It is undeniable that our world is increasingly dominated by electronic devices. While there are some big, well-known companies in this space for investors, there are also smaller companies that help supply the parts needed to produce all the electronics that keep our economy running.
One of these companies is THIS WILL (THIS WILL -4.40%), the leading licensor of wireless and smart sensing technologies. With its technology in billions of devices, is CEVA one of those hidden gems that could offer investors above-market returns?
Power our devices
CEVA’s technology has been included in more than 14 billion chips, including more than 1.6 billion in 2021 alone. These chips are used in a variety of industries, including computing, automotive, robotics, industry, aerospace and defense, and medicine. With its technologies touching so many different sectors of the economy, chances are you’ve used a CEVA-powered device or system without even knowing it.
CEVA charges other technology companies licensing fees to use its patented technology, as well as royalties for each silicon unit that incorporates its hardware or software. In the first quarter – the most recent period – licensing revenue accounted for about two-thirds of total revenue.
Licenses pave the way
CEVA’s revenue from licensing has grown as a percentage of revenue over the past year. In the first quarter of 2021, licenses represented only 57% of revenue. CEVA also provides quarterly updates on the number of new license agreements signed. In the first quarter of 2022, he signed 14, bringing his 12-month total to 76. This represents a 43% increase from the previous 12-month period when he added 53.
In the first quarter of 2022, overall revenue grew 35%, with the licensing business providing the bulk of the power behind this growth, up 56% year-over-year. Royalty revenue – the vast majority of which came from the Asia-Pacific region – rose only 9%. Notably, CEVA’s top five royalty-paying companies accounted for 63% of its total royalty revenue in the quarter. While this degree of corporate concentration is a potential concern, their share is down from 70% a year ago, so the move is in the right direction.
A step towards profitability
CEVA’s operating profit in the first quarter was $500,000, compared to a loss of $1.3 million in the first quarter of 2021. This improvement is all the more impressive as it includes the impact of an acquisition recent, which added operating expenses. CEVA’s net loss of $1.7 million for the period was also a big improvement from the $3.6 million loss in the prior year quarter. On an adjusted basis (taking into account the impacts of stock-based compensation and other acquisition-related expenses), operating income increased by 111% and net income increased by 1,300%.
CEVA as an investment
When the company released its first quarter results, it raised its revenue forecast for the year to a range of $142 million to $146 million. At the midpoint, that would represent a 17% increase from 2021. While that’s good to see, what’s more relevant to CEVA’s potential as an investment is whether or not it can grow. margins and improve profitability.
In the first quarter, gross margin fell to 81% from 91% in the prior year quarter. Management attributed the contraction to acquisition costs. However, he said he expects gross margin to squeeze further to 78% in the second quarter. CEVA is not always profitable or its free cash flow is positive, so it will need to make improvements to the way it operates if it is to be successful in trimming some of its growing revenue down to the bottom line.
One would expect CEVA’s high gross margin to be a great start on the road to profitability, but so far that has not been the case. Until the company can control its operating expenses, it’s hard to be sure that CEVA will be a market-beating stock. That said, CEVA’s price-to-sales ratio of 6.5 is close to where it was at the start of 2020. For investors who believe the company can look to long-term profitability, it may act now from an attractive entry point.