CEVA - NASDAQ

Good day, and welcome to the CEVA, Inc., First Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note today's event is being recorded. I would now like to turn the conference over to Richard Kingston, Vice President of Market Intelligence, Investor and Public Relations. Please go ahead, sir.

Thanks Rocco. Good morning, everyone, and welcome to CEVA's first quarter 2023 earnings conference call. Joining me today in the call are Amir Panush, Chief Executive Officer; and Yaniv Arieli, Chief Financial Officer of CEVA. Before handing over to Amir, I would like to remind everyone that today's discussion contains forward-looking statements that involve risks and uncertainties, as well as assumptions that if they materialize or prove incorrect, could cause the results of CEVA to differ materially from those expressed or implied by such forward-looking statements and assumptions. Forward-looking statements include statements regarding market trends and dynamics, opportunities for Wi-Fi and 5G; our market position, strategy and growth drivers, including with respect to potential benefits of our acquisition of the 3D Spatial Audio business from VisiSonics. Demand for and benefits of our technologies, expectations and financial guidance regarding future performance, including guidance for the second quarter of 2023 and our plans for attending investor events. For information on the factors that could cause a difference in our results, please refer to our filings with the Securities and Exchange Commission. These include consumer demand and the global economy generally, the ability of CEVA's IPs for smarter connected devices to continue to be strong growth drivers for us, our success in penetrating new markets and maintaining our market position in existing markets. The ability of new products incorporating our technology to achieve market acceptance, the speed and extent of the expansion of the 5G and IoT markets, our ability to execute more base station and IoT license agreements, the effect of intense industry competition and consolidation, global chip market trends and our ability to successfully integrate Intrinsix into our business. CEVA assumes no obligation to update any forward-looking statements or information, which speak as of their respective dates. In addition, we will be discussing certain non-GAAP financial measures which we believe provide a more meaningful analysis of our core operating results and comparison of quarterly results. A reconciliation of non-GAAP financial measures is included in the earnings release we issued this morning and in the SEC filings section of our Investor Relations website at investors.ceva-dsp.com. With that said, I’d like to turn the call over to Amir who will review our business performance for the quarter and provide some insight into our ongoing business. Amir?

Thank you, Richard. Welcome everyone and thank you for joining us today. Our first quarter results show continuous progress in diversifying and expanding our licensing business. However, royalties were impacted by customer inventory adjustments and prolonged weak demand for smartphones and PCs. Looking at licensing in more detail, thanks to the hard work and efforts of our team, we signed 13 new licensing and NRE agreements in the quarter. We continue to have excellent traction across our wireless connectivity portfolio in particular, where our 5G and Wi-Fi 6 platforms are in strong demand. Of note three of the licensing agreements we signed in the quarter off strategic significance; one for our DSPs we have a leading Android smartphone OEM for their in-house 5G modem efforts; one for our Penta-G 2 platform for Wadman IoT; and one for our Wi-Fi 6 Access Point IP with a global OEM, who is one of the leading providers of Wi-Fi access points and other networking devices. I will expand on this deal shortly. Other deal to sign in the quarter target Bluetooth connectivity for TWS earbuds consumer IoT and industrial devices, Wi-Fi 6 for access points and mesh use cases, sensor fusion for robot vacuum cleaners and AI for motivators. In royalties, the magnitude of the decline in smartphone and PC related royalties was primarily driven by a pool-in of handset basement shipments in the fourth quarter, which combined with the traditional seasonality resulted in a correction in the first quarter due to inventories. Following conversations we've had with customers and others in the supply chain, we understand the demand has resumed and expect a return to more normal levels as early as the second quarter. Outside of smartphone, we saw excellent growth in our Wi-Fi and cellular IoT royalties, both of which contributed all-time high quality revenue in the quarter. Wi-Fi royalties more than doubled sequentially thanks in part to three new royalty paying customers that reported Wi-Fi 6 shipments to us for the first time. Bluetooth also continued to perform well across the board consumer IoT markets where we have a large presence, while Bluetooth royalties from smartphones were affected by the correction I spoke of. Overall and security is declined 64% sequentially and 71% year-over-year, while base station and IoT royalties declined just 4% sequentially, and 7% annually. On our last earnings call, I outlined three areas identified as key growth driver for CEVA, which aligned with the longer term global megatrends. I want to make the opportunity now to update you on our progress in relation to this. The first is Wi-Fi, where we saw excellent progress in both licensing and royalties during the first quarter. In licensing, we signed three new customers in the quarter, bringing our total number of Wi-Fi 6 licenses to more than 35. While Wi-Fi 6 has achieved a high penetration rate in smartphone and PC to-date, the adoption of Wi-Fi 6 in industrial and board consumer IoT markets, such as TVs, set-top-box, and other smart home devices, is still nascent. This is the market opportunity that many of our Wi-Fi 6 licensees are targeting. And following strong licensing activities among IoT devices customers in the past two years, we are now also engaging with customer licensing our Wi-Fi 6 and 6e solutions for access points, including with the strategic customer that I mentioned earlier. This is a significant development, as access points are an uncharted market for us we have minimal exposure and traditionally dominated by the incumbent Wi-Fi chipset providers. There is a strong appetite for new chipset providers to enter this market. And they are able to accelerate their design activities with our industry leading Wi-Fi 6 IP. These new Wi-Fi chip customers include network equipment OEMs and semiconductor companies, such as the global OEM I alluded to earlier. Moreover, the royalty associated with access points are higher than those from consumer IoT devices, providing a new potentially lucrative royalty stream. And as our customer base expense, our future royalty opportunity for Wi-Fi 6 continue to grow. Market research firm Techno Systems Research forecasts that Wi-Fi 6 device shipments will reach 2.8 billion devices annually by 2027, growing at a CAGR of 25%. As we have discussed previously, we believe the market opportunities for us in Wi-Fi 6 based on our customer design wins is as big as Bluetooth, but with greater royalty revenue potential. Our actions this quarter only serve to reinforce my belief that our Wi-Fi business will be a key royalty graph contributor in the coming years. The second area I would like to update you on is 5G. Where are we signed two important agreements in the quarter. The first of this is a strategic deal with one of the world's leading Android smartphone OEMs. These OEM license our DSPs for the first time as they begin their own in-house 5G more than efforts aimed at reducing the reliance on the 5G merchants semiconductor companies. This trend for OEM designing chips for their own devices bodes very well with semiconductor IP companies like CEVA. OEMs do not have the in-house capabilities to design all aspects of achieve and turn to IP licensers to get many key components of the chip, reducing the risk and allow them focus on areas of the chip where they can achieve differentiation and utilize their in-house expertise. In late 2020, this OEM also licensed our Bluetooth and Wi-Fi IPs, the first chips of which are expected to be in production shortly. If they are successful with their connectivity and 5G chips,, this smartphone OEM has the potential to become a key royalty customer for CEVA in the coming years. The second 5G deal we find in the quarter was for a customer looking to develop a 5G broadband IoT modem targeting a wide variety of end markets, requiring high data throughput, low latency and large data volumes. These end markets include connected cars, wearables, smart grid for variants, AR/VR devices, industrial automation and more. According to the latest Ericsson Mobility Report, there will be more than 3 billion 5G broadband IoT connection worldwide by the end of 2028. This is an exceptional market opportunity. These customers license our PentaG2 platform specifically designed for 5G and IoT, which will allow them to seamlessly develop their 5G RedCap-enabled chip with reduced risk, thanks to our integrated platform offering, which provides the key building blocks of a 5G modem. Also, at Mobile World Congress in February, we announced our most powerful and efficient DSP architecture to date, the CEVA- XC20. The CEVA- XC20 addresses the massive compute requirements of 5G advanced and beyond and can scale to fit customer's requirements from smartphone SoCs through to the Wi-Fi 5G-advanced ASICs for base stations, private networks around and other wireless infrastructure. We believe there is a strong demand for new 5G chips across the wireless industry and among many equipment OEMs. CEVA- XC20 can help to significantly lower the entry the entry barriers for new entrants and incumbents who wish to accelerate the chip designs for these lucrative market opportunities. The third area is application software for embedded system. In addition to earnings, we also announced our acquisition of the 3D spatial audio business from VisiSonics today. Spatial audio is emerging as one of the most interesting areas in audio, enabling a real world audio experience within the digital world. This is increasingly becoming a feature of headsets and TWS earbuds to enhance the user experience for watching movies, gaming, listening to music, podcasts, and even conference calls. VisiSonics has been our partner for 3D spatial audio for the past year, and we develop and joint products which combine their spatial audio software with our head tracking technology to deliver a complete spatial audio experience. This joint solution known as RealSpace is now going into production with our first joint customer boAt, India's first durable and wearable company. THX the world-class audio and video certification and technology company is already an existing customer, a testament to the quality of the software. Following on from the success of the collaboration with boAt and understanding the significant opportunity for spatial audio across end markets, we made a decision to acquire the business and own the complete spatial audio software solution. Initially, we have our dominant present in TWS earbuds market through our Bluetooth and audio DSP customers. We intend to offer headphones and earbuds OEM the capabilities to seamlessly add spatial audio to enhance their product lineups. We can also address the board set of other markets where spatial audio is being adopted, including AR/VR, audio conferencing, healthcare, automotive and media entertainment. Market research firm Future Market Insights estimated 3D audio revenue will grow 4.1x from 2020 to 2032, reaching nearly $31.9 billion in 2032. Indicative of the significant market opportunity that spatial audio possesses. The team is located next to our sensor fusion R&D team in Rockville, Maryland, making the integration of this team straightforward. We believe this modest acquisition provides excellent potential to increase our application software royalty opportunity in the coming years as spatial audio becomes a must-have feature of wireless audio devices. In summary, despite market challenges this quarter, I believe the opportunities we have in front of us continue to grow. We have an outstanding portfolio of wireless connectivity and smart sensing technologies and have fostered strong relationships around the world with leading fabless companies and OEMs. I met with a number of key customers around the world in the quarter and am encouraged by their appetite to expand their relationship with us. Finally, the VisiSonics spatial audio business acquisition we announced today is an additional step in building our future strategy, bolstering our application software licensing business. Now, I will turn the call over to Yaniv for the financials.

Thank you, Amir and Good day to all. I'll start now to review the results of operations in the first quarter of 2023. Revenue for the first quarter is $28.7 million, as compared to $34.4 million for the same quarter last year. The revenue breakdown is as follows. Licensing and marine related revenue reflecting 72% of our total revenue was $20.7 million, as compared to 22.4 million for the first quarter of 2022. Royalty revenue reflecting 28% of our total revenues was $8 million as compared to $12 million for the same quarter last year. Quarterly gross margin came as expected on GAAP and slightly lower non-GAAP basis due to low royalty revenue in the quarter. Gross margin was 82% on GAAP basis and 84% are non-GAAP basis compared to our 82% and 85% guidance on GAAP and non-GAAP respectively. Our non-GAAP quarterly gross margin excluded approximately equity based compensation expenses of $0.4 million and amortization of acquired intangibles of $0.3 million. Total GAAP operating expenses for the first quarter was above the high end of our guidance at $28.2 million due to the timing of the Israeli Innovation Authority grants received lower allocation of Intrinsix' NRE costs from R&D into cost of revenue, and higher professional fees. Total non-GAAP operating expenses for the first quarter, excluding equity-based compensation expenses, amortization of intangibles, and holdback expenses, were $24.1 million, also above the higher-end of our guidance, due to the same reasons I just explained. GAAP operating loss for the first quarter was $4.8 million, down from a GAAP operating profit of $0.5 million in the same quarter a year ago. GAAP quarterly operating profit included equity-based compensation expenses of $3.9 million, the impact of the amortization of acquired intangibles of $0.7 million associated with the acquisition of the Intrinsix and Hillcrest Labs businesses, and $0.3 million of costs associated with the Intrinsix acquisition. Our non-GAAP operating profit was $0.1 million, lower than first quarter 2022 of $5.5 million. GAAP and non-GAAP tax expense were $1.4 million, mainly associated with withholding tax deducted by our customers that could not be utilized and were expensed. And GAAP loss was $4.9 million and diluted loss per share was $0.21 for the first quarter of 2023 compared to a loss of $1.7 million and diluted loss per share of $0.07 cents for the first quarter of 2022. With respect to other related data. Shipped units by CEVA licensees during the first quarter of 2023 were 297 million units, as compared to fourth quarter of 2022 reported shipments of 375 million units, primarily for the reasons Amir discussed earlier. Of the 297 million units reported, 27 million units or 9% were for handset baseband chips. Our base station and IoT product shipments were 270 million units, as compared to 308 million units in the fourth quarter of 2022 and 531 million units in the first quarter of 2022. Bluetooth shipments were 190 million units in the quarter, as compared to 220 million units in the fourth quarter of 2022, mainly due to lower shipments from our Bluetooth smartphone customers associated with the inventory correction. Cellular IoT units were up 19% sequentially to an all-time high of 29 million units. Wi-Fi shipments were 21 million units, as compared to 37 million units in the fourth quarter of 2022. However, we are encouraged by the Wi-Fi product mix as it starts to shift towards Wi-Fi 6, which commands a higher average selling price, resulting in higher royalties. This positive trend reflects the long-term Wi-Fi royalty opportunity for us. Other shipments under our base station & IoT umbrella totaled 30 million units in the quarter. This includes our computer vision, AI, audio, sensor fusion, 5G RAN and DSPs for non- cellular communications. As Amir stated, both Wi-Fi and Cellular IoT contributed all-time high in-category royalty revenues in the quarter. Wi-Fi royalties more than doubled from last quarter thanks in part to three new royalty paying customers that reported Wi-Fi 6 shipments for the first time and is the start of the Wi-Fi 6 royalty cycle for us. As for the balance sheet items. At the end of the quarter our cash and cash equivalent balances, marketable securities and bank deposits were approximately $145 million. Our DSO for the first quarter of 2023 increased to 69 days from 34 days in the prior quarter. Our DSOs for the first quarter increased to 69 days from 34 days in the prior quarter. During the quarter we used $5.1 million cash from operation activities. Ongoing depreciation and amortization were 1.4 million and the purchase of fixed asset was $0.1 million. At the end of the first quarter, our headcount was 497 people whom 413 were engineers. This is up from a total of 487 people at the end of 2022. Now turning to our outlook. As Amir discussed, the smartphone and PC markets continue to experience soft demand. However, within our handset and base station customer mix, we expect strong chip shipments recovery in the second quarter. Our licensing, NRE and related revenues business continues to generate customer traction across our diversified portfolio. In royalties, with several new customers that recently started production, and with the expectation for meaningfully higher shipment volumes of our handset and base station customers in the second quarter, we forecast sequentially higher royalties. Also, the strength of our wireless connectivity markets and customers will continue throughout the year. In light of the current macro environment, we continue to monitor our expenses closely and will take appropriate steps as we see fit. In this regard, we are currently planning for non-GAAP OPEX to be slightly lower than first quarter level, in each of the quarters for the rest of the year. Specifically for the second quarter of 2023, gross margin is expected to be similar to the first quarter, approximately 82% on GAAP basis, and slightly higher sequentially on non-GAAP basis to 85%, excluding an aggregate of $0.4 million of equity-based compensation expenses and $0.3 million amortization of acquired intangibles. OpEx for the second quarter of 2023 is expected to be flattish with the first quarter of 2023, and in the range of $27.7 million to $28.7 million, including an expected $4.1 million of equity-based compensation expenses, $0.2 million to the Intrinsix holdback related expenses, and $0.3 million for amortization of acquired intangibles. Our non-GAAP OPEX is expected to be slightly lower than the first quarter and in the range of $23.1 million to $24.1 million. Net interest income is expected to be approximately $0.7 million. Taxes for the second quarter are expected to be approximately $1.4 million derived mainly from withholding taxes. And share count for the second quarter of 2023 is expected to be 24.4 million shares. And Rocco, we can now open the Q&A session please.

Thank you. [Operator Instructions] Today's first question comes from Matt Ramsay with TD Cowen. Please go ahead.

I guess in the in the short-term Amir. I just want to see if I can characterize this correctly. It seems to me that all the long-term business trends are the way that you guys hope they would be in the licensing momentum diversifying and very strong. But there were just a couple of inventory corrections one in China handset modems with the well-known weakness there with your sort of large customer in China and the other one and Bluetooth in Scandinavia. Is that really all that's gone on here in the short-term that affected royalties and everything else is kind of I don't know running as expected on the broader business?

Yes, thanks for the question. And I will say in high-level, this is very correct, but I will add a little bit more color on a few things just to make sure this is clear. So first, in terms of the overall trends, as you pointed out, we are very, very encouraged by the type of deals that licenses to tweak at this quarter with some of them will drive very strong long-term royalty potential for us and continue great momentum for our Wi-Fi and 5G opportunities overall. In terms of royalty this quarter, definitely, as you pointed out that with that one key customers in China, the corrections in the smartphone and specifically in Q1, we expect meaningful and strong recovery sequentially from Q1 to Q2 in regards to that one specifically. And then, I would say about Bluetooth, it's really to the most part the impact from the same smartphone impacts of the Bluetooth. If we look at our Bluetooth outside that it's actually has been very solid and continue with the trend. And on top of that, of course, what we mentioned about Wi-Fi and narrowband IoT, and all time high, and we see basically the continued growth of these technologies with more companies or basically shipping our products.

No, that's really helpful. And I'm sure that stuff will just work its way through the system we were noticing that with many of your peer companies in the ecosystem as well. For my follow-up question, I wanted to change gears a little bit and talk about some M&A that's happened in and around your company and by your company. I think the first one is you guys announced the VisiSonics deal today alongside of the earnings, and I wonder if you might expand on the technologies the people a little bit more and what your plans are for that business? On the flip side, I did notice that one of your customers in a particularly interesting area around automotive called Autotalks was acquired by Qualcomm and I believe that is an important licensee for CEVA, and the Qualcomm guys is a small deal a tuck-in for them, and they've not said too much about what they plan to do with it. But if you could talk a little bit about what the technology stacks there are, and potentially for that being an entry into a new market for CEVA royalties, that would be really helpful? Thanks guys.

Yes, so first on the VisiSonics deal. As I mentioned in prepared remarks, basically three pillars of growth that I've highlighted, the Wi-Fi, the 5G, and software embedded application. We're already licensed to some of those customers, and some OEMs, our sensor fusion. And with partnership with VisiSonics, we're basically combined into a complete 3D spatial audio solution. What we have seen in the market for TWS earbuds and so on, really very strong demand for 3D spatial audio, we see it as one of the key emerging technology for that space. And with this technology, which is really state-of-the-art for those type of capabilities, we are looking to expand it significantly into additional customer base. We recently announced basically the customers bought as licensing this technology and now we can offer that as a complete solution. Also, from integration point of view, this is so called seamless integration as both the location and the technology and the roadmap that we have worked together is already in place, and we'll basically continue that as one team. And then the last piece on that I would say, it's also going to be accretive as a non-GAAP within 2023. So all along, we see it as a great deal to keep expanding our software embedded application technologies and be able to provide more innovation and differentiation to our OEM customers in the ecosystem. In terms of the other deal?

Sure. So, we have a lot of relationship in history with Autotalks, this has the benefit of being an IP company, you could have held the small ones and don't have the capabilities, especially around cellular and communication as quite complex to come up with an interesting product and later on to be acquired by the giants, the leaders in the space. So obviously, we know them and help them out from day one, as a start, young startup with the communication skills and technology that we brought. They're already starting to ship products last year. We got the initial royalty reports from them. So in this market, when a bigger company acquires you as a customer, first you start a relationship and it needs to bypass or work with you on the way to integrating the product and getting the rights. So that's an interesting opportunity for us. And we'll see where it takes us to the next step. It would be nice to be in their product line in the future. And if not, this is part of the startup world and start part of our add-ons IP company to help the smaller companies. And sometimes we make in build the relationship with the bigger companies that continue with them and show them and give them other products that we can in the future. And sometimes, it ends with at least in the near-term, some nicer roles the opportunity for us coming from a bigger company.

And I would add on that is that, in the past, again, when people thought about 3G, 4G and 5G technology to enable so called smartphone communication. We are for a while talks about really how we're going to have this echo system and our customer base basically to enable the new use cases that 5G really bring to the table, right? And this is a great example of when we have innovators in the market to come up with a new use cases and technology that 5G enables. And then from there basically to help extend for us as the royalty base and technology and the innovation to be deployed in the marketplace. So, vehicle to infrastructure, vehicle to vehicle, so called V2X is a great technology that we believe will expand nicely in the markets in the future years. And we believe there are also many other 5G use cases and opportunities for us to enable in the market and expand the technology and the business.

And our next question tonight comes from Kevin Cassidy of Rosenblatt Securities. Please go ahead.

Just to follow up on the 5G modem application. Will that include millimeter way?

Which 5G you mean?

The general offering or the specific customer?

Yes, this specific customer?

I guess is that Autotalks, you're asking?

Yes. I think so.

Yes. Whether it's going to be just the sub 6G or is it?

I would say we provide the DSP. Yes, I would say in general we provide the DSP is quite agnostic so called to the radio technology. And our customers basically tune it to their needs, specifically about their product release and plans. I will defer that as they announce more about their product releases.

Okay. I understand it's up to their customer. And the ASP increase with Wi-Fi 6, I guess I'm just trying to gauge how large that market can be for you. And does it double your TAM or, and if their units stay the same, or do you see Wi-Fi 6 units far exceeding previous generations?

That's a great question, Kevin. There are two aspects here, maybe even three. One is the volume. Last year, we managed to power of 1 billion Bluetooth devices and we only started to ramp up our Wi-Fi to just shy the 200 million, I believe. There is no reason that the volumes of Wi-Fi should reach over a short period of time due to Bluetooth type of volumes, or even surpass that as they go along because of the use cases, the much wider use cases that Wi-Fi has. That's one. The volume is a big push for us and we saw the new customers three out of 35 customers that have licensed Wi-Fi 6 have the potential with volumes from existing a new customer is the answer of why those volumes should increase. Second ASP because of the use cases that the Wi-Fi 6, they're higher end or industrial, or medical or lots of other devices that ASP over all of the chips and the solution is higher than we get a larger portion. It could be 2x to 3x of what you're getting from a Bluetooth device. And those are the ratios of the chip prices. Number three, a lot of our customers our combo customers that want both Wi-Fi and Bluetooth today or in the future. And therefore, the overall added value for us, in ASP, it's higher if we could provide two technologies and charge for two instead of one. So, we have a lot of very good aspects working in our favor. And it's a significant very short-term opportunity. Look at the numbers from Q4 to Q1, with all the inventory issues and all the slowdown that we are reading and seeing, we have doubled our Wi-Fi revenue from Q4 to Q1 this year, in dollars.

I would add to that. There is basic as you look at that so called there is the software we call it the simple client Wi-Fi and that was now we're going to the upgrade from Wi-Fi 4 to Wi-Fi 6, then once it's on. Of course, in general as taking the semis in the market, the value of a Wi-Fi solution is higher than Bluetooth. And then on top of that what you have is the more complex, sophisticated, enhanced throughputs Wi-Fi 6 clients. And then on top of that you have the Wi-Fi 6 access point that we are just now basically are going to start ramping more and more. And I would say as the market typically the different pricing in the market for this solution as a silicon solution out there, you can't draw basically analysis of our potential from an ASP point of view. But it's meaningfully and very significantly above what you would expect on average four levels of solution on average basis.

And just a quick question on the acquisition, does this include the engineers?

Yes, it includes the small number of engineers that basically located in the same place and they will join us immediately after the close.

Thank you. And our next question today comes from Martin Yang at Oppenheimer. Please go ahead.

My first question on spatial audio is, maybe give us more details to help us understand the competitive dynamics in that market? Who are we competing with and where are the competitors positioned in terms of market verticals?

A competitive dynamics.

I can take that sure. Hey, Martin, it's Richard here. So, we look at the spatial audio market, we're still, it's pretty nascent, and we're still in the beginnings of it. In the smartphone space, it is really apple that seeded the market, and they have their own internal solution. Obviously, Dolby is playing there as well with some other some other players. But really, the difference between what we're bringing to market here versus what these other guys are, is normally you have to have a link between the handset and the earphones. They both have to have technology on them in order to make this work. With the solution that we're bringing to market for Spatial Audio with VisiSonics, this is only on one side. So, it's only in the headset, you don't need any particular codex or any particular software on the handset for this to work. And this is a game changer we'd say the low to mid end of the earbuds and headset market where today's spatial audio is not really playing. So, when we think about the opportunity, there's probably 400 million mid range, TWS headsets a year, you've got the gaming headset and all these other opportunities there. Where we feel, there's a very good opportunity for us to double down on our strong presence in the handset -- sorry, in the headset market that we already have today. We know the customers, we know the industry there and we can take the Spatial Audio Solution into these markets, the much broader mid range and lower range of the market and address it with them with the Spatial Audio Solution that we have something that today is not really available or there. So that's our focal point and target. It's not so much competing with Dolby and Apple at the higher end of things. It's going through the mass market option here.

The other thing to enhance on what Richard said is that, what's unique also about our technology is really to develop that such that it can get into a very small form factor, very optimal in terms of size and power, which really can enable this use cases to penetrate more and more the mid and the low end markets of the TWS also where the volume is very, very high.

Thank you. Our next question today comes from Suji Desilva at ROTH MKM. Please go ahead.

So, on Wi-Fi 6, it's good to see that coming out of the gate. What do you expect to be the pace of unit adoption here relative to other Wi-Fi standards in the past? And what end markets are initially driving the Wi-Fi 5 units?

I would say Wi-Fi 6 the replacement from Wi-Fi 4 to Wi-Fi 6 is very, very strong. So, we definitely see first on the client side. And I would say in the consumer for it started first in smartphones and PCs. And now, it's propagating so called to the all IoT consumer clients devices around us. And then from there, of course, more and more penetrating access points as well.

Again, I'm not sure if we could go continue with doubling like we did from Q4 to Q1, but the second slow is should be now with more players starting to really ship Wi-Fi 6. These are the first ones that have joined the team and the potential as I said earlier from 35 customers is quite big. We think it's going to be one of the faster growth driver for us this year, when looking at all the different segments and product lines, we have.

Overall I would say the expectation in terms of the transition. If we look at the history of Wi-Fi, right that the fastest and the strongest transition was from 11G to 11 and back then in terms of performance and capabilities, and now it's basically into 11ax and Wi-Fi 6, right. So this is really the biggest one in the last few years in terms of transition of Wi-Fi technology. And we are well, well established right now across the ecosystem. We have our IP embedded into our customer product line. So, I would expect it to really grow very, very nicely through the years and continuing through 2024, 2025.

It sounds like you're well positioned there. And my second question is on the acquisition, it seems to be a software licensing model. Can you just remind us how many products you guys have now that are software licensing versus typical licensed royalty? And what percent of revenue could that be as a mix, part of the mix in one to two years as part of your strategic plan?

Great question. Thank you, Suji. This brings us back to what we talked about even last earnings call of the three pillars of growth for us. One of them was embedded software. We started three years ago to remind you the Hillcrest acquisition, sensor fusion, we got into a TV, laptop, vacuum cleaners. Electronics fans, yes, correct. So this is how it started, we had in the last two or three years different audio two different audio solution. And now this is probably the fourth. And if I'm counting just the standalone pieces of embedded software that we're licensing, trying to target, sometimes the OEM has a value there and the proposition is much higher in both for us and as a differentiator for the OEMs. And has worked extremely well, very high margins of that we have with a doubled the revenues of some of those aspects when we three years ago, acquired and got into the business. And on top of that, we're also starting to add AI software packages on top of the processor in the solution itself. So I'm not sure if I have a number as a percentage of revenue. But for sure, this is one of the strategic avenues for us to go after. I think we know how to run this types of businesses and this recent acquisition from today and forces that

[Operator Instructions] Today's next question comes from Chris Reimer with Barclays. Please go ahead.

Actually, most of the topics have already been addressed. Just one touching on China, have you seen any changes in the dynamics there maybe impacting the reopening and when you mentioned that demand has resumed, are you talking about that area or are you talking about in general?

Thanks for that, Chris, it's good to emphasize that a lot of our business and customers in China well known chip vendors to top guys or OEMs around the world, all over the world and they in most cases ship mainly outside of mainland China. So the manufacturer and the design is there but the products and the end markets are all around the world. That's true for the Bluetooth and Wi-Fi, and sound. And even modem, even the handset modem, most of it goes out to the emerging economies in India and other large countries for the low and mid-range phones. So, when we talk about demand, it's not necessarily for Midland China, but throughout the world and all the different segments I think we have mentioned and we talked about earlier.

I would add also that the reduction that we've seen this quarters from the handset market, and our key customers there. I would say in terms of we already see indication of restocking that started in March and will continue to FM and now beyond that. So overall, we are quite confident, I'm very confident that basically we'll see a sequential recovery quarter-over-quarter. And again, the demand is global demand. And specifically also in the different emerging markets, our customers survey quite strongly, we start seeing the stronger recovery and restocking of the inventory.

I may add one thing that we didn't talk about, if you asked about the licensing another royalty to remove to the licensing. We see no slowdown whatsoever in China, there's still good demand for technology development. And they didn't see any really change in the last two quarters coming from China. One of the interesting changes that we have seen globally is coming from Europe. And this is a lot of new money coming from governments to the EU to develop their semiconductor company and the markets. And this is a brand new opportunity for CEVA, as being an IT company. And we talked about Autotalks is one of the nice example. But there are many, many others soon as money flows in. We've seen the trend in China for the last decade, the U.S. has started with their ChipX and we see a lot of potential there for us. And last but not least, maybe two or three weeks ago was this new, stronger trend of the investments in Europe. And we are there to try to make the best of it. So from a licensing perspective, the contract is a lot of money that's been put in around the world to do your chip designs. And the IP model fits exactly that avenue.

Thank you. And our next question comes from David O'Connor at Exane BNP Paribas. Please go ahead.

Maybe Yaniv on the topic of licensing falling onto the commentary there, and any reason that she can't get back to your growth this year on licensing? And then on royalties, maybe also for Yaniv, any additional color on the kind of how we should think about the year-over-year growth on royalties, and that Q-over-Q recovery, you talked about, how strong is that going to be sustainable to the rest of the year?

Yes, sure. It won't demand if I restate the first question. I don't see a drop in the licensing. We do see a drop in the royalties and we explained why. The licensing as we know this business and has been in this business for a long time, $1 million up or down doesn't change the trends. It doesn't change the outlook or anything around that. So, yes, maybe we're a little bit short of the typical 21 to 22-ish, but it's nothing that we are concerned about and nothing that has changed. And we mentioned specifically the quality of the deals in Q1, and this is that if we can say that to every quarter, because sometimes we license to startups and we have no idea how successful and when they'll come up with a product. And if the product will go into mass market, the design with the three of license and Amir talked about this earlier in Q1 could get us to a single, double-digit royalty contributions annually from those deals. So from licensing, I don't see a problem. On the royalty front, Q1 was an anomaly, we understand in the high side, why the handset market did take a beating, as you said, and if the numbers did drop there, we think it's a short-term and maybe talked about the correction into the second quarter. When you look at the rest of the business and what has been growing at CEVA for the last couple of years dramatically, this is the base station and IoT royalties. There was only a 4% sequential decrease from Q4 to Q1. And even if I compared to last year's first quarter, and obviously it's a different environment to many companies and the demand inventory levels are different. We're only down 7% and some of the internal markets there like Wi-Fi and cellular IoT did extremely well. So, we think those trends will continue throughout the year. We believe that the second course would be to go sequentially higher with high magnitude, maybe not to the same norm that we were used to a year ago in handset, but they should start correcting themselves nicely in the second quarter. Could we make up the loss of the handset royalties in the first quarter throughout the year? That's the question that we -- it's harder for us to answer, we don't usually give guidance or relatives because we don't have the insight of exactly how much each customer could ship and when. We've never done that and I don't think we are changing our methodology because nothing has happened or we don't get the royalty reports ahead of time from the OEMs. But the trends of Wi-Fi 6, higher ASPs, multiple products, more embedded software that also possesses higher ASPs and the ramp up on some of these end markets that we talked about. That's something that we're very positive, and they do believe that they will continue to have we seen that growth also happening in Q1. So try to answer the different sides of your question. Hopefully I didn't miss anything.

Maybe just one follow-on from R&D strategic agreement with the Chinese OEM and 5G smartphones. Coming to market now, with their Bluetooth and Wi-Fi chip that they licensed from you guys three years ago, how meaningful is that going to be this year? And is that kind of three year timeframe about, right? We should think about them to come to market with a 5G modem. Thank you.

Sure. In regards to the Wi-Fi and Bluetooth, again, we expect production to start this year, the exact magnitude it's hard to know because it depends really the level of penetration, they will use this technology across their product line and how they will propagate it there. So I would say the significant portion of the upsides will come over the second half of the year and then next year, in terms of their deployment of the so called the 5G solution, I wouldn't say three years, but probably in the range of 2025 as we say today.

Thank you. And our final question today comes from Martin Yang of Oppenheimer. Please go ahead.

I have just one follow-up regarding spatial audio. Is it right to assume that RealSpace technology always integrates with Hillcrest and Intrinsix? Or does always have some elements of motion tracking either for you or someone else?

Yes, Richard, you take it.

Sure. You can do spatial audio with or without head tracking, but it's much more effective with head tracking. So the solution that we offer into the market is Hillcrest, Sensor Fusion integrated with the RealSpace into a single product, which we'll call RealSpace going forward. So that's the technology, it's much more attractive to OEMs that way. It gives them much better spatial audio experience and that's the avenue we're going.

Martin with that said, part of the acquisition was also to bring on THX a well-known audio solution provider, this is a VisiSonics customer, and I receive a customer, and they have used their the VisiSonics standalone solution in their use cases. So as Richard said, it could go both ways, but we also already have customers in production, both in India and in the U.S., with this technology, and these two avenues, one on standalone basis and the second one is the CEVA Hillcrest technology.

I will add on top of that with Richard's comments. I know speaking, again, if there are OEMs that would like to see some portion of our technology and that would make sense with we can definitely support it, but the real value of the technology and that's why strategically also from a technology point-of-view. We decided to go ahead is that we have best-in-class sensor fusion technology that is really I wouldn't say massive, but very, very important components to make 3D spatial audio good solution, VisiSonics brings really great algos and capabilities on the audio domain related to that. And as you combine these two together is that that's brings to bear basically a top notch the Spatial Audio Solution. And as I mentioned in previously, it's also the way that we combine it into embedded code that is small in size and very low power. It's a great, great fit to the TWS market, and to help penetrate these features from the top tier all the way to the mid and low tier of that market.

This concludes our question-and-answer session. I'd like to turn the conference back over to Richard Kingston for closing remarks.

Thanks, Rocco. Thank you everyone for joining us today and for your continued interest in CEVA. As a reminder, the prepared remarks for this conference calls are filed as an exhibit to the current report on Form 8-K and accessible through the investor section of our website. With regard to upcoming events, we will be participating in the following conferences, the TD Cowen Israel investor trip on May 16 in Israel, Oppenheimer's 24th Annual Israeli Conference May 21 in Israel, and Cowen's 51st Annual TMT Conference May 31 and June 1st in New York. Further information on these events and all events, we will be participating in can be found on the investors section of our website. Thank you and goodbye.