Good day and welcome to the CEVA, Inc. Fourth Quarter and Year End 2023 Earnings Conference Call. All participants will be in a listen-only mode. [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, Investor and Public Relations. Please go ahead.

Thank you. Good morning everyone and welcome to CEVA's fourth quarter and full year 2023 earnings conference call. Joining me today on the call are Amir Panush, Chief Executive Officer; and Yaniv Arieli, Chief Financial Officer of CEVA. Before handing over to Amir, I would like to remind everyone 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. These forward-looking statements include statements regarding our market positioning, strategy and growth opportunities, including expectations for expansion into new markets and use cases, as well as expectations regarding our customers' production of products using our IP, market trends, and dynamics, demand for and benefits of our technologies, and our expectations and financial goals and guidance regarding future performance. CEVA assumes no obligation to update any forward-looking statements or information, which speak as of their respective dates. In addition, following the divestment of Intrinsix's business to Cadence, financial results from Intrinsix were transitioned to discontinued operations beginning in the third quarter of 2023, and all prior period financial results have been recast accordingly. We will also 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 filings section of our Investor Relations website. With that said, I'd like to turn the call over to Amir, who will review our business performance for the quarter, review the year, and provide some insight into our ongoing business. Amir?

Thank you, Richard and good morning everyone and thank you for joining us today. 2023 was the beginning of a transformational journey for CEVA, and I am very pleased with the progress we made in my first year with the company. Following the recent in-depth strategic review to really understand our strengths and technology leadership, we have positioned CEVA as the trusted partner for semiconductor companies and OEMs who need our IP to enable three fundamental use cases for smart edge devices; the abilities to connect, sense and infer data, more reliably and efficiently. We have realigned our business to focus our investments and R&D efforts around these use cases and on mega end markets where we see very strong growth opportunities; consumer, automotive, industrial, and infrastructure. Even against a difficult business backdrop in 2023 that continues to affect the semiconductor industry and its end markets, we are already seeing evidence that our updated strategy is producing results. Our customer engagements are deeper, across the value chain, across our entire technology portfolio and expanding into new end markets and strategic opportunities. I'll provide a review of the year shortly, but before that I will review the fourth quarter. For the fourth quarter, our total revenues were in line with our expectations. I am proud of how we have and continue to manage through the challenges in the markets we serve and significantly improve our profitability and earnings power through our focus on operating efficiency. In licensing, while the total licensing revenue recognized in the quarter was lower than usual, the interest in our diversified portfolio and potential new customer opportunities remains solid. We saw good progress on a number of fronts, including a strategic license deal with a US-based MCU leader for our Wi-Fi 6 IP and a licensing deal…

Pardon me, it seems like we've lost connection with our speaker. Please wait while we reconnect. Pardon me, ladies and gentlemen, we've reconnected with our speaker line.

So, let me continue from where I think we -- you stopped hearing us. In terms, of new product launches, we had multiple achievements. For connectivity, we launched our most powerful DSP architecture to date, addressing 5GAdvanced use cases for infrastructure, industrial, mobile and new use cases like 5G satellite communications, and 5G vehicle to everything, our UWB Radar platform for automotive child presence detection; and our Bluetooth solution for Electronic Shelf Labels, an emerging, high volume market. For sensing, we launched our Channel sounding Bluetooth solution, enabling high-accuracy secure positioning for automotive, industrial, and the IoT. For inference, we launched our scalable NPU AI architecture, capable of running generative AI in smart edge devices with industry-leading efficiency. All of these product introductions demonstrate our commitment to the smart edge and our diversified IP portfolio position, and have been very well-received by our customer base. Moreover, these products will serve our licensing business in 2024, along with recent product introductions like our Wi-Fi 7 IP. Overall, looking across our corporate, product, customer, and end markets milestones in 2023, I am extremely proud of what we have achieved and am excited about what's ahead for 2024 and beyond. None of this would have been possible without the dedication, passion, and incredible efforts of our employees worldwide, and I would like to take this opportunity to thank them. Looking ahead into 2024, and our expectations, the Semiconductor Industry Association expects the global semiconductor industry to return to healthier growth following a weak 2023. There still remains, however, some short-term challenging conditions in the industrial and automotive end markets, which are not expected to clear until the second half of the year, and possible inventory buildup that will need be worked down in the first part of the year. Yaniv will provide quantitative guidance shortly. Finally, I want to sincerely wish you and your families a successful and peaceful 2024. I look forward to meeting many of you at conferences, tradeshows and other industry events throughout the year. Now, I will turn the call over to Yaniv for the financials.

Thank you, Amir. I'll now start by reviewing the results of our operations for the fourth quarter of 2023. Revenue for the fourth quarter was $24.2 million as compared to $30.3 million for the same quarter last year. The revenue breakdown is as follows; licensing and related revenues were $11.8 million, reflecting 49% of total revenues as compared to $19.4 million in the fourth quarter of 2022. Royalty revenue was $12.3 million, reflecting 51% of total revenues, up 13% from $10.9 million for the same quarter last year. This is a return to year-over-year growth in royalties for the first time since Q3 2022. Quarterly gross margins came slightly better as expected on GAAP and in-line with non-GAAP basis. Gross margins were 91% on a GAAP basis and 92% on non-GAAP basis. Our total operating expenses for the fourth quarter was in line with the mid-range of our guidance at $24.7 million. Total non-GAAP operating expenses for the fourth quarter, excluding equity-based compensation expenses, amortization, intangibles, and deal costs, were $20.3 million at the lower end of our guidance. GAAP operating loss for the fourth quarter was $2.8 million, down from a GAAP operating profit of $1 million in the same quarter a year ago. Our GAAP taxes were $7.2 million and non-GAAP taxes were $1.4 million. GAAP tax expenses included $1.3 million charges as a result of the completion of a tax audit for prior years, and $4.5 million tax charges, including one-time write-off of a deferred tax asset related to Section 174 of the US tax code. GAAP net loss for the fourth of 2023 quarter was $8.1 million and diluted loss per share was $0.34 as compared to net income of $4.5 million and diluted income per share of $0.19 for the fourth quarter of 2022. Non-GAAP…

We will now begin the question-and-answer session. [Operator Instructions] The first question today comes from Suji Desilva with ROTH MKM. Please go ahead.

Hi Amir, hi Yaniv. Congrats on the progress here. Maybe we can talk about the guidance and -- the first quarter and the full year. Curious what -- you talked about the different mix, Yaniv, and the decline 2% to 6%, Curious what the license royalty implications are there? And then for the quarter and the full year, what are the expectations for mobile, maybe even for the full year versus non-mobile, it would be help understand some color there?

Sure. Good morning. So, overall, we're talking about 4% to 8% annual revenue growth for 2023. We're looking at similar start than we had in 2023 that the first half may be a bit more milder and then things will pick up. Some of the products we are in and the consumer side also have that typical seasonality, and we have seen that in the past. So, those are some of the assumptions that we have built in the model. Obviously, licensing is a lumpy type of business. When we look at it on an overall longer basis, that generates the revenues. Although in the last couple of years, we also added software solutions and capabilities, which have a limited licensing, if at all, upfront fee, but a much, much higher royalty contribution. And the immediate effect on an annual basis, for example, our audio and AI royalties grew more than double in dollars year-over-year, but they don't necessarily contribute to licensing. So, when we look at the full mix, we're looking at growth in both of these segments, both licensing and royalties. On a quarterly basis, it's harder to guess upfront and ASC 606 made our lives more difficult to know in advance how the royalty are going to look like. So, our starting point is coming with the strongest quarter in royalties in 2023 and a gradual improvement from Q1 all the way to Q4, that would probably go down due to the typical seasonality in consumer and mobile that you asked about. And with that said, licensing should be higher Q1 over Q4 for sure. That is the plan. A lot of moving pieces, but from the product portfolio and the revenue mix, these are sort of the high pieces in the puzzle.

And maybe I can add a little bit more color here, Suji. First, good morning to everyone. On top of what Yaniv said, so if we look at royalty going to 2024, there are several things that we are very encouraged by and we see as a potential growth in 2024 versus last year. One that we talk about quite a bit is our Wi-Fi penetration and the transition from Wi-Fi 4 to Wi-Fi 6 and with that higher average ASP and volume increase. The other thing that will probably come more towards the end of the year is the automotive AI, some of those products going into production. As well as I would say, overall, our customer base in the consumer and industrial IoT on average are doing quite well, and we expect that to be a good tailwind and a strong for us to go the royalty moving forward. On the more commuted side, it's really the situation with the whole 5G installment base. That's a market that probably in 2024 as far as what we see today is not going to recover significantly, maybe more towards the second half and then probably more in 2025, which is the overall mix. In terms of licensing, we have several new products that will and should generate for us increased licensing in 2024. Wi-Fi 7 that we already start licensing as well as the new AI products that right now in a significant evaluation across multiple potential customers, and we expect to be able to close some of those deals in 2024.

Okay, great. And then my other question is on the auto ADAS win. Congrats on that. I just want to understand the circumstances for that. Was that a customer who had their own AI and they swapped it out for yours? What kind of tops -- and you talked about seven auto wins, I'm curious if those are all ADAS AI or a variety of products?

Let's start with the first. So, the first thing is an existing customer. They like in power technology, the hardware side of it a while back and build their own chip. The nice part -- the interesting part for them is that the chip is programmable. The deal that we closed now was to have software capability that also their customers could add different sauces of AI use cases and program the final product to be much more flexible. So, it's an existing customer that is going into production this year, and they added the software piece on top of the hardware solution that is ready now, and it was a very interesting and a nice achievement that they're coming back and offering this type of solution in cars today this year. Overall -- Amir, you want to talk about the overall?

Yes, the other seven deals are not AI only. It's across our product portfolio. Overall, we signed, I believe, four AI deals this quarter, three of them related, let's call it, more to vision AI capabilities and ADAS and one related to audio AI capabilities.

Okay. Thanks guys.

You're welcome.

Thank you.

The next question comes from Kevin Cassidy with Rosenblatt Securities. Please go ahead.

Hi. Congratulations on the good quarter. Can you let us know how is the trend for licensing? Are there customer programs that are getting delayed or even being canceled? In this market are you seeing more deals or fewer deals? And what are the issues that your customers are saying?

Yes, Kevin, a few things I would say. First, if we take a step back and look at 2023 overall, definitely, that was a year that started with lots of inventory corrections that our customers need to go to that so-called more pressure on the business overall. And with that, generally speaking, the customers on average, taking more time to go and launch new products and new programs in place. So, that definitely drove some of the delays in 2023. Specifically, for Q4, we are actually very encouraged with the number of deals that we signed, 17 deals in the quarter. And more specifically, we had at least one deal for each of our product technology category. So, really, across our diversified product portfolio, very good engagement with customers with a good significant number of deals. Just the mix every quarter can change in terms of the type of deals and the size of deals. And definitely, as we go to 2024, from the first half to the second half, we expected also to see the larger or more meaningful deals also in that mix, which will drive overall with the rest of our deals at the growth between 2023 and 2024. So, overall, I would say, if we look at the different market segments, automotive and industrial are a little bit weaker in the first half, and we expect inventory correction and overall interest to go back in second half. Consumer IoT and consumer overall is holding up very nicely for us. So, that we expect it to be with the same seasonality of typically the Q1 and with that specifically more in mobile. Beyond that, we expect a good growth during the rest of the 2024.

The last part of Amir's answer that was related to royalties, not necessarily to the licensing question that you had. So, you got both angle.

Right. Okay, great. And maybe just geographically, how is China's licensing opportunities?

Go ahead.

China is still an important and big geography for us, a lot of innovation and existing and repeating customers that come back for new generations of different technologies, whether it's the Bluetooth or Wi-Fi or other connectivity solutions that we have today because I think that we are -- we have a very strong portfolio around that. What was very interesting for us this quarter around that US was stronger than usual for us and a very, very strategic deal with an MCU player that we mentioned earlier in Amir's prepared remark, and that was a positive change for our Q4 revenue mix. It wasn't just China, but here with an interesting development in the US.

Great. Okay. Thank you.

Thank you.

The next question comes from Martin Yang with Oppenheimer. Please go ahead.

Thank you for taking my question. Can you first talk about the revenue outlook broken down by consumer IoT and industrial IoT in 2024, which segment should we expect stronger relative trend comparing to your overall revenue growth outlook?

Great question, Martin. Thanks for that. So, let's repeat some of the highlights that we ended up 2023. While not a simple year for us, more of a transition year. If we still look and do the analysis now at the end of the year, here is how it looks like. On the audio AI front, the royalty -- let's start with royalties, more than doubled for us. We showed growth both in units, 56%, I believe, we said and revenue was up more than 100%. Look at the cellular IoT, which is one of the top markets that we have continued to show separately from the Modem and the Bluetooth and Wi-Fi. This was the third element that we started breaking down maybe a year or so or two years ago. Units were up 64%, revenues were up 47%, almost 50% in cellular IoT. So, that has been working well. Bluetooth, sort of, flattish year-over-year, mainly because of this slower start of 2023. So, we are flattish in revenues, which was -- were about our units, which were about 1 billion units. If you recall last year, we're very close to that, but slightly lower. And Wi-Fi continues to be one of the strongest royalty contributor in both licensing and royalties. The units were down year-over-year because it was a transition year also to Wi-Fi 6, which is a newer technology and the new generation. But because of having a new product and new customers that got in, the ASP is much, much higher. And we reached 40% higher revenues for Wi-Fi royalties in 2023. So, four very -- or three very strong royalty contributors that should continue in 2024. We don't know the pace. We don't know when it's going to pick up in what, but we know that the industrial is very strong and all of these different connectivity solutions are addressed to that as much as the consumer side. The low lights, as Amir mentioned, is mainly the mobile, which started very low, but ramped up and corrected itself. Yet to be seen how 2024 looks like on an annual basis, it's difficult to forecast. But for now, that's not one of our growth drivers. And the base station market, we've suffered not just CEVA, but overall was very muted and lower in 2023, just because 5G didn't bring for the cellular networks, any key or star use case that will -- that happened with deployment or increased deployment. And that's probably going to be muted also in 2024. The rest of the technologies and the markets that we target around edge AI should work out well.

Maybe just another comment to that, Martin. Related to the industrial IoT, I would say overall, we finished this year with 23% of our total revenues. So, this is definitely a significant portion of our revenue also moving forward, we expect it to grow in 2024. And more specifically, if you look at the technologies that we're offering, we are getting more and more embedded with the MCU ecosystems and specifically in the industrial and automotive MCU ecosystem started with some of our connectivity offering, extended to Wi-Fi more recently, and now also to some audio capabilities and in the future, we expect also infer. And that's where we see also the synergy of our technology into the smart edge and MCU ecosystem and specifically there for the industrial IoT market space.

Thank you very much. Next question for mobile. In the longer term, maybe two to three years' time horizon, do you think mobile could recover back to that 2021 level? Or what should we look at -- how should we look at mobile in the longer term in terms of amount contribution to your company?

So, the mobile market, as everybody knows, has consolidated significantly over the last couple of years. There is a handful of players in that industry, the biggest and well-known ones are the Qualcomms and the MediaTeks. There are a few very successful for many years, lower cost solutions like UNISOC and recent years, ASRs as well. There are still very big markets in the world replacement and new markets for low-cost feature phone. Not everybody goes and buys the $1,000 high-end phone. Those markets, we have very strong penetration and solutions. So, that could continue. The pace of all that is not that clear. Handsets haven't been that exciting of a market or a use case in recent years. And there's one other OEM that may change its modem course and maybe things will look different in two to three years, yet to be seen -- no, I don't think anybody has the answer for that piece. The other use cases of 5G and connectivity have gone into other segments in other markets. And there, we have seen licensing activity over the last two to three years, and royalties should also come from that, not the handset market per se, but private RAN and now lots of other solutions that could use 5G. Hopefully, that helps to answer the question. Right now, the last three or four years, if we looked at the slides we presented also in the Analyst Day, you could see that the overall revenue of CEVA in the last five years doubled from just shy of $50 million to more than double $100 million coming from edge -- smart edge devices versus the mobile devices. So, mobile is still there, but the big growth comes from the newer markets that we've added on.

Yes. And just more specifically on that Martin specifically on cellular IoT that is extension of the 5G and mobile, that's where we have seen already this year a very significant growth, both in consumer, industrial, consumer, more in smart watches and those type of things where 5G or other types of technology, so that technology is getting more and more embedded. And in the industrial space also for all the different type of logistics tracking, smart tracking and other so-called industry 4.0 use cases. And beyond, as we move towards this year and the next year also for decent type of satellite type of use cases where 5G, 5G advance will also propagate. We believe it can create for us a nice growth trajectory moving forward.

Got it. Great color. Thank you. That’s all for me.

Welcome Martin.

The next question comes from Chris Reimer with Barclays. Please go ahead.

Hi, thanks for taking my question and congratulations on the strong results. I wanted to ask about your long-term guidance around operating margin. I think at the conference recently, you gave a target of 20% operating margin. I'm just wondering, I realize it's a long-term target, but I'm just wondering what -- how you -- what's the constellation -- what's the makeup of actually getting there? Does that consist of increasing -- expanding gross margins? Or is that specifically no expansion whatsoever? I'm just wondering what the moving parts around that are to you get to that number?

Deep magic. That's the way. One step at a time, with a much more focused, and this is what Amir undertook last year, and we have shared with you over the -- in the prepared remarks. If you look at the overall non-GAAP operating margin of the year, we ended up with about 4%. It was stronger in the second half, 7%, 8% in Q3 and Q4. And when we look into 2024, based on the guidance that we gave, we are planning to probably double it, maybe slightly do even better than doubling it for 2024. So, that's one milestone if you reach the revenue level that we talked about, if we execute our R&D plans and focus on the expense -- with the right expense levels that we have talked about. That's what that milestone will get you to. And if that continues over a few years, that's how we could and with more royalties, which bear very high gross margins and fall to the pre-tax line, that could get us to the next milestone or a few months or it's not going to happen overnight to taking that next stage to 20% non-GAAP operating margin. So, hopefully, that gives you a little bit more color on the timeline.

Maybe just to add on that, just from the top level strategically of that. So, first, this year, we -- or sorry, last year 2023, we came back to a pure IP business model after the divestment of Intrinsix. And with that, we guided will be 90% or above gross margin. And -- so that's on the gross margin. On the operating margin, it's really twofold. One is continuous improvement and growth in our topline, where the guidance we just gave for this year and from that on the long-term model that we gave in the Analyst Day. And then on the OpEx side, it's really maintaining strong focus on where we see and where we believe we will see a long-term growth potential. One example of that is also the acquisition that we did last year of VisiSonics for 3D special audio software capabilities and very quickly, we'll be able to convert it into licensing agreements and royalty bearing with the customer, which overall has been very synergistic on the OpEx side and with that, bringing a very good profitability moving forward to our business. So, both organically and inorganically, we are heavily focusing on the bottom line of how we can drive that synergy as well as the operational margin leverage as we move forward.

Got it. Thanks. That's great color. That's it for me.

Thank you.

The next question comes from Gus Richard with Northland. Please go ahead.

Yes, good morning or afternoon. Thank you for taking the question. I just want to make sure I understand the revenue guidance for the full year. Does the comp include Intrinsix revenue? Or is it just continuing ops in terms of the growth expectations?

No, no, continuing -- it's just the CEVA IP part of it. Intrinsix, we took that out last quarter, discontinued operation. It's not in your topline, it's starting your expense. It's just in the GAAP one line before the -- of discontinued operation. So, it's not included in the numbers, the numbers, the revenue -- overall net revenue numbers for last year were $97.4 million, and that is the basis for the growth in the percentages that we gave.

That was the number I needed. Thank you so much.

No problem. Sure.

The next question comes from David O'Connor with BNP Paribas. Please go ahead.

Great. Good morning -- afternoon, gentlemen and thanks for taking my questions. Just one or two from my side. Maybe, Amir, firstly, one for you. Given the excitement that we're hearing around the AI PC and the AI smartphone. Just wondering with your strong positioning at the edge and around IoT devices. Do you think there is a wave of edge AI licensing that's in front that has yet to happen, and you just haven't kind of seen that yet? That's my first question. And then maybe for Yaniv, just on the model again for that 6% sales growth for 2024. Can you rank for us kind of licensing versus royalties switches higher or lower than that 6% just to get an idea of the trend there? And also, do you expect to grow revenues on a quarterly basis through 2024? Thanks guys.

Sure David. I'll take the first one. Good morning. Sorry, can you repeat the question, David, sorry for that.

Yes, sure. So, just with the excitement around the AI PC and AI smartphone -- and your positioning at the edge, I'm just thinking, is there a wave of licensing at the edge yet to happen? Because you talked in your opening comments that kind of licensing is a bit lumpy. So, just trying to put that in context was all the -- what we're hearing around AI?

Yes. So, -- yes, definitely, David. So, first, this is a focus area for us in 2024, basically delivering our NPU and overall AI portfolio into the smart edge market segments, including automotive, industrial, the consumer IoT later on into the infrastructure. We have already several customers that are evaluating our technology in a very deeper evaluation, and we expect to be able to close some of those deals during 2024. So, that's definitely part of our target and also part of our expectation in terms of the revenue growth in 2024.

And with regards to the model, we don't break out. We never did, again, because we don't have that crystal ball in royalties and volumes between licensing and royalties on an annual basis. We believe both could grow year-over-year. So, again, if you look at the numbers, excluding Intrinsix, that we were just asked about, $57.6 million in the licensing and related revenue basis from 2023. We believe it could -- it should go higher and be higher in 2024. And the $39.9 million of royalties, which suffered year-over-year, mainly because of the base station market that we talked about earlier should also be the basis for the growth. Not sure where it's going to end up, both we have them growing. Our model showed incremental growth on an overall quarter-by-quarter as the year progresses with Q1 being the lowest because of the seasonality of the modem and consumer devices in royalties. Here, we have a little bit more insight because we have seen that trend in recent years. And I hope I answered the question. That's the high level how we see the model for next year next year -- this year.

Yes, that's very clear. Thanks guys.

Thanks David.

Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Richard Kingston for any closing remarks.

Thank you, Betsy, and 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. And with regards to upcoming events, we will be participating in the following conferences. Mobile World Congress from February 26th to 29th in Barcelona, Spain. The Loop Capital Markets 5th Annual Investor Conference, March 12 in New York. The 36th Annual ROTH Conference, March 18 and 19 in Dana Point, California. And the Mizuho Americas Israel Growth Conference, March 25th in New York. For 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 all, and good bye.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.