Good morning, and welcome to the CEVA, Inc. Second Quarter 2019 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Richard Kingston, Vice President of Market Intelligence and Investor Relations. Please go ahead, sir.

Thank you. Good morning, everyone, and welcome to CEVA's Second Quarter 2019 Earnings Conference Call. I'm joined today by Gideon Wertheizer, Chief Executive Officer of CEVA; and Yaniv Arieli, Chief Financial Officer of CEVA. Gideon will cover the business aspects and the highlights from the second quarter and provide general qualitative data. Yaniv will then cover the financial results for the second quarter and also provide qualitative data for the third quarter and the rest of 2019. I will start with the forward-looking statements. Please note that today's discussions contain forward-looking statements that involve risks and uncertainties as well as assumptions that if they materialize or prove incorrect, could cause the results of CEVA to differ materially from those expressed or implied by such forward-looking statements and assumptions. Forward-looking statements include our financial qualitative data for the third quarter and remainder of 2019, including royalty revenues and the mobile market stabilization; optimism about CEVA doubling its 2018 royalty revenue by 2022; ability to capitalize on a healthy design environment to sign licensing agreements and maintain a robust licensing pipeline; optimism about synergies associated with the acquisition of the Hillcrest Labs business and the license arrangement with Immervision, including leveraging Hillcrest Lab's customer base and revenue contribution relating to the Hillcrest Labs business in the second half of the year; and full year expense levels. 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 the ability of CEVA's IP for smarter, connected devices to continue to be strong growth drivers for us; our ability to realize the benefits from the acquisition of certain assets of Hillcrest Labs and license arrangement with Immervision; our success in penetrating new markets and maintaining our market position in…

Thank you, Richard. Welcome, everyone, and thank you for joining us today. We delivered a robust financial performance in the second quarter driven by excellent execution in licensing and noticeable uptrend in royalties. We also expanded our market reach and product portfolio by acquiring U.S.-based Hillcrest Labs, specializing in sensor fusion software technologies and formed a strategic partnership with Immervision, a Canadian-based company with advanced digital imaging software technologies. Total revenue for the second quarter was $18.4 million, up 5% on a year-over-year basis. License revenue was $10.8 million, up 8% year-over-year. Royalty revenue was $7.6 million, up 2% on a year-over-year. Royalty revenue grew 27% sequentially as handset inventory level normalized, which benefit one of our customers supplying cellular baseband to U.S.-based premium smartphone OEM and one of our large China-baseband customer. On the licensing front, we continued the fast pace of customer design wins with 9 new agreements, of which 6 are for our connectivity product and 3 for our smart sensing product. Four of the agreements are with first-time customers. Our second quarter licenses are targeting a diverse range of end markets and applications among which are cellular IoT, wireless earbud, AI and computer vision for consumer and surveillance product and WiFi access points. The wireless earbud or True Wireless Stereo design win is particularly notable as we provide both the sound and the Bluetooth technologies for this target market. With the acquired Hillcrest Labs technology base, we can further extend our offering for this market with sensor fusion software. In the first six months of 2019, we signed a total of 17 deals. That accomplishments bring the total number of deals to more than 160 licensing agreements since the beginning of 2016. These accumulated licenses and ongoing chip and software design are the foundation for royalty…

Thank you, Gideon. I'll start by reviewing the results of our operations for the second quarter of 2019. Revenue for the second quarter was $18.4 million, up 5% as compared to $17.5 million for the same quarter last year. The revenue breakdown is as follows: licensing and related revenue was approximately $10.8 million, reflecting 59% of our total revenue, 8% higher as compared to the second quarter of '18; royalty revenue was $7.6 million, reflecting 41% of our total revenues, up 2% from $7.5 million for the same quarter last year; quarterly gross margins was 86% on GAAP basis and 88% on non-GAAP basis as projected. Non-GAAP quarterly gross margin excluded approximately $0.1 million of equity-based compensation expenses and $0.1 million of the impact of the amortization of the acquired intangibles for our investment in the Narrowband IoT technologies. Our total operating expenses for the second quarter came in at the mid-range of our guidance at $18.1 million. OpEx also included aggregate-based compensation expenses of approximately $2.5 million and $0.2 million for the amortization of acquired intangibles of RivieraWaves. Total operating expenses for the second quarter, excluding these items, were $15.4 million, also at the midpoint of our guidance. U.S. GAAP net loss for the second quarter decreased by 28% to $1.5 million and diluted net income per share decreased 22% to $0.07 compared to a net loss of $2.1 million and $0.09 for the second quarter of 2018. Non-GAAP net income and diluted EPS for the second quarter of 2019 were up 42% and 25% to $1.2 million and $0.05, respectively, from net income and diluted EPS for the second quarter of 2018 was $2.9 million and $0.04. Other related data. Shipped units by CEVA's licensees during the second quarter of 2019 were 217 million units, up 24% sequentially…

[Operator Instructions] And our first question today comes from Peter Zdebski with Barclays.

This is Peter on for Tavy Rosner from Barclays. So you mentioned the inventory normalization in smartphone, was that specific to the U.S. customers? Or is that broad-based geographically? And then I have a follow-up.

This is Gideon. We don't sell to the overall industry, we just focus on what we know about our customers.

And then in terms of inventory levels going into the fall, we understand shipments for your units for your large U.S. premium smartphone customer have been a bit above seasonal in the second quarter. So going into the fall, do you see inventory levels just maybe back down to closer to historical? Or are they even maybe below historical? And maybe how does that factor into your royalty guidance for the third quarter?

Look here, so you need to remember that there is seasonality which is playing in our favor in all the markets, whether it's consumer or handset, and this is not only CEVA, usually, we're in the third and fourth quarter stronger than the first 2 quarters of the year. I think that's what the first we're referring to, on top of that, like we started very last year as well, in our business, it has changed from prior years. And on top of that, you need to fine-tune, as Gideon said, to our specific customers in different markets and different regions. And we have high-end devices as well as low-end devices and we have baked in, to the best of our knowledge, all of that data. First, when we get the Q3 royalty reports, and we'll report it, in early November then we'll have the real numbers, and we'll have a better picture to provide.

Got it. Yes. No, I was just trying to get a bigger picture of seasonality, it looks like it might be a bit stronger this year than last year based on your guide.

Well, it's very similar. It's very similar. We have seen improvement with the Chinese, our Chinese customer. We have talked about that in the prepared remarks, we've seen more design wins, you could look on the web and find them and much more announcements of new chips rolling out the new phones. So that's encouraging. And with that said, we are on top of that of last year, we also have the initial contribution from Hillcrest. So together, given maybe higher sequential increases than last year, the concept is quite similar.

And our next question comes from Suji Desilva with Roth Capital.

Congratulations on the improving results here. So the third quarter '19, you guided very strong royalties. Can you give us some sense of what are the drivers beyond Hillcrest? Just to understand which segments of the business are improving the most here?

Even for the second half of this year?

Yes, sure, for third quarter, second half, yes.

So what we came out after analyzing the second quarter royalty reports is that the inventory was -- it was a stumbling issue in the first quarter and as a concern to us, this kind of normalized. And we are going to regular in -- on the handset side regular -- typical up season, where we have new models and new design comings to the market. So overall, if you look on the -- on our guidance, it's composed of the seasonal uptrend, both in the mobile, in the non-handset. Keep in mind that the non-handset, in general, we have new models coming. So there is a contribution from that -- for that with the strength. Then Hillcrest and of course, the base stations, as we mentioned, ZTE, they are doing well. So all in all, these are the cylinders that are firing in the second half. With that said, there is this -- the global macro that is around us which we keep close eye, and that's the reason that we are also careful with expenses. So overall, we did whatever we can do, you can think in this -- in term of this event, we are generally optimistic.

Okay. And then specifically on wireless infrastructure, can you talk about the shape of the ramp here? Is it steady? Or will there be an inflection quarter ahead? Is -- what's the run rate you'll expect in the next 6 to 12 months from the current levels?

So that's a difficult answer -- question and answer to date. Clearly, you got -- in this space, you see all the global dispute there, whether VP -- how far VP can go to outside of China? What about the other customers that we have? These are kind of thing that we don't know where we are today. Our guidance is -- assume kind of a growth until we see really the 5G coming out and people already start building the base station or upgrading the base station. So it looks positive in terms of this one, it's not a healthy stick, though, for now.

Okay. That's helpful. And then last question, one of your customers, Intel, their assets were acquired, most recently, any insight into the 5G planner opportunity, how to model that for us? Any color you have would be helpful.

You see, we heard about this acquisition of the Intel in -- like anybody else. It's -- they have to conclude on the implication of these deals, I don't know when they -- I think generally, it's good for the industry that OEMs are taking the lead in doing the launches. We -- I believe there will be other. We said it in the past, we believe that people -- OEM people wants to have a control on 5G model, and they will do step in. You can see that CEVA has sold so much substance in this space that any newcomer or incumbent that wants to go to, to step into the modem business, will find the technology CEVA into them in different flavors. So that's what we know now, but we know that we have got to, we can also lot of things to the newcomers.

[Operator Instructions] And this will conclude our question-and-answer session. I'd like to turn the conference back over to Richard Kingston, for any closing remarks.

Thank you. Thank you, everybody, for joining us today, and for your continued interest in and support of 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 at investors.ceva-dsp.com. With regards to upcoming events we will be attending, these include: The Jefferies 2019 Semiconductor, Hardware and Communications Infrastructure Summit, August 27 and 28 in Chicago; the Citi 2019 Global Technology Conference, September 4 to 6 in New York; and the Deutsche Bank Technology Conference, September 10 and 11 in Las Vegas. Please visit the investors section of our website for further information on these events and other events that will, we will be attending. Thank you, and goodbye.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time, and have a wonderful day.