Good day, and welcome to the CEVA Inc. Third Quarter 2021 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation there will be an opportunity to ask questions. [Operator Instructions] I'd now like to turn the conference over to Richard Kingston, Vice President, Market Intelligence, Investor and Public Relations. Please go ahead, sir.

Thank you, Rocco. Good morning, everyone, and welcome to CEVA's Third Quarter 2021 Earnings Conference Call. I'm joined today by Gideon Wertheizer, Chief Executive Officer; and Yaniv Arieli, Chief Financial Officer of CEVA. Gideon will cover the business aspects and the highlights for third quarter and provide general qualitative data. Yaniv will then cover the financial results for the third quarter and also provide qualitative data for the fourth quarter and full year 2021. I'll start with the forward looking statements. Please note 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 and assumptions. Forward-looking statements include statements regarding demand for and benefits of our technologies, expectations regarding market dynamics including anticipated growth in the cellular IoT markets, beliefs regarding benefits and impacts of the Intrinsix acquisition including expansion into the aerospace and defense market, and ability to offer integrated IP solutions and enrich security and assurance products, and guidance and qualitative data for the fourth quarter and full-year 2021. For information on the factors that could cause a difference in our results, please refer to our filings with the Securities and Exchange Commission. These include the scope and duration of the pandemic, the extent and length of the restrictions associated with the pandemic and the impact on customers; consumer demand and the global economy generally; the ability of CEVA's IPs for smarter connected devices to continue to be strong growth drivers for us; our success in penetrating new markets and maintaining our position in existing markets; the ability of new products incorporating our technologies to achieve market acceptance; the speed and extent of the expansion of the 5G and IoT markets; our ability to execute more base station and IoT license agreements; the effect of intense industry competition and consolidation, global chip market trends including supply chain issues as a result of COVID-19 and other factors; and our ability to successfully integrate Intrinsix into our business. CEVA assumes no obligation to update any forward-looking statements or information which speak as of their respective date. With that said, I would now like to hand the call over to Gideon.

Thank you, Richard. It is an exciting time for CEVA. The need for and the deployment of our technologies for the digital transformation era never been more evident. Wireless solutions that we muster are the catalyst for the emergence of new smart devices, among which are teaser videos [ph], earbuds and hearing aids, AR glasses, smart watches, smart home product, industry 4.0 factory automation [ph], telemedicine and more. Our innovation, innovative solutions market range and strong execution of the drivers for another outstanding quarter of new licensing agreement and royalty progress. On the revenue for the third quarter of 2021 was record-high of $32.8 million, up 31% year-over-year. The licensing and environment continues to be robust and came in at $21.6 million, up 74% year-over-year. Our global products targeted for TWS earbud, AR glasses and smart watch markets and our Wi-Fi solutions, which are ubiquitous across many IoT devices and access point product were key contributors. Also in the quarter, our Intrinsix team executed very well, signing important design agreements with Lockheed Martin with a major industrial company in the defense space and with an innovative wearable device company in the medical space. In total, we signed 25 IP licensing and NRA agreement of which Philippines [ph] were first-time customers. Royalty revenue came at $11.2 million in the quarter, down 11% year-over-year. The warranty contribution from our base station and IoT product category was all-time high driven by secular growth in bluetooth, computer vision, sensor fusion and cellular IoT markets. 5G base station visibility was lower than normal as the space experiences longer lead time view supply chain constraint. In total, royalty unit achievement of CEVA-based station in IoT-enabled products were 405 million units in the quarter, up from 200 million units in the third quarter last year. Handset baseline…

Thank you, Gideon. I'll start reviewing our operation into the third quarter of 2021. Revenue for the third quarter was up 31% of $32.8 million, our second sequential all-time high as compared to $25 million for the same quarter last year. Revenue breakdown is as follows. Licensing NRE and related revenue is approximately $21.6 million, an all-new time high, reflecting 66% of our total revenue, 74% growth from $12.4 million for the third quarter of 2020 and 39% sequential growth. It is the full first quarter that we recognized NRE revenues, which resulted from our acquisition of Intrinsix back in June, Royalty revenue was down 11% to $11.2 million, respecting 34% of our total revenue, compared to $12.5 million for the same quarter last year. Gideon noted our consistent growth in base station in IoT and the penetration to 5G smartphone is muted [ph] by larger than expected decline in 2G royalty revenue. Quarterly gross margin came in better than expected, due to lower allocation of Intrinsix NRE cost from the R&D expense line, to the cost of goods expense line. Gross margin was 85% on GAAP basis and 87% of non-GAAP basis as compared to our 81% to 82% basis [ph]. Non-GAAP quarterly gross margin excluded approximately $0.2 million of equity-based compensation expense and $0.2 million from the impact of amortization. Total GAAP operating expenses for the third quarter was over the high-end of our guidance at $26.3 million, due to lower allocation of Intrinsix's NRE cost from R&D to the cost of good and from our prior quarter's basis. Such shift between these two expenses line may happen from time to time and are tied with the actual design services performed in the quarter. OpEx also included an aggregate equity-based compensation expenses of $3.2 million and $1.2 million…

Thank you. [Operator Instructions] Today's first question comes from Matt Ramsay at Cowen. Please, go ahead.

Thank you very much. Good afternoon and good morning, everybody. I guess to start off with congratulations on all the progress in the business and the raising of the guidance and all. I just wanted to understand a bit about what happened in the mobile, I guess base band or handset units dropping off in such a big way and the results. Gideon, if you could just walk me through the market dynamics, or are there a particular licensee situation that went on? Or were there some reclassification of numbers as you guys refocus the company on new growth areas? I'm just trying to get my mind around that one a little bit. Thank you.

Hi, Matt. Good morning. Let me go first on the composition of the royalty. So, we discussed the base station in IoT category is flourishing. And we have almost all the products they are growing; when you look, here are the real significantly computer vision blog posts. Several IoT sensor fusion. That's what we plan and aims and now it's kicking. Base station in IoT, last year we had a very strong quarter and everybody went out of the lockdown so there were the first full quarter of coming out the lockdown, so it's a comparison. But overall, it's moving. We could see it also in the design wins, that they are getting China Mobile. For example, VP got the big China deal. Mobile, when you look is I would say generally is trending the way we expected with CLT growing, the 5G is wide [ph]. I mean, the 2G is something that we had in the past. There could be different reasons. I don't think it's a little thing. Or you don't have inventory in these days, it's more like prioritization. We see many chip companies giving priority from the allocation that they get the top tier to high-end phones and not to this one. From time to time we do two up because last quarter was very significant one, so we move things between quarter. So, I would and the 2G. I don't say it's a market item. I think next quarter is a comeback. That's the reason that we don't change our guidance in as a result. So, it's nothing to do with the general trend that that we see in the mobile which is as we expected. And the good thing is that now we are in the 5G. The way, Matt, when you look at it from nine months perspective, smartphones are up year-over-year for us in volume and the 2G looks better on a nine-month comparison. Still lower than last year, but this is due to the Q3 picked up and we think it could pick up next quarter.

Got it. Thank you for that, guys. Just one quick little follow up to that and then one more question. I guess the follow up is, should I take it from the fact that the mobile rate came down as much as it is? Is that sort of the headwind from the Intel modem transition in Cupertino is kind of fully behind you guys in the run right now? And then my other question is completely unrelated, but on gross margin, you guys came in, well above and OpEx was higher, too. I just wonder, you guys brought in Intrinsix and I think some of the folks there might have been categorized in cost of goods versus OpEx. That would have been in your old core business. Working with the auditors and whatever, is there any kind of change in the allocation there? And how should we think about gross margin going forward? Thanks.

Sure. Let's start with the first one. Apple is still selling iPhone 11 and that's the low-cost type of phone and it's still out there. We don't know until what and how long it stays. But our report for Q3 was stronger than Q2 for example. It's still, it's still contributing. And as long as both phones are shipped, we are getting paid and that's still a contribution. Much lower than in the past, but still a positive contribution for us. That's the comment and Apple has nothing to do with that design loss to Qualcomm. On the cost of goods, you are right, for the service business, when you have projects and recognize revenues, those expenses are written at the cost of good side. What happened in the last quarter that not all the people, the R&D guys were utilized for those yield. We're still doing R&D per se for Intrinsix and not services and therefore we had unlike what we forecasted originally in the beginning of the quarter of 81% to 82%. Just the biggest portion of them kept still in R&D for whether it's security or chiplets, or a bunch of other technologies that infringe success today and we're trying to we invest in IP or business out of that and to combine it with the ongoing services. So, it has nothing to do with arbitraries or whatsoever. This is definitely something that could move from quarter-to-quarter, less than our control and it more depends on the timing of closing the deal and actual stock of an employee or engineer starting to make those design services. And as soon as we're done, those costs are recorded. Now, as long as it's not there, it's in R&D and that could shift and we had about $1 million shift in our expectations in the third quarter. We think that in the fourth quarter, there will be more and higher revenues from NRE and therefore higher expenses in pubs and a little bit lower in R&D lines. So, that the shape that could happen from time to time,

Got it. Just to be clear there, Yaniv, so this is just to set the expectation for investors that this could bounce around a little bit on a quarter-by-quarter basis, but it's not really indicative that anything is changing in the business or the accounting? It's just kind of the way that this business to work as you fold in Intrinsix over time? Thank you for taking my questions, guys.

Yes, that's exactly the case, Matt. Nothing to do with accounting, just the ramp up of the progress and I'm sure that when we are fully ramped up and have many more customers and prospects, we may have less of that effect, because most people will be involved directly with customers.

Thank you. And our next question today comes from Tavy Rosner with Barclays. Please, go ahead.

Hi. Good afternoon. Thanks for taking my questions. Did you break out what the interesting revenue contribution was this quarter? Just like to get a sense of what organic growth was.

The interest income you said? Intrinsix? No?

Intrinsix.

Right now we're looking at it as a one business model. We started off last quarter for the first time with just one month where we stated that this is new, but we'll leave out Intrinsix that was around $21 million run rate that we said in the first earnings call with the combination. Plus- minus that, those are the annual run rate. The idea for us is not to -- as Gideon alluded earlier in the prepared remarks, is not just to talk about market within our reservice end, but also with the combination of IPs and integrate IP solution. Those are the things that we are working on and hopefully that run rate could increase when we offer more IPs to their existing and new customers in the future. I hope that answered your question.

Yes, no, definitely. And just following up on that. Were you able to quantify the opportunity within our workspace and defense?

This is roughly $6 billion market in yield in different chips shipment and tens of billions of dollars in R&D project. And the idea for us is to not just to get into -- continuing to get larger share in this project, but more to dropping into our IP. And in such a case you make a combination of IP and services into this one, and this becomes more typical to what we are doing today by licensing of the self-IP [ph]. The other approach is to go not outside of the difference to large OEMs and to offer them customization of the IP that we have with CEVA; we call it integrated IP solution, it's a more comprehensive solution to the customer, and which -- the benefit for this is higher overall deal size and wealth, and that's exactly what we are doing in this [ph].

I appreciate the color. Great. I'll go back to the queue. Thank you.

Thank you, Tavy.

Our next question today comes from Suji DeSilva at ROTH Capital. Please go ahead.

Hello, good evening. Congrats on the progress here and the diversification, certainly. A couple of questions about the Base Space Station IoT bucket. Now that Bluetooth is the strong; I was curious the non-Bluetooth part of Base Station IoT. Gideon, what do you think are the best growth opportunities over the next several quarters in that because I think it's going to be an increasingly important segment to talk about the non-Bluetooth Base Station IoT segment?

Okay. In terms of shipments, there's a shipment trends in the market that I can expand on this later. So in terms of shipments, we talked about Wi-Fi, Wi-Fi is going significantly in terms of units, we feel -- we dramatically cellular IoT, that's another angle. Now that Europe is bringing up this one, it's -- and we have three customers there, so that's another one. Computer vision, which comes together with AI; so these are active projects, then when you look here year-over-year, it's a substantial goals and that's a driver. Now, we have excellent product for the TWS market that -- where we see now in the licensing, this is what we call the Bluebud. We expanded on that on the prepared remark, and we have now, I think, three or four licenses just in a very short period, and that's should be wider in my opinion in the second half of next year.

Okay. Thanks, Gideon. And then on Bluetooth, it's just a large part of your unit at this point. Is the ASP there relatively static or is there an opportunity to uplift the ASP through products as you go forward?

Excellent question, Suji. So, the market itself is pretty stable there, it's really volume driven at this point because the price points are obviously -- it's the right place in order to tackle such a huge market and consumer and industrial and gaming and everything that's connected to Bluetooth. Wi-Fi is making it's first step because of the advantages of the bandwidth and the technology that has really evolved with all the others. Their ASPs are higher than obviously the Bluetooth but the combination of higher ASPs overall for CEVA is either combo chips, and we've seen those Bluetooth and Wi-Fi together these days. And on top of that, this is what Gideon talked about TWS, which is adding either audio or audio and sensor fusion, and then, the growth has really jumped off significantly. So we have really enjoyed all the different flavors, I would say, of standalone Bluetooth, Bluetooth and Wi-Fi, and these other new technologies. And I think that source with two new deals for TWS, the first and last quarter, and the market is looking very, very hard; it's a nice prospect and achievement for us over there. Let me give you just an indication on the size of the market. The Bluetooth of the world is about 12 billion units a year, and the out of each 1.4 billion units is audio Bluetooth; so TWS has -- and that's exactly where we want to go because we can we have a unique position, and we will combine these two or position; that's exactly what we -- the reason that we build this Bluebud, that we can go to the largest market in the Bluetooth and come out with higher value and as a such their USP will be higher.

If I can take just one last question. Is the licensing at this run rate, the new level ever or how should we think about that? Thanks.

No, licensing revenues have increased for this product line and it's a new sort of combination of product for us; it's not a DSP per se, it's not Bluetooth, so we are able to charge a premium for that. And I think it also saves money for the OEM or for the chip vendor because they don't need to deal with two different suppliers and vendors and chips into COVID; you integrate that into one IC. So it's a win-win for both sides, and the licensing activity has been very active. Along this, again, look at CEVA; overall, the first time north of $20 million, plus $21 million, these are numbers that we had never seen before the old CEVA, and part of it is intrinsics, part of it is the new CEVA of new markets and new opportunities.

And what we -- you know, the another benefit that we see with this licensing is that you get R&D leverage because we were talking about 69% for the nine months -- 69% in operating profit, you saw the world is down year-over-year but the -- but when you look on the operating, you get substantial benefit.

Okay. Thanks, everybody.

Thank you, Suji.

Our next question today comes from Martin Yang at Oppenheimer. Please go ahead.

Hi, good afternoon. Thanks for taking my question. First, I wanted to ask about your traction with customers on Wi-Fi 6? And how -- can you maybe give us more details on how the customers are using Wi-Fi 6? And what are the high growth end-market applications you're seeing for Wi-Fi 6?

Hi Martin, this is Gideon. The way we see today, Wi-Fi 6 is what is called SmartHome. Many products could be TV, could be smart speakers, could be security cameras; these are the main driver of Wi-Fi 6. We start seeing automotive, we start seeing the industrial used cases, but smartphone is a big driver.

Got it, thanks. My second question is your traction with smartphone OEMs that are developing their in-house chips. Is there any updates there? And how have they impacted; do you think they might be developing their own chips in the current environment?

Your line is not that clear. Did you talk about smartphone or smart OEMs?

Smartphone OEMs.

Smartphone OEM?

Yes, the base buyer and license agreement with you.

Yes. I mean this in terms of landscape in the smartphone it's pretty similar that used to be; so there are the few OEMs that internalize and do development. We are associated with some of them, some of them are big also, and there are not that many newcomer into the smartphone market. Now, we have several other angles into the smartphone and also to the 5G. In terms of smartphone, we are getting into the smartphone through our Wi-Fi and Bluetooth technology because all those smartphone needs connectivity, so we have several OEMs that are using our connectivity IP for smartphone and we'll ship and it's -- for us it's indifferent whether you do basement or you do connectivity, doesn't matter. To some extent we're getting higher over them; so that's one of those. The other approach which I touched in the prepared remarks is what is called cellular IoT. Cellular IoT is everything that relates to 5G, that is not handset; so it could be smoke meter, it could be a fixed wireless access which is a very big market, it could be a cellular V2X in automotive; these are very big markets. And here the opportunities are much more open, the market much more fragmented, and the need for a company like us that comes with holistic solution with platform solution, not just component there, and that can be associated with services that's highly valued in the space. And we do get customers; on that I just mentioned three, just in Europe that are actively working.

Thank you.

Thank you.

[Operator Instructions]. Our next question comes from Kevin Cassidy at Rosenblatt Securities. Please go ahead.

Thank you and congratulations on the strong results. I'm wondering if you have conversations with your customers about the supply tightness for next year. What kind of increase in unit shipments; have they given you anything like this?

Hi Kevin, good morning. This is Gideon. It's kind of $1 million question. People are completely split about the severity of this crisis. I mean, they just don't know. And just to give an example, it looks like in the third quarter, only chip for iPhone manufacturer in mobile [indiscernible] was put aside, and people that are -- and it's completely different between new to different between markets. I mean, we -- for sure, we don't know about -- I'm telling you that our customers don't know, different people have different opinions. So we need to take it step-by-step, quarter-by-quarter and looking forward/backward and see whether last year we were in a better position than worse position. But if the supply chain is rare, and it's unknown to almost everybody, unless you are a big name and you can change -- impact the big foundries.

Okay, thanks. And how about visibility into 5G base station deployments? I see many of that coming in 2022?

Let me say that wider [ph] in the market, the demand is there; I mean, no doubt that customers, which is the operator, are waiting for chips, waiting for systems to do it. And when you look on a base station, it's not just where we are -- the basement workload, it's a bunch of other chips, some of them are hardware, some of them are in the antenna side, our systems, there are materials getting there; it's become complicated. So some of our customer publicly said it's become challenging, we think we are on-track; that's what they are saying. But it goes back to your second -- previous question about how -- when the supply chain -- we can see that we know what's going on. Right now, no, but the good news is that demand is there, design wins are there, at least from our customers -- from our customer standpoint as we need to take it quarter-by-quarter, try to help them as much as we can and hope for the best.

So we're more or less reading the public data that you guys have access to. We don't have yet any specific or special information about the 2022 for many of our base station customers or handset customers, in that respect.

Okay. Thank you very much.

Thank you.

Ladies and gentlemen, that does concludes question and answer session. I'd like to turn the conference back over to the management team for any final remarks.

Thanks, Rocco, and thank you, everybody, 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 Investor Section of our website. With regard to upcoming events, we will be participating in the following investor events; The 10th Annual ROTH Technology Event, November 17 and 18; The Fifth Annual Wells Fargo TMT Summit, November 30 through December 2; and Barclays Global Technology Media & Telecommunications Conference, December 7 and 8. For further information on these events and on all events, we will be participating in, it can be found on the Investor Section of our website. Thank you, and goodbye.

Ladies and gentlemen, this concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.