[SAN FRANCISCO] Ceva Inc's bid to rebuild its battered chip design business by catering to Chinese customers is starting to pay off.
Not that the revenue has really started to pour in - it's yet to regain its 2011 peak - but the company's share price is soaring as investors bet that sales are on the rise. The stock has climbed 52 per cent since a low in October to $19.20 in New York, close to the highest since July 2013.
For Ceva Chief Executive Officer Gideon Wertheizer, that rebound, which comes after a 63 per cent selloff since 2011, serves as something of a vote of confidence in his plan to carve out a niche taking on Qualcomm Inc in China. While Qualcomm is the world's largest mobile phone-chip maker, China's market is bigger than any other in the world, giving Mr Wertheizer an opportunity to sell to companies focused on low-end phones that he expects will take a growing slice of the business.
"We are in a trend to increase our market share, because we are expanding our share against incumbents like Qualcomm," Mr Wertheizer said by phone from Herzliya, Israel. "We still have a lot to grow in the handset market, while they are mature."
Mr Wertheizer was the head of Ceva when it was the licensing unit of DSP Group in Israel and became CEO of the independent company, based in Mountain View, California, in 2005. Its rally since Oct 7 compares with a 1.3 per cent advance on the Bloomberg Israel-US Equity index.
Ceva, whose market value has been cut in half to US$388 million from its 2011 peak, is rebuilding its share of the mobile-phone chip market after its fortunes collapsed alongside larger players like Finnish handset maker Nokia Oyj, and the exit of customers like Broadcom Corp and ST-Ericsson. The company designs digital signal processors that power mobile phones, and licenses those designs to chip designers for an upfront fee. It also collects royalties on the sale of phones later built off its plans.
Chinese chip designers like Spreadtrum Communications Inc and MediaTek Inc that use Ceva's technology are poised to take market share from Qualcomm, which was slapped with a US$975 million fine this month by Chinese antitrust regulators, according to Barclays Plc and Wunderlich Securities Inc.
Emily Kilpatrick, a spokesman for San Diego-based Qualcomm, declined to comment.
"China is trying to develop an indigenous semiconductor capability and that's good for Ceva because they're licensing technology to a lot of those companies," Matt Robison, a San Francisco-based analyst with Wunderlich, said by phone on Feb 20.
Ceva's revenue rose 4 per cent to US$50.8 million last year, the first increase since 2011, and net income is forecast to rise 8 per cent in 2015. Five out of eight analysts recommend buying the shares, with an average return forecast of 20 per cent over the next 12 months.
Mr Wertheizer is also feeling optimistic because he's diversifying beyond the mobile phone market. Ceva's wireless communications technology is now being designed into chips for automated driver assistance systems, hearing aids and game consoles. Thirty-two of 36 license agreements last year were for applications outside of mobile phones, the company said on a Feb 3 earnings call.
"The second part of the growth story is even more interesting" than handsets, said Joseph Wolf, an analyst with Barclays Plc in New York who has a buy rating on Ceva. "It's always good for companies to have multiple streams of revenue." Still, revenue from these new applications won't materialise until 2016 at the earliest, Mr Wolf said.
A big jump in handset revenue is still a few quarters away for Ceva because much of the low-cost market in China is based on 3G phones, which are cheaper and yield lower royalties for Ceva, said Jay Srivatsa, an analyst with Chardan Capital Markets LLC in New York.
"What used to be a 5 or 6-cent business has become a 3- cent business," Srivatsa said by phone Feb. 19. "The next quarter or two could be pretty rough for the company." Qualcomm dominates high-end mobile phone chips, and it's unclear when 4G handset prices will drop enough to lure Ceva's target customers in China and across emerging markets to upgrade to smartphones, he said.
Mr Wertheizer says that demand for cheaper smartphones in places like China, India, Indonesia and African countries will allow him to compete against Qualcomm, which had about 500 times more revenue than Ceva last year.
"They're very good technology, no doubt of that, but when it comes to the high volume market, they're facing competition," he said. "The growth is in emerging markets."