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An interesting company

April 14th, 2010 · 1 Comment

Purely knowledge based, no hard assets. We like that business model, in fact, there is more to like….
The shares, already cheap if you subtract the substantial net cash position ($100M, or $5 per share) are coming back a bit, which helps as well…

The only thing holding us back going in full force is that perhaps the markets are due for a breeder. A small initial position now and accumulation on dips is perhaps the best way to go about this

See Ceva Run: Industry Changes Position This Company for Growth
Shlomi Cohen

Today I am adding Ceva (CEVA) to my portfolio tracked by “Globes”. Ceva is listed as a US company, but most of its operations are in Israel. The funds to buy Ceva shares come from a partial sale of two holdings that have yielded a very high return, Apple (AAPL) and Google (GOOG).

Ceva, led by CEO Gideon Wertheizer, began trading on Nasdaq about seven years ago, after being spun off of DSP Group (DSPG). Ceva’s business model is similar to what Saifun tried to do, which is to sell licenses to its intellectual property [IP] in the chip sector, in return for advances and royalties based on sales.

Among well known companies that have a similar model is UK firm ARM Holdings plc (ARMH), which is considered a world leader in electronics. Little Ceva competes with ARM in several niches.

Ceva’s expertise is in selling IP for digital signal processor [DSP] cores, and the company focuses primarily on customers who are large chip suppliers to electronic device makers. Ceva’s solutions are found in processors of telephones built by well known companies like Nokia (NOK), Samsung (SSNLF.PK), Motorola (MOT), and Sony Ericsson (SNE).

While it has never been officially announced, it is known in the market that Apple is also an indirect customer, since it buys 3G processors for iPhones and iPads from Germany’s Infineon (IFX), which builds those processors around Ceva’s DSP solutions, paying $0.05 for each processor .

In 2009, Ceva customers supplied 334 million processors based on Ceva IP, and in total have supplied more than 1 billion processors. The telephone market is its main engine, and last year represented 57% of sales, compared to 51% two years ago, and to only 37% in 2007.

As far as its growth rate, one can be impressed by the fact that in the fourth quarter of 2009, it provided chips for 80 million handsets, compared with 61 million in the third quarter of 2009. While even as an indirect customer, it’s very sexy to have Apple on the list, Ceva earns bigger money from the simpler phones, like those sold by Nokia in China and India.

Ceva has a chance to grab a much bigger share in those markets over the next two years, because two telecommunications chips giants, Texas Instruments (TI) and Freescale Semiconductor (FSL), recently said they will gradually exit the telephone processor market. Both had in-house DSP solutions, which opens up a large potential market for Ceva with other processor manufacturers, who are already its customers, such as Broadcom (BRCM) and Taiwan’s Mediatek.

It is known in the market that Nokia is lowering gears with Texas Instruments, after the latter’s announcement that it is exiting the market, and Nokia is sending orders for telephone processors by Broadcom and Infineon instead.

In addition to growth in the telephone industry, Ceva is set to grow in other markets into which it is entering, and where it can also earn higher royalties from each processor. One such market is its new multimedia solution, which it unveiled a few months ago in Barcelona. These are platforms for applications which combine VoIP, picture, and especially high definition video. The end products can be netbooks, game consoles, tablet computers which will begin to flood the market on the heels of Apple’s success, as well as digital TVs.

Ceva’s market value is around $230 million, and it has over $100 million in net cash. Ceva recorded $38 million revenue in 2009, and analysts forecast profit of $0.60 per share in 2011. The company itself said about six months ago that it was aiming for earnings per share of $1 by 2012 or 2013 at the latest.

With these figures, and if we subtract its $5 cash per share from its current share price of around $11, we get a very low multiple of 10 times 2011 profit. In my opinion, sometime in the next year, when the growth rate of its royalties picks up steam, the market will grant Ceva a much higher earnings multiple, and then its share price should jump. UK rival ARM Holdings, for example, trades at a multiple of 40, because its growth rate is very high.

Tags: CEVA

1 response so far ↓

  • 1 persistentone // Apr 17, 2010 at 6:12 am

    Trading at nearly four times book value with a return on equity under 7% and return on assets around 2%, it’s hard to see a value play here.

    With sales growth around 1.8%, it’s hard to call them a growth story.

    The huge amount of cash on the balance sheet suggests they don’t manage cash well. They should be distributing a huge dividend to shareholders.