CEVA: Previous outlook maintained despite being behind schedule

CEVA (Nasdaq:Seba), a licensor of IP for wireless connectivity technology, smart sensing and other solutions, released its latest earnings report on May 9th, causing some trepidation. And earnings came in well below expectations. Shares plummeted by more than 10% at one point, bringing CEVA to within an inch of the support offered by the existing trend line, but it recovered with a more modest loss. We explain why next.

Why stocks need to make decisions

a Previous article Since February of last year, we have focused on CEVA’s recently published financial model, which predicts strong growth in the coming years. This, along with improved earnings, contributed to the stock’s rise at the time, immediately increasing the stock by 21.4%. After the release of the 2023 Q4 report. Still, after considering other aspects, we rate CEVA a Hold rather than a Buy. For example, stocks have been underperforming for quite some time and could continue to do so if there is new pressure on earnings, such as from geopolitical trade issues.

The chart above shows why we were justified in not buying during last February’s rally. The stock price has fallen since then. The stock hit its 2024 high of $25.19 a few days after the aforementioned article was written, but no new highs have been made since February 15th. On the contrary, the stock price has been gradually declining since it closed at $20.16 on May 17th. In his one-year rally for the sector that CEVA belongs to, CEVA is currently down 11.2% year-to-date.

The overall direction of stock prices since the October bottom has remained high, but this may change in the near future. Notice how the stock respects the boundaries imposed by the uptrend line and downtrend line, as shown on the chart. However, this cannot continue as the trend line is on a collision course. The stock must either break through the upper trend line or break through the lower trend line.

For the reasons mentioned above, both bulls and bears may want to hold back on their bets. In the former case, a break above the upper trend line would be desirable. In the latter case, it would be desirable to break below the lower trend line. Either way, the current action won’t last long and the stock will have to make a decision.

Why stocks sold after CEVA’s latest report

This graph shows something else. On May 9th, the stock price fell and almost broke the lower limit of the uptrend line, which happened to be the day that CEVA released its latest quarterly report, the first quarter of 2024 report. was lower than expected. Consensus had expected non-GAAP earnings of $0.03 per share on revenue of $23 million, but CEVA reported a loss of $0.05 on revenue of $22 million. The table below shows numbers for the first quarter of 2024.

On a GAAP basis, CEVA reported a net loss of $5.45 million, or $0.23 per share. Royalty revenue contributed $10.7 million, up 33% year over year, offset by license and related revenue of $11.4 million, down 37% year over year. Note that CEVA disposed of Intrinsix. Intrinsix is ​​excluded from continuing operations figures. CEVA ended the first quarter of fiscal 2024 with $159 million in cash, cash equivalents, securities and bank deposits and no long-term debt on its balance sheet.

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sauce: Ceva

Shipments increased 25% year-on-year to 371 million units, leading to an increase in royalties. Bluetooth shipments accounted for the majority at 202 million units, followed by mobile phones at 61 million units. Wi-Fi unit shipments were strong, increasing 50% year-on-year to 31 million units. CEVA entered into 11 license agreements in the first quarter of 2024, two of which are first-time customer agreements.

CEVA lags but maintains previous outlook

CEVA fell short of expectations, but management provided details on why. Many license agreements that were expected to close during the quarter were delayed. However, CEVA seems to think it will be able to recover within the year, as it maintains its forecast given earlier this year that its fiscal year 2024 revenue will increase by 4-8% year-on-year. From the first quarter earnings report:

“On the licensing side, we experienced challenges in the first quarter with some license agreements being postponed until the end of the year, but overall we are pleased with the quality of the license agreements signed and our overall commitment to next-generation IP. Demand has been very encouraging. We have a portfolio of technologies that meet some of the critical pain points in semiconductor and OEM smart edge roadmaps, and we are confident that we can meet our total revenue goals this year. The ability to build a healthy backlog also reinforces this belief. Overall, I believe 2024 will be a year of growth for CEVA. I am very confident that we will achieve our goals.”

sauce: CEVA earnings report

Quarterly guidance indicates that second quarter fiscal 2024 revenue is expected to increase 6-16% sequentially, implying revenue of $23.4 million-$25.6 million. Non-GAAP gross margin is expected to be 90%, consistent with the previous quarter.

“Next, let’s talk about our guidance for the second quarter of 2024. As Amir mentioned earlier, we closed a number of deals at the beginning of the second quarter, and we are very excited about our second quarter guidance for our broader technology. We also have a good outlook on potential deal flow” and the market. We expect loyalty to increase year-over-year in the second quarter and are monitoring the timing of new product introductions from our customers. Overall, he expects overall revenue for the second quarter to increase between 6% and 16%, primarily from licensing.

Gross margins are expected to be consistent with the first quarter, approximately 88% on a GAAP basis and 90% on a non-GAAP basis, excluding stock-based compensation expense of $0.2 million and amortization of acquired intangible assets of $0.1 million.”

Using these guidelines for CEVA, we estimate non-GAAP EPS for the second quarter of 2024 of $0.03, assuming revenue hits the midpoint of guidance.

Assuming CEVA grows 4-8%, FY2024 revenue will end up being $101.3 million to $105.2 million. This is expected to result in 2024 non-GAAP EPS of $0.28 to $0.32, which is better than 2023 EPS of $0.10 but well below 2022 EPS of $0.78. Please note that CEVA does share buybacks, and this and other factors may impact the final number. This translates to a non-GAAP P/E ratio of 67.2x, resulting in a stock price of $20.16 and EPS of $0.30.

CEVA expects growth to continue in the coming years, as shown in its latest report. Investor presentation. In the presentation, the company is expected to have a CAGR of 8% to 12% from 2023 to 2027, with 2027 sales of $142.6 million and non-GAAP EPS of $1.00. Applying a P/E multiple of 82x, which has averaged over the past five years, CEVA’s stock price is $82. That is, four times the current stock price.

Could China be a headwind for CEVA?

It is worth mentioning that China contributed $13.6 million to the revenue of $22.07 million in Q1 FY2024, accounting for a 62% share. In comparison, China contributed $17.8 million to her 2023 Q1 revenue of $26.26 million, accounting for a 68% share. Simply put, the numbers would be better if China didn’t exist. China’s sales decreased by $4.2 million year over year, and the total sales decline equated to her $4.19 million.

There is reason to think this may be an ongoing event rather than a one-time event. Because of the risk of relying on external IP that can be cut off by US government restrictions, Chinese companies are increasingly relying on their own IP, especially in the case of China. This is because this trend is becoming more pronounced. specific companies.

Huawei, for example, has seen a rebound in sales, often profiting at the expense of the companies that license IP from CEVA. This applies, for example, to the 5G RAN equipment market, where Huawei is outperforming CEVA customer Nokia. Huawei also has its own cellular modem for mobile devices. That means CEVA will be affected if Huawei’s smartphones regain the market share it lost over the past few years, mainly due to losing access to U.S. technology in countries such as China. There are many other examples.

Huawei and other Chinese companies are also aiming to develop their own technology standards, especially after the start of the technology war between the US and China, which could ultimately cost them CEVA sales. This includes standards that compete with Wi-Fi and Bluetooth. Both are important for his CEVA, as mentioned earlier in the shipping data. As China becomes more dependent on its own intellectual property, it will need less intellectual property from CEVA. So the recent downturn could be just the beginning of something long-term.

Key points for investors

CEVA managed to rally at the beginning of the year with its outlook calling for growth in 2024 and the years beyond, but CEVA has lagged behind after the first quarter of fiscal 2024 report came in below expectations. For CEVA to grow in FY2024 as requested at the beginning of the year, it will need to outperform the results shown in its latest report.

Shares fell after the release of Q1 FY2024 results, but losses were mitigated as CEVA stuck to its FY2024 outlook, suggesting CEVA believes it can make up for the rest of the year. There is. This is important because assuming CEVA achieves the goals laid out in its recent presentation, the stock price could rise many times over. This includes an increase in EPS from $0.10 in fiscal 2023 to more than $1.00 in fiscal 2027, or 900%.

Still, the fact that licensing deals are delayed is not a positive sign. CEVA trades at a high multiple, and for this to be justified, the company will need to show strong growth. CEVA trades like a high-growth stock, but it lacks growth. Growth is expected to pick up in the second half of 2024, but so far there has been little momentum. In fact, CEVA is lagging behind due to its low start to the year.

The chart suggests that CEVA is stabilizing before its next move. The stock has had a series of lower highs and higher lows, but this won’t last forever. The stock actually fell below support after the latest report, but recovered over time. Although this can be seen as a good sign after the disappointing report, it is still too early to call it safe as there is still a chance of breaking support below the trend line. If the stock price moves in the opposite direction to your expectations, a long or short bet can be at a disadvantage, so it may be worth taking your bets off the table.

I have a neutral stance on CEVA. The stock price is on hold and may rise or fall in the near future. The smart thing to do is wait to see which direction the stock is headed and wait for further clarity. While CEVA’s adherence to its prior outlook is a sign of confidence, it does not mean we should ignore actual results. China seems to be causing problems for her CEVA, and there are reasons why more problems are likely in China.

The bottom line is that if CEVA can achieve its goals, it will be a stock to buy, but there is a lack of evidence that CEVA will achieve exactly that goal. If future quarters are similar to the most recent quarter, you may need to revise your goals. CEVA can still salvage its goals for this year and beyond, but it will require bold decisions. Some may be willing to give CEVA the benefit of the doubt, but not everyone will.