily due to higher R&D personnel (including Intrinsix employees), Holdback Merger Consideration costs, higher currency exchange expenses, and higher project-related expenses[162] - For the nine months, also impacted by lower Crédit Impôt Recherche (CIR) from French tax authorities[162] - Number of R&D personnel increased to 318 at September 30, 2021, from 304 at September 30, 2020[164] Sales and Marketing Expenses This section analyzes CEVA's sales and marketing expenses, detailing changes driven by personnel costs and equity-based compensation Sales and Marketing Expenses (in millions) | Period | 2021 | 2020 | | :----- | :--- | :--- | | Q3 | $3.2 | $2.7 | | 9 Months | $9.4 | $8.8 | - Increase primarily due to higher salaries and related costs, partially offset by lower non-cash equity-based compensation expenses[165] - Sales and marketing personnel increased to 36 at September 30, 2021, from 35 at September 30, 2020[166] General and Administrative Expenses This section analyzes CEVA's general and administrative expenses, detailing changes influenced by compensation, credit losses, and acquisition-related costs General and Administrative Expenses (in millions) | Period | 2021 | 2020 | | :----- | :--- | :--- | | Q3 | $3.5 | $3.6 | | 9 Months | $10.5 | $10.9 | - Q3 decrease primarily reflected lower non-cash equity-based compensation, partially offset by higher salaries and related costs[167] - 9-month decrease primarily reflected lower allowance for credit losses and lower non-cash equity-based compensation, partially offset by higher professional services cost associated with the Intrinsix transaction[167] - General and administrative personnel increased to 46 at September 30, 2021, from 32 at September 30, 2020[168] Amortization of intangible assets This section analyzes the amortization charges for intangible assets, noting the impact of recent acquisitions Amortization Charges (in millions) | Period | 2021 | 2020 | | :----- | :--- | :--- | | Q3 | $0.8 | $0.6 | | 9 Months | $2.1 | $1.7 | - Increase due to amortization of intangible assets associated with the acquisition of Intrinsix in May 2021, as well as existing assets from Hillcrest Labs and Immervision[169] Financial Income, Net This section analyzes CEVA's financial income, net, detailing the impact of interest income, marketable securities, and foreign exchange fluctuations Financial Income, Net (in millions) | Component | 9 Months 2021 | 9 Months 2020 | Q3 2021 | Q3 2020 | | :-------- | :------------ | :------------ | :------ | :------ | | Financial income, net | $0.34 | $2.69 | $(0.05) | $1.02 | | Interest income and gains/losses from marketable securities, net | $1.13 | $2.26 | $0.32 | $0.66 | | Foreign exchange income (loss) | $(0.79) | $0.43 | $(0.37) | $0.36 | - Decrease primarily reflected lower combined bank deposits and marketable securities balances (due to Intrinsix acquisition) and lower yields[172] - Foreign exchange loss increased due to devaluation of Euro cash balances as the U.S. dollar strengthened against the Euro[172] Provision for Income Taxes This section analyzes CEVA's income tax expense, highlighting the impact of income earned in different jurisdictions and their respective tax rates Income Tax Expense (in millions) | Period | 2021 | 2020 | | :----- | :--- | :--- | | Q3 | $1.8 | $1.8 | | 9 Months | $5.8 | $2.5 | - Increase for the first nine months primarily reflected a significant increase in income earned in France, which has a relatively high corporate tax rate of 26.5%[173][175] - Israeli subsidiary qualifies for a 12% tax rate on profits from intellectual property as a "Technological Preferred Enterprise" from 2020 onwards[177] Critical Accounting Policies and Estimates This section identifies CEVA's critical accounting policies and estimates, noting consistency with previous annual reports - Critical accounting policies and estimates include revenue recognition, fair value of financial instruments, equity-based compensation, and income taxes[178] - No changes in critical accounting policies compared to the Annual Report on Form 10-K for the year ended December 31, 2020[179] Liquidity and Capital Resources This section discusses CEVA's liquidity position, capital resources, and cash flow activities from operations, investing, and financing Cash, Cash Equivalents, Bank Deposits, and Marketable Securities (in millions) | Metric | Sep 30, 2021 | Dec 31, 2020 | Change | | :----- | :----------- | :----------- | :----- | | Total | $145.2 | $159.7 | $(14.5) | | Cash and cash equivalents | $34.3 | $21.1 | +$13.2 | | Short-term bank deposits | $36.8 | $20.2 | +$16.6 | | Marketable securities | $74.1 | $88.8 | $(14.7) | | Long-term bank deposits | $0 | $29.5 | $(29.5) | - The decrease in total liquidity was principally due to $29.9 million cash used for the acquisition of Intrinsix, net of cash acquired[180] - $134.6 million of the total liquidity was held by foreign subsidiaries, with an intent to permanently reinvest earnings[181] - Management believes current capital resources will provide sufficient capital to fund operations for at least the next 12 months[189] Operating Activities This section analyzes CEVA's net cash provided by operating activities, detailing key drivers such as non-cash adjustments and changes in operating assets and liabilities Net Cash Provided by Operating Activities (in millions) | Period | 2021 | 2020 | | :----- | :--- | :--- | | 9 Months | $14.8 | $8.3 | - Key drivers for 2021 included $15.2 million in non-cash adjustments (depreciation, amortization, equity-based compensation) and $3.1 million from changes in operating assets and liabilities (e.g., decrease in trade receivables, increase in deferred revenues)[184] Investing Activities This section analyzes CEVA's net cash used in investing activities, highlighting the impact of the Intrinsix acquisition and changes in marketable securities Net Cash Used in Investing Activities (in millions) | Period | 2021 | 2020 | | :----- | :--- | :--- | | 9 Months | $(4.6) | $(7.3) | - Included a $29.9 million cash outflow for the acquisition of Intrinsix, net of cash acquired[187] - Net proceeds from bank deposits were $13.0 million in 2021, and net cash outflow for marketable securities was $6.8 million[187] Financing Activities This section analyzes CEVA's net cash provided by (used in) financing activities, focusing on stock-based awards and share repurchases Net Cash Provided by (Used in) Financing Activities (in millions) | Period | 2021 | 2020 | | :----- | :--- | :--- | | 9 Months | $3.2 | $(1.9) | - Primarily driven by $3.2 million received from the exercise of stock-based awards[189] - No shares were repurchased in the first nine months of 2021, compared to $4.8 million in repurchases in the comparable 2020 period[188] Item 3. Quantitative and Qualitative Disclosures About Market Risk CEVA is exposed to market risks primarily from foreign currency exchange rate fluctuations (NIS and Euro vs. USD) and interest rate changes - CEVA is exposed to foreign currency exchange rate fluctuations, primarily between the U.S. dollar and the NIS and Euro, as a majority of expenses are denominated in these foreign currencies[191] - The company uses foreign currency cash flow hedging programs (forward and option contracts) to mitigate risks associated with non-U.S. dollar denominated payroll expenses[192][193] - Experienced foreign exchange losses of $367 thousand in Q3 2021 and $783 thousand for the first nine months of 2021 due to the devaluation of Euro cash balances as the U.S. dollar strengthened[191] - Fluctuations in interest rates within the investment portfolio are not anticipated to have a material effect on the financial position on an annual or quarterly basis[198] Item 4. Controls and Procedures As of September 30, 2021, CEVA's Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective - Disclosure controls and procedures were evaluated and deemed effective as of September 30, 2021, by the CEO and CFO[199] - No material changes in internal control over financial reporting occurred during the most recent fiscal quarter[199] PART II. OTHER INFORMATION This section provides additional information including legal proceedings, risk factors, equity security sales, and exhibits Item 1. Legal Proceedings CEVA is not currently a party to any litigation or other legal proceedings that are expected to have a material effect on its business, results of operations, or financial condition - CEVA is not a party to any litigation or legal proceedings expected to have a material effect on its business, results of operations, and financial condition[200] Item 1A. Risk Factors This section details numerous factors that could materially and adversely affect CEVA's business, financial condition, and results of operations - The COVID-19 pandemic could materially and adversely affect business, financial condition, and results of operations due to workforce and operational impacts, economic uncertainty, and supply chain disruptions[203][204] - CEVA operates in highly competitive markets, facing competition from signal processing core providers, CPU IP providers, internal engineering teams, and niche semiconductor design companies, which could lead to loss of sales and lower prices[205][206] - Quarterly operating results fluctuate due to factors like dependence on a limited number of customers, delays in IP licensing, revenue recognition timing, fluctuations in unit shipments, royalty pricing pressures, and lengthy sales cycles[209] - Significant reliance on revenues from a limited number of customers (e.g., UNISOC accounted for 32% of Q3 2021 total revenues) poses a risk if any major customer is lost or consolidates[214] - Business is dependent on IP licensing and NRE revenues, which vary significantly period to period and are difficult to predict, especially with the expansion into non-handset baseband markets and government contracts[215][216] - Royalty and NRE payment rates could decrease due to market pressures, product price erosion, increased volume shipments, or renegotiations, materially affecting operating results[218][222] - Success depends on penetrating new markets and achieving widespread market acceptance for new products, which requires significant R&D investment and faces competitive challenges[224][225] - Difficulties in integrating Intrinsix's personnel, operations, and technologies, or in offering turnkey IP solutions, could prevent anticipated benefits from the acquisition[264] - Significant international operations (78% of 9M 2021 revenues from outside U.S.) expose CEVA to political, economic, and regulatory risks, including currency fluctuations, trade tensions (U.S.-China), and intellectual property protection challenges[233][234][235] - Reliance on contracts with U.S. government prime contractors (Intrinsix's business) exposes CEVA to risks from budgetary constraints, early contract termination, procurement regulations, and potential audits/investigations[243][245] - Inability to adequately protect intellectual property (patents, copyrights, trade secrets) or being sued for infringement by third parties could harm the business[268][270] - The highly cyclical nature of the semiconductor industry, including supply chain disruptions (e.g., chip shortages), can cause significant fluctuations or declines in revenues and operating results[273] - Cybersecurity threats or other security breaches could compromise sensitive information, leading to legal claims, operational disruptions, and reputational damage[278] - The corporate tax rate may increase due to changes in tax laws, challenges to profit recognition in foreign jurisdictions (Israel, Ireland, France), or changes in revenue mix, adversely impacting cash flow and results[280] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds There were no repurchases of CEVA's common stock during the three months ended September 30, 2021 - No repurchases of common stock occurred during the three months ended September 30, 2021[285] Item 3. Defaults Upon Senior Securities This item is not applicable to CEVA for the reporting period - Not applicable[285] Item 4. Mine Safety Disclosures This item is not applicable to CEVA for the reporting period - Not applicable[285] Item 5. Other Information This item is not applicable to CEVA for the reporting period - Not applicable[285] Item 6. Exhibits This section lists the exhibits filed as part of the Form 10-Q, including certifications from the CEO and CFO (Rule 13a-14(a)/15d-14(a) and Section 1350), and Interactive Data Files (iXBRL) for the financial statements - Includes Rule 13a-14(a)/15d-14(a) Certifications from CEO and CFO[285] - Includes Section 1350 Certification from CEO and CFO[285] - Interactive Data Files (iXBRL) for Condensed Consolidated Financial Statements are provided[285][286] Signatures This section contains the official signatures of CEVA's Chief Executive Officer and Chief Financial Officer, certifying the report - Report signed by Gideon Wertheizer (CEO) and Yaniv Arieli (CFO) on November 9, 2021[288]