CEVA Inc. Strong Quarter—Raising Price Target

This morning before the bell, CEVA reported 3Q15 results: another strong quarter driven by licensing and a resurgence in royalty revenues—a new record high. As the company begins to gain share in 4G/LTE, mgmt indicated it sees y/y royalties growing 22%. We believe this is just the beginning as OEMs look for vertical integration (Samsung) or cheaper, high quality solutions (China Mainland OEMs). We raise our price target to $25 from $21 as we are unconcerned with potential socket losses in Samsung flagships, as we believe the OEM is working to further integrate its own solutions throughout its product offering (low-mid-end offerings need integration to compete on price). We reiterate our Outperform rating.

KEY POINTS

■ Quarterly Results: CEVA reported 3Q15 revenues/EPS of $16.2M/$0.22, in line with the October 5th pre-announcement (note). Revenue driven by eight new licensing agreements, five utilizing CEVA's connectivity solutions. GM up 100bps Y/Y to 92%. R&D fell to 38% of sales in the Q as R&D grants were recognized. Total unit shipments up 4% as LTE and non-baseband growth offset 2G decline.

■ China Market Updates: With Marvell's exit from the China LTE market, CEVA sees another 2016 opportunity in China low-end LTE with Spreadtrum. Recent numbers estimate 89% of China smartphones shipped in August were LTE, while LTE has grown 307% on a YTD basis in China. On a global basis, estimates put LTE penetration at just 10%.

■ Non-baseband Outlook: Non-baseband solutions outside of BT continue to gain traction as shipments grew 67% sequentially. CEVA signed two deals with its vision solution in the auto space in the Q. Mgmt expects to see a contribution from audio solutions in 2016 as well as begin to see the effect of a ramp in machinemachine connections.

■ Guidance: 4Q15 revenues guided to $15-16M and non-GAAP EPS $0.16-0.18 as gross margins are expected to remain strong at 92%. On faster than expected 4G adoption and higher contributions from non-baseband/non-bluetooth shipments, our 2015E/2016E non-GAAP EPS increases from $0.48/$0.77 to $0.53/$0.85.

■ Increasing PT to $25: We still see the stock at the start of multi-year growth due to share gains in 3G/4G baseband and traction in non-baseband offerings. We apply a 23.5x multiple to our 2016 estimate of $0.85 and add in ~$5 of cash.