QuickLogic Corporation
Q2 2019 Earnings Call Transcript

Published: 7 Aug 2019

[Operator:]

Ladies and gentlemen, good morning. At this time, I would like to welcome everyone to QuickLogic Corporation's Second Quarter Fiscal Year 2019 Earnings Results Conference Call. As a reminder, today's call is being recorded for replay purposes through August 14th, 2019.I would now like to turn the conference over to Mr. Jim Fanucchi of Darrow Associates. Mr. Fanucchi, please go ahead, sir.

[Jim Fanucchi:]

Thank you, operator and thanks to all of you for joining us, calling in from Boston this morning in advance of their appearance at today's Oppenheimer Conference are; Brian Faith, President and Chief Executive Officer; and Dr. Sue Cheung, Chief Financial Officer.As a reminder, some of the comments QuickLogic makes today are forward-looking statements that involve risks and uncertainties, including, but not limited to stated expectations relating to revenue from new and mature products. Statements pertaining to QuickLogic’s future stock performance; design activity and its ability to convert new design opportunities into production shipments; timing and market acceptance of the customers’ products; schedule changes and projected production start dates that could impact the timing of shipments; the company's future evaluation systems; broadening our ecosystem partners; expected results and financial expectations for revenue, gross margin, operating expenses, profitability and cash.These statements should be considered in conjunction with the cautionary warnings that appear in QuickLogic’s SEC filings. For additional information, please refer to the company's SEC filings posted on its website and the SEC’s website. Investors are cautioned that all forward-looking statements in this call involve risks and uncertainties, and that future events may differ materially from the statements made.For more details of the risks, uncertainties and assumptions, please refer to those discussed under the heading, Risk Factors in the most recent Annual Report on Form 10-K, most recent Quarterly Report on Form 10-Q, recent Forms 8-K and other documents we periodically file with the SEC. These forward-looking statements are made as of today, the day of this conference call, and management undertakes no obligation to revise or publicly release any revisions of the forward-looking statements in light of any new information or future events.In today's call, we will be reporting non-GAAP financial measures. These non-GAAP measures should not be considered as a substitute for or superior to financials prepared in accordance with GAAP. You may refer to the earnings release we issued today for a detailed reconciliation of our GAAP to non-GAAP results and other financial statements. We have also posted an updated Financial Table on IR webpage that provides current and historical non-GAAP data.Please note, QuickLogic uses its website, the company blog, corporate Twitter account, Facebook page and LinkedIn page, is channels of distribution of information about its products, its planned financial and other announcements, its attendance at upcoming investor and industry conferences and other matters, such information may be deemed material information, and QuickLogic may use these channels to comply with its disclosure obligations under Regulation FD. A copy of the prepared remarks on today's call will be posted on QuickLogic’s IR web page shortly after the conclusion of today's earnings call.And with that, I would not like to turn the call over to Brian.

[Brian Faith:]

Thank you, Jim. Good morning from Boston everyone and thank you all for joining our Q2 2019 financial results conference call. A lot has happened since the close of Q2, do mostly due to recent schedule changes that are outside our control, our full year 2019 revenue is now expected to live significantly behind the outlook we shared last May and reiterated in June.Our revised 2019 outlook is for total revenue of $13 million to $13.5 million and non-GAAP gross profit margin in the low 60% range. At the midpoint, this projects a total revenue increase of approximately 5% and a 25% increase to non-GAAP gross profit dollars compared to 2018. After carefully evaluating our new design wins and the revised production schedules we have received from our customers during the last several weeks, I believe we remain on track to achieve our goal of non-GAAP and cash flow break-even in Q1 2020 and profitability for full year 2020.With the cash we raised in June, we have strengthened our balance sheet to support these goals and I do not expect a need to raise further cash via and offering going forward. Just ahead of our June offering, we became aware that our military customers were faced with delays from their end customer. We were initially assured those delays would be resolved quickly and that production schedules would be accelerated resulting in full year shipments being in line with our previous outlook.Our sales channel has since confirmed directly with our US Navy Admiral, that production will be extended rather than accelerated. This extension reduces our outlook for Q3 and full year 2019 mature product revenue by approximately $2 million. The ongoing trade war with China has caused several of our customers to delay new product introductions. The threat of terrorists on certain Chinese consumer electronics products has disrupted the introduction schedule for one of our largest 2019 design wins.Our lead customer for this design has advised us that its major retail outlets in the US have purchased enough of its current models to take them through the holiday shopping season. As a result, the new models incorporating our EOS S3 for always-on voice control that it had planned to begin shipping in Q3 2019 have been pushed out to Q1 2020. We have discussed the situation with the consumer company that we worked with to develop the always-on EOS S3 voice control reference design that was the basis for the lead OEM design. Through this, we've been advised they will wait for the lead OEM to bring their product to market, which has been given several months of exclusivity.Following the release by the lead OEM in Q1, we remain confident the reference design will be used by multiple OEMs across numerous product models during calendar year 2020. While this will clearly benefit us next year, the delayed introduction by the lead OEM reduces our second half and full year 2019 outlook by approximately $1.3 million.In the Hearable market, we continue to support production for JD.com, SF Express and a variety of smaller EOS S3 design wins. While we have encountered some new product introduction delays that are attributable to the trade war with China, we finally have a clear path forward for Amazon AVS or Alexa Voice Service compliant hearable design. With that, and the revised schedules we have received from our customers, I believe revenue generated by hearable designs will ramp significantly beginning in Q4 2019.Amazon has created two levels of compliance for its hearable specification known as AVSClose Talk. AVS Close Talk Certification is the specification for finished devices. Passing Certification testing enables a finished device to be branded as AVS Close Talk compliant. We believe the first finished device using EOS S3, which was submitted to Amazon last Friday, will pass the Certification test later this month and be displayed by Amazon at theSeptember IFA Conference in Berlin.To the best of our knowledge, this will be the first in-ear hearable device that is certified by Amazon to be branded as AVS Close Talk compliant. A level up from Certification, and with much more stringent criteria, is AVS Close Talk Qualification. This is the standard that reference designs must meet in order to be included on the Amazon AVS Development Kit web page. The reason this test is more stringent is, Amazon wants to ensure that a qualified reference design has enough guard-band to enable new product designs to easily pass AVS Close Talk Certification testing.Several months ago, we partnered with Retune DSP, which is the only voice processing software that has been awarded AVS Close Talk Qualification. We have since ported the Retune DSP VoiceSpot wake-word software to EOS S3 and confirmed with our internal testing that it meets AVS Close Talk Qualification requirements with only one microphone. As a result, our customers that have one mic designs should be able to move forward with Certification testing once they port the Retune software to their design.We have been working closely with one of the world’s largest hearable manufacturers to develop a complete and turnkey reference design using EOS S3 running Retune DSP software. We anticipate that design will be completed and delivered to Amazon for AVS Close Talk Qualification testing by the end of Q3. If successful, this reference design will be included on the Amazon AVS Development Kit web page.In addition to Retune DSP, we have also formalized a partnership with Nuance Communications and ported its widely used wake-word and voice command technology to EOS S3. Nuance has been involved in voice processing software for over two decades and has a wide user base with particularly good penetration in China.While the delays we have encountered in the Hearable market reduce our 2019 outlook by approximately $1.2 million, we believe we finally have a clear path for our customers that are targeting AVS Certification for their products. With this, we believe Hearable revenue will accelerate beginning in Q4 2019. Beyond the Hearable market, we continue to support the Cleer voice-enabled Bluetooth speaker. As Cleer continues its expansion into European markets, we are optimistic that we’ll see higher volume requirements for it in the second half of 2019.In June, we announced a new Integrated Alarm System or IAS reference design from Infineon that targets home, commercial and industrial IoT applications. The Infineon IAS addresses the growing problem of false alarms by processing inputs from sound and pressure sensors. With this, the system can differentiate between noises from TVs or maybe a pet as opposed to a real event like an intruder breaking a window or opening a door.IAS can be implemented as a standalone product or integrated into a variety of multi-function IoT devices. A number of well-known consumer product companies are currently evaluating the IAS reference design for integration into their products. Similar to the strategy used for Wi-Fi and camera modules, a large module manufacturer has already designed a new low-cost module based on the Infineon IAS that OEMs can easily integrate into finished IoT designs. This module is scheduled for introduction before the end of 2019.We recently established a partnership with Atmosic, which is rapidly developing traction forIts new ultra-low-power Bluetooth Low Energy or BLE solution. Leveraging this and our new partnership with Retune DSP, we have already won a new design with a large consumer electronics OEM for a voice-enabled TV remote control. This design is scheduled for release in December 2019 and is forecasted to ship several hundred thousand units in 2020. We are engaged with this customer on a second design that has significantly higher volume potential that is scheduled to launch in 2020.I’m very pleased to confirm the Japanese smartphone OEM that we signed a broad MOU with in 2018 has designed our EOS S3 into four smartphones and one feature phone so far. We shipped a modest quantity of EOS S3 to this customer during the first half to support pre-production builds of the first smartphone, which is scheduled for release by a Japanese carrier later this month. Following that release, we expect production will ramp during the last four months of 2019.The release schedule for the next three smartphones has been extended to late Q4 2019. The feature phone, which we expect will have two to four times the average annual volume of the smartphones, is currently scheduled for release in Q2 2020. These release schedule adjustments lower our second half and full year 2019 outlook by approximately $900,000.In eFPGA, we finalized the license agreement with a prime military contractor in Q2 that has been commissioned by the DoD to evaluate and recommend embedded FPGA solutions and suppliers. Military contractors already represent a large market for discrete FPGAs and the DoD is taking steps now that will make it easier for its contractors to incorporate embedded FPGA in ASIC designs. We are optimistic the evaluation of our solution will be favorable and with that, help us close one of our ongoing engagements with a DoD contractor and lead to new opportunities for our embedded FPGA IP with other contractors.We had expected to finalize testing of the ETH Parallel Ultra-Low Power IC that includes our eFPGA IP last quarter. However, given the travel and vacation schedules of key people fromETH, the qualification is ongoing. We expect the qualification to be completed during Q3.We are very close to signing a new MTLA with a semiconductor company and believe we are on track to finalizing a license agreement with another company during Q4. As we’ve discussed in the past, the MTLA generates only modest revenue, but enables us and the customer to fast-track SoC License Agreements that generate considerably more revenue.In the broader picture, we have engaged with quite a few OEMs and Semiconductor companies that would like to license our eFPGA IP, but want us to modify it to suit their application and use case. The challenge here is the requested changes require what is often a significant R&D investment from QuickLogic that is unlikely to be leveraged to other opportunities. While some of these opportunities could work out well if the company develops an SoC or ASIC that moves into high volume production, we have determined the risk of that, and lack of leverage is not the best investment of our R&D resources.Due to that, we are in the process of building out a more scalable go-to-market strategy that leverages the relationship and technology of some of our key partners. We look forward to providing details on this in the coming months. At the bottom line, the balance of these puts and takes lowers our second half and full year 2019 outlook for eFPGA by about $600,000 but positions us for what we believe will be a very significant upside for eFPGA IP revenue beginning in early 2020.Let’s shift now to wrap up with QuickAI and SensiML. Late in 2018, we launched a QuickAI Multi-chip Module or MCM, initiative to accelerate our penetration into certain AI Vision markets. We have since decided that it will not provide us with the ROI or leverage of our key resources that we originally envisioned. There are several reasons behind this decision

[Sue Cheung:]

Thank you, Brian. Good morning and thanks to everyone for joining us. For the second quarter of fiscal 2019, total revenue was $2.1 million, which was within the revised guidance range of $2.0 million to $2.4 million that was included in our Form 8-K filing on June 18th. This compares with revenue of $3.1 million in the second quarter last year.Of the $2.1 million in Q2 revenue, sales of new products were $700,000. This compares with $1.6 million in the second quarter last year. This decline was primarily due to a significant decrease in low margin connectivity and display bridge sales that were not fully offset by increased revenue from strategic new product sales.Our mature product revenue was $1.4 million, a slight decrease when compared with $1.5 million in Q2 last year. In the second quarter, we had 2 customers each accounting for 10% or greater of sales. Gross margin in Q2 was 49.8%, compared with 50.1% in the same quarter last year. The gross margin was impacted by unabsorbed manufacturing overhead from low revenue.Operating expenses for Q2 2019 were approximately $4.8 million, compared with $4.5 million in Q2 2018. Within our Q2 2019 OpEx, R&D expenses were $2.7 million and SG&A expenses were $2.1 million. This compares with $2.2 million and $2.4 million, respectively in Q2 2018. The increase in R&D expenses was mostly due to additional engineers acquired from SensiML earlier this year.The net total for other income, expense and taxes in Q2 was a $101,000 expense, compared with a $233,000 benefit in the second quarter last year. Net loss in Q2 was $3.8 million or $0.04 per share. This compares with a net loss of $3.0 million or $0.04 per share in the second quarter last year.Now turning to the balance sheet for Q2. The total cash at the end of Q2 was $28.2 million. The main changes in cash were the net proceeds of $8.3 million from the public offering, less the approximately $3.5 million cash usage in the quarter. Our cash balance at the end of the second quarter also include the $15 million draw from the bank revolving line of credit.Moving to our forecast for the third quarter of fiscal 2019, which will end on September 30. Our revenue guidance for the third quarter of 2019 is $2.1 million plus or minus 10%. We believe total revenue will be comprised of approximately $1.0 million of new product revenue and a $1.1 million of mature product revenue.With our guidance for sequentially flat revenue, we currently believe our non-GAAP gross margin will be approximately 51%, plus or minus 3%. As was the case for Q2, our gross margin will be impacted by unabsorbed manufacturing overhead due to low revenue. We are forecasting non-GAAP operating expenses of approximately $5.2 million, plus or minus $300,000.Within OpEx, we expect our non-GAAP R&D to be approximately $3.1 million and SG&A to be approximately $2.1 million. The $400,000 increase in total operating expenses from Q2 is due primarily to the timing of engineering consulting expenses and one-time costs associated with the recent move of our headquarters to San Jose. We believe total OpEx expenses will decline to the high $4 million range starting in Q4, as these one-time expenses roll off and we begin to benefit from the lower cost of our new facility.After interest expense, other income and taxes, we currently forecast our non-GAAP net loss will be approximately $4.2 million or $0.04 per share based on approximately 116 million shares. The primary difference between our GAAP and non-GAAP results is our stock-based compensation expense, which we expect to be approximately $750,000. We expect our stock-based comp expense will remain in this range of $700,000 for – the mid $700,000 for the foreseeable future.Finally, in Q3, we expect to use between $3.8 million and $4.2 million in cash. Our expected cash usage will be impacted by low revenue and an anticipated increase in working capital. As a reminder to what I said in our last call, the move to San Jose is expected to be net neutral to cash in 2019, and lead to an annual savings of approximately $500,000 starting in 2020. We currently expect our Q4 cash usage will decline by more than 50% from Q3.Before handing the call back to Brian, I do want to mention that NASDAQ has granted us a 180-day extension, through January 13th, 2020, to regain compliance with its minimum bid price requirement. This news was included in the SEC Form 8-K we filed on July 18th.With that, let me now turn the call back over to Brian for his closing remarks.

[Brian Faith:]

Thank you, Sue. As we entered July, we faced a rapid succession of schedule adjustments from customers that we expected would driver our revenue growth in 2019. Following this, we met with these customers to ensure the programs remained solid and reaffirm the new schedules we were provided.With the information we’ve received from our customers, we are significantly more confident in our belief that we will report break-even operations on both a cash and non-GAAP basis for Q1 and achieve non-GAAP profitability for full year 2020. We have carefully modeled our cash usage en route to these goals and hold the firm opinion that we will not need to raise additional money through a public stock offering going forward.While the tally of the delays, and impact of our decision to move away from QuickAI MCMs, totals approximately $8 million, some of that was a guard-band above our previous outlook for 2019 and we expect some of it will be offset by new design wins that were not included in that outlook. As a result, and after a careful evaluation of the data, we have adjusted our 2019 revenue outlook to between $13 million to $13.5 million.We believe mature product revenue will be relatively flat with last year and that new product revenue from connectivity and display bridge designs will be about $200,000 lower than the outlook we shared in May. We believe other new product revenue will offset that decline and provide us with modest full year revenue growth. With this mix, we are currently modeling our full year 2019 non-GAAP gross profit margin in the low 60% range. This would represent approximately 10 percentage points higher than what we reported for 2018.Let me take a moment to share what gives us confidence in our ability to rebound from our mid-year low and achieve the goals I have outlined. We believe production demand from our military contractors will rebound in Q4 and hold through at least 2020; possibly much longer.By the end of Q4, we believe we will have four smartphones running in production. We believe volume will ramp for these four smartphones beginning in Q1 2020 and that the feature phone, which is forecasted to have two to four times the average volume of the smartphones, will enter production in Q2 2020.The schedule we have from our large consumer electronics customer indicates it will ramp production of its first models in Q1 2020 and as additional OEMs introduce voice control, we believe the aggregate volume will increase throughout 2020.With the anticipated completion of our first Amazon AVS Close Talk Certified design this month and an AVS Close Talk Qualified reference design being listed on the Amazon Development Kit web page later this year, we believe hearable demand will increase significantly in Q4 and accelerate moving forward.We believe the first of what could be several voice-enabled TV remote controls incorporating EOS S3 will enter production late in Q4 and we expect production will begin ramping in Q1 2020. We also believe the module based on the Infineon IAS reference design will be in production late in Q4. However, since we don’t have any detail beyond that, revenue from this design win would be an upside to our near-term outlook.We are in the process of enhancing our core eFPGA technology and applying a more scalable go-to-market strategy that leverages the relationship and technology of some of our key partners.We do not want to tip our hand to our competitors, but since these changes will address key concerns that have delayed license deals in 2019, we think they will lead to a sharp ramp of eFPGA IP revenue in 2020; possibly beginning as early as Q1. We also believe we are on course to win one significant license agreement during Q4 2019.Moving from only three SaaS customers at the close of Q1 to 12 at the close of Q2 and with solid penetration into Global Fortune 500 companies, SensiML is clearly building impressive momentum. We believe this trend will accelerate in the second half of 2019 and continue for years beyond that.I’ll readily admit that SensiML’s goal of becoming the de facto software Toolkit for end-point AI may seem ambitious at this stage; however, we think it is a very realistic and achievable target. We look forward to releasing more information about our progress towards this goal during the coming months.While we are not ready to share a full year 2020 outlook, the mix of business we see today gives us confidence that we will not only significantly increase revenue, but again deliver a solid increase in our non-GAAP gross profit margin for the fourth straight year, and with that, report non-GAAP profitability for full year 2020.That completes our prepared remarks. Operator, I would now like to open the call for questions.

[Operator:]

Thank you. [Operator Instructions] We’ll now take our first question from Suji Desilva from ROTH Capital. Please go ahead. Your line is open.

[Suji Desilva:]

Good morning, Brian. Good morning, Sue.

[Brian Faith:]

Good morning, Suji.

[Suji Desilva:]

So, can you – so what's SensiML with the adjustments around the module and chip and QuickAI, can you talk about what the new revenue run rate estimates are for that segment and what the size of these SensiML engagements that are building, the 12 customers, what the size of each of those engagements are?

[Brian Faith:]

Sure. So the general model for SensiML is that it's $10,000 to $25,000 per quarter for the SaaS license. Some of those 12 are not at that level yet, because we were bundling those with the QuickAI HDK as a starter kit for some of the initiatives that we're running with our channel partners. So, some of those are lower revenues. And what I just said, a handful of them are at that revenue level on the per quarter basis.We expect that pricing is going to maintain in that range of that $10,000 to $25,000 depending on the level of data science expertise the customer needs ramping through the year, as I said, ending the year, somewhere between 50 and 100 subscribers to the SaaS. Some of that will be based on QuickAI Hardware Development Kits that we’ve put out into the channel and sold through to end customers and some of that will be the SensiML tool kit running on third-party MCUs that we have not announced yet.

[Suji Desilva:]

Okay, so by end of ‘19, 50 plus subscribers, is that right?

[Brian Faith:]

Correct. Exactly right.

[Suji Desilva:]

Okay. And then the Japan OEM, smartphone OEM, can you talk about the reasons the -- that some of the phones were delayed in the marketplace and then what – when I look at the new product revenue you’re guiding for the second half ’19, is that smartphone ramp the primary driver of the sequential increases there?

[Brian Faith:]

Yeah, so the primary reason for the second tranche of phones the number two, number three and number four, those are just the schedules that they're negotiating with their carrier. And they were different from what they originally shared with us. But I've seen product rollout information now that's been agreed to by the carrier, specifically, and I am confident in the launch that they've told us now and what I've communicated on this call.As far as the magnitude of the revenue in Q4, this customer is one of the top revenue drivers. Outside of that, it would be the Hearables. And then also the large IP deal that I mentioned during the eFPGA part of the prepared remarks.

[Suji Desilva:]

Okay, and then my last question is around the AVS, the concept of Close Talk. Just curious what percent of the addressable market is Close Talk versus, I guess, the contrast would be just the traditional AVS I guess, if you can kind of clarify that landscape and what the relative size of the opportunities are just to understand how important Close Talk could be? Thanks.

[Brian Faith:]

So in general, I'd say if you look at the market today, none of it is Close Talk, because there aren't really any products out in the market yet I think except for a couple of over-the-ear, over-the-head headsets from a couple of the OEMs. I think that in general, if you look at Bluetooth headsets, the big growth driver in the market right now is the TWS, which looks like the Apple Airpods. And so that's a double-digit percentage of the Hearables market in general.And now that Amazon is going to be having these Close Talk Certified and Qualified ones, we expect that will actually be a growth driver moving forward. And with our finally getting qualified here and certified, now we can see that opening up for us to be shipping into these products. In the future, I think most people assume that the growth for the Bluetooth hearable space is going to be the TWS form factor size like the Airpods driven by the sort of fashionistas that are liking to follow the Apple Airpod form factor.

[Suji Desilva:]

Right, okay. All right. Thanks, guys.

[Brian Faith:]

Thanks, Suji.

[Sue Cheung:]

Okay, thanks.

[Operator:]

We'll take our next question from Rick Neaton with Rivershore Investment Research. Please go ahead. Your line is open.

[Rick Neaton:]

Thank you. Hi, Brian. Hi, Sue. Good morning.

[Brian Faith:]

Good morning, Rick.

[Sue Cheung:]

Good morning.

[Rick Neaton:]

The first thing I'm trying to do is, square your reported Q2 product revenue with your June Reg FD disclosure. It looks like you're about 50% short of what you thought you were going to report in Q2. And can you provide some color on what caused that new product revenue to fall short of your implied forecast for that?

[Brian Faith:]

Yes, you're referring to the original guidance for Q2, correct?

[Rick Neaton:]

Yeah, your original guidance was $3.8 million at the midpoint and $2.5 million of mature product, $1.3 million of new product. Then when you revised your guidance, you said that mature product was the sole cause of the new lower revenue range. And that you could – the sole cause, meaning you were - your range was down $1.4 million to $1.8 million, your material product revenue actually fell only $1.2 million short and not $1.4 million to $1.8 million and your new product revenue was $700,000 instead of $1.3 million. So what caused that $600,000 miss on the forecast?

[Brian Faith:]

Yeah, so the new product miss there, the $600,000, that was primarily the Hearables related to these AVS push outs for qualification and certification. The other aspect of that was the consumer electronics OEM, the big design win, we did think that we will start to ship into them in the Q2 timeframe, because if they wanted to be in the shelves for the holiday season, they'd have to start building products and to make sure it got on a boat in time to come over to the US. Those are the primary differences. There was also some I think, connectivity revenue difference for the new product. And I also believe the display bridge was down a little bit if my memory serves correctly. But the primary parts of that were the Hearables and the consumer electronics.

[Rick Neaton:]

Okay. You mentioned how the new tariff situation between the US and China are affecting your customers, and I know part of – one of your contract manufacturers for your own packaging Amcor is – has most of its, if not all of its facilities in China, is that affecting you at all?

[Brian Faith:]

So we do have a new package for EOS S3 that we have started developing earlier this year. That's actually the only package that we have at this point, it's being done in China. And that will have a tariff applied to it. We can apply for credits back if that shipped out of the country, to a non-NAFTA country; we get the majority of that tariff back.If it stays within the NAFTA countries then the tariff still stays, and that what that means is, we're going to be raising the price on that dilution to the customers. So we're not absorbing that. That's the only issue that we have directly on the incoming goods from the tariff situation. All the other tariff situations that we have are tariff related are really with our end customer.

[Rick Neaton:]

Okay. And the consumer electronics and customer that move gets production schedule due to the tariff situation how certain are you that their new schedules any more definite than their old one?

[Brian Faith:]

I'm very certain, because I know that the large retailer that was supposed to have these products on the shelf for holiday still wants them. And they're just not willing to take the risk for this year for the holiday season. But in the next year, they absolutely want to have these in the early part of the year on their shelf and there's couple other online retailers that want to carry the same product as well.So I’ve double and triple checked that now with the OEM with the partners that we developed this with and everybody's saying the same thing. So I'm very confident in that revised schedule.

[Rick Neaton:]

Is that customer going to still manufacture those products in China? Are they going to move their production outside of China?

[Brian Faith:]

Actually, this particular customer and a few of our other customers have already started building at manufacturing facilities in Vietnam. And I believe this product will eventually be manufactured in Vietnam, so that it will not be subject to the same tariffs.

[Rick Neaton:]

Okay, thank you.

[Brian Faith:]

That was [indiscernible] about.

[Rick Neaton:]

Okay. Well, so that – that's a factor that makes you more certain about 2020. Is that right?

[Brian Faith:]

Correct. Yeah, we're seeing a lot of guys like I said, including Hearables that are moving manufacturing to Vietnam. And so provided the situation with Vietnam doesn't change, that gives us a lot of confidence. And so they are going to be able to ship these into the US without being subject to tariffs anymore.

[Rick Neaton:]

One last thing, I just wanted to clarify your revenue forecast for 2019. You're saying about $7 million of mature product and about $6 million of new product revenue? Is that correct?

[Brian Faith:]

That's correct.

[Rick Neaton:]

Okay, and there could be a $0.5 million bump in one or both of those segments?

[Brian Faith:]

Correct.

[Rick Neaton:]

So that means, you're expecting about $4.6 million of new product revenue in the second half of this year. How much of that $4.6 million, the estimate will come from what you call strategic new products?

[Brian Faith:]

Well the majority of it would be strategic new products. I think by the end of this year, we're, for the most part going to be out of the Samsung display bridge that we sell to the tablets and we’ll have the ongoing connectivity, but the vast majority of that $4.6 million that you talked about will be strategic new products.

[Rick Neaton:]

So basically, if I modeled Q4 revenue at about $5.9 million plus or minus based on your $13 million to $13.5 million forecast, that would be a proper way to model Q4?

[Brian Faith:]

Yeah, that will be proper to model that.

[Rick Neaton:]

Okay –

[Brian Faith:]

And then –

[Rick Neaton:]

Thanks so much, Brian.

[Brian Faith:]

Yeah –

[Rick Neaton:]

It could be above $6 million, it could be $5 million, could be $5.5 million to $6.5 million, basically?

[Brian Faith:]

Yeah. And what I was also saying is gross margins in the mid to high 60s in that quarter.

[Rick Neaton:]

Right, okay. Thanks so much, Brian. Appreciate it.

[Brian Faith:]

Thank you. Thank you, Rick.

[Operator:]

We’ll now take our next question from Richard Shannon from Craig-Hallum. Please go ahead. Your line is open.

[Richard Shannon:]

Good morning, Brian and Sue. How are you?

[Brian Faith:]

Doing well. How are you, Richard?

[Sue Cheung:]

Fine.

[Richard Shannon:]

I'm fine. Thanks. First here, maybe a kind of a summary of a couple of things I've heard between your prepared remarks and the Q&A here. Brian, just want to make sure I caught all of the kind of offsets from your original guidance for the year in terms of revenues. I think I heard the kind of the embedded FPGA we contracted about $2 million, the consumer electronics OEM about $1.3 million and then I think I missed a couple of the other buckets there. Can you detail those for me again, please?

[Brian Faith:]

Yeah, so starting with the mature; the mature revenue was $2 million with the push out of the military for the mature product revenue. The CE was $0.3 million. The Multi-chip Module for QuickAI was $2 million, and then with the design is $1.3 million, I believe I said.

[Richard Shannon:]

Okay, all right. Perfect. And then, I think you made some comments regarding the mature products with the Navy contract of having some confidence that's going to kick in I think in the – in a little bit in the fourth quarter and have confidence of remaining throughout 2020. Historically, how good are those forecast have been and that gives you the confidence to stretch through entire next year?

[Brian Faith:]

So it’s two aspects of that. The one is, are we in the program period? And then the second one is, how many units o that program is the government going to authorize to be built? So from being in the program, that's a 100% confidence, because we've been in these programs for some time when the government's not going to change out FPGAs out of the military vehicle aircraft that's just going to stay there.As far as the unit volume goes, that's really what's changed in the timing in this year. But like I said, this time, we've actually gotten word directly from the US Navy – Navy Admiral that controls the pedestrians of this and he's outlined the exact quantity of the aircraft that he wants to build and how that flows through to us. So, I have a much, I think more confident view now that volumes for this year. And it kind of makes sense, because I think the government spending cycles tend to start in October 1st. And so that's sort of aligned with having more shipments in Q4 from the new funding that will come into them.And then as far as how it goes into next year, like I said it, we're not – the government's not going to change out an FPGA from the military aircraft or vehicle those are just going to stay in, because the quad costs of changing out far away the cost of the component. And so I'm sure that's going to be continuing into next year.

[Richard Shannon:]

Okay so –

[Brian Faith:]

We even asked from them it’s going to go for three years with these different programs. But we are not going to be giving any outlook for three years for now – right now.

[Richard Shannon:]

Okay, that's fair enough. Brian, maybe my last question here is on the embedded FPGA, I think you were referring to an upcoming and butchered the language you used, but talking about changing the scalability of it. So you want to do these customizations all the time. Is this going to help you get into a kind of new markets or new classes of customers or maybe you can help us understand how this is going to help you from more of a revenue and customer generating point of view?

[Brian Faith:]

Yeah, so if you look at where we are today with the FPGA, we target customers that are largely focusing on low-power endpoint markets, because that's where our FPGA has been and tailored to do for our own use. We're getting a lot of inbound requests for higher density, higher performance FPGAs and what that really involves is porting it to a different process mode or different foundry from what we have today. And those ports can be time-consuming and capital-intensive.So in order to make this a more scalable business, we're looking at ways and again, I can't be specific, because I don't want to articulate the strategy before we're ready to come out that with this. But it's going to be in a way that we can target some of these new process those are foundries as well as go-to market a little bit differently to get into these customers that are pulling us in that direction, but doing it in a more scalable way. So it's not like a one port for one customer each and every time, because that's we don't want to be in the services business. We want to do IP ports that have several customers behind that port. And I think this new way that we're going to go-to market we’ll address some of that.

[Richard Shannon:]

Okay, fair enough. We look forward to hearing more detail about that. Maybe one last question, Brian, and I'll jump out of line here. SensiML, sounds like you're getting a lot of customer attraction there. What's kind of your pain point for pushing the growth even faster? Is this your headcount or channel partners? Or maybe you can help us understand how you can extend an even improve the traction you've had today?

[Brian Faith:]

Yeah, so for me, I boil down to two things. So one of the big initiatives that we've had in the last quarter is to host a lot of these web seminars, and then face-to-face seminars put on by our distributors in Europe primarily. And that's generated something like 700 qualified leads of people, some of which have already bought the HDK SensiML bundle and some of which have not.So converting those qualified leads into people placing purchase orders, what we're trying to do there is, ease that friction by moving to a web-based store on the SensiML website so they can do that by themselves. And we just launched a new website, I think last week for SensiML that enables people to start doing that. So we're trying to make that conversion lower resource-intensive on us and easier on the customer. That's one big initiative.The second is the fact that we are and even from day one, we were very clear that SensiML will be able to run on other people's processor, not just our own. And we're starting to see the fruit of that labor. And we’ll be more public about who those new microcontrollers are. But that's going to open up the sales channel that we don't have as a company our scale, where these bigger companies are out pushing the same solution with SensiML. So once that really gets going, I think we're going to see a big uptick in closing these deals because we'll have another sales force effectively behind it.So those are the two primary things that's really - the third one I'll just throw in there. AI is still very new for people, a lot of people want to use it. They don't know how and so we've done some marketing campaigns now where we have these online tutorials with videos that people can do offline. So they're not dragging our data scientists off on a support issue and that should make it a more scalable business as well. So they can sort of do self help on how they can apply the power of the SensiML tool kit that in their own office.

[Richard Shannon:]

Okay, great. That's all for me.

[Brian Faith:]

Okay. Thanks, Richard.

[Operator:]

At this time it appears we have no further questions, I’d like to turn the conference back to you, Brian, for any additional or closing remarks.

[Brian Faith:]

Yes, thank you. So we’ll be participating in several investor and industry events this quarter. A few of the highlights include

[Operator:]

This concludes today’s call. Thank you for your participation. You may now disconnect.