Digital signal processer (DSP) cores developer Ceva Inc. (Nasdaq:CEVA); LSE:CVA) has flown below the semiconductor and capital market radars for years. In the decade since its founding, the company has slowly boosted revenue and profits, and while there is no chance that it will become an industry giant, at least under its current model, it appears to be headed toward becoming a quite promising Israeli company for its shareholders. At the very least, it should offer some interesting times.
Ceva, like other intellectual property (IP) companies, has a revenue model based on one-time sales of licenses to use its technology, and royalties on the sale of products that use the technology. This model should enable the company to see an upside from the expected rise in the baseband processor business thanks to increased demand by customers and their indifference to prices.
Ceva CFO Yaniv Arieli told "Globes", "We don’t care about the cost of a mobile telephone or of a processor. We're satisfied with only a few cents. We're therefore enjoying an increase in quantity."
Ceva makes $0.05-0.10 on the sale of every processor that includes the company's IP. The numbers add up, however, when you're talking about a market share of 13% in 2008, and expectations of a 20% share of a 1.1 billion mobile telephone market in 2009. Ceva posted $9.5 million revenue in the first quarter of 2009, of which 40% came from royalties. Investment house William Blair sees Ceva's revenue from royalties surpassing licenses, its core business, in 2010.
Ceva's customers will mean little to anyone outside the semiconductor industry: Broadcom Corporation (Nasdaq: BRCM), Infineon Technologies AG (NYSE; XETRA: IFX), Marvell Technology Group (Nasdaq: MRVL), NXP Semiconductors NV, ST-Ericsson, and other companies that sell DSP cores based on Ceva technology. Nonetheless, these companies' customers, which apply Ceva IP in the mobile telephones that they manufacture, dominate the market: Samsung Electronics Co. Ltd. (KRX: 005930), LG Electronics Co. Ltd. (KSX: 66570), Sony-Ericsson, and Nokia Corporation (NYSE; LSE; HEX: NOK). Apple Inc. (Nasdaq: AAPL) also uses Ceva IP in its iPhone.
Commenting on market penetration, Arieli says, "Our main competition is from in-house developments at producing companies. The challenge is to persuade the companies that our product is cheaper."
"Globes": That's quite an ambition, is it not?
Arieli: "We also had ambitions for baseband processors. A few years ago, we didn’t see ourselves increasing our market share from 4% to our current 14%. If we seek a new place for growth, then processors for applications is undoubtedly the place."
These new challenges raise speculation about Ceva's cash reserves, which is currently $85 million.
"At the moment, a buy-back of shares is a more suitable use," said William Blair analyst Anil Doradla several weeks ago. "A strategic acquisition of technology might be a good idea, but only after the buy-back."
Arieli is a bit more insistent on this point. "The big question is how you find the right bride. In any M&A we will want to make, you have to be very careful not to destroy the profit momentum, which makes the choice very hard," he says.
What about the reverse side of the coin: an acquisition of Ceva? Doradla sees several possibilities among the large semiconductor companies that are Ceva's customers, specifically Broadcom, Samsung, or even Nvidia Corporation (Nasdaq: NVDA), which would want Ceva's technology and potential at home, ahead of the changes in cellular standards.
Arieli is a bit less enthusiastic about selling the company. "If you want to sell the company, you have to find the right point to do it. I feel that we're far from there. Within three years, we can have 30% to 50% of the market. Let's wait until we're one of the big players," he says.
Published by Globes [online], Israel business news - www.globes-online.com - on August 3, 2009
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