Good day, and welcome to the Second Quarter 2022 Earnings Conference Call. [Operator Instructions]. Please note today's event is being recorded. I would now like to turn the conference over to Richard Kingston. Please go ahead.

Thank you, Ako. Good morning, everyone, and welcome to CEVA's Second quarter 2022 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 highlights on the second quarter and provide general qualitative data. Yaniv will then cover the financial results for the second quarter and also provide guidance for the third quarter and full year 2022. I'll 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 statements regarding market trends and dynamics, including anticipated growth in the wireless component of the global semiconductor market are and our customer's gain in market share and the future of 5G and Wi-Fi, our market position and strategy, including the strength of our technology offerings and efforts with respect to our co-creation business proposition, impacts of global economic uncertainty and COVID on our business, including royalties, demands for and benefits of our technologies, and expectations and financial guidance regarding future performance, including for the full year and third quarter of 2022. 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 the duration of the pandemic, including continued restrictions in China, the extent and the 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 entering new markets and maintaining our market 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 enhanced 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 dates. With that said, I'll now hand the call over to Gideon.

Thank you, Richard. Good morning, everyone, and thank you for joining us today. We will produce solid second quarter financial result despite the challenging macroeconomic backdrop and disruption in production schedule base of the lockdown in major cities in China. Our strength in the wireless space, that according to a recent study by McKinsey would be responsible for 25% of the growth in the global semiconductor market over the next 5 years. Continues to drive our business and enable us to expand our footprint in the growing market of 5G, wearable, automotive [indiscernible]. Revenue for the second quarter came at $33.2 million, up 9% on a year-over-year basis. The licensing environment continues to be strong, delivering $22.1 million in quarterly revenue at the back of '22 licensing agreement with customers targeting a multitude of wirelessly connected devices, AI-driven sensor, satellite communication and more. We also signed a strategic agreement for our Bluebud wireless audio technology in the wearable space, which I will touch on later. Asia continues to be a major driver of our business but our activities and scope of engagement with U.S.-based customers is picking up. Royalty revenue came in $11.1 million, down 26% on a year-over-year basis. Second quarter 2021 royalty revenue included revenue of approximately $3.3 million for following and resolution of disagreements on royalty rates with a customer. Carving out the $3.3 million amount royalty re for the second quarter of 2022 was down only 4% versus the second quarter of 2021. In handset, global economic uncertainty and the impact of COVID measures in China are causing consumers to adopt cautious approach with their disposable income, which adversely impact handset shipments, particularly in the low and the mid tiers. Our base station IoT royalty category showed resilience as 5G RAN rollout continues in China and…

Thank you, Gideon. I'll start by further reviewing the results of our operations for the second quarter of 2022. Revenue for the second quarter was $33.2 million, up 9% compared to $30.5 million for the same quarter last year. The revenue breakdown is as follows. Licensing, NRE related revenue was $22.1 million, reflecting 67% of our total revenue, up 42% as compared to $15.5 million in the second quarter of 2021. Royalty revenue was $11.1 million, reflecting 33% of our total revenues, down 26% from $14.9 million in the second quarter of 2021. Second quarter 2021 royalties included revenue of approximately $3.3 million following the resolution of a disagreement on royalty rates with the customer. After carving out the $3.3 million, royalty revenue for the second quarter of 2022 was down only 4% versus the second quarter of 2021. Base station and IoT royalty revenue contributed $7 million in the quarter, flattish from the first quarter and up 6% year-over-year despite the impact of the lockdown in major cities in China on some of our Chinese customers and the overall challenging macroeconomic environment. Gross margin was 79% on GAAP basis and 82% on a non-GAAP basis. slightly better on GAAP and in line with our non-GAAP expectations. Non-GAAP quarterly gross margin excluded approximately $0.3 million of equity-based compensation expenses and $0.5 million of amortization of assets associated with the Intrinsix acquisition and investment. Our total operating expenses for the second quarter were $26.6 million, below the low end of our guidance of $27.1 million and the first quarter expenses of $27.5 million, mainly due to improved FX environment and the timing of the Israel Innovation Authority grants received in the second quarter. OpEx also included an aggregated equity-based compensation expenses of approximately $3 million, amortization of acquired intangibles of $0.8…

[Operator Instructions]. Today's first question comes from Matt Ramsay at Cowen.

Yaniv, I couldn't help but notice there in your guidance commentary for the third quarter and the back half of the year that you guys didn't really talk about revenue. So I'd be remiss if I didn't ask the question. So if you could give us a little bit of help there on just the trends you're seeing in the different end markets and how you guys think about revenue trending. Obviously, there's caveats around the macro, but I think that's going to be the question that most folks want to ask here. So let's just see what we have to say on revenue.

Sure. I'll start and maybe Gideon will jump in as well. So we are not giving guidance on a quarterly basis due to the fact for many years now that our customers under 606 revenue recognition rules, we report what our customers report in the same quarter itself. So we don't really get -- and you guys also don't get visibility from the cell phone manufacturers and OEMs and Bluetooth enabled devices and a lot of other OEMs, how much they actually plan to sell. And therefore, giving guidance of a big portion of our royalty of our revenues, which are the royalties under 606 has been very difficult, and we have stopped doing that because the data does not exist. And with that said, there are some very positive trends in our royalty business, and that's around base station IoT. We managed with all the uncertainty that you asked and mentioned to grow that portion of the business, 6% with the lock down and the rest of the macro concern. A lot of it this time around, every quarter it comes from a different market that's stronger than others. This time around, we saw growth in a very strong growth compared to Q1, for example, in the 5G base station land. We saw continued growth in Bluetooth devices on a year-over-year basis and cellular IoT devices on a year-over-year basis. So that trend continues. I think it should be there for a long period of time. Every quarter, a different market, a different segment could pull in or be the driver for those royalties. And I think because we are powering so many devices, $1.6 billion last year and the numbers are looking quite solid for this year as well. The weakest link in the other category of royalties…

Yes, let me just highlight 2 things regarding the royalties. Obviously, Q2 was a tailwind or headwind, I would say on handset revenue, onset royalties at the low, I would say, low end, concentrating on the lower end and beating the NIM. The way we see it is the OEMs are a bit prudent in piling up the inventories or prefer to clean up inventory in preparation. We are getting to the second half of the year, and we see more prudency there at the OEM level. When it comes to the market, we were in this position several times when there is some kind of macro events that affect the economy, the low end, the handset is the first thing that impacted, but it's the first thing to recover and it could be a fast swing when this uncertainty goes. So that's where we see it now. We have the product. 5G is where the opportunity to enhance 5G [indiscernible] as well is where our customers are focusing and they have the product in place. We'll be discussing [indiscernible] design wins [indiscernible], and of course, there is the India side of things. So as soon as this cloud of uncertainty will somehow clear up, we're going to see this coming back strong. When it comes to the base specialty, I think the unit covers properly. We talk about a diverse market. And I would say we see the [indiscernible] all over the place because we are coming, our customers are coming every quarter with new products. It's share gain. It's growing. It's not just growing with the market but above the market because there are new product coming from our customers. So the handset is something that impacted that, but the rest is [indiscernible].

Just as my follow-up question, I'll keep it quick, and I'll get back in the queue. Yaniv, I think you guys gave some commentary in the script about the amount of smartphone units that were in your royalties. Could you also sort of quantify how much of the royalty revenue in the second quarter was in the handset market just so we can calibrate risks there.

Yes. Sure, we continue to give these numbers quarter after quarter. Out of the $11.1 million, $7 million were base station IoT and the $4.1 million were handset related.

And our next question today comes from Kevin Cassidy with Rosenblatt Securities.

You showed 22 new IT deals and very impressive with that. And last quarter, it was only 14 new deals, but the revenue is about the same. Can you say, is there a trend there for smaller deals? Or maybe just give us a feel for what happened in that mix.

Yes, we answered that from time to time. I don't think that taking the revenue and divided by the number of deals gets you anywhere. Some deals that were signed are not delivered because if we don't know the customer, we don't know its financial background, we don't recognize and don't deliver the technology before we actually get paid. So there is a little bit more complexity around the number of deals that get signed versus the average amount. I would say that in every given quarter, we have 1 or 2 bigger deals for millions of dollars, and we could have smaller deals for a single user for some software elements or work in the hundreds of thousands of dollars, and we could have deals and usually we do have deals in the $2 million or $3 million type range. And I wouldn't take one -- you cannot from those numbers, we get to one answer. Rather, it's a combination of large deals, small deals, recurring customers, 5 new customers that we have never had any business with. Some we deliver immediately and recognize. Some we don't deliver because we don't know the customer, its financial background yet, and we want to wait for the payment. And some are some work that we do, whether it's NRE or some special customizations, then that gets recommended or a few quarters without counting that in the new deal every quarter, obviously. So it's a combination of all these 3 or 4 elements.

Okay. I understand. Just make sure it's not a trend. And the Intrinsix. You didn't say much about some of the pipeline that you're working on there. Can you give us some feel for the Intrinsix opportunities?

Intrinsix has a strength in the defense market. The defense market has its own dynamics. And usually, it's a long project. What we are having now when under the umbrella, I see what is our new customer base, we already signed few designs in respect to see the customer base that come to us and after understanding what increase contribute asking for such designs. And what we're discussing on the call about the co-creation business where we come to the customer and take the lead on the wireless system, Intrinsix has a significant role because those guys are the integration -- the integrator of IPs.

And our next question today comes from Suji Desilva at Roth Capital.

Gideon, you talked in the prepared remarks about having cellular and WiFi and the coexistence. Can you talk about the advantages of CEVA of being in both markets, along with just having a strong opportunity in each one, maybe the synergy between them?

Well, there is a lot of technology synergy between WiFi and 5G. They use the same -- especially WiFi 7 and 5G. They use the same modulation mechanisms. With that said, the way we deal with customers is that we see the Wi-Fi as the local area network and 5G is the one broad network. So when we go to customer proposition, we basically -- it's 2 technologies that we put together these two components of our offering. And we do all the integration between the two. But customer, we see more and more customers asking for both technologies, either in order to address larger markets or go to what is called access point or fixed wireless access, where on one hand, the Internet is coming to the home through 5G and spread over the home through WiFi.

And then on the 5G infrastructure base station side, can you talk about how many customers you're ramping today maybe versus 12 months ago? And is there any inflection in the upcoming quarters or maybe the macro would impact that? Any thoughts there on how 5G is going to ramp up from here?

So first of all, in terms of customers, we have 2 big customers that take us to the macro base station, the largest base station. We have several other customers that are -- expose us to different other markets like small cells and the 5G, and that's what we like and believe in 5G is extremely big use in one hand and also some new form factor of 5G. So, we have things like private networks. We have [indiscernible] antenna. So only the strong opened 1. So these are all vectors that extend the TAM, the total available market of the 5G. And we approach all of them. I think I heard Nokia saying that outside of China, 5G network is only in 15% of the available market, 15%. So think about the opportunity ahead of us in terms of geographies, in terms of India. It's a big market. And another thing, it's a high entry barrier because if you have the relationship with the students, very difficult to create an alternative. That's helpful.

And our next question today comes from Chris Reimer with Barclays.

I wanted to ask about operating margin. You mentioned in your comments that you might be seeing some benefit or derisking. I was just wondering if you could give us a little color around what's going on there and what the moving parts are?

Yes, sure. Great question. But when we added Intrinsix and added both NRE services and the co-creation of licensing both and offering both IPs and services and designs of chips or blocks, it obviously took our margins down from the 90s that we were for many years to the low 80s, anywhere between 80% to 84ish type, 85%, that's where we are in the sweet spot in our understanding of the existing market, and until new royalty payers will come in from that new business model. With that said, the simple combination of the same level of licensing of 22%-plus and higher royalties than where we are now with $11 million for Q2 gets you to slightly better margins. It's just a technicality here, nothing has changed in the business. It's just the mix of licensing versus royalties and the higher the royalties, obviously, in the future as well, the higher the margin will be, but we don't see it going anywhere higher than that 83%, 84% for combinations from this business kick in as well. So that's what the [indiscernible] understanding for the guidance for Q3.

Got it. And just touching on M&A. Are you seeing any changes perhaps or any thoughts on pipeline now that we've seen some valuations come down recently?

So our barrier of not doing M&A is too frequent is not necessarily only from valuation or valuation at all, but it's more of what's the right next step for us, what is the new technology, the new markets, the new add-on that we could grow the business quicker and faster and add more offerings to the semiconductor industry, whether it's in hardware or software or IP, that's really where the merit is. There's no doubt that it's a little bit of an easier environment to look for deals and better pricing. But our dilemma of what is the next step for CEVA to continue its growth and expedite it really comes from what is right and not how much it will cost. It's a factor, but let's find the right technology. We have multiple ideas by the way. We have multiple different projects that we're looking into. We have different collaborations and different ideas that we want to target, and we're actively looking. Nothing right now on the agenda, but that's something that we continuously want to add on to our offerings.

And our next question today comes from David O'Connor with BNP Paribas.

Gideon, maybe going back to the strategic agreement of co-creation with the customer. Can you just talk around the catalyst that drove that decision? Why now? And also maybe related to that. Can you talk around the impact on the model from the kind of co-creation relationship? And I have a follow-up.

So let me explain the rationale from a customer standpoint to go to this proposition and maybe Yaniv can add implication on the model. But the rationale for the customer is if you want as a company to get into the wireless space, and you are not Mediatech, Broadcom, and Qualcomm to some extent, it's a huge [indiscernible]. Because you need to deal with things that are not just complicated in terms of technologies and integration with RF. It's also skills that it scales. Now, we figure out the fact that we have all these technologies and abilities to do. And we bring in our other competencies, whether it's Intrinsix in design or whether it's software, and we come to the customer and say, we can create for you for you, that's the cocreate. We can create for you your own wireless system. And the result of this one is it's a larger deal, a large amount of royalties. And in terms of the business model, it does not disrupt the business model because it's still IP. What we deliver is IP. We don't deliver chips or semiconductor to them, it's just the IP. But from the customer standpoint, this block has a huge value.

I'll add one more thing to it that classical IP model, you license your IP and you wait until the customer finishes its design. It could take 1 or 2 years, qualify the chip, test it, and then that goes to the OEM into the final product. Here, when we do a lot or a whole sit from an IT and service. So that sort of moved a bit of the responsibility for the success of that blocker chip to us. So we have more visibility into that. And didn't mention the key critical change in the business model is that as soon as that chip goes to production, hopefully or maybe could be a little bit shorter than 2 years in this type of consumer-based solution, we'll get royalties. And on a typical old school NRE service base, there is no royalties. It's a onetime deal, maybe recurring engineering efforts, but you don't get the royalty component. Here as soon as that chip is ready out the door in production, that's the [indiscernible] to the volume and to the royalties there from our perspective. So it's a win-win, both from a little bit more involvement in R&D of our customers and the road map to come up with that chip into production. And on the other hand, it's the royalties.

And maybe even going back to your prepared remarks, you talked about engagements with U.S. companies picking up, I think. Which technologies are these engagements picking up? And what are you doing a bit differently maybe to capture some of these U.S.-based opportunities?

In terms of the nodes?

Is it hearables, wearables, is that on handsets, which kind of areas are these engagements picking up, the U.S.-based opportunities.

The specific engagement that we talked about in the prepared remarks, it's wireless audio, meaning Bluetooth and audio. This combination also possess complexities. And the target market is wearables and and watches, smart watch.

And if I could just squeeze one last one in. Just on the handset base spend royalties, how would you split that out low end kind of midrange versus high end in your royalties?

Most of our business is in the mid range these days, our customers business today. UNISOC is the biggest customer of ours. They are a strong presence worldwide, India, China, Latin America, in mid-range phones. The low-end phones are almost disappearing, the 2G and 3G don't really exist that much anymore. So it's mainly the 4G bringing the volume and 5G, they have a good offering with some design wins. So that's the potential over the next couple of years. Thank you.

And our next question today comes from Martin Yang of Oppenheimer.

I have a question regarding your Bluetooth and WiFi portfolio. How much do you estimate that you have the exposure to consumer end markets through your direct customers? And do you foresee any upcoming weakness into the second half for Bluetooth and Wi-Fi shipments?

Well, when it comes to Bluetooth and WiFi, it's -- I cannot simply say exposure to consumer market. It's all over the place. We have people that use our technology for automotive. We have people that use our technology in industrial recently. We see people are using it in [indiscernible] headset audio. So there is not any concentration on specific market. And that's the reason that it's resilient because every quarter, somebody else flows and could be another company that faces difficulties. We saw clearly in the report that we got in the quarter.

I think that royalties for Bluetooth were up year-over-year with all these market uncertainties. So this is part of the answer that we have seen in the second quarter as well.

This concludes our question-and-answer session. I'd like to turn it back over to Richard Kingston for closing remarks. Richard, maybe you're mute?

Apologies. Sorry. Thank you all for joining us today and for your continued interest in CEVA. And as a reminder, the prepared remarks on the conference call today 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 Oppenheimer 25th Annual Technology Internet and Communications Conference being held virtually tomorrow, August 10. We'll participate at the Rosenblatt Securities Technology Summit Age of AI Conference, August 23 and 24. We will be in attendance at the Jefferies 2022 Semiconductor IT Hardware and Communications Infrastructure Summit, August 30 and 31 in Chicago and the Jefferies Israel Tech Trek, which will take place September 21 and 22 in Tel Aviv. Further information on these events and all events we will be participating in can be found on the Investors section of our website. Thank you, and goodbye.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect your lines, and have a wonderful day.