CEVA, Inc. (CEVA) Earnings Call Transcript

Good day, and welcome to the CEVA, Inc. Third Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note, today's event is being recorded. I'd now like to hand the conference over to Richard Kingston, Vice President, Market Intelligence and Investor and Public Relations. Please go ahead.

Thank you, Rocco. Good morning, everyone, and welcome to CEVA's third quarter 2026 earnings conference call. Joining me today are Amir Panush, Chief Executive Officer; and Yaniv Arieli, Chief Financial Officer. Before handing the call over to Amir, I'd like to remind everyone that today's discussion contains forward-looking statements that involve risks and uncertainties as well as assumptions that if they materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such statements. Important factors that can cause actual results to differ include, but are not limited to, those stated in our earnings release issued earlier today and in our filings with the SEC. We will also discuss certain non-GAAP financial measures, which we believe provide investors with additional insight into our core operating performance. Reconciliations between our GAAP and non-GAAP results are included in the earnings release issued this morning and available on the Investors section of our website. With that said, I'll turn the call over to Amir. Amir?

Thank you, Richard, and good morning, everyone. During the third quarter, we made good progress across our business. AI licensing revenues reached a record, accounting for more than 35% of total licensing and related revenues. Our customers shipped 623 million CEVA-powered devices, matching our all-time quarterly record and non-GAAP earnings per share improved. Overall, licensing revenues was lower than we anticipated as a significant multiyear connectivity agreement with a key strategic customer that we expected to sign in the third quarter was delayed. It has since been signed early in the fourth quarter, and I continue to be very encouraged by our diversified licensing pipeline across Connect, Sense and Infer. In royalties, we saw strong growth in mobile and broad-based IoT with royalties up 18% sequentially, although memory market headwinds tempered volume across compute-intensive consumer devices such as smartphone, PCs and TVs. These developments reflect the continued execution of our strategy to broaden our addressable market, deepen our relationships with leading semiconductor companies, OEMs and system players and help our customers bring successful CEVA-powered products to market, which drives our future royalties. Turning now first to licensing. We signed 10 agreements during the quarter, including 3 with first-time customers. AI-related deals were particularly strong, accounting for 6 of these agreements. We believe our record quarterly AI licensing revenues demonstrate that our investment in AI technologies is translating into meaningful business today and will drive long-term royalty growth. Building on this momentum, we recently introduced our expanded NeuPro family of AI processors with new market-leading features and significant improvements in performance and energy efficiency. With the newest addition to the family, NeuPro Ultra, we are extending CEVA reach beyond the edge into AI infrastructure. We expect this will significantly expand our addressable market as data center solutions providers seek greater efficiency across inference systems. The expanded portfolio builds on our existing base of more than 50 NeuPro customers and opens new opportunities in areas such as memory and connectivity infrastructure, where efficient AI processing is becoming critical. We are already seeing customers' interest across these new applications, including in the quarter, a new customer selected NeuPro-M for an AI infrastructure application focused on improving the efficiency of data centers inference systems. Other edge AI agreements targeted consumer, automotive and industrial markets. We also made further progress towards NPU royalty generation. As highlighted in our November 2 announcement, our customers, Mobilint recently launched its REGULUS AI SoC, which incorporates both our NeuPro-Nano NPU and SensPro AI DSP technologies in the same SoC, illustrating how adoptions of multiple CEVA technology can expand our royalty opportunity per device. Several other NeuPro customers completed chip tape-outs during the third quarter and we expect initial NeuPro royalties around the end of this year or early 2027. Turning to Connect. Our wireless connectivity business continues to benefit from the growing need for multiple connectivity technologies in increasingly intelligent devices. Our leadership in this market was recently reaffirmed by IPnest, which ranked CEVA #1 in wireless interface IP for the third successive year with approximately 68% market share by revenue. During the quarter, 3 of our highest volume connectivity customers extended their long-standing agreements with CEVA for multiple years and added more CEVA IP. One licensed our Wi-Fi 6 and Wi-Fi 7 technologies, complementing our Bluetooth and DSP IP, it already ships in high volume. Combining connectivity technologies within the same customer is a core part of our strategy and more than 30 customers now license both Bluetooth and Wi-Fi from us, increasing our footprint within their products and our royalty content per device. In Sense, we secured a new agreement for our MotionEngine Hex technology to enable advanced motion-based interaction for smart TVs. Our customer is targeting one of the world's largest television brands. Together with last year's agreement with a leading smart TV platform provider to integrate MotionEngine into its operating system, this extends our presence across both the platform and device levels of the smart TV ecosystem, enabling more intuitive and precise user experiences as televisions evolve into increasingly interactive entertainment and gaming platforms. Turning now to royalties. Revenue increased 3% year-over-year on shipments of 623 million CEVA-powered devices, matching our all-time quarterly record. Our IoT unit volume reflects the scale and penetration of our connectivity business with strong Bluetooth volumes, record cellular IoT shipments and record Wi-Fi 6 unit shipments, which carry higher royalty value. This strength was partly offset by weakness in the compute-intensive consumer devices such as smartphone, PCs and TVs, where memory market headwinds weighed on demand. A key development was continued ramp of internally developed modem at a major U.S. customer, contributing to growth in mobile royalties. This is the first time our customers has moved its internally developed modems into high-volume production across its mainstream flagship smartphone models, an important step for CEVA in this market. We expect this volume ramp to accelerate significantly in the fourth quarter, supported by a full quarter of device shipments across multiple models and to continue into 2027 and beyond. We believe this, together with continued share gains in broad-based IoT will support future royalty growth. Yaniv will provide more detail on the royalty results in his financial review. In summary, the third quarter showed progress across each part of our strategy. AI is becoming a meaningful licensing business. Our connectivity franchise continues to scale across IoT and a new smartphone royalty cycle is underway. At the same time, 2 of our highest volume connectivity customers added more CEVA technologies and extended their relationships with us well into the future, supporting a continued increase in our average selling price per design. With that, I will turn the call over to Yaniv to review our financial results.

Thank you, Amir. Good morning, everyone. I'll now review our financial results for the third quarter. Revenue for the third quarter increased 2% year-over-year to $29.1 million, supported by 18% sequential royalty growth of shipments of 623 million CEVA-powered devices, matching our all-time quarterly record. The revenue and other financial breakdown are as follows. Unless otherwise stated, all comparisons are to the third quarter of 2025. Licensing and related revenues increased 2% to $16.3 million, representing approximately 56% of our total revenues. AI licensing reached a quarterly record and accounted for more than 35% of our total licensing and related revenues, reflecting the growing commercial adoption of our AI portfolio and expanding our future royalty opportunity. Royalty revenues increased 3% year-over-year and 18% sequentially to $12.7 million, representing approximately 44% of total revenues. Growth was led by the continued ramp of internally developed modems in a major U.S. customer and record royalty revenues related to our wireless IoT business lines. GAAP gross margin was 85% compared to 88%. Non-GAAP gross margin was 86% compared to 89%. GAAP operating expenses were $28.3 million at the low end of our guidance, reflecting expense control. Non-GAAP operating expenses, excluding equity-based compensation expenses, amortization of acquired intangibles and acquisition-related costs were $22.5 million, also at the low end of our guidance. GAAP operating loss was $3.5 million compared to GAAP operating loss of $2.1 million. Non-GAAP operating income was $2.5 million compared to $3.1 million and non-GAAP operating margin was 9%. Net financial income was $2.3 million compared with $1.2 million attributed to better hedging. Income taxes expense was approximately $1.1 million compared to $1.7 million with a decrease mainly due to lower withholding taxes. GAAP net loss was $2.3 million or $0.08 per diluted share compared to GAAP net loss of $2.5 million or $0.10 per diluted share. Non-GAAP net income increased 39% to $3.8 million and non-GAAP diluted earnings per share increased 18% to $0.13. Non-GAAP net income increased 67% sequentially from $2.3 million and non-GAAP diluted earnings per share increased by 63% from $0.08. With respect to other related data, during the quarter, customers shipped 623 million CEVA-powered devices, an increase of 8% compared to the third quarter of 2025 and 10% sequentially. Of those shipments, mobile shipments reached 82 million units or approximately 13% of the total, an increase of 19% year-over-year and 34% sequentially. Mobile royalty revenues increased 20% year-over-year and 30% sequentially. Consumer IoT shipments increased 4% to 518 million units. Industrial IoT shipments increased 120% to 23 million units. Looking at our connectivity technologies, these shipment metrics demonstrate the breadth of our royalty base across multiple end markets. Bluetooth shipments increased 9% to 329 million units. Cellular IoT shipments reached a new quarterly record of 69 million units, up 2%. Wi-Fi shipments were 78 million units, down 6%. We saw a significant increase in royalty contribution from higher-value Wi-Fi 6 products, reflecting the improving technology mix of our customers' deployments with Wi-Fi 6 representing 57% of Wi-Fi unit shipments, up from 24%. As for the balance sheet items, at the end of the quarter, with approximately $221 million in cash, cash equivalents, marketable securities and bank deposits, providing significant financial flexibility to support continued investments in our technology road map while maintaining a disciplined approach to capital allocation, including selective strategic M&A opportunities that can accelerate our growth. Days sales outstanding were 56 days, lower than the 70 days in the prior quarter. During the quarter, we generated $1.5 million of cash from operating activities. Depreciation and amortization expenses were $0.8 million, while capital expenditures totaled $1.1 million. At the end of the quarter, we employed 394 people, including 315 engineers, reflecting the continued investments in innovation while maintaining disciplined expense management. Turning to our outlook. In the first 9 months of 2026, licensing and related revenues increased 14% year-over-year, led by strong demand for AI technologies. Our pipeline is robust with healthy deal flow across Connect, Sense and Infer heading into 2027. In royalties, customers shipped CEVA-powered devices at a level matching our all-time quarterly record, reflecting the scale of our IoT connectivity business despite memory market headwinds and compute-sensitive consumer markets. Smartphone modems add a multiyear growth driver for us through 2027 and beyond. We expect a fourth quarter -- strong fourth quarter with approximately 24% sequential revenue growth at the midpoint of our guidance. This would represent the highest quarterly revenues in CEVA's history and we expect non-GAAP diluted EPS to more than double sequentially. Our fourth quarter outlook is based upon expected step-up in smartphone modem royalties at a major U.S. customer, typical fourth quarter seasonality and our robust licensing pipeline. It also reflects a disciplined assessment of the opportunities we expect to convert in this quarter. At the midpoint of our fourth quarter guidance implies full year 2026 revenue growth of approximately 11%. We will continue to invest in our road map while carefully managing costs and mitigating foreign exchange headwinds and now expect full year non-GAAP expense growth, which is the cost of revenues and the OpEx of approximately 7% or $7 million, which is below our previous expectations. Fourth quarter guidance. Revenues are expected to be in the range of $34 million to $38 million. Gross margin is expected to be approximately 88% on a GAAP basis and 89% on a non-GAAP basis, excluding approximately $0.2 million of equity-based compensation expense and $0.1 million of amortization of acquired intangibles. GAAP operating expense are expected to be between $27.6 million and $28.6 million including approximately $4.3 million of equity-based compensation expenses and $0.1 million of amortization of acquired intangibles and $0.1 million for acquisition-related costs. Non-GAAP operating expenses are expected to be between $23.1 million and $24.1 million. Net financial income is expected to be approximately $2 million. Income tax expense is expected to be approximately $1.8 million and our weighted average diluted share count is expected to be approximately 30.1 million shares on GAAP and non-GAAP basis. Rocco, we are ready to take questions now.

[Operator Instructions] Today's first question comes from Kevin Cassidy at Rosenblatt Securities.

Congratulations on the results. Maybe just to look at the mobile market. I know you have the U.S. customer that's started shipping, but how about the rest of the market? Can you get a feel -- give us a feel for how the mobile market is? And what are your customers saying about unit shipments this quarter and even into next year?

Yes. Thanks for the question, Kevin. This is Amir. So there are several things that we need to keep in mind as we look at the mobile market. I will start first, as you mentioned, with the U.S. customers, we expect a very significant ramp in Q4 and as we go into 2027. Definitely, in this quarter, Q3, it was only just a very short period of time within the quarter, within the end of the quarter. So the contribution in this quarter was quite minimal comparing to what we expect in Q4 and next year. As we look at the overall smartphone market, as we also commented in the script, overall, this market, I will say also the so-called what we call compute-intensive consumer market, whether it's so-called the TV, PCs and mobile, that market is under pressure because of the price increase in the market. And if we compare this year versus last year, definitely, we have seen decline in the overall so-called addressable market, the size of the market. Having said that, and we also mentioned that in the previous quarter, we are seeing our low-tier customer that supplies our technology. While they started the year very, very soft in Q1, we really see a very strong sequential growth as we go through the year. So Q2 was much stronger. Now Q3 is stronger. And while the overall market is soft, we are seeing them actually also gaining market share. So net year-over-year, it's still lower than last year. But for us, at least the impact is much less because the lower-tier customer is actually gaining share, growing quarter-over-quarter. And specifically with the U.S. customers, we are looking for a very significant ramp as we go to Q4 and beyond.

Kevin, maybe I would add one more thing that if you look at the mobile royalty revenues, with all the headwinds and the difficulties, they grew 20% dollar-wise for us year-over-year and 30% sequential. So still, we're seeing higher more 4G and 5G type phones versus 2G and 3G phones a year ago, which bears higher ASPs and 20% year-over-year doesn't yet before the big U.S. guy starts to kick in with much higher volume and dollars, it's still a very solid contribution for mobile this quarter.

Okay. Great. And maybe as you're entering into the AI infrastructure market with the NeuPro, how -- is there going to be a difference in time to market or time to royalty in the AI infrastructure versus AI edge?

Yes. Thanks for the question, Kevin. First, we are super excited how we are doing in the market overall with our NPU product line. As we mentioned, now we have more than 15 customers that already licensed the technology. And based on that success on the edge side in terms of the performance and what we can support the customer base, what we've seen is actually a very good capability to expand it into the infrastructure. And within the infrastructure market, we see actually 2 type of customers adopting our technology. One is more the customers that want so-called to internalize those capabilities and develop their own NPU ASIC and they don't want to start from scratch, can be OEMs or semiconductor customers. But also we see whether it's the memory supplier or the so-called the high-speed wire connectivity suppliers looking to add NPU so-called on their own edge within the infrastructure to accelerate the performance. And our technology that really can customize and scale up and down, a great, great fit and provide an extremely good performance to run inference on the infrastructure. In terms of time to market to your question, actually, it's quite similar. Overall, AI is moving very, very rapidly. So there is very strong and very push and demand to get those products to market as quickly as possible. So this is not longer than what we've seen on the edge. It's our typical 18 to 24 months to get to royalty. The other thing that I will mention on the infrastructure, actually, we already started licensing this new technology last quarter. And this quarter, we got another customer that licensing the technology. So while we just came and announced it more publicly this quarter, this technology, we have been [indiscernible] and it's already starting to get integrated by several customers.

Our next question today comes from Suji Desilva at ROTH Capital.

On the 4Q licensing versus 3Q, I know there's a large deal signing and moving into 4Q. Can you give us a sense of that magnitude of the impact there? And then the run rate into '27, what's the normalized rate through the movement of that deal?

Yes. It's an important deal for us. It's an existing customer, multiuse type of technology, significant deal. It's a bit of a timing issue of not being able to close it in the third quarter, but it was already closed in the beginning of the fourth quarter. We saw a pretty nice run rate in the first 2 quarters of the year of that $18-ish million level. We're confident with these types of levels. We're adding more technology, more offerings. We have been able to license new technologies to existing customers this quarter. So for the time being, we are very comfortable at these higher levels than last year. And we are looking at a nice growth year-over-year with the licensing, which will give us strong opportunities to increase royalties in years to come.

Yes. Suji, I may add a few other data points here. So if we look at the first 3 quarters of this year, licensing is 14% higher than the previous year. So overall, licensing has been strong and good. Unfortunately, meaningful deal here, as Yaniv mentioned, with existing customers that they pushed to Q4, which we already signed. This deal, by the way, is a great deal. It's with existing customers that will expand and adding additional connectivity technology to their portfolio. So we are very excited about the deal that signed as well as overall, if we look at backlog of Q4 and the deals that we have in the pipeline, we are very confident with our ability to go and deliver in Q4 and actually finish the year very nicely on the licensing overall.

Okay. Great. And then my second question, maybe following up on Kevin's question, you answered -- typical time to royalties of 18 to 24 months, even for the AI NeuPro infrastructure. Based on the wins and the pipeline for that AI infrastructure and NeuPro in general, when maybe the elbow or the kind of the inflection point in the royalties like from here looking forward, just to understand what the time frame to that might be based on your visibility here?

Yes. So we mentioned also on the prepared remarks that we're expecting some of the royalties that probably will start in the coming Q4. But the more ramp will start through 2027 and then even further in 2028. Another data point that I can share is the large PC customer that we mentioned previously, actually, we have tape-out the device with them. So we really are very, very encouraged with the execution and how that's moving forward. We have now multiple customers that tape-out and they are targeting to ramp within 2027. So overall, very, very encouraging signs on that front.

Our next question today comes from Joseph Cardoso at JPMorgan.

Maybe for the first one, Wi-Fi units softened again this quarter on a sequential basis. And I was just curious if you can help us think through the ramp here going forward, particularly as you highlighted Wi-Fi 6 record unit or record quarter here. Maybe just help us think about how we think about the crossover of Wi-Fi 6 and Wi-Fi 5 or the legacy Wi-Fi products rolling off as we think about going forward? And then I do have a quick follow-up.

Sure. I'm happy to add some color here. Wi-Fi shipments this quarter were 78 million units, not the highest. It was down 6% from a volume perspective year-over-year. But we mentioned a very interesting data point, which we have been talking about for a while now and that's replacing the existing Wi-Fi 4 with Wi-Fi 6 technology. We have said for a while that the ASPs and the technology is more expensive and much higher RF for us. And we have doubled the volume of Wi-Fi 6 for north of 50% of that volume, up from a year ago of 24%. What that means is that the royalty contribution on those 78 million devices more than doubled year-over-year, while the units went down. And that is exactly the way to achieve that is to replace with the newer Wi-Fi technologies and we are seeing it very strongly this quarter. As soon as that continues and Wi-Fi units continue to increase, that will have a double impact on the overall revenue and the dollars we collect.

Maybe I'll add a few more data points. First, I would say we have really established extremely strong leadership in the marketplace with our wireless connectivity, both Bluetooth and Wi-Fi technology. If we look at Wi-Fi, now we have more than 30 customers that already now have licensed both the Wi-Fi and Bluetooth technology from us, so-called a combo technology. And within Wi-Fi 6, we now have more than 40 customers that already license our Wi-Fi 6. So really, quarter-by-quarter, we keep seeing more customers ramping now their products into volume shipments and then keep growing that volume shipment. So we expect the Wi-Fi volume shipments to grow significantly, while, as Yaniv pointed out, also the transition from Wi-Fi 4 to Wi-Fi 6 will come in a very, very strong phase as we already announced seen in this quarter. So we are very encouraged about that and the trajectory as it -- as going to move forward.

And maybe as my follow-up, it sounds like the scope of opportunities are expanding for you guys. I think now this quarter, you also talked about television program that's in the pipeline. But simultaneously, the engineering headcount continues to trend lower. Can you maybe just double-click on this dynamic? What's driving it? And how should we think about the sustainability of that going forward and implications to the cost structure here?

Let me start with the cost structure, maybe. The biggest hit for us in 2026 was unfortunately the dollar weakening against the euro and the shekel, which are the 2 main currencies, which probably about 300 of 400 engineers are located at. And that was about a 20% hit overall year-over-year. So that's something that is the major expense item on our books this year. And even that, we have managed to decrease a bit and state that if in the prior guidance, the annual guidance, we talked about $8 million or 8%. Now we have tuned that down to about 7% overall expense increase, which is about $7 million. So from a number perspective, hopefully, that headwind is behind us and the comparison for next year will not be as hard as it was of '25 versus '26 from just the FX perspective. Headcount fluctuates up or down every quarter, but we're still investing a lot in R&D, especially the AI and also in new markets like the RF add-on to Bluetooth and to Wi-Fi technology. So in some places, we're trying to be a bit more lean. And on the others, we're continuing to invest heavily. Amir, maybe you want to add there?

Yes. What I would say is that, first, from an investment profile and how we look at the business, there are 3 things we want to make sure that we are going to execute well, and that's our very strong growth driver and we'll keep investing in R&D. One, of course, is the AI and now the expansion into infrastructure. The second is overall our leadership in wireless connectivity and then driving solutions with RF and overall complete software and hardware. All those things, we have been able pretty much to execute within the baseline of the headcount that we have had. As Yaniv mentioned, specifically in 2026 versus 2025, we had the headwinds of the exchange rate. For the most part, this is probably behind us as a comparison to next year. So we are well set basically to keep investing in R&D while at the end of the day, driving improved profitability as the top line growth.

Our next question today comes from Josh Buchalter at TD Cowen.

Maybe to start, it sounds like there's a good deal of renewed optimism in the smartphone market, specifically given what's going on with the modem share. Could you maybe speak to your philosophy on this business? Like is this kind of in cash cow mode where you're monetizing previous investments? Or are you guys investing to continue to expand opportunities specifically in the smartphone modem market?

Yes. Great question, Josh. I would say first, strategically for the company, as also we have indicated previously, our strategy is diversification; diversification of our product portfolio as well as markets. So we are not targeting mobile as a specific market to so-called tailor our IP and customized just for that. We are building a broad-based IP in order to get it into the different markets. Specifically for mobile, there are 2 trends that definitely we would like to see our technology so-called supporting that and we see very good opportunities moving forward. One is all the things related to the convergence between satellite communication and the cellular communication, so-called 5G, 5G enhanced the 3GPP plus satellites. We mentioned already in the past design wins that we have in that perspective. And we are offering our PentaG solution as a complete software and hardware offering that our customers can take into the satellite communication as well as the solar communication as a single solution. The next is, of course, 6G that is coming in the coming few years. Our technology is developed such that is upgradable for that and we are supporting the next generation of this technology. So this is another opportunity for us as we move forward. But overall, we'll continue developing our IP and not just for mobile, not just mobile as a target market, but as a broad-based IP offering. And we are very, very happy to see that inflection coming right now just this quarter and really ramping in Q4 and beyond. So this is a great ramp that we will see as we go through the 2027 and beyond.