2023-08-17 09:12:24 ET
Summary
- CEVA went from bad to worse in its latest report due to unexpected setbacks, but it is calling for an improvement.
- CEVA was right in predicting an increase in royalties, but this was more than offset by licensing issues.
- CEVA stock has fallen to lows it has not seen since 2016 and the stock needs to bounce soon or the path could be clear for much lower prices.
- A case can be made for and against CEVA and which one makes the most sense can vary depending on one’s viewpoint.
CEVA ( CEVA ), a licensor of IP for wireless connectivity technologies, smart sensing and other solutions, headed into the Q2 report on August 9 feeling good after rallying for three months following an atrocious Q1 report that saw the stock collapse and challenge multi-year lows. The market expected to see justification as to why CEVA deserved to get the benefit of the doubt and confirmation CEVA had left the worst behind. However, the opposite happened with CEVA falling short for the second consecutive quarter after encountering unexpected headwinds. The stock fell to lows that haven’t been seen in years. Why will be covered next.
CEVA went from bad to worse
CEVA saw non-GAAP earnings collapse from $0.23 in Q4 to $0.00 in Q1, twice the decline expected, but that was expected to be as bad as it gets with CEVA calling for a recovery in royalty revenue after the segment drove Q1 way below expectations. Unfortunately, this proved to be incorrect. Q2 estimates called for a sequential rebound with non-GAAP EPS of $0.07 on revenue of $30.9M, but CEVA fell way short of estimates, like the quarter before, with a non-GAAP loss of $0.48M or $0.02 per share on revenue of $26.2M, a decline of 8.9% QoQ and 21.2% YoY.
In terms of GAAP, CEVA finished with a loss of $5.8M or $0.25 per share. Licensing, NRE and related revenue totaled $16.8M and royalty revenue contributed the remaining $9.4M, both lower YoY. However, there was a ray of hope with royalty revenue increasing by $1.4M QoQ. CEVA ended with $136M in cash and cash equivalents on the balance sheet with no debt. The table below shows the numbers for Q2 FY2023.
(Unit: $1000, except EPS) | |||||
(GAAP) | Q2 FY2023 | Q1 FY2023 | Q2 FY2022 | QoQ | YoY |
Revenue | 26,172 | 28,735 | 33,195 | (8.92%) | (21.16%) |
Gross margin | 79% | 82% | 79% | (300bps) | - |
Operating income (loss) | (6,274) | (4,793) | (276) | - | - |
Net income (loss) | (5,818) | (4,872) | (1,123) | - | - |
EPS | (0.25) | (0.21) | (0.05) | - | - |
(Non-GAAP) | |||||
Gross margin | 82% | 84% | 82% | (200bps) | - |
Operating income (loss) | (1,055) | 69 | 4,634 | - | - |
Net income (loss) | (480) | 107 | 4,314 | - | - |
EPS | (0.02) | 0.00 | 0.18 | - | - |
Source: CEVA
The sequential improvement in royalties was assisted by CEVA licensees increasing their unit shipments. Shipments increased by 73M QoQ to 370M units in Q2 FY2023. Base station and IoT products contributed 291M units, 21M more QoQ, and handset baseband chips contributed the remaining 79M, an increase of 52M QoQ. Bluetooth led the way once again by accounting for 210M units.
Will CEVA rebound for real or miss estimates once again?
It’s worth mentioning that CEVA was correct in predicting a sequential improvement in royalties as mentioned in the Q1 earnings call . Nevertheless, there is no getting around the fact CEVA badly missed consensus estimates for Q2, just as it did in Q1 when it also badly missed earnings estimates. CEVA therefore had some explaining to do as to what drove the much weaker-than-expected results. While CEVA was correct in forecasting an increase in royalties, this was more than offset by unexpected headwinds in licensing that caused the latter segment to come in weaker than expected. From the Q2 earnings call:
“Our second quarter results reflect the dynamic environment more about by challenging macroeconomic conditions that has led to slower-than-expected recovery in some regions. On the other hand, we also saw resumptions in chip demand following a few quarters of inventory correction. Our licensing business experienced a slowdown in the quarter, which I will explain momentarily. On royalties, we saw our royalty revenue recovered to grow 17% sequentially, and we anticipate this recovery can continue in the coming quarters. In licensing, our revenue came in below our expectations. The primary reason for this relates to the semiconductor start-ups, a customer base that is an important contributor to any IP licensing business, semiconductor startups rely on venture capital funding to underpin their businesses.
Funding from VC for semi start-ups slowed down towards the end of 2022 and global VC funding for the first quarter of 2023 fell 50% year-over-year. Consequentially, some of the deals with start-ups, we anticipate closing in the quarter did not come through as planned, and the resulting shortfall and licensing revenue was unexpected. However, we are already seeing funding of startups in the semiconductor ecosystem, picking up again and anticipate licensing to these companies will recover in the coming quarters."
A transcript of the Q2 FY2023 earnings call can be found here .
However, CEVA is seeing a revival in licensing, which, together with increased royalty revenue in the coming quarters, is why CEVA is calling for an improvement for real in Q3. So even though CEVA has badly missed consensus estimates for two consecutive quarters, the consensus among six Wall Street analysts is that Q2 was the bottom and earnings will get better. Consensus estimates predict CEVA will wind up with non-GAAP EPS of $0.14 on revenue of $110.7M by the end of FY2023 after incurring a loss of $0.02 per share in the first half. In comparison, CEVA earned $0.78 on revenue of $134.6M in FY2022.
Could the stock go lower than it already has?
Management may have tried to lessen the blowback by calling for a better Q3, even though it did the same thing in the previous quarter, which turned out to be misplaced. As a result, the stock sold off after the Q2 results disappointed for the second time and the market did not get the improvement that was expected. The stock lost 12.2% on August 9 after the Q2 report, three months after losing 14.5% on May 10 after the Q1 report.
The stock has fallen to $20.27 as of August 15, and it got as low as $20.10 if intraday lows are included, which means CEVA has lost 20.8% YTD. Moreover, not only is $20.10 a new 52-weeks low as it has fallen below the previous one at $20.52, set a day after the Q1 results were released, but it also represents a multi-year low as $20.10 is below the March 2020 low of $20.45 and the December 2018 low of $20.40. The last time the stock got any lower than $20.10 is all the way back in March 2016, which is seven years ago.
A previous article speculated that the stock might find some support and thus rally after it came close to matching the March 2020 low of $20.45 with the May 2023 low of $20.52, in effect pretty much completing a 100% retracement of the uptrend, starting with the March 2020 low of $20.45, and ending with the February 2021 high of $83.95.
However, this proved to be incorrect, because even though the stock did proceed to rally off the May 2023 low as shown in the chart below, the stock got stopped in its tracks by the Q2 report and it is now at the lowest levels since 2016. The 100% Fibonacci retracement provided some support and an attempt was made to bounce back, but in the end, it just wasn’t enough.
There is a small chance the stock might attempt a bounce in the coming days. Keep in mind that the stock is deep into oversold territory with an RSI value of 19.48, which suggests a bounce is possible in the short term. The break below the multi-year lows was not accompanied by volume, which may be the reason why some may still be banking on support coming through.
However, if the stock continues to fall, it may not stop until it finds another support level. This may be difficult to find in the $18-20 region, which suggests the stock could be in for a long haul. The stock may make it all the way back to around $16.64 or so, which is roughly where the stock used to hang out a lot years ago.
There is one more reason why the stock could go lower. Multiples may not be enticing enough to convince buyers now is the time to step in. For instance, CEVA trades at 154 times forward non-GAAP earnings. In terms of GAAP, no multiple is assigned as CEVA is in the red. The table below shows some of the multiples for CEVA.
CEVA | |
Market cap | $510.95M |
Enterprise value | $384.26M |
Revenue (“ttm”) | $129.0M |
EBITDA | $0.4M |
Trailing non-GAAP P/E | N/A |
Trailing non-GAAP P/E | 153.88 |
Trailing GAAP P/E | N/A |
Forward GAAP P/E | N/A |
PEG GAAP | N/A |
P/S | 4.13 |
P/B | 1.97 |
EV/sales | 3.15 |
Trailing EV/EBITDA | N/A |
Forward EV/EBITDA | N/A |
Source: Seeking Alpha
Investor takeaways
CEVA has been badly hit by the drop in demand for consumer devices, especially mobile devices like handsets and Bluetooth devices. However, OEMs have started to increase shipments of chips utilizing CEVA IP, which is why royalty revenue increased sequentially in the latest report. And while licensing revenue fell short, CEVA is predicting a recovery in this segment.
Together, these two form the basis for why CEVA believes Q2 was the bottom and why the numbers are expected to get better in the coming quarters. On the other hand, it’s worth reminding that CEVA’s ability to forecast has been rather shaky in recent quarters. There is a reason after all why earnings estimates were way off for two consecutive quarters, so some skepticism is probably warranted with regards to the outlook.
I am neutral on CEVA. There is a case to be made for long CEVA, Assuming CEVA is correct that the bottom is in, then CEVA may be worth looking at with the stock at multi-year lows. Keep in mind the stock has been going lower since the February 2021 high, which is more than two years ago. The stock has sold off by so much that it is probably due for a bounce for that reason alone. CEVA has been hit and miss with its forecasts, but if that is no problem, long CEVA is worth a look.
On the other hand, it’s worth pointing out that the root cause of why CEVA has been hit hard has not been truly resolved. The average consumer worldwide is under pressure for a host of reasons, including the rising cost of living and thus less disposable income, which is causing them to cut back on non-essential spending like consumer gadgets. Such an environment, which could last for a long time, does not favor CEVA.
Bottom line, there is an argument to be made for and against CEVA. Some may be willing to roll the dice based on a forecast from CEVA. Others may not be so willing to forget that CEVA did get it wrong before and thus refrain from putting too much stock on an outlook that may be too optimistic. Either argument can be made. Whichever sounds the most sensible is up to each individual to decide.
For further details see:
CEVA Hits A Multi-Year Low After Falling Way Short Of Expectations Again