QuickLogic Corporation
Q4 2020 Earnings Call Transcript

Published: 17 Feb 2021

[Operator:]

Ladies and gentlemen, good afternoon. At this time, I'd like to welcome everyone to QuickLogic Corporation's Fourth Quarter and Fiscal Year 2020 Earnings Results Conference Call. As a reminder, today's call is being recorded for replay purposes through February 24, 2021. I would now like to turn the conference over to Mr. Jim Fanucchi of Darrow Associates. Mr. Fanucchi, please go ahead.

[Jim Fanucchi:]

Thank you, Sherry and thanks to all of you for joining us. Our speakers today are Brian Faith, President and Chief Executive Officer; and Dr. Sue Cheung, Chief Financial Officer. Following current social distancing practices, management is doing this call from different locations today.

[Brian Faith:]

Thank you, Jim. Good afternoon, everyone, and thank you all for joining our fourth quarter and fiscal 2020 financial results conference call. Before I discuss our quarterly results and review the status of our strategic initiatives, I'd like to take a moment to reflect on the past year. 2020 was full of challenges for all of us both personally and professionally. I want to personally thank the QuickLogic team for their tireless efforts as we work through the COVID-19 challenges. With the recent introduction of multiple COVID-19 vaccines and improvements in COVID-19 related treatments, there is finally a clear path to getting past the pandemic. 2020 was a transformational year for QuickLogic as we accelerated our move from being primarily a product company to a platform company, leveraging artificial intelligence and open source software, especially for our programmable logic technology and the multitude of devices that included. This move will significantly broaden our addressable markets and is expected to deliver improved financial results in fiscal 2021 and beyond.

[Sue Cheung:]

Thank you, Brian. Being that this is my last earnings call with the company and after almost 14 years with QuickLogic, I'm glad to have this opportunity to let everyone know how proud I am of what we have achieved, especially during the translation to a more software open source and IP focused company, and managing the business through the challenges brought on by the COVID pandemic. QuickLogic is well positioned to improve in 2021, and I'm confident their best days are yet to come. Anthony and I have been working together since his arrival last month. I'm confident he will be a great resource for the company as he assumes the leadership of QuickLogic's finance team.

[Brian Faith:]

Thank you, Sue. Related to the guidance and outlook Sue provided, we are currently in the process of formalizing a strategic initiative with multiple partners. Depending on our final determination of how this is treated, there could be an upside to the first quarter revenue by up to 25% above the midpoint of the guidance range. Alternatively, we could recognize the initiative as an offset to R&D. If this is the determination, we would instead see savings come in the operating expense line of up to 20% from the $3.3 million midpoint. This initiative would also decrease cash usage by the entire amount. We chose not to make any assumptions in the Q1 guidance and instead took a conservative approach. As of today, we currently expect the determination not later than when we report our first quarter results in early May, and we'll update investors as soon as the determination is final. Furthermore, we believe there will be additional opportunities around this strategic initiative throughout 2021, and we'll provide updates once future events are finalized. In summary, as we look back on what we have accomplished to transition QuickLogic, particularly in the context of the COVID-19 pandemic, I could not be prouder of what our team has achieved. We have realigned the company not just in terms of having the right resources to execute on the open source initiative, but also significantly reducing our cost structure, making profitability before the end of 2021 much more attainable. With what we have in place and the opportunities that are opening up for new business, it is clear we have made tremendous progress on the continued evolution of QuickLogic. I fully expect that the efforts we put in during 2020 will deliver the financial goals I have outlined and should put us on a path to sustained profitability starting at the end of this year. I would again like to thank our many stakeholders, including our customers, partners and QuickLogic team members for their continued support during these extraordinary and challenging times. That completes our prepared remarks. Operator, I would now like to open the call for questions.

[Jim Fanucchi:]

Sherry, we're ready for the Q&A session now.

[Operator:]

The first question comes from Suji Desilva from Roth Capital.

[SujiDesilva:]

So Brian I’ve a lot to ask you, but maybe the last thing you mentioned, the strategic initiative, which could show revenue or R&D upside. Is this the first time you're mentioning this or is this something you've talked about in the past? Just want to try to put it in the context of the multiple things you've talked about over the last few quarters.

[BrianFaith:]

It's something we've been working on for several quarters, but I have not mentioned one piece of it until today.

[SujiDesilva:]

And then as we look at sort of the '21 revenue and margins, what are reasonable expectations? Typically, it will give us a kind of year-over-year or an exit rate run rate for potential for '21. Is that something you'd be willing to give at this point for margin and revenue?

[BrianFaith:]

Yes, from an outlook point of view, and I'll take this since this is Sue's last call. We're still looking in the mid-teens for this year, low to mid-teens on the revenue line, which should be up very healthily over last year in terms of revenue. And then gross margins, we are looking in the 60s for the year. This is going to be increasing quarter-over-quarter as we start to book in more revenue from SensiML and more IP deals as part of the revenue profile, which has gross margin uplift.

[SujiDesilva:]

And guiding new product revenue, $1.2 million, it hasn't seen that level since 2018, but I know there's also been a composition shift in the new revenue. So if you could kind of walk us through kind of then to now? And is this mostly the Japan smartphone or what are the other elements of new revenue that are getting you back to $1.2 million?

[BrianFaith:]

So from a single customer point of view, the Japan smartphone is definitely the largest driver, really sort of firing on all cylinders with that customer now. From the prepared remarks, I also talked about an IP deal that we've been able to close within the quarter, that shows up as new revenue, which we didn't have a big-IP deal in the fourth quarter. So you see that uplift there. We do see some increase in SensiML from last quarter as well. And then there's some other FPGA-based products that fall into that same new product category for us that would be contributing in Q1 also. So yes, noticeable increase from last quarter. And I think it's really just firing on all cylinders on all these different product initiatives finally starting to take hold.

[SujiDesilva:]

And lastly, can you talk about the IP deals and maybe help size what a typical customer deal would be? And is it all upfront versus recurring? Just to understand how the revenue models in?

[BrianFaith:]

Yes. So the revenue model for the IP is an upfront license and back in royalties. Typically, our upfront fee is in the few hundred thousand dollar range, it could go higher depending on the process node. And then there's royalties on unit shipped once they've actually started shipping die or products that have the IP in that. And those are basically two knobs that we have to turn on any deal. So if somebody needs something lower on the front end, we can do more royalty. If they need lower cost of goods then we can dial down royalty and more upfront. So we have two levers that we can play with there. But fundamentally, there's both of those components. In addition, there's also support maintenance and that really sort of offsets our upfront cost and supporting a customer with the IP and getting it integrated correctly and everything works in their chip before they tape out.

[Operator:]

So the next question comes from Richard Shannon from Craig-Hallum.

[RichardShannon:]

I want to follow-up on Suji's first question, and Brian, also one of your last comments and try to tie to what I think I heard earlier. Is this potential upside from the strategic initiative, is this related to the, if I got my notes right here, deep engagement with couple of large semi-con players in the last two quarters. Is that specifically what you're referring to?

[BrianFaith:]

No, those are different. The two large different semiconductor players I was talking about are very specific to SensiML and their expansion was more large microcontroller partners from an ecosystem go-to-market point of view. My comments were related to parties independent of that.

[RichardShannon:]

I guess we'll probably hear more about that. We're probably not going to talk about it. So I'll move on here. Brian, you made some interesting comments regarding -- I think you titled the section in your comments about kind of business model details and embedded FPGA, and you talked about some tool chain benefits here. Can you kind of give us a sense of the significance of this and how did it play into this this larger IP deal that you're seeing or going to recognize this quarter? What does that mean for your pipeline going forward?

[BrianFaith:]

Well, it's huge actually. Anytime you can get a 10x improvement on something, it's pretty big. It really allows us a lot more flexibility in customers that we engage because we can do so with less resources and less time, which really means you can tackle more opportunities at the same time. It also changes the economics for the customer, such that we can still get our target gross margins are better. And again, we can be engaging more customers at once with that new business model. So as I said in the the prepared remarks, I'll be sharing more details about this and I think it will become more apparent in the future. For now, because of competitive reasons, I'm not going to go into details because I like the competitive moat we have ourselves in at the moment. But it is groundbreaking what we've been able to do through that research and through that project over the last year and half. If I elaborate a little bit more, if you think about in the past and you've seen us talk about different IP nodes that we've ported to, they typically have like a 12 to 18 month cadence for a new process node that we bring on. And so that's an engineering team over the course of a year, year and half and all their salaries and tools expenses and test chips and all those things wrapped up. So really it changes the economics if we can do that with such speed now and agility and that's what we're going to be able to do. So I think you're going to start to see a lot more from us on this IP initiative because of the results of this whole thing.

[RichardShannon:]

Brian, maybe if you could -- you probably correct me on my time frames here, but related to QuickFeather here, you've been and QORC, you have been in the market for, I think, a little over a couple of quarters now. Obviously, early stage here. It sounds like you're very excited, shipped a lot of dev kits so far and have goals for big goals here for this year. Maybe you can kind of share some early success stories, even if they're interim level where that leads you to excitement, any applications or any way to think about where you’re really seeing some -- both interesting applications as well as ones that can drive some volume for you over time.

[BrianFaith:]

Yes. So I'll make some broad brush statements, and then I'll sort of narrow in on one specific example. So just broad brush, there are a lot of folks that are buying these dev kits that are doing things around wearable computing or around industrial IoT applications, because there are sensors on the board already and because we have the integration with SensiML. And they really do span all the segments I was referring to earlier, so smartphones, wearables, hearables, IoT applications. But I think a true testament to what we're doing and why this is a very different QuickLogic in a different time in QuickLogic. There's this design partner of ours Optimus Logic, I'm going to give them some airtime from your question here. So they're our first authorized design partner. They were a key partner in getting all of the software drivers in middleware done for the Japanese smartphone customer. So they got to know the EOS S3 in some level of detail, and they've actually intersected now on top of all this open source software development we have. They have taken that and they have run with it. So you can stay tuned for some announcements along this area, but they basically outlined an entire set of modules that you can then integrate into other systems that have the EOS S3 on it. And in some cases, sensors, in some cases, not they have wearable computing reference designs that are form factor and ready for their end customers to bring to market. And not only that but then they have a lot of ties into different entities across Asia. And one of which is just the fact that they're going to be able to get these dev kits into a lot of the universities across India. And a lot of people say, well, yes, universities, you buy 100 here or 100 there. But all of the work at those universities do actually makes the product and the software better for the other customers in the market, the professional customers that are going to take volume out of that. And as an example, through a collaboration between Optimus and IIT Hyderabad, they basically took these open source tools and they got it running on an Android smartphone and a Raspberry Pi. So think about that for a second. How many people in the world have an Android smartphone, a lot, billions, right? It's incredible to think about how many phones that are out there now with people that can actually do design with our products that couldn't have done that before that. And so that's just, I think, a testament to the open source actually you can tap into that collective intellect of the community and the desire to make these products more for the masses, and they're doing that. And I think, again, stay tuned for actual announcements with Optimus and real products that are going to be shipping in volume, it's going to be imminent. But that, I think, is a perfect example of a success story starting from QuickFeather.

[RichardShannon:]

I guess my last question, I'll jump on the line here on SensiML. I think just going through my notes here, you mentioned stuff about some engagement with large enterprises and cycle time to turn the license has taken a few times, but it sounds like you're approaching some meaningful wins here. Maybe you can discuss how that's going?

[BrianFaith:]

Yes. So I would acknowledge definitely, it's still a slower ramp than what we anticipated a year ago. But I think now with some of the fundamental changes that SensiML has gone through as far as go to market strategy goes, we're starting to see some improvements there. So one is just sort of simplifying the offering, if you will, for the community addition. The other on the enterprise side, if I look at the list and have it in front of me, there's a lot of things around wearable computing, like AR, VR watches that you're wanting to do more gestures based on AI/ML. And we're also starting to see an uptick in, I would say, both consumer IoT and industrial IoT, where you're using just a lot of different sensors. So vibration sensors, microphones, weight sensors, strain gages, all these different sensors that people will need to build algorithms around, but they just don't want to do that from scratch. And so a lot of these enterprises, they are very large. They're Fortune 500 type companies that are now deeply engaged with SensiML. And one thing I will say, in the past, what might limit the progress or the rate at which we can close an enterprise deal is sort of limited by how soon can the enterprise customer actually get hardware that they can build a model from. And so that's why doing these different reference designs with these microcontroller companies as well as what OptimusLogic is doing on the wearable side with a form factor wearable. You can sort of compress time now and get customers to start collecting data and building the AI models before their target hardware is actually done. And I think that that change in go to market strategy was for the second half of last year. And I think, immediately, now we're starting to see some improvements in the hit rate on that. And just in terms of the community addition, I mean, I said in the call, more than 100 folks added to that, that was through the first six weeks of the quarter. So we're at a pretty good clip of multiple per day coming on to the platform, not all of which will become large enterprise deals. But I've definitely seen an uptick in the rate of large enterprise companies approaching us and saying, hey, how can I evaluate that? And I think that's a market change from where we were last year.

[Operator:]

The next question comes from Martin Yang from Oppenheimer.

[MartinYang:]

Sue, best of luck on your next position. Brian, I want to ask about your community engagement effort, I think you have been pretty active on different conferences as well as interviews. And are those public appearances helpful in your promoting the QuickFeather development board as well as your open source initiatives ,and how are the community response so far?

[BrianFaith:]

So one of our company goals this year is to ensure that, that we're seen as a thought leader in that space because we are the first programmable company to really jump in and embrace this whole open source initiative. And so part of that is making sure that we're out there speaking, and doing our views, podcasts, all those things. Before, we'd have to pay to do those, right? We'd have to pair way into those pay to play events, all of these that we've been doing are basically, we're invited because they see that we are doing something different, invite us for free, participated in these things and we've seen a huge increase. I mean just, if you look at my LinkedIn alone, how many people are viewing these posts on these different events and come into the company blog and watching or reading these different things, it's a huge increase from last year. And that's actually translated into direct opportunities now where people are approaching me about, hey, how can we use QuickFeather and SensiML work? Hey, this open source FPGA thing is great, can we use it in this type of wearable or IoT example product? And I know that we can't directly correlate LinkedIn stuff to revenue. But I can tell you it's a funnel. It's a numbers game. And so the work that come in the top of the funnel, the more that come out the bottom. And these are very highly qualified opportunities coming in now because they're attending these events on their own accord, and they're seeing us there and we're following up afterwards. So I think again, it's a huge change. A lot of my time now is spent doing those things, which I love doing because you get to meet a lot of these great potential customers that we can convert to revenues. So you're going to continue to see more of that from us. Probably on a monthly cadence, you're going to see us out there evangelizing what we're doing. It's just so that we're -- everybody understands what we're doing.

[MartinYang:]

That's great. I look forward to those events upcoming. Can you also talk about what are you seeing in the hearable space? I think, overall, all the related applications and hardware are still very, have a very strong growth momentum. Where are you seeing your opportunity lies, specifically for this year and where are the newer design or customer engagement take you regarding the designs that leverage your products?

[BrianFaith:]

So historically, we've talked about hearables, hearables being Bluetooth accessories that you wear on your head that have always on voice. And I think that now that we're finally able to say that we're Amazon certified and we're going to launch that tomorrow, that's going to continue moving along some of these hearable opportunities that we've already been cultivating for some time. And I think there will be some revenue from that in the second half. Another hearables application voice activated is related to remote controls, but we didn't give a lot of airtime to you today, but that was the second always listening application that I was alluding to, and I do see that going to production this year as well. And then interestingly enough, now that we have a microphone on QuickFeather and we have a couple of voice partners on the software side, we are seeing folks now coming to us and actually asking for what we had said would happen like two years ago, it took us a while to go here. But integrating motion AI for wearables, and I'm talking about risk warn wearables or headwind wearables, with the ability to do voice commands. And moreover, there's also opportunities now in line powered consumer IoT for the same type of thing where you're integrating voice commands into something that has to be always on or always listening, but maybe not necessarily battery powered. And I think a lot of that now is just -- we're getting a lot more traction here because people are starting to recognize what we're doing and the voice partners are having an easier time porting to the platform because of the open source software nature of our offering. So there isn't going to be one big application area this year that stands out from the rest in terms of voice. I think it is going to be fairly split across the hearables that we had talked about in the last couple of years, where we're competing, where they're using voice for control and then some IoT type applications for consumer IoT. And by the way on the wearable side, we are seeing more interest now in sort of these wearables around elder care or children, especially, I think this is sort of brought on by the pandemic. If any of us have elderly relatives that we need to -- we're wondering about. Are they active? Are they moving? Have they fallen down? A lot of that can be done with -- over the off the shelf motion sensors and AI software. And so we have a couple of wins already with wearables in that area that are also leveraging the SensiML capability for that as well as integrating voice at the same time, to get back to your question. So yes, it's pretty diverse, which I think is a good thing and several that should hit in production this year.

[Operator:]

You next question comes from Rick Neaton from Rivershore.

[RickNeaton:]

Sue, thank you for your assistance over the past four and half years and good luck in your new position Inland, and I hope you're successful there as you were at Quick. A couple of questions since most have been asked already. Brian, when you spoke about the total addressable market that you're trying to serve in your prepared remarks or the total addressable market. What portion of that is QuickLogic trying to serve initially with its new strategy?

[BrianFaith:]

Well, I'd say all of the edge inferencing is part of our certain available market, be it sort of the IP or the chip sales.

[RickNeaton:]

When you spoke about the ecosystem partnership and that was in relation to SensiML and some partners, I believe. Is that a system -- are those partnerships going to just carry the software or are they going to generate revenue through SensiML, through making SensiML the default software that runs on a particular item?

[BrianFaith:]

In the case of all of these semiconductor partners, the typical business model is that they have the software running on their dev kits. They arm their sales force with those dev kits to show customers. And so we get inbound needs from that from qualified customers that it’s incumbent on us to close that deal and we get the revenue from that. So there's no like prepayment of revenue from microcontroller guys. Typically, they show the kits, they show the solution, they showcase that at conferences, we get inbound these and then we close.

[RickNeaton:]

Were any of your prepared remarks today addressing the COVID app initiative that you had talked about in a couple of previous conference calls?

[BrianFaith:]

No, they weren't. But I'd be happy to elaborate now that we're in the Q&A section. So that initiative, we have built models for the COVID cost detector. They're pretty accurate. The model with the temperature sensing, which is the very first part of it that we had discussed in different webinars with the consortium of companies, that's actually at a specific university right now in the US, wrapping up the research on that. And then at some point, they need to go for IRB approval. There is just an actual end customer lined up for this through one of the consortium partners. But I think that they need to see that approval process before they would go to production. Interestingly enough, that work has actually opened up a lot of other opportunities with customers that are looking at sound classification, with microphone data and using AI/ML techniques like SensiML to build models around that. So I'm still confident that we will see some revenue from that first opportunity. But it's also really blossomed into much more than that as a result of all the airtime that that initiative got.

[RickNeaton:]

Okay. Thanks very much. Appreciate your time.

[BrianFaith:]

Thank you, Rick. Okay. So I think the operator is not able to close the side, so I'm going to do that for us. Thank you for participating in today's call and continued support. We look forward to speaking with you again when we report our first quarter results in May. And I appreciate your patience as we went through the technical difficulties today. Thank you, and have a great day.

[Operator:]

Thank you. This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant evening.