Ahead of the market open, CEVA issued a 3Q13 earnings pre-announcement which calls for September quarter revenue to approximate $10.0 million versus prior guidance of $11.5-$12.5 million. While CEVA has disappointed in recent quarters, we are sticking with our Buy rating for a few reasons. First, we believe the 3Q13 license miss is temporary in nature and the $2.0 million license shortfall in 3Q13 may be made up as soon as 4Q13. Additionally, we believe royalties are on the cusps of an upward inflection with the likelihood of long-term growth catalyzed by nonbaseband applications such audio DSP subsystems, multimedia co-processing and basestation equipment. Last, shares are trading at slightly more than 2.0x net cash while the company remains comfortably profitable. We believe CEVA may eventually be part of a larger design IP company such as ARM, Imagination Tech, Cadence Design or Synopsis.
To hit the midpoint of prior guidance, the company was expected to generate $6.0 million in license revenue and $6.0 million in royalties. Per today’s preannouncement, the company is expected to miss license revenue by $2.0 million because of the delayed signing of a “significant” license agreement. In fact, had the referenced license deal closed 3Q13 revenue would have approached the upper end of original guidance. To make things worse, 3Q13 R&D expenses are now expected to be $600,000 higher than prior guidance due to the delay in receiving the normal quarterly R&D grant from the Israeli Office of the Chief Scientist, a grant most Israeli chip companies receive.
The 3Q13 grant will fall into 4Q13 and combine with the amount the company expected to receive during 4Q13, resulting in an approximate 20% quarter over quarter decline in 4Q13 R&D expenses. Regarding the missed license deal, there is a good chance the deal will slide into 4Q13. CEVA’s long-term license revenue guidance is $4.5-$5.5 million/quarter, and despite the 3Q13 miss, there is no reason to think CEVA’s long-term license revenue expectations have stepped down. While Sept-Q royalties are not expected to miss original guidance of $6.0 million, they are expected to decrease 10% quarter over quarter and decrease 15% year over year.
The quarter over quarter decline is function of very poor sales of CEVA-based baseband sales by Intel during the June-Q (royalties recognized three quarters in arrears). In essence, Nokia was most likely reducing component inventory during the June-Q is anticipation of selling the handset business to Microsoft. Based on normal seasonality and normalization of Nokia inventory, we are inclined to believe Intel’s Sept-Q baseband sales will increase significantly quarter over quarter, resulting in a royalty tailwind for CEVA’s Dec-Q. We will have a better sense of CEVA’s Dec-Q royalty trends when Intel reports results on October 15 and Broadcom reports on October 22.