Q1 2023 CEVA Inc Earnings Call
Good day and welcome to the CEVA, Inc. First quarter 2023 earnings conference call.
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I would now like to turn the conference over to Richard Kingston, Vice President market Intelligence Investor and public Relations. Please go ahead Sir.
Rocco good morning, everyone and welcome to see this first quarter 2023 earnings conference call.
Joining me today on the call are Amir <unk>, Chief Executive Officer, and you've already Alley, Chief financial officer of CEVA.
Before handing over to Amir I would like to remind everyone that today's discussion contains forward looking statements that involve risks and uncertainties as well as assumptions that if they materialize or prove incorrect could cause the results of CEVA to differ materially from those expressed or implied by such forward looking statements on assumptions.
Forward looking statements include statements regarding market trends and dynamics opportunities for Wi Fi at five G.
<unk> four and benefits all of our technologies.
Spectation on financial guidance regarding future performance, including guidance for the second quarter of 2023, and our plans for attending investor events.
For information on the factors that could cause a difference in our results. Please refer to our filings with the security and Exchange Commission.
These include consumer demand and the global economy generally.
The ability of Steve is IP for smarter connected devices to continue to be strong growth drivers for us.
Our success in penetrating new markets and maintaining our market position in existing markets.
The ability of new products, incorporating our technology to achieve market acceptance the speed and extend of the expansion of the five <unk> and Iot markets, our ability to execute more base station and Iot license agreements the.
The effect of intense industry competition and consolidation.
Global chip market trends and our ability to successfully integrate intrinsic into our business Steve.
CEVA assumes no obligation to update any forward looking statements or information, which speak as of their respective dates.
In addition, we will 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 filing section of our Investor Relations website at investors CEVA <unk> DSP Dot com.
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 I'm here.
Thank you Richard and welcome everyone and thank you for joining US today, our first quarter results show continued progress in diversifying and expanding our licensing business.
However, royalties were impacted by customer inventory adjustments and prolonged weak demand for smartphones and Pcs.
Looking at licensing in more detail thanks to the hard work and efforts of our team. We signed 13, new licensing agreements in the quarter. We continued to have excellent traction across our wireless connectivity portfolio in particular, where our five G and Wi Fi six platforms are in strong demand.
Also note that licensing agreements, we signed in the quarter all of our strategic significance wildflower Dsp's, we are a leading Android smartphone OEM for their in house five G. Modern Air Force one for our Penta GPU platform for broadband Iot and one for our Wi Fi six access.
Point IP, we have a global OEM, who is one of the leading providers of Wifi access points and other networking devices.
I will expand on this deal shortly.
Other deals signed in the quarter target Bluetooth connectivity for Gws ear, Bud consumer Iot and industrial devices Wi Fi six for access points and mesh use cases.
So our fusion for robot vacuum cleaners, and a I don't want you to Adas.
In royalties the magnitude of the decline in smartphone and PC related royalties was primarily driven by a pull in of handset baseband shipments in the fourth quarter, which combined with the traditional seasonality resulted in a correction in the first quarter due to inventory.
Following conversation, we've had with customers and others in the supply chain, we understand the demand has resumed and expect a return to more normal levels as early as the second quarter.
Outside of smartphone we saw excellent growth in our Wi Fi and cellular Iot royalties, both of which contributed all time high royalty revenue in the quarter Wi Fi royalties.
More than doubled sequentially. Thanks in part to three new royalty paying customers that reported Wi Fi six treatments to ask for the first time blue.
Bluetooth also continued to perform well across the board consumer Iot market, where we have a large presence while bluetooth royalties from smartphones were affected by the correction I spoke off.
Although and such royalties declined 64% sequentially and 71% year over year, while base station and Iot royalties declined just 4% sequentially and 7% annually.
On our last earnings call I outlined three areas identified as key growth drivers placebo.
Which aligns with the longer term global Megatrends.
Two mega opportunity now to update you on our progress in our relationship in relation to this.
The first is Wi Fi, where we saw excellent progress in both licensing and royalties during the first quarter.
In licensing we signed three new customers in the quarter, bringing our total number of Wifi six licensees to more than 35.
While Wi Fi six has achieved a high penetration rate in smartphone and PC to date, the adoption of fly seeks in industrial and the broad consumer Iot market.
[noise] Tvs set top boxes and other smart home devices is still nascent this is the market opportunity the tomato for Wi Fi six licensees aren't targeting.
And following strong licensing activities among Iot devices customers in the past two years. We are now also engaging with customer licensing our Wifi six and six E solutions Fox, a sponge, including with the strategic customer that I mentioned earlier.
This is a significant development as access points are in uncharted market for us we have minimal exposure and traditionally dominated by the incumbent Wi Fi chipset providers.
There is a strong appetite for new chipset providers to enter this market and they are able to accelerate their design activities with our industry, leading Wifi six IP.
This new Wi Fi chip customers include network equipment, Oems and semiconductor companies such as the global OEM I alluded to earlier.
Moreover, the royalties associated with Axis fund Oh higher than those from consumer Iot devices, providing a new potentially lucrative royalty stream.
And as our customer base expand our future royalty opportunity for Wifi six continues to grow.
Market research firm <unk> system research forecast that Wi Fi six device shipments were to reach $2 8 billion devices annually by 2027 growing at a CAGR of 25%.
As we have discussed previously we believe the market opportunities for us in Wifi six based on our customer design wins is as big as a bluetooth, but with greater royalty revenue potential.
Action this quarter only serve to reinforce my belief that our Wi Fi business will be a key royalty growth contributor in the coming years.
The second area I would like to update you on is five G, where we signed two important agreements in the quarter.
The first of these is a strategic deal with one of the world's leading Android smartphone Oems.
Diesel Yam license, our DSP is for the first time as they begin their own in house five G. Modern efforts aimed at reducing the reliance on the five gene merchant semiconductor companies.
These trends are probably am designing chips for their own devices bodes very well with semiconductor IP companies like Simo.
Oh, Yeah, I'm still not have the in house capability capabilities to design all aspects of the cheap and turn to IP licenses to get many key component of their cheap reducing their risk and allowed them to focus on areas of the cheap where they can achieve differentiation and utilize their in house expertise.
In late 2020. This OEM also license, our Bluetooth and Wi Fi I piece, the first chips, which are expected to be in production shortly.
If they are successful with that connectivity and <unk>. These smartphone OEM has the potential to become a key royalty customer for CEVA in the coming years.
The second five G. P. M. We cited the courtyard was for a customer looking to develop a five G broadband Iot and more than targeting a wide variety of end market requiring high data throughput lower latency and large data volumes.
This end market includes connected cars Wearables smart grid somebody on a L V. Our devices industrial automation minimal.
According to the latest Ericsson mobility report there will be a more than 3 billion five G broadband Iot connection worldwide by the end of 2028. This is an exceptional market opportunity. These customers license our Panther II platform, specifically designed for five gene broadband Iot, which was.
A lot of them seamlessly develop their five G. That's kept our naval cheap we've reduced risk thanks to our integrated platform offering which provides the key building blocks off of 50 or more of them.
Also at mobile World Congress in February we announced our most powerful and efficient DSP architecture to date, the CEVA XC 'twenty. The CEVA XC 20 addresses the massive compute requirement.
<unk> advance and beyond and can scale to fit the customer's requirement from smartphone I still see through to the Wifi five G. A defense AC four base stations private networks, Oran and other wireless infrastructure.
We believe there is a strong demand for new Pfizer Pfizer G. Cheap of course, the wireless industry and among many equipments Oems Steve.
Exit 'twenty can help to significantly lower the entry the entry barriers for new entrants and incumbent who wish to extra alright, there chip designs for this lucrative market opportunities.
The third area is application software for embedded system.
In addition to earnings we also announced our acquisition of the Treaty Special audio business from basically Sonics today.
Special audio is emerging as one of the most interesting areas even argue enabling a real war. The audio experience. We've ended did you thought award. This is increasingly becoming a feature of headsets and T. W. S ear buds to ensure to enhance the user experience for watching movies gaming listening to music both.
And even conference calls.
This is funny because it's been our partner for three of these special audio for the past year, and we developed and joint products, which combine their special audio software with our head tracking technology to deliver a complete special audio experience. This joint solution known as real space is now going into production.
We have our first joint customer boat, India's first year of bone and wearable company T.
T H X the World Class audio and video certification and technology company is already an existing customer a testament to the quality of the software.
Following on from the success of their collaborations with both in understanding the significant opportunity for special argue at cost and market. We made a decision to acquire the business and on the complete special audio software solution.
Initially we have our domain at present and tw as Airbus market through our Bluetooth audio DSP customers, we intend to offer headphones and the air bus OEM that capability to seamlessly add.
Special audio to enhance their product lineups.
We can also address a broad set of other markets, where special ideally is being adopted including a L V already our audio conferencing healthcare automotive and media are determined.
Market research firm future market insights estimate the treaty deal revenue will grow 4.1 X from 'twenty to 'twenty, two to 'twenty, sorry to reaching nearly $51 $9 billion in 'twenty two.
Indicate Dave off the significant market opportunity that special audio professors.
The team is located next to our sense of future R&D team in Rockville, Maryland, making the integration of these seem straightforward. We believe it is modest acquisition provides excellent potential to increase our application software what's your opportunity in the coming years, especially larger becomes a must have feature with wireless.
Audio devices.
In summary, despite market challenges this quarter I believe the opportunities we have in front of us continuing to grow we have an outstanding portfolio of wireless connectivity and smart sensing technology and foster a stronger strong relationship around the world, we have leading fabless companies and Oems.
I met with a number of key customers around the world in the quarter and I'm encouraged by their appetite to expand their relationship with us finally.
Finally, the amazing Sonics special audio business acquisition, we announced today is an additional step in building our future strategy bolstering our application software licensing business.
Now I will turn the call over to <unk> for the financials.
Thank you Amy and good day to all.
I'll start by reviewing our results of operations for the first quarter of 2023.
For the first quarter was $28 $7 million as compared to 34 4 million for the same quarter last year.
Revenue breakdown is as follows licensing and related revenue, reflecting 72% of our total revenue was $27 million as compared to $22 4 million for the first quarter 2022.
Royalty revenue, reflecting 28% of our total revenues was $8 million as compared to $12 million for the same quarter last year.
Quarterly gross margin came as expected on gap and slightly lower non-GAAP basis due to lower royalty revenue in the quarter gross margin was 82% on GAAP basis, and 84% the non-GAAP basis compared to over 82% and 85%.
Guidance on GAAP and non-GAAP .
Correct.
Our non-GAAP quarterly gross margin excluded approximately equity based compensation expenses of <unk> $4 million and amortization of acquired tangibles zero $3 million.
Total GAAP operating expenses for the first quarter was above the high end of our guidance of $28 $2 million due to the timing of the Israeli innovation authority grants receivable lower a location of intrinsic in our REIT cost bromine or D and E to the cause.
The revenues and higher professional fees.
Total non-GAAP operating expenses for the first quarter excluded equity based compensation expense and amortization of intangibles and hold back expense were $24 $1 million also above the high end of guidance due to the same reasons I just explained.
GAAP operating.
<unk> loss for the quarter was $4 $8 million down from GAAP operating profit of zero point $5 million in the same quarter a year ago.
GAAP importantly, operating profit included equity based compensation of $3 $9 million the impact of amortization of zero point $7 million.
Associated with the acquisition the intrinsic Hillcrest.
There's less beautiful used millions of dollars associated.
Sure.
Since acquisition, our non-GAAP operating profit was zero point $1 million.
Lower than the first quarter of 2020 to $5 5 million.
Yeah. The non-GAAP tax expenses were $1 $4 million, mainly associated to withholding tax deducted by our customers.
Could not be utilized and works.
And our GAAP loss was $4 $9 million and diluted loss per share was 21.
For the first quarter was 23 compared to a net loss of $1.7 million and diluted loss per share of seven.
For the first quarter on 2022.
Yes.
With respect to other related data.
Shipped units by CEVA licensees during the first quarter.
297 million units as compared to the fourth quarter of 2022 reported shipments of 375 million units.
Similarly.
For the following reasons discussed earlier.
Of the 297 million units reported 27 million units or 9% were for handset baseband chips.
Our base station and Iot products shipments were 270 million units as compared to $308 million for the fourth quarter of 2022, and 531 million units for the first quarter of 2022.
Total shipments were 190 million units in the quarter as compared to 220 million units for the fourth quarter of 2022, mainly due to.
Lower shipments from Bluetooth smart phone customers associated with the inventory correction.
The little royalty units were 19% up sequentially to an all time record high of 29 million units.
Wifi shipments were 21 million units as compared to $37 million for the fourth quarter of 2022. However, we are encouraged by the Wi Fi product mix as it starts to shift towards Wi Fi six.
Which commands a higher average selling price, resulting in higher royalties. This positive trend reflects the long term Wi Fi royalty opportunity for us.
Other shipments other under the base station and Iot umbrella totaled 30 million units for the quarter. This include our computer vision AI audio sensor fusion <unk> and DSP for non cellular communications.
If I misstated.
Both Wi Fi and cellular Iot contributed all time record high in this category for royalty revenues in the quarter.
Wi Fi royalties more than doubled from the last quarter. Thanks in part to three new royalty payer is paying customers that reported Wi Fi six shipments, but the very first time, and then started the Wi Fi six royalty cycle for us.
And so the balance sheet items.
At the end of the quarter, our cash cash equivalent balances marketable securities and bank deposits were a proximity $145 million.
Our dsos for the first quarter increased to 69 days from 34 days in the prior quarter.
During the quarter, we used $5 1 million daus cash from operation activities ongoing depreciation and amortization were $1 4 million and the purchase of fixed asset was zero point $1 million.
At the end of the first quarter, our head count was 497 people with whom 413, where engineers. This is up from a total of 487 people at the end of 2022.
Now turning to our outlook.
As I discussed.
The smartphone and PC markets continue to experience soft demand.
However, within the handset and base station customer mix, we expect strong chip chip shipments recovery in the second quarter.
And royalties with several new customers that recently started production and with the expectation for a meaningful higher shipment volumes of our handset and base station customers in the second quarter, we forecast.
The sequentially higher royalties after that.
From a wireless connectivity markets and customers will continue throughout the year.
In light of the macro economic environment, we continue to monitor our expenses closely.
And we will take all appropriate steps as we see fit.
In this regard we're currently planning our non-GAAP opex to be slightly lower.
And then the first quarter level in each of the following quarters of the rest of the year.
Specifically for the second quarter gross margin is expected to be similar to the first quarter level of approximately 82% on GAAP basis.
Slightly higher sequentially on non-GAAP basis to 85%, excluding an aggregated base compensation expense of zero point $4 million and zero point $3 million for amortization.
Of intangibles.
Opex for the second quarter is expected to be flattish with the first quarter and in the range of 27, seven to $28 $7 million excluding.
The $4 $1 million of equity based compensation zero point $2 million for intrinsic holdback related expenses and zero point $3 million for amortization of acquired intangibles.
Our non-GAAP Opex is expected to be slightly lower than the first quarter in the range of 23.1.
Net interest income is expected to be approximately zero point $7 million taxes for the second quarter is expected to be flattish at $1.4 million again derived mainly from withholding taxes.
And the share count for the second quarter.
<unk> to be approximately $24 4 million.
Million shares.
Rocco we could now open the Q&A session. Please.
If you'd like to ask a question. Please press Star then one.
My question has already been addressed and they'd like to remove yourself from queue. Please press Star then two.
Today's first question comes from Matt Ramsey with Cowen. Please go ahead.
Good afternoon, and good morning, everybody. Thanks, guys for taking my question.
I guess in the short term Amir I just wanted to see if I can characterize this correctly it seems to me that.
All the long term business trends are are the way that you guys are.
I hope they would be in the licensing momentum diversifying and very strong but.
A couple of inventory corrections one in.
China handset modems with.
Weakness there with your sort of large customer in China, and any other one and Bluetooth.
In Scandinavia.
Is that really all that's gone on here in the short term that affected royalties and everything else is kind of.
I dunno running as expected all around the broader business.
Yeah. Thanks for the question and I will say in high levels and this is very correct, but I will add a little bit more color on a few things just to make sure. This is clear. So first in terms of the overall trends as you pointed out well very well.
Very encouraged by the type of deals that are in licenses that we got there this quarter.
Dan will drive a very strong long term royalty potential slot and continued great momentum follow Wi Fi five G opportunities at all.
In terms of the royalties this quarter definitely as you pointed out that there are ways that one key customer of ours and in China. The corrections in the smartphone and specific in Q1, and we expect a meaningful and a strong recovery.
A question from Q1 to Q2 of them in regards to the to that one specifically.
And then I would say about Bluetooth, it's really to the most part the impacts from the sand smartphone impacts of the Bluetooth if we look at our Bluetooth I would say that it's actually hasn't been they're very solid and continue with the trend.
And on top of that of course, what we mentioned about Wifi and narrow band Iot and all time high in and we see basically the continued growth of these technologies with more companies are basically shipping all products.
Got it now.
That's really helpful.
And I'm sure. That's helpful. Just work its way through the system.
Noticing that with with many of your peer companies in the ecosystem as well.
For my follow up question I wanted to change gears, a little bit and talk about some M&A that's happened.
Around your company and by your company I think the first one is you guys announced the Onyx deal today.
Today alongside of the earnings in <unk>.
I Wonder if you might expand on on the technologies that people are little bit more and what your plans are for that business on the flip side.
I did notice that.
One of your customers in a particularly interesting area around automotive called auto talks with was.
Acquired by Qualcomm and I believe that.
[noise] licensee for CEVA, and a Qualcomm Guy did a small deal or a tuck in for them and they've not said too much about what they plan to do with it but if you could talk a little bit about what the technology stacks, there are and potentially for that being an entry into a new market for royalties.
Thanks, guys.
Yeah. So first on the visa Sonics deal and as I mentioned and they pay in March.
Purging remarks, we basically three pillars of growth that I highlight that the Wifi device and software embedded application and wed already license to some of those customers are and some Oems our sensor fusion and with partnership with Lasersonic basically combined does it.
Into a complete <unk> special audio solution.
And in the market for TWD, there's ear buds and men and and so on really very strong demand.
These special idea, we see it as one of the key emerging technology for this space.
And with this technology, which is really state of the hour for those type of capabilities.
And we are looking to expand that significantly into additional customer base, we recently announced that basically that the cut.
We're as bullish as licensing this technology and now we can offer that as a complete solution.
Also from integration point of view. This is a so called seamless integration as both the location and the technology out there and the roadmap that we had walks together is already in place.
And that is the one team.
And then the last based on that I would say, it's also going to be accretive as a non-GAAP , leaving 2023. So all along we see it as a great deal to keep expanding our software embedded application technologies and be able to provide more innovation.
And differentiation to our OEM customers in the ecosystem.
In terms of the the other deal.
Yeah.
Sure. So we have a long relationship and history with the Orca dogs. This is there is the benefit of being an IP company you could have held the small ones and don't have the capabilities, especially around cellular and communication was quite complex.
And to come up with an interesting product and wants to be acquired.
<unk>.
The leaders in the space. So obviously, we know them and help them out.
This is the start of a young startup with the communication skills and technology.
We brought they're already starting to ship products last year and we got the initial royalty reports from them. So in this market when they're a bigger company requires the use of customer first you start a relationship and it needs to bypass or work with you along the way.
Two to integrating the product and getting the rights. So that's an interesting opportunity for us and we'll see where it takes us to the next step it would be nice to be in their product line in the future.
This was part of the startup world and start part of our.
Hey, Andy.
Yes.
Add ons of the IP company to help the smaller companies and sometimes we make and build the relationship with the bigger companies that continue with them and show them and give them other products that we can in the future and sometimes it.
It ends with at least in the near term there is some nicer royalty opportunity for us coming from a bigger company.
And I would add on that is that.
And in the past again when people thought about <unk> 40, and 52 days technology to enable a so called smart phone communications.
We have for a while talked a bunch of it how are we going to have ecosystem at all.
Go ahead of the new use cases.
We really like.
The innovators in the mountains to come with the new use cases and technology that fast G&A.
And then from there.
As far as the royalty based technology.
And the innovation to the marketplace.
Vehicle to infrastructure vehicle to vehicle. So can be two X is a great technology, which we believe will expand nicely in the market.
And in the future years.
There are also many other types of use cases and opportunities for us to enable them to market and expand the technology in the business.
Thank you very much guys.
Got it.
Thank you.
And our next question today comes from Kevin Cassidy of Rosenblatt Securities. Please go ahead.
Yes. Thanks for taking my question I mean, just to follow up on the five G. A modem application will will that include a millimeter wave.
Which then it's like do you mean.
Generally the offering or the this specific customer.
Yeah.
Specific customer.
I guess the.
At other docs, we yes.
But the other docs you're asking.
Yes, I think so.
Yeah, what whether it's going to be you know just just the sub.
I would say we provide DSP ASIC.
Okay.
Yeah, I would say you know in general the way provided DSP is quite agnostic, so called to the radio technology and our customers basically journey to their needs.
Specifically about therefore that releases and plans and I will defer that day as they announce more about their product releases.
Okay, I understand it it's up to the customer and.
Why.
The the ASP increase with Oh, Wi Fi six I guess I'm, just trying to gauge how large that market can be for you.
And you know it does it does a double your Tam or.
And if the unit stayed the same or do you see Wi Fi six units are far exceeding our previous generations.
That's a great question, Kevin So the two there are two aspects here, maybe even three one is the volume of last year we.
We manage the power of 1 billion.
Bluetooth devices, and we only started to ramp up our Wi Fi. It was just shy of the 200 million I believe there's no reason that the volumes of Wi Fi should reach.
Over a short period of time, the Bluetooth type of volumes or even.
Surpass that as they go along because of the use cases, the much wider use cases, the Wi Fi.
That's why the volume is a big.
Push for us and we saw the new customers three out of 35 customers that are licensed Wi Fi six of the potential with volumes from existing and new customer.
The answer of why those volumes should increase second day of speed because of the use cases that the Wi Fi systems then.
Our how you ran or industrial or medical or a lots of other.
In devices.
Fields overall of the chips and the solution is higher then we get a larger portion it could be two <unk> of what you are getting from our Bluetooth device and those are the ratios of the chip price says and number three a lot of our customers a combo customers that want both Wi Fi and Bluetooth.
Oh in the future.
Therefore, the overall value for us and ASB is higher if you could provide to technologies and charge for tool instead of once we have a lot of very good.
<unk> working in our favor and its a significant very short term opportunity look at the numbers from Q4 to Q1 with all the inventory issues and all of a slowdown, but we are reading and seeing we have doubled our Wi Fi revenue from Q4 to Q1 this year.
I would add to that there is basically as you look at the so called there is they're there they're still quite with call. It the simple clients Wi Fi and there was no. We are going for the upgrades from Wifi for Wi Fi six that I'll touch on of course in generally speaking the same as in the markets there the variety of Wi Fi.
Sure, it's higher than Bluetooth and then on top of that what you have is the more complex sophisticated enhanced throughput Wi Fi six client and then on top of that you have Wi Fi six access point that we are just now basically are going to start ramping more and more and I would say is as the market typically.
Different pricing in the market for those solution as a silicon solution out there.
You can draw basically analysis of our potential from an ASP point of view, but it's meaningfully and very significantly above what you would expect our leverage level as a solution.
On a mix basis.
Okay, great. Thank you for those answers.
And just a quick question on the acquisition.
This will include our engineers.
Yes, it's a small number of engineers and that basically located in the same place and they wouldn't join US immediately after the close.
Okay, great. Thank you.
Thank you.
Thank you and our next question today comes from Martin Young of Oppenheimer. Please go ahead.
Hi, Good morning, and good afternoon. Thank you for taking my question. My first question on spatial audio or it is.
Give us more details to help us understand the competitive dynamics in that market, who are we competing with and where are the competitors positions in terms of a mark of market verticals.
Any competitive dynamics.
Okay.
I can take that sure.
Thanks, Richard here.
So you know when you look at this space with audio market, we're still it's pretty nascent and we sit in the beginnings of it.
In the smartphone space. It is really apple exceeded the market and they have their own internal solution, obviously dalby use playing there as well with some other some other players, but really the difference between what we're bringing to market here versus what these other guys are.
Is normally you have to have a link between the handset and the earphone devote hub to hub technology on them in order to make this work with the solution that we're bringing to market for spatial audio with busy Sonics. This is.
Only on one side. So it's only in the headset you don't mean, any particular codecs or any particular software on the handset producers work and this is a game changer for the.
When we say the low to mid end of the ear Bud and headset market, where today's special audio is not really playing so when we think about the opportunity. There is probably 400 million midrange gws headsets year, you've got the gaming headsets and all these other opportunities there where we feel there's a very good opportunity for us too.
Double down on our strong presence in in the handset sorry in the headset market that we already have today and.
We know the customers we know the industry there and we can take the spatial audio solutions into these markets the much broader mid range or lower range of the market and address it with the special audio solution that we have something that today is not really available are there. So that's our that's our focal point and target is not so much competing with Dolby and Apple at the higher end of things.
It's going to the mass market option here.
The other thing to enhance on what we just said is that what's unique about our technology is really too.
And develop that such that it can get into a very small form factor very optimized in terms of size and power, which really can enable these use cases to penetrate more and more damage than the low end markets of the dws also where the volume is very very high.
Thank you and ladies and gentlemen, our next question today comes from Sushi the silver at Ross.
Please go ahead hi.
Maryann you gave them so on Wi Fi six it's good to see that coming out of the gate, what what what do you expect to be the pace of unit adoption here relative to other Wi Fi standards in the past and what end markets are initially driving the Wifi six units.
I would say Wifi six the replacement from Wifi four to Wifi six is very very strong. So we definitely see it first on the client side.
And I would say in the consumer afraid started first in smartphone and Pcs and now it's propagating soccer to the all Iot consumer clients devices Amanda.
Then from there of course are more and more penetrating DOCSIS upon sale as well.
And the pace.
Again, I am not sure if we could go continue with doubling like we did from Q4 to Q1, but the base no doubt should be now with more players starting to really.
<unk> shipped Wi Fi six we ended the first ones in.
Hey, Ben joined the team and the potential as I said earlier from 35 customers is quite big we think it's going to be one of the faster growth driver for us this year.
When looking at all the different segments.
Yeah, and overall I would say the expectation in terms of that transition. If we look at the history of fly Fi right. The fastest and the strongest transition was from 11 <unk> to 11 and back then in terms of performance and capabilities and now it's basically aim to eliminate axe in Wifi six right. So this is really that the biggest one in the last few years.
In terms of transition of wireless technology, and we are well established right now at cost in the ecosystem.
Our IP embedded.
And to our into our customer product line. So I would expect it to really grow very very nicely 20 years and continuing through 2020 for 2025.
Good it sounds like you're well positioned there and my second question is on the acquisition.
It seems to be a software licensing model can you just remind us how many products you guys have now that our software licensing versus.
Typical license royalty and what percent of revenue could that be as a mix part of the mix in one to two years as part of your strategic plan.
Yeah, Great question. Thank you Susie and this brings us back to what we talked about even last last earnings call of the three pillars of growth for us.
One of them was.
Embedded software, we start up three years ago to remind you of the Hillcrest acquisition sensor fusion and we got into the Tvs.
T V laptops vacuum cleaners.
Yeah.
Sure.
But then its funding electronic hands, yes, correct. So this is how it started we added in the last two or three years is different audio two different audio solution and now this is probably the fourth if I'm counting just the standalone pieces of software embedded software that we're licensing trying to target some volumes.
The Oems.
The value there and the proposition is much higher and it both for US and is a differentiator for the Oems.
And it's worked extremely well very high margin about the weather.
More than doubled.
Our revenues.
Those aspects when we.
Three years ago required and got into the business and on top of that we're also starting to add AI.
Software packages on top of the of the processor and the solution itself. So.
I'm not sure if I have that number as a percentage of revenue but for sure. This is one of the strategic avenues for us to go after I think we know how to run these types of businesses and the recent acquisition from today enforces that.
Okay, Alright, thanks, guys.
Thank you.
Ladies and gentlemen, I was in my mind or if you'd like to ask a question. Please press Star then the one today.
Today's next question comes from Chris Reimer of Barclays. Please go ahead.
Hi, Thanks for taking my question.
Actually no.
Ah you're capping have already been addressed one touching on China.
Have you seen any changes in the dynamics there may be impacting your reopening and when you mentioned that.
Demand has.
You're talking about that area or are you talking about in general.
Yes.
It's a good to emphasize that a lot of our business and customers in China.
Well known the chip vendors too.
Top guys or Oems around the world all over the world and they in most cases ship mainly outside of mainland China. So the.
<unk> manufacturer in the design is there, but the products in the end markets are all around the world that's true for the Bluetooth and Wi Fi and the sound and EBIT modem, even the handset modem most of it goes out to the emerging economies in India and other large.
In countries.
China, but.
Throughout the world and all the different segments I think we have mentioned.
We talked about earlier with.
I would add also that.
The reduction that we've seen this quarter is from the handset market and lucky customized here I would say in terms of we already see an indication of restocking that started in March and then continue to fill in and now beyond that so overall.
We are quite confident I'm very confident that Mexico will see a sequential recovery quarter over quarter and again the demand is as global demand and specifically also in the different emerging markets well.
Some of our survey quite strongly and we start seeing a stronger recovery of any restocking of inventory.
The way I may add one thing that we didn't talk about if you ask about the licensing another role deal removed to the licensing we see no slowdown whatsoever in China, there's still good demand for technology development and.
Didn't see any really change in the last two quarters coming from China. One of the interesting changes that we have seen globally is coming from Europe and this is a lot of new money coming from governments. The U two develop their semiconductor company in the markets and this is a brand new opportunity for <unk>.
As being in the company and we talked about at the Fox is one of the.
A nice example, but there are many many others soon as money flows in we've seen the trend in China for the last decade.
So started with their chip bags, and we see a lot of potential there for us and less about lease maybe two or three weeks ago was this new.
Stronger trend of their investments in Europe , and we are there to try to make the best of it so from a licensing perspective.
The contract there's a lot of money, that's being put in and around the world.
To do the Orange chip designs.
And by the model fits exactly that the.
That Avenue.
Great. Thanks, Thanks for the color that's it for me.
Thank you. Thank you and our next question comes from David O'connor of Exane BNP Paribas. Please go ahead.
Great. Thanks for taking my question, maybe on the topic of licensing calling on some of the commentary there <unk> any reason that she can't get back to your growth. This year on licensing them and then on royalties. Maybe also for you you need any additional.
Any color on the kind of how we should think about the year over year growth on royalties and.
Q O Q recovery, you talked to boats.
How strong is that going to be sustainable through the rest of the year.
Yes sure.
Don't be Mad at me, if I really restate. The first question I don't see a drop in the licensing we do see a drop in and the royalties and we explained why in licensing because we know this business and haven't been in this business for a long time $1 million up or down doesn't change the trends it doesn't change the outlook.
Look or anything around that so yeah, maybe we were a little bit short of the difficult 'twenty one to 'twenty two ish, but it's not not nothing.
But we are concerned about and nothing that has changed and we mentioned specifically the quality of the deals in Q1 and this is Doug I think.
We can say that the Andy every quarter, because sometimes we license to startups and we have no idea how successful and when they'll come up with a product and if the project will go into mass market. The design wins that we have licensed to them you talked about this earlier in Q1 could get us to.
Single double digit royalty contribution annually from from those deals so from a licensing I don't see a problem.
On the royalty front.
Q1 was an anomaly we understand on the high side why is the handset market.
It did take a beating as you said I missed the numbers did drop there we think it's a short term.
And we talked about the correction into the second quarter. When you look at the rest of the business and what has been growing its evolved for the last couple of years dramatically and this is the base station and Iot royalties. There was only a 4% sequential decrease from Q4 to Q1 and even.
If I compare to last year's first quarter, and obviously, it's a different environment to many companies in the demand inventory levels are different we were only down 7% and some of the internal.
Markets, there like Wi finding solar Iot did extremely well so.
We think those trends will continue throughout the year.
We believe that the second quarters to be sequentially higher.
With high magnitude, maybe not to the same norm that we were used to a year ago and handset, but they should start correcting themselves.
Nicely in the second quarter.
Could we make up the loss of the handset royalties in the first quarter throughout the year. That's the question that we.
It's harder for us to answer that we don't usually give guidance of royalties because we don't have the insight of exactly how much each customer good ship and win and we have never done that and I don't think we are changing our methodology because nothing has happened or we don't get the royalty reports ahead of time from the Oems.
But the trends of Wi Fi six higher asp's multiple products more.
Embedded software.
It also possesses higher asp's and the ramp up on some of these end markets.
But we talked about.
That's something that we are very positive.
Believe that they will continue to have we seen that group also happening in Q1 so.
Try to answer the different sides of your question hopefully I didn't miss anything.
No. That's super helpful. Thank you and maybe just one follow on from a familiar on the strategic agreement with the Chinese OEM and flight G smartphone.
So they're coming to market now with the Bluetooth and Wifi chips that they license from you guys at three years ago.
How meaningful is is that going to be this year and is that kind of three year timeframe of boat right. How we should think about them to come to market with a <unk> modem. Thank you.
Sure sure.
In regards to the Wifi Bluetooth again, we expect production to start this year the exact magnitude it's hard to know because it depends really on the level of penetration. They will use this technology across their product line and how they will propagate it there. So I would say that the significant portion of that upside will come towards the second half of the year and then next.
Each year in terms of the deployment of the so called the <unk> solution.
I would say, it's I wouldn't say three years, but probably in the range of 2025 ramp as we see it today.
Very helpful. Thanks, guys.
Okay. Thank you thank.
Thank you and our final question today comes from Martin Young at Oppenheimer. Please go ahead.
Oh, Thanks, I have just one follow up regarding special audio.
Is it right to assume that real space technology always integrates with Hillcrest sensor fusion or does always have some elements of it.
A motion tracking either from you or from someone else.
Yeah Richard.
Sure. So yeah. It you can do spatial audio with or without head tracking, but it's much more effective with head tracking so the solution that we offer into the market is.
Hillcrest sensor fusion integrated with the real space into a single product, which we call real space going forward.
So that's the technology, it's much more attractive to Oems that way it gives them much better space in all your experience on the that's the Avenue, we're going down.
With that said.
Martin, but that said part of the acquisition was also to bring on THX, a well known audio solution provided this is.
And this is sonic customer and now with CEVA customer and their views there that leads to some extend alone solution in their use cases, so as Richard said it could go both ways, but we also we already have customers in production both in India and.
In the U S.
This technology and these two avenues, one on Standalone basis, and the second with the CEVA Hillcrest technology.
Maybe I will add on top of that.
With those comments generally speaking again, if the Oems that they would like to see some portion of our technology and it would make sense, where we can definitely supported but that the real value of the technology and that's why strategically also from a technology point of view, we decided to go ahead is that we have best in class sensor fusion technology that is really.
I wouldn't say massive but very very important components to make sure the special deal.
Good solution. This is sonic banks really great oligos and capabilities on the idea of domain related to that and as you combine these two together, it's a debt that brings to bear basically.
Topnotch, they D, especially larger solution and as I mentioned in previous day. It's also the way that we combine it into embedded card. It is small in size and very low power. It's a great great fits to the tw there's market.
And to help penetrate these features from the top tier all the way to the mid and low tier of the market.
Thank you Amy.
Yes sure.
Yeah, well listen gentlemen, this concludes our question and answer session I would like to turn the conference back over to Richard Kingston for closing remarks.
Thanks, Rocco. 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.
The TD count Israel Investor trip on May 16 in Israel.
Oppenheimer's, 24th annual Israeli conference May 21st in Israel.
<unk> 51st annual TMT Conference May 30, <unk> and June 1st in New York.
Further information on these events in all events, we will be participating in can be found on the investors section of our website. Thank you and goodbye.