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CEVA INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) You should read the following discussion together with the unaudited financial statements and related notes appearing elsewhere in this quarterly report. This discussion contains forward-looking statements that involve risks and uncertainties. Any or all of our forward-looking statements in this quarterly report may turn out to be wrong. These forward-looking statements can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. Factors which could cause actual results to differ materially include those set forth under in Part II-Item 1A-"Risk Factors," as well as those discussed elsewhere in this quarterly report. See "Forward-Looking Statements." BUSINESS OVERVIEW The financial information presented in this quarterly report includes the results of CEVA, Inc. and its subsidiaries. CEVA is the world's leading licensor of DSP-based IP platforms for communications (wireless and wired modems, Wi-Fi and bluetooth), vision, audio and voice, as well as Serial ATA (SATA) and Serial Attached SCSI (SAS). Our technologies are widely licensed and power many of the world's leading semiconductor and original equipment manufacturer (OEM) companies. In 2013, our licensees shipped more than one billion CEVA-powered chipsets targeted for a wide range of diverse end markets. To date, more than 5 billion CEVA-powered devices have shipped, illustrating the strong market deployment of our technology. Our DSPs power many of the leading handset OEMs in the world today, including Coolpad, HTC, Huawei, Lenovo, LG , Nokia, Samsung, TCL, Xiaomi and ZTE, as well as hundreds of local handset manufacturers in China and India. Based on internal data and Strategy Analytics' provisional worldwide shipment data, CEVA's worldwide market share of cellular baseband chips that incorporate our technologies was approximately 34% of the worldwide shipment volume in the first quarter of 2014. We believe the adoption of our DSP cores and software technologies in markets such as smartphones, tablets, base stations, DSLR cameras, automotive advanced driver assistance systems (ADAS) and Internet of Things (IoT) continues to progress. As a testament to this, during the second quarter of 2014, we signed a licensing agreement with a key customer who plans to use our DSP for its next-generation LTE-Advanced technology. In addition, our strategy to expand beyond the cellular baseband market continues to progress. During the second quarter, ten out of the eleven deals signed were with customers targeting non-baseband applications. We anticipate this expansion strategy will result in future royalty growth and a more diversified royalty base. We believe the following key elements represent significant growth drivers for the Company: • CEVA is firmly established in the largest space in the semiconductor industry-baseband for mobile handset-as well as the other evolving cellular markets, such as mobile computing and machine to machine. Our competitive edge in software-defined radio technology for the next generations of LTE and Wi-Fi in base stations and broadband satellite communications, and the inherent low cost and power performance balance of our technologies, puts us in a strong position to simultaneously capitalize on mass market adoption and address all of the growth sectors of the space. • Our proven track record in baseband processing technologies, in particular our pioneering position in software-defined radio, allows us to expand into other cellular markets, including small cells, macrocells and IoT. • The market potential for advanced audio and voice processing across mobile, automotive and consumer devices offers a new growth segment for the company. As a testament to this, during the second quarter, we signed five audio licensing agreements with customers who will deploy our audio DSP into a range of end markets, including smartphones, automotive infotainment, tablets, wearables and game consoles. Our CEVA-TeakLite-4 DSP was specifically designed to address the increasingly complex processing and stringent low-power requirements of advanced voice pre-processing and audio post-processing algorithms, including always-on voice activation, voice trigger, noise elimination and audio rendering. Many companies are looking to replace their older in-house DSPs due to the power and performance requirements outlined above. Furthermore, the programmable nature of our audio/voice DSP combined with a large ecosystem of audio partners developing software enable our customers to significantly differentiate their products and feature sets. Our proven track record in audio/voice, with more than 3 billion audio chips shipped to date, puts us in a strong position to power audio roadmaps across this new range of addressable end markets. • The market potential for vision offers a new growth segment for the company. Our CEVA-MM3101 platform is the most mature technology today that offers a unified software-based vision platform that can support these future developments. As a testament to this, we have eight customers to date addressing this new growth segment with our CEVA-MM3101 platform, including three mobile OEMs. Per ABI Research, one billion cameras were shipped in 2012, and this number is predicted to grow to 2.7 billion in 2017. 80% of this volume is attributable to smartphones, where we already have a strong foothold through our other technologies. Mobile OEMs are looking for new DSLR features such as smarter autofocus, best picture using super resolution algorithms, and better image capture in low-light environments. 19 -------------------------------------------------------------------------------- Table of Contents Furthermore, with the addition of video analytics support, cameras will enable new services like augmented reality, gesture recognition and advanced safety capabilities in cars. We see this new revolution as an opportunity for us to significantly expand our footprint in smartphones and further into tablets, PCs and automotive applications. • Our recent acquisition of RiveraWaves, a leading licensor of Wi-Fi and Bluetooth connectivity IP, will allow us to expand further into the connectivity space. This acquisition substantially increases our overall addressable market to cover all categories of connected devices. Our addressable market size is expected to be 35 billion devices in 2020, per recent data from ABI Research, in addition to the 7 billion devices that we are addressing with our DSP products. Notwithstanding the various growth opportunities we have outlined above, our business operates in a highly competitive environment. The maintenance of our competitive position and our future growth are dependent on our ability to adapt to ever-changing technologies, short product life cycles, evolving industry standards, changing customer needs and the trend towards cellular baseband, connectivity, and voice, audio and video convergence in the markets that we operate. Also, our business relies significantly on revenues derived from a limited number of customers. The discontinuation of product lines or market sectors that incorporate our technology by our significant customers or a change in direction of their business and our inability to adapt our technology to their new business needs could have material negative implications for our future royalty revenues. For example, the shift away from feature phones by our customer Intel and the exiting of the handset baseband market by our customer Broadcom, as well as the slower than expected market adoption of LTE technologies, have negatively impacted our royalty revenues. Moreover, competition has historically increased pricing pressures for our products and decreased our average selling prices. Royalty payments under our existing license agreements also could be lower than currently anticipated for a variety of reasons, including decreased royalty rates triggered by larger volume shipments, lower royalty rates negotiated with customers due to competitive pressure or consolidation among our customers. Some of our competitors have reduced their licensing and royalty fees to attract customers and expand their market share. In order to penetrate new markets and maintain our market share with our existing products, we may need to offer our products in the future at lower prices which may result in lower profits. In addition, our future growth is dependent not only on the continued success of our existing products but also the successful introduction of new products, which requires the dedication of resources into research and development which in turn may increase our operating expenses. Furthermore, since our products are incorporated into end products of our OEM and semiconductor customers, our business is very dependent on their ability to achieve market acceptance of their end products in the handset and consumer electronic markets, which are similarly very competitive. In addition, macroeconomic trends may significantly affect our operating results. For example, consolidation among our customers may negatively affect our revenue source, increase our existing customers' negotiation leverage and make us more dependent on a limited number of customers. Also, since we derive a significant portion of our revenues from the handset market, any negative trends in that market would adversely affect our financial results. Moreover, the semiconductor and consumer electronics industries remain volatile, which makes it extremely difficult for our customers and us to accurately forecast financial results and plan for future business activities. Our license arrangements have not historically provided for substantial ongoing license payments so revenue recognized from licensing arrangements vary significantly from period to period, depending on the number and size of deals closed during a quarter, and is difficult to predict. Moreover, our royalty revenues are based on the sales of products incorporating the semiconductors or other products of our customers, and as a result we do not have direct access to information that will help us anticipate the timing and amount of future royalties. We have very little visibility into the timetable of product shipments incorporating our technology by our customers. As a result, our past operating results should not be relied upon as an indication of future results. RESULTS OF OPERATIONS Total Revenues Total revenues were $9.2 million and $22.9 million for the second quarter and first half of 2014, respectively, representing a decrease of 28% and 8%, respectively, as compared to the corresponding periods in 2013. The decrease in total revenues for the second quarter reflected lower overall revenues. The decrease in total revenues for the first half of 2014 reflected lower royalty revenues, offset by higher licensing and related revenues. Five largest customers accounted for 65% of our total revenues for both the second quarter and first half of 2014, as compared to 82% and 68% for the comparable periods in 2013. Two customers accounted for 28% and 12% of our total revenues for the second quarter of 2014, as compared to two customers that accounted for 47% and 14% of our total revenues for the second quarter of 2013. Three customers accounted for 21%, 13% and 13% of our total revenues for the first half of 2014, as compared to two customers that accounted for 32% and 14% of our total revenues for the first half of 2013. Generally, the identity of our customers representing 10% or more of our total revenues varies from period to period, especially with respect to our licensing customers as we generate licensing revenues generally from new customers on a quarterly basis. With respect to our royalty revenues, three royalty paying customers each represented 10% or more of our total royalty revenues for both the second quarter and first half of 2014, and collectively represented 84% and 77% of our total royalty revenues for the second quarter and first half of 2014, respectively. Four royalty paying customers each represented 10% or more of our total royalty revenues for both the second quarter and first half of 2013, and 20-------------------------------------------------------------------------------- Table of Contents collectively represented 86% and 82% of our total royalty revenues for the second quarter and first half of 2013, respectively. We expect that a significant portion of our future revenues will continue to be generated by a limited number of customers. The concentration of our customers is explainable in part by consolidation in the semiconductor industry. The loss of any significant customer could adversely affect our near-term future operating results. Our total revenues derived solely from the handset baseband market represented 60% and 58% of our total revenues for the second quarter and first half of 2014, respectively, as compared to 78% and 60% for the comparable periods in 2013. Licensing and Related Revenues Licensing and related revenues were $4.4 million and $12.3 million for the second quarter and first half of 2014, respectively, representing a decrease of 29% for the second quarter of 2014 and an increase of 10% for the first half of 2014, as compared to the corresponding periods in 2013. The decrease in licensing and related revenues for the second quarter of 2014 principally reflected lower revenues from our CEVA-X DSP core family of products, partially offset by higher revenues from our CEVA-TeakLite core family of products. The increase in licensing and related revenues for the first half of 2014 principally reflected higher revenues from our CEVA-TeakLite core family of products, primarily attributable to a comprehensive agreement with a key player in the smartphone chipsets space, partially offset by lower revenues from our CEVA-X DSP core family of products. Licensing and related revenues accounted for 47% and 54% of our total revenues for the second quarter and first half of 2014, respectively, compared to 48% and 45% for the comparable periods of 2013. During the second quarter of 2014, we concluded 11 new license agreements. Six agreements were for CEVA DSP cores, platforms and software, three agreements were for CEVA Bluetooth technology, and two agreements were for CEVA SATA/SAS technology. Target applications include LTE-Advanced baseband, audio, connectivity and SSD drives. Geographically, nine of the agreements concluded were in the Asia Pacific, including Japan, and two were in U.S. Royalty Revenues Royalty revenues were $4.9 million and $10.6 million for the second quarter and first half of 2014, respectively, a decrease of 27% and 23% from the second quarter and first half of 2013. Royalty revenues accounted for 53% and 46% of our total revenues for the second quarter and first half of 2014, respectively, as compared to 52% and 55% for the comparable periods of 2013. The decrease in royalty revenues for the second quarter and first half of 2014 reflected a significant volume reduction in 2G and 3G feature phones, especially from our customer Intel due to its strategic decision to refocus its resources on LTE and de-emphasize 2G and 3G chips. Per expectation voiced by Intel, it expects its LTE chip volume ramp-up to be delayed to the end of 2014 or early 2015, which delay may negatively affect our future royalty revenues. Furthermore, the exiting of the handset baseband market by our customer Broadcom may also negatively impact our royalty revenues. However, we believe that Broadcom's volume shipments to Samsung, the majority of which was for 3G feature phones, will be replaced by newer chips to Samsung from our other customers, thereby partially offsetting the royalty loss from Broadcom. Our customers reported sales of 198 million and 410 million chipsets incorporating our technologies for the second quarter and first half of 2014, respectively, as compared to 281 million and 564 million for the comparable periods of 2013. The five largest royalty-paying customers accounted for 92% and 88% of our total royalty revenues for the second quarter and first half of 2014, respectively, as compared to 90% and 87% for the comparable periods of 2013. As of June 30, 2014, 26 licensees were shipping products incorporating our technologies, as compared to 29 licensees as of June 30, 2013. 21-------------------------------------------------------------------------------- Table of Contents Geographic Revenue Analysis First Half First Half Second Quarter Second Quarter 2014 2013 2014 2013 (in millions, except percentages) United States $ 6.8 29 % $ 3.2 13 % $ 1.6 17 % $ 1.6 12 % Europe and Middle East (1) $ 3.3 15 % $ 7.4 30 % $ 1.5 16 % $ 3.4 27 % Asia Pacific (2) (3) (4) (5) $ 12.8 56 % $ 14.3 57 % $ 6.1 67 % $ 7.8 61 % (1) Germany $ *) *) $ 3.5 14 % $ *) *) $ 1.8 14 % (2) China $ 6.5 28 % $ 10.8 43 % $ 3.8 41 % $ 6.8 53 % (3) Taiwan $ 3.1 14 % $ *) *) $ *) *) $ *) *) (4) S. Korea $ *) *) $ *) *) $ 1.2 13 % $ *) *) (5) Japan $ *) *) $ *) *) $ 1.0 11 % $ *) *) *) Less than 10% Due to the nature of our license agreements and the associated potential large individual contract amounts, the geographic split of revenues both in absolute dollars and percentage terms generally varies from quarter to quarter. Cost of Revenues Cost of revenues were $1.4 million and $2.5 million for the second quarter and first half of 2014, respectively, as compared to $1.1 million and $2.7 million for the comparable periods of 2013. Cost of revenues accounted for 15% and 11% of our total revenues for the second quarter and first half of 2014, respectively, as compared to 9% and 11% for the comparable periods of 2013. The increase for the second quarter of 2014 principally reflected higher customization work for our licensees (which expenses are allocated from the research and development expense line) and higher salary and related costs. The decrease for the first half of 2014 principally reflected lower customization work for our licensees (which expenses are allocated from the research and development expense line) and lower subcontractor costs, partially offset by higher salary and related costs. Included in cost of revenues for the second quarter and first half of 2014 was a non-cash equity-based compensation expense of $56,000 and $114,000, respectively, as compared to $81,000 and $150,000 for the comparable periods of 2013. Gross Margin Gross margin for the second quarter and first half of 2014 was 85% and 89%, respectively, compared to 91% and 89% for the comparable periods of 2013. The decrease for the second quarter of 2014 mainly reflected lower overall revenues. Operating Expenses Total operating expenses were $10.1 million and $20.5 million for the second quarter and first half of 2014, respectively, as compared to $9.9 million and $19.1 million for the comparable periods of 2013. The increase in total operating expenses for the second quarter of 2014 principally reflected (i) higher salary and related costs as a result of a higher number of research and development personnel, and (ii) higher currency exchange expenses as a result of the devaluation of the U.S. dollar against the Israeli NIS, partially offset by higher research grants received from the Office of Chief Scientist of Israel (the "OCS") and lower marketing and trade shows activities. The increase in total operating expenses for the first half of 2014 principally reflected: (1) higher salary and related costs as a result of a higher number of research and development personnel, (2) higher currency exchange expenses as a result of the devaluation of the U.S. dollar against the Israeli NIS, (3) higher project-related expenses, and (4) higher non-cash equity-based compensation expenses, partially offset by higher research grants received from the OCS and the Seventh Framework Programme of the European Union. We expect that as a result of the RivieraWaves acquisition in July 2014, our operating expenses will include, starting from the third quarter of 2014: (1) the ongoing RivieraWaves expenses, which is expected to be approximately an additional $1.2 million per quarter; and (2) costs related to the RivieraWaves employee retention plan, which is expected to be approximately $0.7 million per quarter in 2014 and approximately $0.3 to $0.5 million per quarter in 2015 and approximately $0.2 million in each of the first two quarters of 2016. Research and Development Expenses, Net Our research and development expenses, net were $6.1 million and $12.0 million for the second quarter and first half of 2014, respectively, as compared to $5.6 million and $10.7 million for the comparable periods of 2013. The net increase for the second 22 -------------------------------------------------------------------------------- Table of Contents quarter of 2014 principally reflected: (1) higher salary and related costs, including as a result of a higher number of research and development personnel, (2) higher currency exchange expenses as a result of the devaluation of the U.S. dollar against the Israeli NIS, (3) higher non-cash equity-based compensation expenses, partially offset by higher research grants received from the OCS. The net increase for the first half of 2014 principally reflected: (i) higher salary and related costs, including as a result of higher research and development personnel, (ii) higher currency exchange expenses as a result of the devaluation of the U.S. dollar against the Israeli NIS, (3) higher project-related expenses, and (4) higher non-cash equity-based compensation expenses, partially offset by higher research grants received from the OCS and the Seventh Framework Programme of the European Union. Included in research and development expenses for the second quarter and first half of 2014 were non-cash equity-based compensation expenses of $533,000 and $1,134,000, respectively, as compared to $409,000 and $855,000 for the comparable periods of 2013. Research and development expenses as a percentage of our total revenues were 66% and 53% for the second quarter and first half of 2014, respectively, as compared to 44% and 43% for the comparable periods of 2013. The number of research and development personnel was 143 at June 30, 2014, compared to 125 at June 30, 2013. Sales and Marketing Expenses Our sales and marketing expenses were $2.2 million and $4.6 million for the second quarter and first half of 2014, respectively, as compared to $2.5 million and $4.9 million for the comparable periods of 2013. The decrease for the second quarter of 2014 principally reflected lower marketing and trade shows activities. The decrease for the first half of 2014 principally reflected lower commission expenses. Included in sales and marketing expenses for the second quarter and first half of 2014 were non-cash equity-based compensation expenses of $266,000 and $568,000, respectively, as compared to $332,000 and $628,000 for comparable periods of 2013. Sales and marketing expenses as a percentage of our total revenues were 24% and 20% for the second quarter and first half of 2014, respectively, compared to 20% for both the comparable periods of 2013. The total number of sales and marketing personnel was 28 at the end of both June 30, 2014 and 2013. General and Administrative Expenses Our general and administrative expenses were $1.9 million and $3.9 million for the second quarter and first half of 2014, respectively, as compared to $1.7 million and $3.6 million for the comparable periods of 2013. The increase for both the second quarter and first half of 2014 principally reflected higher salary and related costs and higher professional services cost. Included in general and administrative expenses for the second quarter and first half of 2014 were non-cash equity-based compensation expenses of $493,000 and $1,045,000, respectively, as compared to $524,000 and $1,031,000 for the comparable periods of 2013. General and administrative expenses as a percentage of our total revenues were 20% and 17% for the second quarter and first half of 2014, respectively, as compared to 14% for both comparable periods of 2013. The number of general and administrative personnel was 20 at June 30, 2014, compared to 23 at June 30, 2013. Financial Income, Net (in millions) First Half First Half Second Quarter Second Quarter 2014 2013 2014 2013 Financial income, net $ 0.88 $ 1.44 $ 0.42 $ 0.71 of which: Interest income and gains and losses from marketable securities, net $ 0.93 $ 1.53 $ 0.46 $ 0.73 Foreign exchange loss $ (0.05 ) $ (0.09 ) $ (0.04 ) $ (0.02 ) Financial income, net, consists of interest earned on investments, gains and losses from sale of marketable securities, accretion (amortization) of discounts (premiums) on marketable securities and foreign exchange movements. The decrease in interest income and gains and losses from marketable securities, net, during the second quarter and first half of 2014, principally reflected less combined cash, bank deposits and marketable securities balances held and lower yields. We review our monthly expected major non-U.S. dollar denominated expenditures and look to hold equivalent non-U.S. dollar cash balances to mitigate currency fluctuations. This has resulted in a foreign exchange loss of $0.04 million and $0.05 million for the second quarter and first half of 2014, respectively, and a foreign exchange loss of $0.02 million and $0.09 million for the comparable periods of 2013. 23 -------------------------------------------------------------------------------- Table of Contents Provision for Income Taxes Our income tax benefit was $0.3 million and our income tax expenses were $0.3 million for the second quarter and first half of 2014, respectively, as compared to tax expenses of $0.3 million and $0.7 million for the comparable periods of 2013. The decrease for the second quarter and first half of 2014 primarily reflected less income before taxes. Currently, our Israeli and Irish subsidiaries are taxed at rates substantially lower than U.S. tax rates. Our Irish subsidiary qualified for a 12.5% tax rate on its trade. Interest income generated by our Irish subsidiary is taxed at a rate of 25%. Our Israeli subsidiary is entitled to various tax benefits by virtue of the "Approved Enterprise" and/or "Benefited Enterprise" status granted to its eight investment programs, as defined by the Israeli Investment Law. In accordance with the Investment Law, our Israeli subsidiary's first six investment programs were subject to corporate tax rate of 26.5% for the first half of 2014, and our Israeli subsidiary's seventh and eighth investment programs were subject to corporate tax rate of 10% for the first half of 2014. However, our Israeli subsidiary received an approval for the erosion of tax basis with respect to its second, third, fourth, fifth and sixth investment programs, and this resulted in an increase in the taxable income attributable to the seventh and eighth investment programs, which were subject to a reduced tax rate of 10% for the first half of 2014. The tax benefits under our Israeli subsidiary's active investment programs are scheduled to gradually expire starting in 2017. To maintain our Israeli subsidiary's eligibility for the above tax benefits, it must continue to meet certain conditions under the Investment Law. Should our Israeli subsidiary fail to meet such conditions in the future, these benefits would be cancelled and it would be subject to corporate tax in Israel at the standard corporate rate and could be required to refund tax benefits already received, with interest and adjustments for inflation based on the Israeli consumer price index. Critical Accounting Policies and Estimates Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates. We believe that the assumptions and estimates associated with revenue recognition, fair value of financial instruments, equity-based compensation and income taxes have the greatest potential impact on our consolidated financial statements. Therefore, we consider these to be our critical accounting policies and estimates. See our Annual Report on Form 10-K for the year ended December 31, 2013, filed with the SEC on March 14, 2014, for a discussion of additional critical accounting policies and estimates. There have been no changes in our critical accounting policies as compared to what was previously disclosed in the Form 10-K for the year ended December 31, 2013. LIQUIDITY AND CAPITAL RESOURCES As of June 30, 2014, we had approximately $22.9 million in cash and cash equivalents, $57.6 million in short term bank deposits, $42.9 million in marketable securities, and $16.0 million in long term bank deposits, totaling $139.4 million, compared to $151.6 million at December 31, 2013. The decrease for the first half of 2014 principally reflected a share repurchase of $14.3 million. During the first half of 2014, we invested $58.3 million of cash in bank deposits and marketable securities with maturities up to 42 months. In addition, during the same period, bank deposits and marketable securities were sold or redeemed for cash amounting to $68.8 million. All of our marketable securities are classified as available-for-sale. The purchase and sale or redemption of available-for-sale marketable securities are considered part of investing cash flow. Available-for-sale marketable securities are stated at fair value, with unrealized gains and losses reported in accumulated other comprehensive income (loss), a separate component of stockholders' equity, net of taxes. Realized gains and losses on sales of investments, as determined on a specific identification basis, are included in the interim condensed consolidated statements of operations. We did not recognize any other-than-temporarily-impaired charges on marketable securities during the first half of 2014. For more information about our marketable securities, see Notes 3 to the attached Notes to the Interim Condensed Consolidated Financial Statements for the three and six months ended June 30, 2014. Bank deposits are classified as short-term bank deposits and long-term bank deposits. Short-term bank deposits are deposits with maturities of more than three months but no longer than one year from the balance sheet date, whereas long-term bank deposits are deposits with maturities of more than one year as of the balance sheet date. Bank deposits are presented at their cost, including accrued interest, and purchases and sales are considered part of cash flows from investing activities. 24 -------------------------------------------------------------------------------- Table of Contents Operating Activities Cash provided by operating activities for the first half of 2014 was $1.3 million and consisted of net income of $0.5 million, adjustments for non-cash items of $3.7 million, and changes in operating assets and liabilities of $2.9 million. Adjustments for non-cash items primarily consisted of $3.2 million of depreciation and equity-based compensation expenses and $0.6 million of amortization of premiums on available-for-sale marketable securities. The decrease in cash from changes in operating assets and liabilities primarily consisted of an increase in prepaid expenses and other current assets of $0.7 million, a decrease in accrued expenses and other payables of $0.7 million, and a decrease in accrued payroll and related benefits of $2.0 million, mainly as a result of bonus payments, partially offset by a decrease in trade receivables of $0.6 million. Cash provided by operating activities for the first half of 2013 was $1.4 million and consisted of net income of $3.9 million, adjustments for non-cash items of $2.8 million, and changes in operating assets and liabilities of $5.3 million. Adjustments for non-cash items primarily consisted of $3.0 million of depreciation and equity-based compensation expenses, $0.2 million of realized gain, net, on sale of available-for-sale marketable securities, $0.8 million of amortization of premiums on available-for-sale marketable securities, and $0.7 million of accrued interest on bank deposits. The decrease in cash from changes in operating assets and liabilities primarily consisted of an increase in trade receivables of $3.0 million, an increase in prepaid expenses and other current assets of $0.8 million, an increase in deferred taxes, net of $0.5 million, a decrease in deferred revenues of $0.3 million, a decrease in accrued expenses and other payables of $0.8 million, and a decrease in accrued payroll and related benefits of $0.6 million, partially offset by an increase in income taxes payable of $0.5 million. Cash flows from operating activities may vary significantly from quarter to quarter depending on the timing of our receipts and payments. Our ongoing cash outflows from operating activities principally relate to payroll-related costs and obligations under our property leases and design tool licenses. Our primary sources of cash inflows are receipts from our accounts receivable, to some extent, funding from the OCS and interest earned from our cash, deposits and marketable securities. The timing of receipts of accounts receivable from customers is based upon the completion of agreed milestones or agreed dates as set out in the contracts. Investing Activities Net cash provided by investing activities for the first half of 2014 was $10.2 million, compared to $8.8 million of net cash used in investing activities for the comparable period of 2013. We had a cash outflow of $18.8 million and a cash inflow of $43.8 million in respect of investments in marketable securities during the first half of 2014, as compared to cash outflow of $46.3 million and a cash inflow of $34.9 million in respect of investments in marketable securities during the first half of 2013. For the first half of 2014, we had net investment of $14.6 million in bank deposits, as compared to net proceeds of $3.5 million from bank deposits for the comparable period of 2013. We had a cash outflow of $0.2 million and $0.6 million during the first half of 2014 and 2013, respectively, from purchase of property and equipment. We had a cash outflow of $0.3 million during the first half of 2013 from minority investments in private companies. Financing Activities Net cash used in financing activities for the first half of 2014 was $12.8 million, compared to $3.4 million of net cash used in financing activities for the comparable period of 2013. In January 2012, our Board of Directors reaffirmed its authorization for the repurchase by the company of 1,966,700 shares of common stock pursuant to Rule 10b-18 of the Securities Exchange Act of 1934, as amended. In July 2013, our Board of Directors authorized the repurchase of an additional 2,000,000 shares of our common stock pursuant to Rule 10b-18 of the Exchange Act. During the first half of 2014, we repurchased 929,685 shares of common stock pursuant to our share repurchase program, at an average purchase price of $15.35 per share, for an aggregate purchase price of $14.3 million. During the first half of 2013, we repurchased 304,738 shares of common stock pursuant to our share repurchase program, at an average purchase price of $15.92 per share, for an aggregate purchase price of $4.9 million. During the first half of 2014, we received $1.5 million from the exercises of stock-based awards, as compared to $1.4 million received for the comparable period of 2013. We believe that our cash and cash equivalents, short-term bank deposits and marketable securities, along with cash from operations, will provide sufficient capital to fund our operations for at least the next 12 months. We cannot provide assurances, however, that the underlying assumed levels of revenues and expenses will prove to be accurate. In addition, as part of our business strategy, we occasionally evaluate potential acquisitions of businesses, products and technologies and minority equity investments. Accordingly, a portion of our available cash may be used at any time for the acquisition of complementary products or businesses or minority equity investments. Such potential transactions may require substantial capital 25 -------------------------------------------------------------------------------- Table of Contents resources, which may require us to seek additional debt or equity financing. We cannot assure you that we will be able to successfully identify suitable acquisition or investment candidates, complete acquisitions or investments, integrate acquired businesses into our current operations, or expand into new markets. Furthermore, we cannot provide assurances that additional financing will be available to us in any required time frame and on commercially reasonable terms, if at all. See "Risk Factors-We may seek to expand our business in ways that could result in diversion of resources and extra expenses." for more detailed information. SUBSEQUENT EVENTS In July 2014, we acquired RivieraWaves, a privately-held, French-based company and a leading provider of wireless connectivity IP for Wi-Fi® and Bluetooth® technologies. Under the terms of the agreement, we agreed to pay an aggregate of approximately $19 million to acquire RivieraWaves with $11,969,000 paid at closing and the remainder of the consideration to be paid upon the satisfaction of certain performance and other milestones. In addition, we established an employee retention plan for the former RivieraWaves' employees at an expense of approximately $3.4 million to be payable on a quarterly basis for a period of two years after the acquisition. We currently anticipate that as a result of the acquisition, our initial goal is to reach shipments of 400 million units of royalty-bearing connected devices (exclusive of handsets) by 2018 and a 25% increase in our annual 2015 licensing revenues as compared to our historical revenue figures in the range of $22 million to $24 million. In August 2014, we received a consideration of 756,700 Euro (approximately $1,014,000) when Antcor Advanced Network Technologies S.A. ("Antcor"), a company in which we had a minority investment of 1,250,000 Euro (approximately $1,561,000), was acquired. Pursuant to the acquisition agreement, we may receive additional proceeds from the acquiror during the next five years based on achievement of certain performance and other milestones by Antcor. |