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CEVA, Inc.
DSP Specialist Poised for Market Share Gains
Leading pure play in DSP cores: CEVA is a leading supplier of digital signal processor (DSP) core solutions, which are crucial building blocks for semiconductor chipsets used in many digital electronic products, most notably mobile devices, digital media players, netbooks, and set-top boxes. DSP functionality shifting to buy versus build model: We believe the economics of semiconductor design favor a shift toward an outsourcing model. The increasing complexity of electronic devices is driving the need for smaller, more reliable, and more efficient components. Given limited resources, many chipset vendors have realized cost advantages from outsourcing certain functions. As a leading supplier of DSP intellectual property, CEVA’s licensing and royalty business will benefit significantly from this outsourcing trend, in our opinion. Market share gain opportunity in mobile handsets: We expect CEVA’s royalty business to be the primary growth driver over the next few years. During 2008 we estimate 160 million mobile handsets contained CEVA technology, a 13% market share of units shipped. By 2010, we estimate CEVA’s market share will increase to 20%, or 247 million units. We believe the key enablers for this growth are share gains by CEVA licensees as well as new handset design wins by CEVA. We peg CEVA’s royalty revenue at 48% of overall sales in 2010, up from 36% in 2008. Healthy margins augmented by operating leverage: Since 2004, CEVA has maintained a gross margin near 90%; we believe this level is sustainable. Furthermore, over the next couple of years, we expect significant operating leverage to drive operating margin from 11.6% in 2008 to 15.8% in 2010, with the potential for high-teens operating margin longer term. Valuation attractive: Excluding $4 per share in cash, CEVA shares trade at 11 and 8 times our 2009 and 2010 EPS estimates, respectively. The enterprise is valued at 1.6 and 1.4 times our 2009 and 2010 sales estimates, respectively. Based on these four metrics, CEVA trades at a 40% to 65% discount to its closest comparable, ARM Holdings. Coupled with what we believe are conservative earnings estimates, this disparity in valuation offers a compelling entry point. Risks: Key risks include lack of visibility and “lumpiness” in the licensing business, customer concentration, customers transitioning away from a licensing model to develop technologies in-house, and pricing pressures from larger players. CEVA is a leading designer and licensor of silicon intellectual property. The company provides DSP cores, subsystems, and application-specific platforms used in the handset, portable multimedia device, and consumer electronics markets.

Technology │Wireless Communications April 28, 2009 Basic Report
Stock Rating: Company Profile:

(09-037)
Outperform Aggressive Growth

Symbol: CEVA (Nasdaq) Price: $7.75 (52-Wk.: $5–$11) Market Value (mil.): $151 Fiscal Year End: December Long-Term EPS Growth Rate: 12% Dividend Yield: None Estimates EPS FY EBITDA (mil.) FCF (mil.) Valuation CY P/E 2008A $0.32 $5.40 $(3.88) 2009E $0.30 $4.88 $5.38 2010E $0.45 $8.25 $8.18

24.2x

25.8x

17.2x

Trading Data Shares Outstanding (mil.) Float (mil.) Average Daily Volume Financial Data Long-Term Debt/Total Capital Book Value Per Share Enterprise Value (mil.) EBITDA (2009E) Enterprise Value/EBITDA Return on Equity

19.53 15.70 58,286

0.0% $6.09 $66.73 $4.88 13.7x 5.7%

Anil Doradla 312.364.8016 adoradla@williamblair.com

Brian Nugent, CFA 312.364.5486 bnugent@williamblair.com

William Blair & Company, L.L.C. intends to seek or expects to receive compensation for investment banking services from the company in the next 3 months. Please consult page 30 of this report for all disclosures.

William Blair & Company, L.L.C. 222 West Adams Street Chicago, Illinois 60606 312.236.1600 www.williamblair.com

William Blair & Company, L.L.C.

Investment Summary
We are initiating coverage of CEVA with an Outperform rating and an Aggressive Growth company profile. CEVA is a pure-play provider of chipset intellectual property (IP) solutions oriented toward communication and digital multimedia applications. The company’s main solutions, known as digital signal processor (DSP) cores, are key building blocks for semiconductor chipsets used in the wireless handset, portable multimedia, home entertainment, storage, and telecommunication end-markets. Each of these types of electronics requires conversion and manipulation of analog and digital signals. This necessitates a dedicated set of semiconductor components having high-capacity real-time processing capabilities, the main function of a DSP core. According to our estimates (which we believe are conservative), there were more than 2 billion electronic devices shipped using DSP cores in 2008 (ranging from mobile devices to digital TVs). By 2012 we estimate the market to increase to 2.7 billion units, or a fouryear CAGR of 6%. As the end-market opportunities have been significant, over the years the industry has attracted a fair number of competitors. That said, the tough competitive environment, combined with specialized skills required to succeed, has resulted in many players either exiting the business or being acquired by larger companies. Among the DSP core providers, CEVA has built a reputation as an innovator. The company has leveraged a talented research-and-development team focused solely on DSPs, with more than 15 years of expertise, to advance its position with many of the industry’s leading semiconductor players, including Infineon, ST-Ericsson, Samsung, Sony, Mediatek, and others. Our positive outlook on CEVA is due to a combination of favorable end-market trends, market share gain opportunities, and solid company fundamentals. Following are the key reasons for our Outperform rating. DSP Design Shifting From Build to Buy Consumer devices, ranging from smartphones to digital TVs and set-top boxes, are getting more complex. To address the increased complexity, semiconductor designers are faced with a never-ending mandate to supply smaller, more feature-rich components that are more reliable, less expensive, and able to achieve higher performance levels, while using equivalent/less battery power. Given these design challenges, combined with constraints of operating with finite engineering talent, we believe semiconductor companies are increasingly relying on outsourcing design functions outside their core expertise to reduce cost and optimize the value of their core competencies. Based on CEVA’s progress with several Tier 1 semiconductor designers, in addition to our industry checks, we believe DSP technology is an area that will increasingly move toward the outsourcing/licensing model. Our conviction is based on the following: • • It has become less expensive to license the DSP technology than to develop it in-house. DSP applications have become increasingly complex in terms of the trade-off between features and power consumption, requiring focused expertise to compete. Even with vast resources, semiconductor companies have found it increasingly difficult to differentiate their DSP solutions for certain applications.

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Mobile Share Gain Opportunity In 2008 we estimate CEVA’s worldwide market share of baseband processors, a component in every wireless handset, was 13.3%. Furthermore, the mobile handset market accounted for 52% of CEVA’s royalty-bearing shipments in 2008. By 2010, we estimate CEVA’s baseband market share in the handset market will increase to 20% of the 1.24 billion-unit worldwide

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handset market. In addition, we estimate that by the end of 2010, 61% of all royalty-bearing shipments will be derived from the mobile handset industry. Table 1 shows our forecasts of CEVA’s market share in the mobile handset industry.
Table 1 CEVA, Inc. Handset Shipments 2008 Worldwide handset shipments (billions) 1.20 CEVA share 13.3% Mobile handset contribution to CEVA’s 52.0% royalty shipments
Source: William Blair & Company, L.L.C. estimates

2009E 1.12 15.0% 53.1%

2010E 1.24 20.0% 60.9%

We believe some of the key drivers for CEVA’s success in the mobile handset market include: • Handset manufacturers, namely Nokia, are diversifying their supplier base. We expect this to result in Infineon, ST-Ericsson, Broadcom, and other CEVA licensees taking digital baseband market share from Texas Instruments, which had been a dominant player but is exiting the space. Strong performance and share gains from mobile devices already containing CEVA technology, such as the Apple iPhone. Share gains in low-end handsets as larger licensors such as ARM are not focused on this low-content opportunity. Progress in high-end devices as feature-rich devices increasingly require a dedicated DSP for optimal power efficiency and performance.

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Several Near-Term Catalysts Beyond the Mobile Space Outside of baseband applications in mobile handsets, we believe CEVA has opportunities in several large and underpenetrated markets, such as DVD players, Blu-ray players, settop boxes, hard disk drives, and portable multimedia players. In 2008 we believe CEVA’s non-handset addressable market was roughly 1 billion units. By 2012, we expect this market to grow to 1.28 billion units, with a four-year CAGR of 7%. Table 2 shows our forecasts of CEVA’s market share in the non-mobile-handset industry.
Table 2 CEVA, Inc. Non-Handset Shipments 2008 978 2009E 880 16.9% 46.9% 2010E 942 16.9% 39.1%

Worldwide non-handset shipments (millions)

CEVA share 15.1% Non-handset contribution to CEVA’s royalty 48.0% shipments
Source: William Blair & Company, L.L.C. estimates

Within the non-handset market, CEVA’s opportunity in multimedia devices is perhaps the most visible incremental catalyst. Because CEVA often provides software and incremental support of these high-end devices, we believe the company earns a higher per-unit royalty

Analyst Name 312.364.xxxx Anil Doradla 312.364.8016

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rate. At present, CEVA does not derive any royalty revenue from multimedia devices, but we expect this to change as the company gets new design wins. Some of the key areas where we believe CEVA may benefit include the following. • We expect several CEVA-enabled personal media players to be introduced in Asia during 2009 and 2010. While volumes are difficult to predict, we believe the designs are in place, and we expect these devices to augment CEVA’s royalty rate even in low volumes. The Nintendo DSi, which we believe contains high-value CEVA content, was introduced this fall. CEVA had no content in prior versions of the DS. The platform has cumulatively shipped more than 100 million units since inception.

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Licensing Model Enables Operating Leverage CEVA has maintained a pro forma gross margin near 90% for several years and has held pro forma operating expense growth to 3% per year during the last two years. With limited incremental costs associated with higher revenue, particularly for royalty revenue, we believe the company is well positioned to drive revenue upside to the bottom line, not only on a quarterly basis, but also over longer periods as the business scales.

Investment Highlights
Several Industry Dynamics Favor CEVA DSP—build versus buy. Shorter product cycles and increased complexity of digital products have forced semiconductor companies to carefully evaluate the return on R&D investments. While these companies seek differentiation in every application, the benefits of creating a “perfect chip” often outweigh the costs. Companies with particularly limited resources have no choice but to license any application outside their core expertise. Other companies may have vast resources, but often lack the engineering talent to excel in every application. As such, by concentrating on any given application, there is an inherent opportunity cost in not focusing on a different application. We believe DSPs have evolved into an application where it is difficult to differentiate oneself without continually committing significant resources. Our industry checks indicate that several companies that have historically developed their own DSP solutions in-house have begun to realize the benefits of outsourcing DSP functions. Many have begun licensing DSP technology from CEVA but have not fully adopted a licensing model, implying good growth opportunities, in our view, for CEVA from both existing as well as new licensees. For example, we believe Broadcom is a CEVA licensee for baseband applications, but has several more product lines that do not use CEVA as DSP cores. Greater competition for mobile basebands at large handset vendors should benefit CEVA. Until recently, the baseband market at large handset vendors, such as Nokia and Sony-Ericsson (about 40% of the worldwide market share), had been dominated by Texas Instruments (TI) (with more than 90% market share). However, over the past couple of years, Nokia and Sony Ericsson (among others) have announced plans to diversify their component suppliers, mainly driven by cost and performance considerations. Given the deteriorating outlook at its top customers and little market interest when it sought to sell the business, TI decided to wind down its merchant baseband business (the company expects to be totally out of the business by 2012). We expect CEVA to be a predominant beneficiary of TI’s departure over the next couple of years as its main licensees gain market share.

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In September 2007, Nokia announced partnerships with Infineon, ST-Ericsson, and Broadcom, each of which we believe is a CEVA licensee for baseband DSPs. While Infineon has begun ramping up in Nokia’s 1200 series, the timing of other product ramp-ups remains more uncertain. That said, we believe over time CEVA licensees will take a significant share of basebands in Nokia’s 400 million-plus annual device shipments. For perspective, unit shipments with CEVA technology totaled 307 million in 2008, with no material impact from Nokia. Augmented by similar potential share gain opportunities at other handset vendors, by 2010, we believe its licensees can achieve 20% market share of mobile handset basebands, up from 13% in 2008. The ARM versus CEVA debate. Figure 1 shows the layout of a low-end and high-end mobile handset. As shown, in a low-end handset, the whole phone is developed on a single chip solution that integrates multiple subfunctions that include radio baseband, input-output interfaces, and voice/video applications. In the case of high-end phones, the complexity and sophistication of phone features require different chipsets specializing in different functions. From CEVA’s point of view, that means the separation of the baseband and applications processor functionality. The baseband, in a nutshell, is responsible for processing the received (as well as transmitted) voice and data streams within a mobile handset and the application processor is responsible for performing all the multimedia applications and services.
Figure 1 CEVA, Inc. Low-End Versus High-End Mobile Phone Layout

High End Phone
CEVA
DSP Core DSP Core

Baseband
ARM

Application Processor
ARM

Low End Phone
CEVA
DSP Core

Single Chip Solution
ARM

Source: William Blair & Company, L.L.C.

In both low- and high-end phones, there is a need for two types of processors: One set of processors that can provide overall coordination of all the different functions within a phone, with another set of processors that specializes in performing high-speed processing of audio and video applications. Another way of looking at this is to view the set of processors responsible for coordinating as being a “conductor” of an orchestra, while the second set of processors are the individual instruments being coordinated by the conductor.

Analyst Name 312.364.xxxx Anil Doradla 312.364.8016

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William Blair & Company, L.L.C.
CEVA’s DSP cores are essential elements within the mobile handsets where there is a need for high-speed processing of audio and video streams. As a result, DSP cores are essential functions in basebands and applications processors in the phone. While in the low-end phones DSP cores are incorporated into basebands, in the high-end phones they are incorporated into both baseband and application processors. Coming back to the orchestra analogy mentioned above, CEVA’s DSP cores are not suitable for the role of the conductor. For that, there is a need for generic processors, such as those provided by ARM Holdings. Over the past several years, with more than 90% of the market share, ARM Holdings has developed a dominant share of the processor market in the mobile handset market (and performing the role of the conductor in the analogy above). That said, ARM processors are not designed to cater to the high-speed DSP functionality required by both low- and highend multimedia-intensive devices, such as smartphones. As a result, we believe CEVA will continue gaining market share with its focus on the DSP core market, while ARM will continue catering to the generic processor needs of the mobile handset market. Company-Specific Investment Merits Differentiation. We believe CEVA is attractive as a focused pure play with sustainable competitive advantages. The company has been developing DSP technology for more than 15 years. As such, it has a compelling product portfolio that allows licensees to optimize the cost/functionality trade-off for nearly any DSP application. The company also provides extensive tools and support to help licensees during the design process. Moreover, the company has forged relationships over the years with leading semiconductor companies and OEMs, allowing it to cater its next-generation solutions to the specific requirements of its customers. We believe each of these attributes provides CEVA with a sustainable competitive advantage. High switching costs. We believe CEVA benefits from high switching costs customers would face if they transitioned DSP strategies. The initial decision to license critical technologies requires careful consideration, suggesting licensees must be committed to a long-term relationship before licensing CEVA cores. The learning curve on new platforms, software, and codes is steep. In addition, CEVA-enabled devices typically require a 12- to 18-month lead time before coming to market. While licensees have options for switching in any given chipset application, we believe these considerations make it costly for customers to shift away from CEVA in their long-term product roadmaps. Targeting business where larger players are not interested. We believe the company will benefit from being significantly smaller in size as it pursues business opportunities that are of less interest to the larger vendors. We believe CEVA benefits from flying under the radar as a competitive threat to larger industry players, such as ARM, TI, and Freescale. Greater focus in the baseband business. We believe larger industry players, such as ARM and TI, are focusing on the greater content available in the application processor market within the mobile handset industry. To these larger companies, the opportunity presented by DSP cores from baseband modem solutions in the low to midrange segments of the 2G and 2.5G market is less financially attractive. Unlike the application processor business, where the dollar content is 3 to 4 times higher than the baseband content, the baseband IP royalty content is in the range of $0.05 to $0.10 per unit. An acquisition target? We believe CEVA has a valuable IP portfolio and a talented design team. With an enterprise value of roughly $72 million, the company would not be difficult to digest relative to the billions of dollars of cash on the balance sheets of several semiconductor

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companies. These characteristics could make CEVA an acquisition target of either a semiconductor player or another IP licensor, either of which we believe would result in a significant premium to the current valuation. With several large semiconductor companies heavily dependent on DSP core functionality, a vertical acquisition could make sense if such a company were contemplating building the technology in-house. That said, an entrenched mobile chipset company, such as Broadcom or Samsung, would not be likely to continue licensing the technology to its competitors, and therefore the acquisition would provide only technology advantages, as opposed to revenue streams, which could make such a deal harder to justify. On the other hand, a larger licensor like ARM would likely be better equipped to integrate CEVA’s licensing model with its own. Beyond ARM, the challenge for other licensors is that the DSP likely falls outside their core expertise, making synergies more difficult to identify. Moreover, it is unclear whether other licensors, such as MIPS, would be an acquirer or target for CEVA given their similarly small size. Attractive Financial Profile Leveraged profitability structure. Like other companies with successful licensing models, CEVA has a strong margin profile. During its most recent quarter, the company reported 89.0% pro forma gross margin and 13.5% pro forma operating margin. While there is limited potential expansion on the gross margin line, we believe gross margin is sustainable near 90% on a long-term basis. Perhaps more important, we believe the company can achieve significant operating leverage on incremental revenue growth. The company’s long-term operating margin target is 15% to 20%, compared with 11.6% achieved during 2008. While we model modest operating margin contraction in 2009 before a recovery in 2010, given limited variable costs, we believe the business is well positioned to drive any revenue upside to the bottom line. Furthermore, the company has indicated that it plans to trim $1 million out of the combination of cost of goods sold and operating expenses in 2009, which lowers fixed costs as well. Several catalysts could drive upside to estimates. We believe there are multiple catalysts that could drive upside to our and Street estimates over the next two years. In the “Financials” section of this report, we detail multiple growth drivers and potential upside scenarios. We believe there could be as much as 20% upside relative to our $0.30 EPS estimate for 2009; we also believe our $0.45 EPS estimate for 2010 could be conservative. Broadly, we see the following factors as potential upside catalysts for the licensing and royalty segments. • Broader adoption of the CEVA portfolio by existing licensees, due to more favorable buy-versus-build economics. Refreshes to CEVA’s DSP platform, i.e., new product introductions. Adoption of the recently released CEVA-XC, the company’s new advanced DSP core, which we believe would drive higher dollar content licensing agreements. Share gains by CEVA licensees at handset OEMs, including Infineon, Broadcom, and ST-Ericsson at Nokia. Better-than-expected adoption of personal media players and other multimedia applications being introduced this year, which would be positive for both volumes and royalty rates since CEVA has a strong emerging position in this end-market.

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Healthy balance sheet and cash flow facilitate accretive share repurchases. With no debt, more than $4 in net cash per share, and three straight years growing cash and investments, the company is not exposed to the risk of tightening credit markets and is well positioned to continue investing for growth, in our view. On August 4, 2008, CEVA’s board approved a share repurchase program of up to 1 million shares, or roughly 5% of the shares outstanding. Through December 31, the company had repurchased 753,000 shares at roughly $7.70 per share, leaving 247,000 shares on the authorization. On March 2, 2009, the company adopted a 10b5-1 plan for 196,000 shares, which it indicated were the remaining shares on the authorization. Qualitatively, we see the purchases as a positive signal of the company’s confidence in its prospects. While we suspect the share count will be coming down and that incremental repurchases since December 31 would be accretive to our estimates, we have conservatively modeled a flat share count for 2009.

Valuation
Based on our 2009 and 2010 EPS estimates of $0.30 and $0.45, respectively, CEVA is currently trading at 26 and 17 times our forward estimates. CEVA shares trade at a 2% premium over its peer group median for 2009. We believe valuation metrics accounting for CEVA’s cash and absence of debt are more reflective of the company’s value. The enterprise is valued at a significant discount to the group (over 35% versus the median of the group) on an enterprise-value-to-sales basis. Based on our estimates, CEVA trades at an enterprise-value-to-sales multiple of 1.6 times for 2009 and 1.4 times for 2010 (versus 2.6 and 2.3 times for the group on 2009 and 2010, respectively). Using a metric of price excluding cash to earnings (P/E excluding cash in table 3), CEVA’s discount is even more compelling, in our opinion. Relative to the peer group median of 16.5 times using 2010 EPS estimates, CEVA shares are valued at a discount of roughly 50%. Excluding CEVA’s interest income from our estimate in 2010 but including interest in the comparables, CEVA’s 10.3 multiple is still 37% below the peer group median.
Table 3 CEVA, Inc. Comparable Companies: Financial Analysis
Price 4/27/09 5.17 26.07 3.05 43.17 17.47 10.48 24.38 7.75 Market Cap 2,172 1,136 136 71,207 22,301 6,479 11,978 151 Enterprise Value 2,069 999 114 62,355 19,761 5,531 10,016 67 Sales CY09 CY10 456 304 91 9,904 8,767 2,174 3,778 41 488 351 11,406 9,080 2,506 4,326 49 EPS CY09 0.25 1.54 0.53 1.77 0.47 0.30 0.51 0.30 Mean Median *ARM Holdings' sales and EPS estimates are based on Great Britain pounds translated to dollars for comparability Sources: Thomson Financial, CEVA estimates, and William Blair & Company, L.L.C. analysis CY10 0.31 2.02 2.10 0.90 0.54 0.93 0.45 Price/Sales CY09 CY10 4.8x 3.7x 1.5x 7.2x 2.5x 3.0x 3.2x 3.7x 3.7x 3.4x 4.4x 3.2x -6.2x 2.5x 2.6x 2.8x 3.1x 3.5x 3.1x EV/Sales CY09 CY10 4.5x 3.3x 1.3x 6.3x 2.3x 2.5x 2.7x 1.6x 3.1x 2.6x 4.2x 2.8x -5.5x 2.2x 2.2x 2.3x 1.4x 2.9x 2.3x P/E CY09 21.0x 16.9x 5.8x 24.5x 37.1x 34.5x 47.6x 25.6x 26.6x 25.0x CY10 16.7x 12.9x -20.5x 19.4x 19.3x 26.3x 17.1x 18.9x 19.3x P/E Ex. Cash CY09 CY10 20.0x 14.8x 4.1x 21.4x 32.9x 29.4x 39.8x 11.3x 21.7x 20.7x 15.9x 11.3x -17.9x 17.2x 16.5x 22.0x 7.6x 15.5x 16.5x

Company Name Arm Holdings Plc Interdigital Inc Mips Technologies Inc Qualcomm Inc Texas Instruments Inc Marvell Technology Group Broadcom Corp. Ceva Inc

Ticker * ARMH IDCC MIPS QCOM TXN MRVL BRCM CEVA

We believe the most relevant comparable for CEVA is ARM Holdings, as both companies are pure IP players primarily focused on the mobile handset market. We believe ARM can continue to garner a premium to CEVA because it has a more established licensing business, caters to a more attractive subsegment (much more content per device), and has a superior operating margin structure. That said, because of its strong market position—for Anil Doradla 312.364.8016 -8-

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example, ARM has a 90%-plus share in mobile handsets—we believe ARM’s growth is closely tied to the growth of its served markets. We believe CEVA’s growth, conversely, can significantly exceed the growth rate of its served markets because the company is relatively underpenetrated. We also see greater potential margin expansion in CEVA given this penetration opportunity. Factoring in the basic merits of each company, we believe CEVA shares should trade at a more modest discount to ARM than the 40% to 65% levels represented in current valuations. Lastly, we have added confidence recommending CEVA because we have an upward bias to our EPS estimates in both 2009 and 2010. We quantify potential upside scenarios to our 2009 EPS estimates in the “Financials” section of this report. In short, we believe there could be roughly $0.05 to $0.07 upside relative to our 2009 EPS estimate of $0.30.

Investment Risks
Larger Customers In-Sourcing DSP Development One of the key downside risks for CEVA, in our view, would occur if a large customer transitioned to proprietary DSP development rather than outsourcing to CEVA. In recent years, we believe the trend has actually been the opposite, with more companies evaluating and adopting DSP licensing agreements for at least a portion of their products. That said, over time this trend could reverse if companies see compelling reasons to develop DSP technology in-house. Customer Concentration CEVA derives a significant portion of its revenues from a small number of customers. Table 4 shows revenues derived from CEVA’s top five customers between 2006 and 2008. As also shown in the table, the company’s royalty business (36% of 2008 sales) is highly concentrated across a small number of customers. The company has maintained that the top customers vary from year to year, and as such the company does not believe its long-term growth outlook is closely tied to any one customer.
Table 4 CEVA, Inc. Customer Concentration 10% customers No. 1 Customer No. 2 Customer No. 3 Customer Top 5 customers (% total sales) Top 5 customers paying per-unit royalties (% royalty sales) 2006 16% 2007 17% 12% 11% 53% 68% 2008 20%

42% 75%

49% 79%

Note: 10%-plus customers are not necessarily listed in order of their sales contribution Source: Company reports

Spin-offs From Texas Instruments (TI) We believe CEVA benefits from being essentially the only pure play in the DSP core licensing business. When TI was shopping its merchant baseband business, we believe it found few buyers, mainly because its relationship with its key customer, Nokia, has been in jeopardy. That said, the underlying DSP technology has some value that could be developed into a rival licensing business in competition with CEVA. In our opinion, such a scenario is unlikely to pose a serious threat to CEVA considering that TI would have to sell this business at a discounted price to an acquirer capable of bringing the portfolio up to speed.

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Volatility in Licensing Business Figure 2 shows the year-over-year change in CEVA’s royalty and licensing segments. As shown, the company’s licensing business (54% of sales) has been more volatile than its royalty business. The main reason is that while the royalty business is driven by repeat business from a diverse group of products and end-markets, the company’s licensing business is driven by new product designs, with 50% of licensing agreements coming from new customers.
Figure 2 CEVA, Inc. Segment Revenue Growth
70%

50% % Change in Revenue

30%

10%

-10%

-30%
20 06 20 07 20 08 20 10 E 20 09 E

Royalties

Licensing

Sources: Company reports and William Blair & Company, L.L.C. estimates

Delays in Product Rollouts CEVA’s royalty business is driven by the company’s customers purchasing the IP from CEVA and integrating it in their products. In many situations, delays in product launches (causes unrelated to CEVA) may result in revenue opportunities being delayed. For example, while we are confident that Infineon and Broadcom are in Nokia’s design plans over the next couple of years, we do not know when these designs will reach meaningful volumes. Foreign-Currency Fluctuations While CEVA transacts and reports its revenues in U.S. dollars, the bulk of the company’s expenses (most employee salaries) are denominated in new Israeli shekels and euros. Although the company attempts to mitigate this risk with foreign-currency hedges, financial results have been affected nonetheless. Table 5 shows the net impact of foreign-currency fluctuations in the last three years. Although we estimate the EPS impact of the losses was less than a penny in 2006 and 2008, greater volatility could be a material headwind going forward.
Table 5 CEVA, Inc. Foreign Currency Gain (Loss) (in thousands) 2006 2007 2008 ($134) $38 ($150)

Source: Company reports

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Company Overview
Based in San Jose, California, CEVA was formed through the combination of the DSP IP licensing division of DSP Group, Inc. and Parthus Technologies plc in November 2002. As of December 31, 2008, the company had more than 180 employees. R&D facilities are located in Israel, Ireland, and the United Kingdom, with sales offices in the Asia-Pacific region, Sweden, and the United States. The company has been licensing a platform of DSP silicon intellectual property (IP) to semiconductor and OEM companies for more than 15 years. Products Figure 3 outlines CEVA’s IP portfolio.
Figure 3 CEVA, Inc. Product Roadmap

Source: Company reports

Programmable DSPs. As figure 3 illustrates, CEVA has a wide range of DSP cores that vary by cost, power efficiency, and performance. The company introduces a new DSP core roughly once per year and new technologies could be either higher up the functionality curve or between existing legacy products to better match the cost/performance needs of various applications. The flexibility of the core technology allows CEVA to, for example, address all ranges of the handset market, from low-end, high-volume handsets to high-end smartphones like the Apple iPhone. Each of these cores can perform baseband functions for mobile handsets; the X platform enables video DSP functions, whereas the Teak platform is built around more basic audio applications. The latest product introduction was the CEVA-XC, released in February 2009. DSP subsystems. The company also offers DSP-based subsystems for systems-on-chip (SoC) designs. The subsystems combine selected hardware peripherals used in the design process with software modules and chip designs. Common subsystem applications include wireless base stations, VoIP, and portable media players. Application-specific platforms. Application-specific platforms integrate the DSP core, hardware subsystem, and application-specific software. Common application-specific platforms include video, audio, voice-over-Internet protocol (VoIP), Bluetooth, and Serial Advanced Technology Attachment (SATA).

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CEVA technology was deployed in more than 300 million unit shipments in 2008. Table 6 illustrates the end-markets in which CEVA technology is deployed. Baseband programmable DSPs for cell phones accounted for more than half of device shipments in 2008, and the company had a roughly 13% share of the global handset market.
Table 6 CEVA, Inc. End-Market Products Targeted by CEVA Licensees
End-Product Handsets Portable Multimedia Application Basebands Application processors Portable video players Mobile TVs Personal navigation devices MP3/MP4 players DVD players Blu-ray players Set-top boxes Digital TVs Game consoles (portable and home systems) Disk drives Solid state storage devices Residential gateways Femtocells VoIP phones Network infrastructure Est. Market Size (in millions) 2008E 2012E 1,200 1,434

252

246

Home Entertainment

602

789

Storage Telecommunication Devices

52

127

72

118

Sources: Company reports, IDC, and Infonetics

Customers CEVA licenses its IP to semiconductor and OEM companies throughout the world. These licensees, in turn, apply CEVA technology to handsets, portable multimedia, and other consumer electronics products noted above. As of December 31, 2008, there were 27 licensees shipping CEVA-based technologies; 21 of these licensees pay per-unit royalties and 6 have prepaid royalty agreements. At any point in time, there could be 50-plus licensees developing chips.
Figure 4 CEVA, Inc. CEVA Business Model: Sample Licensees and End-Customers

License Fee License Fee

Royalty Royalty

Silicon IP Silicon IP

Chips Chips

Development Tools, Support, Software Development Tools, Support, Software

Source: Company reports

During 2008, one customer drove 20% of sales (we speculate it was Infineon), with the rest accounting for less than 10% each. In 2007, three customers combined for 40% of sales.

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William Blair & Company, L.L.C.
Distribution With a salesforce of 20 employees, the company licenses its IP directly to its customers. The close partnerships the company has fostered with its licensees form, in our view, a key competitive advantage. Perhaps most important, with hands-on involvement in customer designs, CEVA can cater its most important asset—R&D talent—to dynamically address customer demand. Supporting CEVA technology implementation through 12- to 18-month lead times also provides CEVA with good visibility into the product pipeline of its licensees. CEVA maintains sales personnel in the Asia-Pacific region, Sweden, Israel, and the United States. Competition We believe CEVA has few direct competitors for DSP programmable cores, but the company competes with a host of IP vendors and semiconductor companies that offer comparable solutions or choose to develop DSPs in-house. These competitors generally fall into the following categories: Companies developing DSP solutions in-house. Semiconductor companies that have developed proprietary DSP solutions represent perhaps the largest obstacle for CEVA adoption. In the purest form, these are large chipset manufacturers such as Qualcomm, Freescale, and TI, which decline to outsource DSP core technology expertise. Qualcomm is the dominant supplier of chipsets used in code division multiple access (CDMA)-based handsets. In our view, Qualcomm has enough R&D resources, expertise, and market share to justify proprietary baseband technology development. Freescale supplies Motorola, the only top-five handset manufacturer that we believe is not using CEVA technology. Companies with both licensed and in-house solutions. Mediatek, Broadcom, NXP, and several other CEVA licensees fall into a different category. While these companies leverage CEVA technology for baseband applications, they also maintain their own DSP core products for other applications. Over time, it is possible that these companies will adopt the licensing model more broadly if other DSP applications (set-top boxes, VoIP, etc.) do not justify the R&D investments required to maintain them. Indirect competition from merchant baseband suppliers. TI has been the key baseband supplier for non-CDMA-based handsets. The company has a dominant share of baseband applications at Nokia and Sony Ericsson, which combined accounted for nearly half of all worldwide handset volumes in 2008. However, Nokia has announced plans to diversify its suppliers, opening the door for several CEVA licensees and leading TI to wind down its merchant baseband business altogether. Analog Devices is another large general-purpose chipset supplier competing with CEVA licensees. IP vendors with RISC processor expertise offering DSP extensions. ARM Holdings provides reduced instruction set computer (RISC) microprocessors contained in more than 90% of wireless handset devices. These platforms typically incorporate DSP extensions that communicate video, audio, and voice compression. ARC, MIPS Technologies, and Tensilica have similar competing processors/controllers in other consumer electronic and home entertainment applications. Direct DSP core IP providers. VeriSilicon is a privately held semiconductor company that also offers a DSP core solution. Management Gideon Wertheizer, chief executive officer. Gideon Wertheizer has served as chief executive officer since May 2005. Before his appointment as chief executive officer, Mr. Wertheizer was executive vice president and general manager of CEVA’s DSP business unit. Before CEVA’s formation in November 2002, Mr. Wertheizer held various positions—executive vice president of strategic business development, vice president for marketing, and vice president of VLSI design—at DSP Group. Mr. Wertheizer has 26 years of experience in Analyst Name 312.364.xxxx Anil Doradla 312.364.8016 - 13 -

William Blair & Company, L.L.C.
the semiconductor and silicon intellectual property (SIP) industries. Mr. Wertheizer holds a Bs.C. in electrical engineering from Ben Gurion University (Israel), as well as an executive M.B.A. from Bradford University (United Kingdom). Yaniv Arieli, chief financial officer. Yaniv Arieli has served as chief financial officer of CEVA since May 2005. Before his appointment as chief financial officer, Mr. Arieli held various executive-level positions at DSP Group beginning in 1997, including president of U.S. operations and director of investor relations, and vice president of finance, chief financial officer, and secretary of the DSP cores licensing division. Before joining DSP Group, Mr. Arieli was account manager and certified public accountant with Kesselman & Kesselman (a subsidiary of PricewaterhouseCoopers). Mr. Arieli is a CPA and holds a B.A. in accounting and economics from Haifa University (Israel) as well as an M.B.A. from Newport University. Issachar Ohana, vice president, worldwide sales. Issachar Ohana has served as CEVA’s vice president of worldwide sales since November 2002 and executive vice president of worldwide sales since July 2006. Mr. Ohana joined DSP Group in August 1994 as a VLSI design engineer and was appointed project manager of the R&D group in July 1995, director of core licensing in August 1998, and vice president–sales of core licensing in May 2000. Mr. Ohana holds a B.Sc. in electrical and computer engineering from Ben Gurion University (Israel) as well as an M.B.A. from Bradford University (United Kingdom).

Financials
Revenue Analysis CEVA’s revenue comprises three primary streams. Figure 5 illustrates the percentage of revenue of each of these segments. Below we discuss these revenue components, the underlying drivers of CEVA’s business, and our assumptions for 2009 and 2010, along with potential upside opportunities relative to our estimates.
Figure 5 CEVA, Inc. Segment Revenue Mix (% of sales)
100%
12% 11% 17% 10% 9% 11%

12% 18%

14% 21%

15%

12% 23%

14%

14%

12%

80%

22%

25%

25% 37%

37%

30%

32% 43%

60%

40%
66%

72%

70%

65%

60%

65%

61% 49%

51%

60%

59% 46%

20%

0%
1Q 06 2Q 06 3Q 06 4Q 06 1Q 07 2Q 07 3Q 07 4Q 07 1Q 08 2Q 08 3Q 08 4Q 08

Licensing

Royalties

Other

Sources: Company reports and William Blair & Company, L.L.C. estimates

Licensing revenue is paid and recognized when a semiconductor or OEM accesses CEVA technology and begins its design process. Because licensing deals are typically weighted toward the end of each quarter, a small portion of the licensing revenue could be deferred to subsequent quarters and recognized on delivery of all software and codes; the delayed revenue recognition does not typically last more than a quarter.

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William Blair & Company, L.L.C.
The licensing fee to access the technology is generally paid once for every core DSP that is licensed. CEVA offers eight DSP cores that vary by performance features, power consumption, and cost, allowing licensees to match cost and performance based on the requirements of the application. In turn, a given licensee could have eight agreements with CEVA. CEVA typically introduces its next-generation cores one time per year. Licensing revenues are driven by the number of agreements and the up-front fee per license. Figure 6 illustrates the trend in these metrics during the last three years.
Figure 6 CEVA, Inc. Licensing Agreements and Average Revenue Per Agreement
14 $1,200

12 License Agreements
12

10
10 8 6 4 2 0
06 06 06 06 07 07

10 9 8 9

10 8 6 6

$1,000 $800 $600 $400 $200 $0

9 7

07

08

08

07

08

1Q

2Q

3Q

1Q

4Q

3Q

2Q

4Q

1Q

2Q

3Q

License Agreements

$/Agreement (thousands)

Sources: Company reports and William Blair & Company, L.L.C. estimates

Licensing volumes. Since peaking in 2006, the number of licensing agreements per quarter has been declining, particularly during 2008. We believe the decline in licensing agreements is driven by two factors. First, licensing agreements are tied to the overall macroeconomic outlook. While the company believes it has a strong licensing pipeline with many potential licensees evaluating its technology, the industry has aggressively lowered R&D spending to align with reduced endmarket demand, which we believe has forced many agreements to be delayed. The industry has also witnessed fewer start-ups emerging as a result of challenging credit conditions; historically, new licensees have accounted for 50% of licensing arrangements. The other factor is that the company has deemphasized some of its technology, such as Bluetooth and SATA, which augmented the number of agreements but were a drag on the dollar amount per agreement and became less attractive for the royalty business. Given the still-lackluster demand outlook, the company acknowledges limited visibility in licensing demand, and we believe negotiations are often pushed to the end of the quarter as potential licensees seek favorable end-of-quarter terms. Therefore, the number of license agreements can be an important swing factor for the company in terms of reaching quarterly guidance targets. That said, given a strong pipeline and a solid record, in our view, in terms of setting appropriate expectations for licensing agreements, we believe the company has demonstrated that it can mitigate the quarterly earnings risk from licensing. Licensing dollars per agreement. The company averages between $500,000 and $1 million per license agreement (although some agreements can be even higher), as illustrated in figure 6. This metric is a function of the type of core being licensed, the size of the licensee, and other factors negotiated on a per-contract basis. As the complexity of Analyst Name 312.364.xxxx Anil Doradla 312.364.8016 - 15 -

4Q

08

Average $/Agreement (thousands)

William Blair & Company, L.L.C.
DSP core applications increases, the fee to access a given core increases. Generally, we believe smaller, start-up licensees fall into the lower end of the range but pay a higher royalty rate on their unit shipments. We believe demand is shifting favorably toward higher licensing fees per contract, as illustrated by the 2008 increase in figure 6. We believe this trend is indicative of greater demand for increasingly complex cores, as well as the de-emphasis of less strategic CEVA cores. While the dollar per agreement varies quarterly, we view the impact from a shortfall in the number of contracts as significantly higher than the dollars per contract. Royalty revenue is realized per unit, based primarily on the type of CEVA technology used in a given application. As such, the key drivers are the royalty rate per unit and the volumes of royalty-bearing CEVA-based products shipped by licensees. Royalty revenue is recognized in arrears (i.e., shipments by licensees in December are recognized by CEVA during the March quarter), providing very good visibility for this revenue component on a quarterly basis. Royalty rate. CEVA typically receives between $0.05 and $0.15 per royalty-bearing unit. Baseband DSPs used in mobile handsets, which were 51% of total royalty revenue (and an even higher proportion of unit shipments) during 2008, typically generate per-unit royalties at the low end of this range. DSPs used in application processors, like the one we believe is designed into the Nintendo DSi, for example, generate per-unit royalties at the high end of this range. New product ramp-ups by CEVA licensees are also a key driver for per-unit royalties because the royalty rate is a step function of volumes; initial shipments of a given application using CEVA technology start at a higher royalty rate until they reach volume milestones. In early 2007, for example, the royalty rate was roughly $0.10 per unit because some key products, such as the Sony PlayStation 3, were initially ramping up to production at higher royalty rates. When a product reaches production milestones, there is a floor on the royalty rate around $0.05 per unit or slightly below.
Figure 7 CEVA, Inc. Royalty Rate Per Unit
$0.11 $0.10 $0.09 $0.08 $0.07 $0.06 $0.05
08 06 07 07 07 08 4Q 1Q 2Q 3Q 4Q 1Q 08 06 06 06 07 2Q 3Q 1Q 2Q 3Q 4Q 08

Sources: Company reports and William Blair & Company, L.L.C. estimates

Royalty volumes. In terms of volumes, figure 8 illustrates the inflection point in product shipments containing CEVA technology beginning in fourth quarter 2007; unit shipments grew 58% sequentially during the quarter, and then matched the 86 million-unit level in the following quarter. While the company engaged in prepaid royalty agreements in the past— where licensees would pay for a maximum number of units up front as opposed to on a per-unit basis—the company ceased prepaid royalty agreements in May 2005. The company Anil Doradla 312.364.8016 - 16 -

William Blair & Company, L.L.C.
ceased prepaid agreements to optimize its royalty revenue from high-volume markets. As such, the line in figure 8 illustrates that royalty-bearing shipments as a percentage of total CEVA-based units have more than doubled during the last three years. Specifically, at the recent trough level, royalty-bearing shipments were 37% of the total, compared with the fourth quarter 2008 level of 81%.
Figure 8 CEVA, Inc. Unit Shipments Containing CEVA Technology CEVA-based shipments (millions)
100 90 80 70 60 50 40 30 20 10 0
06 06 06 06 07 07 07 07 08 08 08 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 08

90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

Royalty-bearing units

Non-royalty-bearing shipments

% Royalty-bearing

Sources: Company reports and William Blair & Company, L.L.C. estimates

The “other” segment comprises support, training, and sales of development systems. Representing $4 million to $5 million in each of the last four years, we do not view the segment as material to the company’s growth outlook or as a strategically meaningful piece of the business. Seasonality. Because CEVA recognizes royalties in arrears (i.e., shipments by licensees in December are recognized by CEVA during the March quarter), its quarterly revenue level should peak during the first quarter due to the holiday selling season. The second quarter is the weakest one seasonally, followed by a typical increase in both the third and fourth quarters. Revenue projections. Table 7, on the following page, highlights our assumptions of the key underlying revenue drivers over the next two years, and how they compare with the company’s 2007 and 2008 performance. Royalties. As indicated in table 7 and throughout this report, we view the royalty segment as the key driver for overall revenue growth during the next two years. Royalty revenue has increased from roughly 19% of sales in 2006 to 36% in 2008. Management expects this trend to continue, and has indicated that royalty revenue could constitute 50% of sales over the next couple of years. We model royalty revenue at roughly 42% and 48% of sales in 2009 and 2010, respectively. Driving the royalty revenue, we model 15% and 38% growth in royalty-bearing shipments during 2009 and 2010, respectively, driven primarily by share gains in the handset market. Specifically, over the next two years, Nokia represents the key share gain opportunity, in our view. Infineon is shipping CEVA-based technology into Nokia’s 1200 series, where similar legacy low-end product lines peaked at 14 million units per quarter. We expect this ramp-up to be supplemented later in the year with another Infineon win at Nokia, followed by Broadcom, which we believe is licensing CEVA baseband DSP technology, ramping up to low volumes with Nokia late in 2009 and making a more meaningful contribution in 2010. Analyst Name 312.364.xxxx Anil Doradla 312.364.8016 - 17 -

William Blair & Company, L.L.C.
Table 7 CEVA, Inc. Key Revenue Assumptions Fiscal Year Ends December (in millions unless otherwise indicated) Total Revenue Y/Y change Licensing Revenue % of revenue Y/Y change License Agreements Y/Y change $/Agreement (thousands) Y/Y change Royalty Revenue % of revenue Y/Y change Royalty-Bearing Shipments Y/Y change Royalty Rate Y/Y change Other Revenue % of revenue Y/Y change

2007 33.21 2.2% 19.50 58.7% -12.0% 36 -5.3% 542 -7.2% 9.10 27.4% 44.0% 127.2 54.7% $0.072 -6.9% 4.62 13.9% 14.8%

2008 40.37 21.5% 21.70 53.8% 11.3% 30 -16.7% 723 33.6% 14.35 35.5% 57.8% 227.0 78.5% $0.063 -11.6% 4.32 10.7% -6.5%

2009E 40.64 0.7% 19.50 48.0% -10.1% 27 -10.0% 722 -0.2% 17.03 41.9% 18.7% 261.3 15.1% $0.065 3.1% 4.11 10.1% -4.6%

2010E 48.64 19.7% 21.00 43.2% 7.7% 30 11.1% 700 -3.1% 23.52 48.4% 38.1% 361.0 38.1% $0.065 0.0% 4.11 8.5% 0.0%

Sources: Company reports and William Blair & Company, L.L.C. estimates

While we want to highlight Nokia design volume opportunities, we also see potential share gains for CEVA licensees with three of the next four top handset OEMs, i.e., Samsung, Sony Ericsson, and LG. We also expect Infineon to maintain its position as the baseband supplier for the iPhone. Given the challenges inherent in timing volume ramp-ups for these wins, we believe we have taken a conservative approach to CEVA’s share of basebands in mobile handsets. That said, we believe these opportunities set the stage for CEVA to potentially double or triple its share of the handset market, from an estimated 13% in 2008 to our 20% estimate in 2010. In terms of the royalty rate, we forecast modest growth in 2009 (3%), followed by a flat royalty rate in 2009. While the high-volume baseband applications in mobile phones are likely to be a drag on the royalty rate, higher-value applications and new product ramp-ups are likely to offset this headwind, by our estimate. We will monitor the success of the Nintendo DSi and a couple of other personal media players being released in Asia, which we expect to contain CEVA technology. These devices will compete with Apple’s iPod Touch, among other devices. At this early stage, it is difficult to handicap the success of these devices, but even at low volumes we expect them to be accretive to the royalty rate given the highervalue nature of the applications, as well as the generally higher royalty rate for CEVA on initial shipments of new products. Licensing. We model a 10% decline in licensing revenue during 2009, followed by an 8% rebound in 2010. We model 27 agreements in 2009, down from 30 in 2008, given the macroeconomic overhang. Because the number of license agreements per quarter has declined to six during the last two quarters (from a peak of 12 in 2006), we believe Street expectations for this segment have similarly moderated.

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William Blair & Company, L.L.C.
The company introduced its CEVA-XC core in February 2009. Because there is typically a six-month lead time on new technology agreements following the core introduction, we expect the CEVA-XC to drive incremental licensing agreements toward the end of 2009 and beginning of 2010; as of the most recent quarter, there were no CEVA-XC agreements in place. We expect the CEVA-XC, as the most sophisticated core in the portfolio, to bolster the dollars per agreement during the next two years. Other. We expect the other segment to decline 5% in 2008 and remain flat near $4 million in 2010. Margin Analysis CEVA has an attractive operating model, in our view, with targeted long-term net margin in the low-20% range. As illustrated in table 8, the company sees a significant margin expansion opportunity before it reaches its targeted levels. We believe the key to achieving these margin targets is that the operating expense base is largely fixed. In upside scenarios, we believe the company could achieve the midpoint of its net margin target in the next two to three years, implying 340 basis points of leverage relative to 2008.
Table 8 CEVA, Inc. Target Operating Model Long-Term Upside Potential (Midpoint) +14.5% +130 bps -460 bps +590 bps +340 bps

Royalty Revenue (% of sales) Gross Margin Operating Expenses Operating Margin Net Margin
Source: Company reports

Target Level ~50% 90%-plus 70%-75% 15%-20% 15%-25%

2008 Level 35.5% 88.7% 77.1% 11.6% 16.6%

Gross margin. In our view, CEVA has a strong and fairly straightforward gross margin profile. Similar to other licensing companies—such as ARM Holdings and the licensing segment of Qualcomm—we believe the company earns over 90% gross margin on both its licensing and royalty segments (89% of 2008 sales). The other 11% of sales—support, training, and sales of development systems—drags the overall gross margin to the high-80% level. As the latter revenue component has declined as a percent of the mix, the gross margin has inched up in recent years, as shown in figure 9.
Figure 9 CEVA, Inc. Pro Forma Gross Profit and Gross Margin
43.8 Pro Forma Gross Profit (millions) 40 36.3 95% 93% Pro Forma Gross Margin 91% 30 28.5 29.4 89% 87% 85% 20 83% 81% 10 79% 77% 0 2006 2007 2008 2009E 2010E 75%

35.8

Sources: Company reports and William Blair & Company, L.L.C. estimates

Analyst Name 312.364.xxxx Anil Doradla 312.364.8016

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William Blair & Company, L.L.C.
Given our assumption that the “other” segment will continue to decline as a percentage of the total in 2009 and 2010 (exiting 2010 below 9% of sales), we estimate gross margin will continue to trend upward to a level slightly above 90% in total during 2010. Operating margin. Pro forma operating expenses have grown 3% per year during the last two years (2006 to 2008) and 2008 operating expenses were actually $2 million below the 2005 level. In turn, operating margin has improved in each of the last three years and was 11.6% in 2008. Given the lack of visibility in the licensing segment, the company has trimmed its expense base even further and expects the combination of cost of goods sold and operating expenses to decline by $1 million in 2009. While we see rather modest gross margin expansion from current levels, we believe there is still considerable operating leverage in the model. We model operating margin of 15.8% in 2010 and, importantly, we believe the company is well positioned to drive any revenue upside to the bottom line, as we will detail in the following section.
Figure 10 CEVA, Inc. Pro Forma Operating Expenses and Operating Margin
$25 20%

Operating Expenses (in millions)

$20

16%

$10

8%

$5

4%

$0 2006 -$5 2007 2008 2009E 2010E

0%

-4%

S&M

R&D

G&A

Operating Margin

Sources: Company reports and William Blair & Company, L.L.C. estimates

Upside Scenarios for EPS We model pro forma EPS of $0.30 in 2009 and $0.45 in 2010. As illustrated in figure 11, we expect a modest decline in EPS, due primarily to the macroeconomic headwinds and a reduced licensing number of agreements in the first half of the year. Our estimates are a penny above consensus for 2009 and $0.05 above consensus for 2010 (there is one analyst with a 2010 estimate). While we model a $0.02 EPS contraction in 2009, we believe we have taken a fairly conservative approach to 2009 revenue assumptions given the uncertain timing of new product ramp-ups and licensing agreements (particularly for new cores like CEVA-XC). Over the course of 2009, we believe several scenarios may result in CEVA exceeding our and consensus estimates; although we have not quantified 2010 upside scenarios, we also have a positive bias toward out-year estimates.

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Operating Margin

$15

12%

William Blair & Company, L.L.C.
Figure 11 CEVA, Inc. Pro Forma EPS
$0.60

$0.45 $0.40 $0.32 $0.30

$0.20 $0.11

$0.15

$0.00 2006 2007 2008 2009E 2010E

Sources: Company reports and William Blair & Company, L.L.C. estimates

We grouped the potential scenarios in CEVA’s two primary segments: licensing and royalties. For both scenarios, we make the following assumptions relative to our current estimates: • • • • Gross margin unchanged (89.2% of sales). Interest income unchanged ($2.48 million). Tax rate unchanged (10%). Share count unchanged (20.3 million).

For the royalty scenario, we assume operating expenses are unchanged from our current estimate of $31.9 million, as we do not foresee any incremental costs related to betterthan-expected royalty revenue. For the licensing scenario, we hold operating expenses unchanged as a percentage of sales (78.5% of sales) to account for the incremental costs to CEVA to support new designs. Royalty upside. As shown previously in table 7, we estimate 261 million royalty-bearing shipments in 2009 and a royalty rate of $0.065 per unit. We believe there could be upside to our estimates from the following sources: • • • • Share gains by CEVA licensees at handset OEMs, particularly Nokia. Accelerated production ramp-ups of licensees’ design wins. An increase in the number of licensees shipping royalty-bearing units (currently 21). Better-than-expected adoption of personal media players and other multimedia applications being introduced this year, which would be positive for both volumes and royalty rates. Improvement in overall end-market demand, particularly for the handset market.

•

Analyst Name 312.364.xxxx Anil Doradla 312.364.8016

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William Blair & Company, L.L.C.
Table 9 CEVA, Inc. Fiscal 2009 EPS Sensitivity to Royalty-Bearing Units and Royalty Rate Royalty-Bearing Unit Growth From FY08 10.7% 12.9% 15.1% 17.3% 19.5% Royalty-Bearing Units (millions) 251 256 261 266 271 ($0.06) ($0.05) ($0.04) ($0.03) ($0.02) ($0.01) $0.00 ($0.04) ($0.03) ($0.02) ($0.01) ($0.00) $0.01 $0.02 ($0.03) ($0.02) ($0.01) $0.00 $0.01 $0.02 $0.03 ($0.02) ($0.01) $0.00 $0.01 $0.02 $0.03 $0.04 ($0.01) $0.00 $0.02 $0.03 $0.04 $0.05 $0.06

8.5% $2.04 Royalty Rate Growth From FY08 -1.7% -0.1% 1.5% 3.1% 4.7% 6.3% 7.8% Royalty Rate 246

21.7% 276 $0.01 $0.02 $0.03 $0.04 $0.05 $0.06 $0.07

$0.062 ($0.07) $0.063 ($0.06) $0.064 ($0.05) $0.065 ($0.04) $0.066 ($0.03) $0.067 ($0.02) $0.068 ($0.01)

Source: William Blair & Company, L.L.C. estimates

The company grew royalty-bearing units 78% in 2008. With an incremental 10 million units (20% unit growth) and a modest royalty rate increase, we believe there may be an upside of $0.03 to $0.04 to our $0.30 EPS estimate. Licensing upside. As previously shown in table 7, we estimate 27 licensing agreements during 2009 at a rate of $722,000 per agreement.
Table 10 CEVA, Inc. Fiscal 2009 EPS Sensitivity to Licensing Agreements and Revenue Per Agreement License Agreement Growth From FY08 (30.0%) (20.0%) (10.0%) 0.0% 10.0% Total Licensing Agreements 21 24 27 30 33 ($0.03) ($0.03) ($0.02) ($0.02) ($0.02) ($0.02) ($0.01) ($0.02) ($0.02) ($0.01) ($0.01) ($0.01) ($0.00) ($0.00) ($0.01) ($0.01) ($0.00) $0.00 $0.00 $0.01 $0.01 ($0.00) $0.00 $0.01 $0.01 $0.01 $0.02 $0.02 $0.01 $0.01 $0.02 $0.02 $0.02 $0.03 $0.03

(40.0%) $2.04 Growth in $/Agreement From FY08 -10.5% -7.1% -3.6% -0.2% 3.3% 6.8% 10.2% $/Agreement (thousands) 18

20.0% 36 $0.02 $0.02 $0.03 $0.03 $0.04 $0.04 $0.04

$647 ($0.04) $672 ($0.04) $697 ($0.03) $722 ($0.03) $747 ($0.03) $772 ($0.03) $797 ($0.02)

Source: William Blair & Company, L.L.C. estimates

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William Blair & Company, L.L.C.
We believe there could be upside to our estimates from the following sources: • • • Broader adoption of CEVA’s DSP portfolio by existing customers. Refreshes to existing CEVA DSP cores (i.e., new product introductions). New licensing agreements for the CEVA-XC core, driving higher dollars per contract.

We see limited downside from the six-agreement quarterly run-rate the company achieved in both the September 2008 and December 2008 quarters. Conversely, we believe there may be upside of $0.02 to $0.03 relative to our $0.30 2009 EPS estimate, primarily from higher-than-forecast licensing counts. Balance Sheet and Cash Flow CEVA has a strong balance sheet, in our view, with $84 million in cash and investments (more than $4 per share) and no debt. While the cash flow from operations has been lumpy during the past couple of years and the company used $3.4 million in operations during 2008, the business cumulatively generated $24.8 million in cash from operations during 2007 and 2008 on less than $10 million in net income. Moreover, cash and investments have increased at an 11% compound annual rate from 2005 through 2008, as shown in figure 12.
Figure 12 CEVA, Inc. Cash and Investments (millions)
90 80 70 60 50 40 30 20 10 0 2005 2006 2007 Short-Term Bank Deposits 2008 Marketable Securities
35 38 41 13 18 8 23 7 3 39 29 32

Cash & Cash Equivalents

Sources: Company reports and William Blair & Company, L.L.C. estimates

The following factors have contributed to uneven cash flow from operations during the last two years. 2007 • Inflow of $21.3 million from the disposal of marketable securities.

2008 • Outflow of $5.9 million for reorganizations. The majority of this outflow was incurred when the company terminated a 25-year lease on a facility in Ireland. Outflow of $3.4 million from taxes on a capital gain from the divestment of an equity investment in GloNav (sold to NXP Semiconductors). - 23 -

•

Analyst Name 312.364.xxxx Anil Doradla 312.364.8016

William Blair & Company, L.L.C.
The cash flow was also overstated relative to net income in 2007 because of an unusual licensing agreement. Because the licensee wanted a five-year service agreement (two years is the norm), CEVA was initially forced to defer $2.5 million of revenue that it received on the agreement. The contract has since been amended to facilitate the revenue recognition, and we do not expect agreements of this nature to force material revenue deferral in the future. Uses of cash. CEVA has modest capital requirements, consisting of computer hardware and software used in engineering, furniture and fixtures, and testing equipment. Capital expenditures have averaged between 1% and 3% of sales since 2005. On August 4, 2008, CEVA’s board authorized a 1 million share repurchase program, allowing the company to reduce the share count by roughly 5%. Through December 31, the company had repurchased 753,000 shares at roughly $7.70 per share. Fourth Quarter 2008 Highlights In its most recent quarter reported February 3, CEVA posted pro forma EPS of $0.08, up roughly fourfold from $0.02 in the year-ago quarter. Revenue. Revenue of $10 million grew 22% year-over-year and matched the midpoint of guidance. Licensing agreements were lackluster at six (flat sequentially). While the revenue per agreement was up $323 compared with the prior year, it declined on a sequential basis. This yielded a 23% sequential decline in licensing (46% of sales) revenue, but we believe this was in line with the company’s expectations. Royalty revenues grew 30% sequentially and 41% year-over-year, surpassing the $4 million level for the first time. The company highlighted the share gain opportunity from TI’s plans to exit its merchant baseband business. While units containing CEVA technology declined 11% year-over-year, royalty-bearing units grew 25%, indicative of the prepaid royalty volumes winding down. The royalty rate also increased 12% year-over-year, driven by three multimedia customers ramping up production; management indicated there are two more multimedia applications expected to begin production during the second half of the year. Margins. Pro forma gross margin of 89.0% was down 40 basis points sequentially and 10 basis points year-over-year. We attribute the sequential decline to modest operating leverage on the 2% sequential sales decline, as well as mix, with the “other” segment accounting for 11.1% of sales, up from 9.2% in the prior quarter. Pro forma operating expenses were flat sequentially. In turn, pro forma operating margin of 13.5% declined 190 basis points sequentially given the revenue decline. The company repurchased 554,000 shares at $7.50 per share and has 250,000 shares remaining under its 1 million share authorization. 2009 Outlook Table 11 summarizes CEVA’s guidance for the March 2009 quarter. The company did not provide full-year guidance due to limited visibility in the licensing segment. Given the presumably lower outlook for licensing, the company implemented further cost controls and expects the combination of 2009 cost of goods sold and operating expenses to decline by $1 million versus 2008. Management expects generally tighter expense controls and, to a lesser extent, reduced staffing to drive the improvement. Lastly, management highlighted its expectation for year-over-year growth in the royalty segment. Given the expected contraction in handset and consumer electronics end-markets and the deteriorating outlook for semiconductor suppliers, we believe CEVA expects significant share gains and new product introductions to generate year-over-year royalty growth.

Anil Doradla 312.364.8016

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William Blair & Company, L.L.C.
Table 11 CEVA, Inc. First Quarter 2009 Guidance Guidance Range $8.7 million-$9.7 million 89% $7.2 million-$7.8 million $0.6 million 10% 20.3 million $0.05-$0.07 $0.01-$0.03 Consensus Estimate William Blair Estimate $9.3 million $9.2 million 88.9% 89.0%

Revenue Gross Margin Non-GAAP Operating Expenses Other Income Tax Rate Shares Pro Forma EPS GAAP EPS

$0.05

$0.06

Sources: Company reports, Thomson, William Blair & Company, L.L.C. estimates

Additional information is available upon request. This report is available in electronic form to registered users via R*Docs™ at www.rdocs. com or www.williamblair.com. Please contact us at (800) 621-0687 or consult http://www.williamblair.com/pages/eqresearch_ coverage.asp for all disclosures. DJIA: S&P 500: NASDAQ: 8,076.29 857.51 1,679.41

The prices of the common stock of other public companies mentioned in this report follow: Analog Devices Apple, Inc. DSP Group, Inc. LM Ericsson Motorola Nokia Sony Corporation $20.84 $124.73 $5.82 $9.24 $5.71 $13.48 $26.31

Analyst Name 312.364.xxxx Anil Doradla 312.364.8016

- 25 -

William Blair & Company, L.L.C.

Table 12 CEVA, Inc. Earnings Model
Fiscal Year Ends December ($ in millions, except per share items) Total Revenue Q/Q change Y/Y change Licensing % of revenue Q/Q change Y/Y change Royalties % of revenue Q/Q change Y/Y change Other % of revenue Q/Q change Y/Y change COGS Gross Profit Gross Margin Q/Q change Y/Y change Research & Development % of revenue Q/Q change Y/Y change Sales & Marketing % of revenue Q/Q change Y/Y change General & Administration % of revenue Q/Q change Y/Y change Amortization % of revenue Q/Q change Y/Y change Total Operation Expenses % of revenue Q/Q change Y/Y change Pro Forma Operating Income % of revenue Q/Q change Y/Y change Other Income % of revenue Q/Q change Y/Y change Pretax Income (EBT) Taxes (benefit) Tax Rate Pro Forma Net Income % of revenue Q/Q change Y/Y change Pro Forma EPS Q/Q change Y/Y change Shares - diluted Q/Q change Y/Y change GAAP Net Income GAAP EPS 2007 33.21 2.2% 19.50 58.7% -12.0% 9.10 27.4% 44.0% 4.62 13.9% 14.8% 3.77 29.44 88.7% +100 bps 18.20 54.8% 0.5% 5.92 17.8% 1.7% 4.94 14.9% 2.2% 0.15 0.4% -64.3% 29.21 88.0% 0.1% 0.23 0.7% -135.4% 3.21 9.7% 22.4% 3.44 0.36 10.6% 3.08 9.3% 50.1% $0.15 44.0% 20.30 5.3% 1.29 $0.06 Mar-08 1Q08 10.07 22.2% 30.3% 5.09 50.5% 26.8% 9.7% 3.73 37.1% 22.7% 90.8% 1.25 12.4% 5.0% 10.3% 1.14 8.93 88.7% -40 bps +150 bps 4.85 48.2% 0.4% 7.7% 1.68 16.7% 10.1% 13.9% 1.40 13.9% 2.6% 31.0% 0.02 0.2% -12.5% -50.0% 7.95 79.0% 2.7% 12.2% 0.97 9.6% -341.5% -375.9% 0.81 8.1% -19.8% -1.5% 1.78 -0.08 -4.7% 1.87 18.5% 313.7% 295.3% $0.09 315.8% 271.4% 20.89 -0.5% 6.4% 5.51 $0.27 Jun-08 2Q08 10.08 0.2% 18.4% 6.03 59.8% 18.4% 8.9% 3.04 30.1% -18.6% 58.4% 1.02 10.1% -18.2% -4.1% 1.24 8.84 87.7% -100 bps -170 bps 4.97 49.3% 2.4% 13.1% 1.66 16.5% -0.8% 9.0% 1.41 14.0% 0.6% 18.9% 0.02 0.2% -4.8% -51.2% 8.07 80.0% 1.4% 12.8% 0.78 7.7% -20.0% 66.7% 0.52 5.2% -35.7% -16.6% 1.30 -0.18 -13.7% 1.48 14.6% -20.8% 56.8% $0.07 -21.1% 49.1% 20.97 0.4% 5.2% 0.69 $0.03 Sep-08 3Q08 10.21 1.2% 16.9% 5.97 58.5% -0.9% 12.4% 3.30 32.3% 8.5% 51.3% 0.94 9.2% -8.1% -24.3% 1.08 9.13 89.4% +170 bps +60 bps 4.51 44.1% -9.4% 0.8% 1.68 16.5% 0.9% 20.4% 1.36 13.3% -3.5% 3.3% 0.01 0.1% -40.0% -70.7% 7.56 74.1% -6.3% 4.6% 1.57 15.4% 102.2% 201.5% 0.65 6.3% 23.6% -13.4% 2.22 0.40 18.2% 1.81 17.8% 22.7% 49.6% $0.09 22.8% 45.8% 20.97 0.0% 2.6% 1.40 $0.07 Dec-08 4Q08 10.01 -1.9% 21.5% 4.61 46.1% -22.8% 15.0% 4.28 42.8% 29.9% 40.8% 1.11 11.1% 19.0% -6.1% 1.10 8.91 89.0% -40 bps -10 bps 4.76 47.5% 5.6% -1.6% 1.54 15.3% -8.5% 0.8% 1.27 12.7% -6.7% -7.0% 0.00 0.0% -100.0% -100.0% 7.56 75.6% 0.1% -2.4% 1.35 13.5% -14.1% -435.8% 0.75 7.5% 16.9% -25.6% 2.10 0.54 25.8% 1.56 15.6% -13.9% 246.1% $0.08 -9.7% 263.7% 19.98 -4.7% -4.8% 0.96 $0.05 2008 40.37 21.5% 21.70 53.8% 11.3% 14.35 35.5% 57.8% 4.32 10.7% -6.5% 4.56 35.81 88.7% + bps 19.08 47.3% 4.9% 6.56 16.2% 10.8% 5.45 13.5% 10.2% 0.05 0.1% -64.2% 31.14 77.1% 6.6% 4.67 11.6% 1903.9% 2.73 6.8% -14.8% 7.40 0.69 9.3% 6.72 16.6% 118.3% $0.32 113.3% 20.70 2.0% 8.57 $0.42 Mar-09 1Q09E 9.22 -7.9% -8.4% 4.05 43.9% -12.2% -20.4% 4.08 44.2% -4.8% 9.2% 1.10 11.9% -1.6% -12.0% 1.01 8.21 89.0% bps +30 bps 4.80 52.0% 0.8% -1.2% 1.48 16.0% -3.9% -12.1% 1.24 13.5% -2.0% -11.2% 0.00 0.0% NM NM 7.52 81.5% -0.6% -5.5% 0.69 7.5% -48.8% -28.8% 0.60 6.5% -20.4% -26.1% 1.29 0.13 10.0% 1.16 12.6% -25.5% -37.7% $0.06 -26.7% -35.9% 20.30 1.6% -2.8% 0.43 $0.02 Jun-09 2Q09E 8.76 -5.1% -13.2% 4.20 48.0% 3.7% -30.3% 3.57 40.7% -12.5% 17.4% 0.99 11.3% -9.9% -3.0% 1.01 7.75 88.5% -50 bps +80 bps 4.57 52.2% -4.7% -8.0% 1.53 17.5% 3.8% -7.9% 1.19 13.6% -4.4% -15.6% 0.00 0.0% NM NM 7.29 83.3% -3.0% -9.6% 0.46 5.2% -34.2% -41.4% 0.60 6.9% 0.0% 14.9% 1.06 0.11 10.0% 0.95 10.8% -18.3% -35.7% $0.05 -18.3% -33.6% 20.30 0.0% -3.2% 0.22 $0.01 Sep-09 3Q09E 10.56 20.6% 3.4% 5.63 53.3% 33.9% -5.8% 4.01 37.9% 12.3% 21.5% 0.93 8.8% -6.3% -1.0% 1.14 9.42 89.2% +70 bps -20 bps 5.17 49.0% 13.2% 14.8% 1.71 16.2% 11.6% 1.9% 1.36 12.9% 14.4% 0.0% 0.00 0.0% NM NM 8.25 78.1% 13.1% 9.1% 1.17 11.1% 157.4% -25.4% 0.63 5.9% 4.2% -3.1% 1.80 0.18 10.0% 1.62 15.3% 70.3% -10.8% $0.08 70.3% -7.9% 20.30 0.0% -3.2% 0.89 $0.04 Dec-09 4Q09E 12.11 14.7% 21.0% 5.63 46.5% 0.0% 21.9% 5.38 44.4% 34.3% 25.7% 1.10 9.1% 19.0% -1.0% 1.22 10.89 89.9% +70 bps +90 bps 5.57 46.0% 7.7% 17.1% 1.82 15.0% 6.2% 18.2% 1.48 12.2% 8.5% 16.2% 0.00 0.0% NM NM 8.86 73.2% 7.5% 17.2% 2.02 16.7% 72.6% 49.8% 0.65 5.4% 4.0% -13.8% 2.67 0.27 10.0% 2.40 19.9% 48.7% 54.1% $0.12 48.7% 51.6% 20.30 0.0% 1.6% 1.67 $0.08 2009E 40.64 0.7% 19.50 48.0% -10.1% 17.03 41.9% 18.7% 4.11 10.1% -4.6% 4.38 36.26 89.2% +50 bps 20.11 49.5% 5.4% 6.53 16.1% -0.3% 5.27 13.0% -3.1% 0.00 0.0% -100.0% 31.92 78.5% 2.5% 4.34 10.7% -7.0% 2.48 6.1% -9.4% 6.82 0.68 10.0% 6.13 15.1% -8.7% $0.30 -6.8% 20.30 -2.0% 3.21 $0.16 2010E 48.64 19.7% 21.00 43.2% 7.7% 23.52 48.4% 38.1% 4.11 8.5% 0.0% 4.80 43.84 90.1% +90 bps 22.62 46.5% 12.5% 7.54 15.5% 15.4% 5.98 12.3% 13.4% 0.00 0.0% N/A 36.14 74.3% 13.2% 7.70 15.8% 77.3% 2.80 5.8% 13.1% 10.50 1.26 12.0% 9.24 19.0% 50.6% $0.45 49.7% 20.43 0.6% 6.32 $0.31

Sources: Company reports and William Blair & Company, L.L.C. estimates

Anil Doradla 312.364.8016

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Analyst Name 312.364.xxxx Anil Doradla 312.364.8016 - 27 - 27 -

William Blair & Company, L.L.C.

Table 13 CEVA, Inc. Balance Sheet Model
Fiscal Year Ends December ($ in millions, except per share items) ASSETS Current Assets Cash & cash equivalents Short-term bank deposits Marketable securities Trade receivables Deferred tax asset Investment in other company, net Prepaid expenses and other accounts receivable Total Current Assets Noncurrent Assets Severance pay fund Deferred tax assets PP&E, net Investment in other company, net Goodwill Other intangible assets Total Noncurrent Assets Total Assets LIABILITIES Current Liabilities Trade payables Deferred revenues Taxes payable Accrued expenses and other payables Total Current Liabilities Noncurrent Liabilities Accrued severance pay Accrued liabilities Total Noncurrent Liabilities Total Liabilities Stockholders' Equity Stockholders' Equity and Liability 2007 Mar-08 1Q08 Jun-08 2Q08 Sep-08 3Q08 Dec-08 4Q08 2008 Mar-09 1Q09E Jun-09 2Q09E Sep-09 3Q09E Dec-09 4Q09E 2009E 2010E

40.70 7.13 28.55 2.50 0.86 4.23 3.30 87.27

52.50 7.22 25.80 6.00 0.99 0.00 3.51 96.02

43.09 7.44 35.94 5.88 1.34 0.00 3.56 97.25

11.14 40.41 36.30 3.84 1.30 0.00 3.99 96.99

13.33 39.42 31.88 5.39 1.09 0.00 4.92 96.03

13.33 39.42 31.88 5.39 1.09 0.00 4.92 96.03

16.92 39.42 31.88 2.81 1.09 0.00 4.92 97.03

15.92 39.42 31.88 4.98 1.09 0.00 4.92 98.20

18.08 39.42 31.88 4.41 1.09 0.00 4.92 99.80

18.71 39.42 31.88 6.35 1.09 0.00 4.92 102.37

18.71 39.42 31.88 6.35 1.09 0.00 4.92 102.37

26.89 39.42 31.88 7.48 1.09 0.00 4.92 111.68

3.09 0.46 1.63 0.00 36.50 0.05 41.72 128.99

3.54 0.73 1.56 0.00 36.50 0.03 42.36 138.38

3.86 0.81 1.63 0.00 36.50 0.01 42.81 140.06

3.94 0.62 1.51 0.00 36.50 0.00 42.57 139.56

3.44 0.35 1.27 0.00 36.50 0.00 41.56 137.59

3.44 0.35 1.27 0.00 36.50 0.00 41.56 137.59

3.44 0.35 1.23 0.00 36.50 0.00 41.52 138.55

3.44 0.35 1.20 0.00 36.50 0.00 41.49 139.69

3.44 0.35 1.16 0.00 36.50 0.00 41.45 141.25

3.44 0.35 1.14 0.00 36.50 0.00 41.43 143.80

3.44 0.35 1.14 0.00 36.50 0.00 41.43 143.80

3.44 0.35 1.18 0.00 36.50 0.00 41.47 153.15

0.46 0.73 0.32 8.45 9.95

0.87 0.70 3.39 8.64 13.60

0.71 2.11 1.82 8.83 13.47

0.50 1.73 0.86 8.81 11.90

0.62 1.03 0.04 10.45 12.14

0.62 1.03 0.04 10.45 12.14

0.42 1.03 0.04 10.45 11.94

0.61 1.03 0.04 10.45 12.13

0.55 1.03 0.04 10.45 12.08

0.69 1.03 0.04 10.45 12.22

0.69 1.03 0.04 10.45 12.22

0.81 1.03 0.04 10.45 12.33

3.14 1.51 4.65 14.60 114.39 128.99

3.72 0.00 3.72 17.32 121.05 138.38

4.06 0.00 4.06 17.53 122.53 140.06

4.15 0.00 4.15 16.06 123.50 139.56

3.79 0.00 3.79 15.93 121.66 137.59

3.79 0.00 3.79 15.93 121.66 137.59

3.79 0.00 3.79 15.73 122.82 138.55

3.79 0.00 3.79 15.92 123.77 139.69

3.79 0.00 3.79 15.87 125.39 141.25

3.79 0.00 3.79 16.00 127.79 143.80

3.79 0.00 3.79 16.00 127.79 143.80

3.79 0.00 3.79 16.12 137.03 153.15

Sources: Company reports and William Blair & Company, L.L.C. estimates

Anil Doradla 312.364.8016 - 28 -

William Blair & Company, L.L.C.

Table 14 CEVA, Inc. Cash Flow Model
Fiscal Year Ends December ($ in millions, except per share items) Cash Flow From Operating Activities Net income Adjustments to reconcile net income and cash Depreciation % of Beginning PP&E Impairment of assets Amortization of intangibles Equity-based compensation Gain from sale of property and equipment Loss (gain) on trading marketable securities Loss on sale of available-for-sale marketable securities Amortization of discount (premium) on available-for-sale marketable securities Unrealized foreign exchange loss (gain) Accrued interest on short-term bank deposits Gain on realization of investments Trading marketable securities, net Changes in operating assets and liabilities Decrease (increase) in trade receivables Increase in other accounts receivable and prepaid exp Increase in deferred tax assets Increase (decrease) in trade payables Increase (decrease) in deferred revenues Increase (decrease) in accrued expenses and other payables Increase (decrease) in taxes payable Increase (decrease) in accrued severance pay, net Net cash provided by operating activities Cash Flow From Investing Activities Purchases of property and equipment % of sales Proceeds from sale of property and equipment Investment in short-term bank deposits Proceeds from short-term bank deposits Investment in available-for-sale marketable securities Proceeds from maturity and sale of available-for-sale marketable securities Transaction cost related to the GPS divestment Proceeds from realization of investment Purchase of technology Net cash provided by investing activities Cash Flows From Financing Activities Purchase of treasury stock Proceeds from issuance of common stock and treasury stock upon exercise of stock options Proceeds from issuance of common stock and treasury stock under employee stock purchase plan Net cash provided by financing activities Effect of exchange rate changes Net (decrease) increase in cash Cash and equivalents, beginning of period Cash and equivalents, end of period
Sources: Company reports and William Blair & Company, L.L.C. estimates

2007 1.29 0.88 51.7% 0.00 0.15 2.13 -0.00 -0.14 0.00 -0.03 -0.04 -0.13 -0.43 21.31

Mar-08 1Q08 5.51 0.19 11.9% 0.00 0.02 0.58 -0.00 -0.01 0.00 0.00 0.14 -0.09 -10.87 0.00

Jun-08 2Q08 0.69 0.16 10.4% 0.00 0.02 0.72 0.00 0.13 0.00 0.00 0.06 -0.04 -0.02 0.00

Sep-08 3Q08 1.40 0.17 10.2% 0.00 0.01 0.79 0.00 0.20 0.00 0.00 0.02 -0.26 -0.36 0.00

Dec-08 4Q08 0.96 0.15 10.0% 0.14 0.00 0.84 0.00 -0.32 0.29 0.18 -0.00 -0.34 -0.90 0.00

2008 8.57 0.67 41.4% 0.14 0.05 2.92 -0.00 0.00 0.29 0.18 0.22 -0.73 -12.15 0.00

Mar-09 1Q09E 0.43 0.14 11.0% 0.00 0.00 0.73 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Jun-09 2Q09E 0.22 0.14 11.0% 0.00 0.00 0.73 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Sep-09 3Q09E 0.89 0.13 11.0% 0.00 0.00 0.73 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Dec-09 4Q09E 1.67 0.13 11.0% 0.00 0.00 0.73 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

2009E 3.21 0.53 42.1% 0.00 0.00 2.92 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

2010E 6.32 0.55 48.8% 0.00 0.00 2.92 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

5.92 -0.71 -0.32 -0.28 0.32 -1.74 0.19 -0.15 28.23

-3.50 -0.21 -0.41 0.36 -0.03 -1.52 3.07 0.13 -6.63

0.12 -0.02 -0.42 -0.16 1.41 0.10 -1.58 0.01 1.18

2.05 -0.37 0.23 -0.19 -0.38 -0.33 -0.95 0.01 2.04

-1.55 -0.97 0.48 0.15 -0.70 2.24 -0.82 0.16 -0.02

-2.89 -1.57 -0.12 0.16 0.31 0.49 -0.28 0.31 -3.43

2.58 0.00 0.00 -0.20 0.00 0.00 0.00 0.00 3.69

-2.17 0.00 0.00 0.19 0.00 0.00 0.00 0.00 -0.89

0.57 0.00 0.00 -0.05 0.00 0.00 0.00 0.00 2.26

-1.95 0.00 0.00 0.14 0.00 0.00 0.00 0.00 0.72

-0.96 0.00 0.00 0.08 0.00 0.00 0.00 0.00 5.78

-1.12 0.00 0.00 0.11 0.00 0.00 0.00 0.00 8.78

-0.81 -2.4% 0.01 -5.00 1.03 -39.99 13.47 -0.04 0.43 0.00 -30.91

-0.13 -1.3% 0.00 0.00 0.00 -5.42 8.20 0.00 15.10 0.00 17.75

-0.23 -2.3% 0.00 -5.26 5.07 -13.22 2.86 0.00 0.02 0.00 -10.76

-0.05 -0.5% 0.00 -32.71 0.00 -6.13 5.04 0.00 0.36 0.00 -33.50

-0.05 -0.5% 0.00 -9.95 11.28 -3.71 8.49 0.00 0.90 0.00 6.96

-0.46 -1.1% 0.00 -47.91 16.35 -28.49 24.58 0.00 16.38 0.00 -19.55

-0.10 -1.1% 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 -0.10

-0.10 -1.1% 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 -0.10

-0.10 -0.9% 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 -0.10

-0.10 -0.8% 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 -0.10

-0.40 -1.0% 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 -0.40

-0.60 -1.2% 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 -0.60

0.00 3.92 0.90 4.82 0.59 2.73 37.97 40.70

0.00 0.12 0.51 0.62 0.06 11.80 40.70 52.50

0.00 0.15 0.00 0.15 0.02 -9.41 52.50 43.09

-1.23 0.27 0.58 -0.38 -0.11 -31.95 43.09 11.14

-4.60 0.01 0.00 -4.58 -0.18 2.18 11.14 13.33

-5.82 0.55 1.08 -4.19 -0.21 -27.37 40.70 13.33

0.00 0.00 0.00 0.00 0.00 3.59 13.33 16.92

0.00 0.00 0.00 0.00 0.00 -0.99 16.92 15.92

0.00 0.00 0.00 0.00 0.00 2.16 15.92 18.08

0.00 0.00 0.00 0.00 0.00 0.62 18.08 18.71

0.00 0.00 0.00 0.00 0.00 5.38 13.33 18.71

0.00 0.00 0.00 0.00 0.00 8.18 18.71 26.89

Analyst Name 312.364.xxxx Anil Doradla 312.364.8016 - 29 - 29 -

William Blair & Company, L.L.C.

Table 15 CEVA, Inc. Selected Financial Ratios Fiscal Year Ends December ($ in millions, except per share items) Cash Flow Generation Free Cash Flow FCF Q/Q growth Y/Y growth FCF Yield EBITDA Dividend Cash Conversion Cycle Accounts Receivable Sequential change Receivable turnover Receivable DSO Accounts Payable Sequential change Payable turnover Days in Payables Cash Conversion Cycle Profitability Ratios Return on Assets (ROA) Return on Invested Capital (ROIC) Return on Equity (ROE) Liquidity Ratios LT Debt to Capital Debt / Asset Book Value per Share Tangible Book Value per Share Net Cash Net Cash per Share Mar-08 1Q08 Jun-08 2Q08 Sep-08 3Q08 Dec-08 4Q08 Mar-09 1Q09E Jun-09 2Q09E Sep-09 3Q09E Dec-09 4Q09E

2007

2008

2009E

2010E

27.43 NM 11.1% 1.26 0.00

-6.75 NM NM -16.9% 1.19 0.00

0.95 NM -92.5% 2.3% 0.96 0.00

1.99 109.9% 55.7% 4.6% 1.75 0.00

-0.07 NM NM -0.2% 1.50 0.00

-3.88 NM -2.7% 5.40 0.00

3.59 NM NM 9.7% 0.83 0.00

-0.99 NM NM -2.7% 0.59 0.00

2.16 NM 8.7% 5.9% 1.30 0.00

0.62 -71.1% NM 1.7% 2.15 0.00

5.38 NM 3.6% 4.88 0.00

8.18 52.1% 5.5% 8.25 0.00

2.50 -5.92 6.1 60.0 0.46 -0.26 6.4 56.8 -51

6.00 3.50 9.5 38.6 0.87 0.42 6.9 52.9 -43

5.88 -0.12 6.8 53.8 0.71 -0.16 6.3 58.2 -51

3.84 -2.05 8.4 43.5 0.50 -0.21 7.1 51.4 -43

5.39 1.55 8.7 42.1 0.62 0.11 7.9 46.5 -38

5.39 2.89 10.2 35.7 0.62 0.16 8.5 42.9 -33

2.81 -2.58 9.0 40.6 0.42 -0.20 7.9 46.5 -37

4.98 2.17 9.0 40.6 0.61 0.19 7.9 46.5 -37

4.41 -0.57 9.0 40.6 0.55 -0.05 7.9 46.5 -37

6.35 1.95 9.0 40.6 0.69 0.14 7.9 46.5 -37

6.35 0.96 6.9 52.7 0.69 0.08 6.7 54.4 -47

7.48 1.12 7.0 51.9 0.81 0.11 6.4 56.9 -50

2.5% 2.8% 2.8%

5.6% 6.3% 6.3%

4.2% 4.9% 4.9%

5.2% 5.9% 5.9%

4.5% 5.1% 5.1%

5.0% 5.7% 5.7%

3.4% 3.8% 3.8%

2.7% 3.1% 3.1%

4.6% 5.2% 5.2%

6.7% 7.6% 7.6%

4.4% 4.9% 4.9%

6.2% 7.0% 7.0%

0% 0% 5.68 4.55 76.38 3.76

0% 0% 5.84 4.87 85.51 4.09

0% 0% 5.89 4.94 86.48 4.12

0% 0% 5.94 4.92 87.86 4.19

0% 0% 6.09 5.06 84.63 4.24

0% 0% 5.91 4.88 84.63 4.09

0% 0% 6.05 5.03 88.22 4.35

0% 0% 6.10 5.08 87.22 4.30

0% 0% 6.18 5.16 89.39 4.40

0% 0% 6.30 5.29 90.01 4.43

0% 0% 6.30 5.29 90.01 4.43

0% 0% 6.71 5.71 98.19 4.81

Sources: Company reports and William Blair & Company, L.L.C. estimates

William Blair & Company, L.L.C.
William Blair & Company, L.L.C. is a market maker in the security of this company and may have a long or short position. Current Ratings Distribution (as of 3/31/09) Coverage Universe Percent Inv. Banking Relationships* Outperform (Buy) 55% Outperform (Buy) Market Perform (Hold) 44% Market Perform (Hold) Underperform (Sell) 1% Underperform (Sell) Percent 3% 1% 1%

* Percentage of companies in each rating category that are investment banking clients, defined as companies for which William Blair has received compensation for investment banking services within the past 12 months. Anil Doradla attests that 1) all of the views expressed in this research report accurately reflect his personal views about any and all of the securities and companies covered by this report, and 2) no part of his compensation was, is, or will be related, directly or indirectly, to the specific recommendations or views expressed by him in this report. Stock Rating: William Blair & Company, L.L.C. uses a three-point system to rate stocks. Individual ratings reflect the expected performance of the stock relative to the broader market over the next 12 months. The assessment of expected performance is a function of near-term company fundamentals, industry outlook, confidence in earnings estimates, valuation, and other factors. Outperform (O) – stock expected to outperform the broader market over the next 12 months; Market Perform (M) – stock expected to perform approximately in line with the broader market over the next 12 months; Underperform (U) – stock expected to underperform the broader market over the next 12 months; Not Rated (NR) – the stock is currently not rated. Company Profile: The William Blair research philosophy is focused on quality growth companies. Growth companies by their nature tend to be more volatile than the overall stock market. Company profile is a fundamental assessment, over a longer-term horizon, of the business risk of the company relative to the broader William Blair universe. Factors assessed include: 1) durability and strength of franchise (management strength and track record, market leadership, distinctive capabilities); 2) financial profile (earnings growth rate/consistency, cash flow generation, return on investment, balance sheet, accounting); 3) other factors such as sector or industry conditions, economic environment, confidence in long-term growth prospects, etc. Established Growth (E) – Fundamental risk is lower relative to the broader William Blair universe; Core Growth (C) – Fundamental risk is approximately in line with the broader William Blair universe; Aggressive Growth (A) – Fundamental risk is higher relative to the broader William Blair universe. The ratings and company profile assessments reflect the opinion of the individual analyst and are subject to change at any time. The compensation of the research analyst is based on a variety of factors, including performance of his or her stock recommendations; contributions to all of the firm’s departments, including asset management, corporate finance, institutional sales, and retail brokerage; firm profitability; and competitive factors. THIS IS NOT IN ANY SENSE A SOLICITATION OR OFFER OF THE PURCHASE OR SALE OF SECURITIES. THE FACTUAL STATEMENTS HEREIN HAVE BEEN TAKEN FROM SOURCES WE BELIEVE TO BE RELIABLE, BUT SUCH STATEMENTS ARE MADE WITHOUT ANY REPRESENTATION AS TO ACCURACY OR COMPLETENESS OR OTHERWISE. OPINIONS EXPRESSED ARE OUR OWN UNLESS OTHERWISE STATED. FROM TIME TO TIME, WILLIAM BLAIR & COMPANY, L.L.C. OR ITS AFFILIATES MAY BUY AND SELL THE SECURITIES REFERRED TO HEREIN, MAY MAKE A MARKET THEREIN, AND MAY HAVE A LONG OR SHORT POSITION THEREIN. PRICES SHOWN ARE APPROXIMATE. THIS MATERIAL HAS BEEN APPROVED FOR DISTRIBUTION IN THE UNITED KINGDOM BY WILLIAM BLAIR INTERNATIONAL, LIMITED, REGULATED BY THE FINANCIAL SERVICES AUTHORITY (FSA), AND IS DIRECTED ONLY AT, AND IS ONLY MADE AVAILABLE TO, PERSONS FALLING WITHIN COB 3.5 AND 3.6 OF THE FSA HANDBOOK (BEING “ELIGIBLE COUNTERPARTIES” AND “PROFESSIONAL CLIENTS”). THIS DOCUMENT IS NOT TO BE DISTRIBUTED OR PASSED ON TO ANY “RETAIL CLIENTS.” NO PERSONS OTHER THAN PERSONS TO WHOM THIS DOCUMENT IS DIRECTED SHOULD RELY ON IT OR ITS CONTENTS OR USE IT AS THE BASIS TO MAKE AN INVESTMENT DECISION. “WILLIAM BLAIR & COMPANY” AND “WILLIAM BLAIR & COMPANY (SCRIPT)” ARE REGISTERED TRADEMARKS OF WILLIAM BLAIR & COMPANY, L.L.C. Copyright 2009, William Blair & Company, L.L.C.

Anil Doradla 312.364.8016

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Equity Research Directory
Bob Newman, CFA, Principal Manager and Director of Research 312.364.8783 Kyle Harris, CFA, Principal Operations Manager 312.364.8230 BUSINESS SERVICES Industrial Jeff Germanotta, Principal 312.364.5411 Co-Group Head–Business Services Diversified Industrials, Industrial Distribution Nate Brochmann, CFA 312.364.5385 Commercial Services, Logistics/Transportation Brian Drab 312.364.8280 Filtration and Water Treatment, Industrial Technology Professional Services Brandon Dobell, Principal 312.364.8773 Co-Group Head–Business Services Educational Services, Information Services Timothy McHugh, CFA 312.364.8229 Consulting, Staffing John Neff, CFA 312.364.8914 Collection Companies, Information Services CONSUMER Mark Miller, CFA, Principal 312.364.8498 Group Head–Consumer Discount Stores, Energy Retail and Refining, Health and Beauty Jon Andersen, CFA 312.364.8697 Consumer Products Meggan Friedman 312.364.8664 Media and Marketing Services, Packaging and Signage Jack Murphy, CFA, Principal 312.364.8584 E-commerce, Hardlines Retailers Sharon Zackfia, CFA, Principal Apparel, Leisure, Restaurants FINANCIAL Mark Lane, Principal 312.364.8686 Group Head–Financial Brokerage, Commercial P/C Insurance, Exchanges David Long, CFA 312.364.8435 Commercial Banking, Custody Banks, Payment Card Networks, Specialty Finance D.J. Neiman, CFA 312.364.8852 Asset Management 312.364.5386 John Sonnier, Principal Biotechnology 312.364.8224 HEALTHCARE Ben Andrew, Principal 312.364.8828 Group Head–Healthcare Medical Devices Ryan Daniels, CFA, Principal 312.364.8418 Disease Management, Specialty Providers John Kreger, Principal 312.364.8597 Distribution, Outsourcing, Pharmacy Benefit Management Amanda Murphy 312.364.8951 Diagnostic Services, Pharmacy Benefit Management

Brian Weinstein, CFA 312.364.8170 Diagnostic Products TECHNOLOGY Franco Turrinelli, CFA, Principal 312.364.8166 Group Head–Technology Business Software & Services, Employer Services, Payments Infrastructure Jason Ader, CFA 617.235.7519 Data Networking Anil Doradla 312.364.8016 Electronic Components, Wireless Communications Jonathan Ho 312.364.8276 Communications Infrastructure Services, Security Technology Laura Lederman, CFA, Principal 312.364.8223 Business Software & Services, Software as a Service Ralph Schackart III, CFA, Principal Digital Media, Gaming Suppliers 312.364.8753

Bhavan Suri 312.364.5341 Business Software & Services, IT Services Corey Tobin, Principal 312.364.5362 Technology: Energy, Healthcare Information, Specialty EDITORIAL Steve Goldsmith, Head Editor 312.364.8540 Beth Pekol +44 20 7868 4516 Lisa Zurcher 312.364.8437

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