CEVA: The Market Had Second Thoughts After A Mixed Report

The market reacted well at first to the latest report from CEVA (NASDAQ:CEVA), a licensor of wireless connectivity and smart sensing technologies and other solutions, but then seems to have changed its mind on second thought. The stock jumped in response to an earnings report that came in mixed with some good and some bad. The market paid more attention to the former initially, only to take another look at the latter, which likely caused the stock to reverse course. Why will be covered next.

A mixed report to cap off FY2022

CEVA got off to a good start with headline numbers that surpassed expectations for the top and the bottom line, which called for non-GAAP EPS of $0.17 on revenue of $32.3M. Q4 revenue, however, came in higher at $33.4M, although it still represented a decline of 1.9% YoY. Royalties contributed $10.9M, a decline of 14% YoY, and licensing, NRE and related contributed the remaining $22.5M, an increase of 5% YoY.

GAAP EPS declined by 52.9% YoY to $0.08 and non-GAAP EPS increased by 4.6% YoY to $0.23. Note that the GAAP loss of $0.96 a share in Q3 FY2022 was mostly the consequence of a $15.7M write-off of deferred tax assets, another $5M impairment charge connected to Immervision and some other charges. CEVA finished with cash and cash equivalents of $148M on the balance sheet and no debt. The table below shows the numbers for Q4 FY2022.

Source: CEVA

The final numbers for FY2022 can be tabulated with the release of the Q4 numbers. FY2022 revenue increased by 9.7% YoY to $134.6M, a record high. Keep in mind that this number includes contributions from recent acquisitions. CEVA ended with a GAAP loss of $23.2M or $1 per share and a non-GAAP profit of $18.8M or $0.78 per share, an increase of 20% YoY.

Note that CEVA bought back 219K shares in FY2022, which affected the YoY gains. Nevertheless, the non-GAAP weighted-average of shares outstanding rose to 24.1M in Q4 due to stock-based awards, up from 23.7M a year ago. CEVA signed 76 licensing agreements in FY2022, three more than the year before and a record high, including 22 in Q4. Margins declined for the year.

FY2022 was not a bad year for CEVA with a number of new records set, but the year ended soft. Furthermore, shipment data was so-so as well. Licensees shipped a record 1.7B units in FY2022, an increase of 3.5% YoY, but they ended FY2022 on a weak note with a decline of 10% YoY to 375M in Q4. Business is not good right now.

Handset baseband chips totaled 330M, a decline of 14% YoY, as a result of the market for mobile handsets in a slump and the socket loss of one of CEVA’s licensees at a leading smartphone manufacturer. A previous article covers this issue in further detail. Base station and IoT product shipments accounted for the remaining 1.4B units, an increase of 8% YoY with Bluetooth contributing 1B.

The outlook diverges

The outlook was a mixed bag as well. CEVA usually releases its annual guidance at the start of the new fiscal, but it refrained from doing so at this time due to current market conditions with lots of uncertainty out there. On the other hand, management did state that while weak demand is likely to prevail in H1, it also believes that there will be a rebound in demand in H2. From the Q4 earnings call:

“Now, turning to our outlook. As Amir discussed earlier, the smartphone and consumer electronics markets continue to suffer from soft demand and elevated inventories. Also, the technology sector is undergoing project expense adjustments and re-alignments. We expect this softness to continue into the first half of 2023 and anticipate that both our licensing and royalty revenues will be lower sequentially, while picking up the pace in the second half of the year.

Due to this uncertain economic outlook and reduced visibility across the industry, we will refrain from giving annual revenue guidance for 2023 at this time. We will revisit this topic and do our best to provide more information when visibility improves.”

A transcript of the Q4 FY2022 earnings call can be found here.

CEVA expects revenue to decline in the high single digits in Q1 FY2023.

“So, taking all that in account, we are probably looking at high single digits type of sequential lower revenues”

Based on this, consensus estimates expect non-GAAP EPS of $0.12 on revenue of $31.2M in Q1 FY2023. CEVA is predicted to earn $0.41-0.90 on revenue of $130-138M in FY2023, with most of it in the second half of the year. These numbers represent YoY declines of 16.7% and 0.5%, respectively, at the midpoint. In addition, note the fairly wide range in estimates, which is in line with the high degree of uncertainty at this time, especially in the absence of any formal guidance from CEVA. In FY2024, however, growth is expected to return with non-GAAP EPS of $0.80-1.09 on revenue of $147-154M.

The good vs. the bad

CEVA is currently in the midst of a slump, but the market seemed to like the idea of a potential recovery starting in the second half of the year. The stock jumped to a new high in 2023 after the Q4 report was released. In fact, the stock had rallied in the run-up to the report’s release. The stock gained as much as 35.5% as shown in the chart below.

However, the market seems to have changed its mind. The stock quickly gave back the early gains to end the day after the report almost unchanged. The stock then proceeded to go on a decline from which it has yet to recover from. The stock is off the highs, but it has retained most of this year’s gains and it is still up 23.8% YTD.

The market appears to have given the latest report from CEVA a thumbs down on second thought if the post-earnings selloff is any indication. While management suggested a recovery could be here as soon as in H2, the fact remains there’s some uncertainty associated with the outlook. CEVA after all declined to give out guidance for FY2023 as usual. An H2 recovery may not materialize and the current slump could last longer than expected.

Another issue that may have contributed to the second guessing is valuations. For instance, CEVA trades at 50.62 times forward non-GAAP earnings with a trailing P/E of 40.77. In comparison, the sector median is 20.2x forward earnings. Note also how the forward multiple is higher than the trailing multiple, a sign earnings are expected to deteriorate in the next 12 months. Keep in mind that CEVA is not profitable on a GAAP basis, hence the lack of GAAP multiples. The table below shows some of the multiples CEVA trades at.

Source: Seeking Alpha

Investor takeaways

I remain neutral on CEVA as stated in a previous article. It’s worth mentioning that while CEVA serves different markets, almost all of them are targeted at the consumer. For instance, the strength of the market for mobile handsets depends on the consumer willing to spend. Bluetooth is also tied to the consumer segment. 5G infrastructure is not, but carriers have been cautious with their spending due to the state of the economy.

As such, CEVA is heavily impacted if the consumer cuts back on spending due to, for instance, a weak economy, as is the case right now in many parts of the world. In that sense, there are good reasons to be somewhat skeptical of a recovery in H2 in the semiconductor market as suggested by CEVA and a number of other companies. The global economy is suffering from a number of headwinds, including high inflation, and it does not appear this will change anytime soon.

Consumer demand is soft right now, as acknowledged by CEVA’s most recent report, and there are no guarantees it will improve later in the year. On the contrary, it’s not impossible for the consumer to pull back even more, which will impact CEVA due to its heavy exposure to the consumer market through various consumer products like smartphones, earbuds and so on.

This is not to say that the semiconductor market won’t rebound in H2 2023. A lot of companies are banking on this happening, including CEVA. At the same time, there is a degree of risk associated with the outlook, which CEVA admits by declining to issue guidance for FY2023 as usual. While some may be willing to take the risk, others may feel the risk is not worth it, especially with multiples where they are. CEVA is not a cheap stock and to add the risk on top of it may be a hurdle too high to overcome.

Bottom line, in the end it comes down to whether there really is a rebound in demand in H2 2023. If there is, long CEVA could be a winner. If there isn’t, the stock could easily give back all 2023 gains and then some. Without the prospect of recovery in the near term, CEVA is left with declining earnings and elevated multiples. Stocks with those attributes tend not to do well.