QuickLogic Corporation
Q4 2019 Earnings Call Transcript

Published: 13 Feb 2020

[Operator:]

Ladies and gentlemen, good afternoon. At this time, I'd like to welcome everyone to QuickLogic Corporation's Fourth Quarter and Fiscal Year 2019 Earnings Results Conference Call. As a reminder, today's call is being recorded for replay purposes through February 19, 2020. 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, operator 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.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 its customers' products; risks associated with potential disruption caused by the Coronavirus; schedule changes and projected production start dates that could impact the timing of shipments; the company’s future evaluation systems; broadening the number of our ecosystem partners; and 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, the 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, 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 our IR web page 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 as 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 made on today’s call will be posted at QuickLogic’s IR web page shortly after the conclusion of today’s earnings call.I would now like to turn the call over to Brian.

[Brian Faith:]

Thank you, Jim. Good afternoon everyone and thank you all for joining our Fourth quarter and Fiscal 2019 financial results conference call.Many positive developments have taken place since our last earnings call that set the stage for 2020 and will better define our long-term success. We announced design wins with large multi-national companies, added more open source software initiatives to increase our scale and reach, and expanded the ecosystem of partners for our SensiML™ AI software platform business. We expect all of these will contribute to larger revenue opportunities later this year and into the future.In addition, we took significant steps to streamline our organizational footprint through a restructuring. And while we remain excited about our prospects in 2020, admittedly, looking back at 2019, we were disappointed with our revenue performance. Many of these challenges we talked about in prior earnings calls were due to factors beyond our control. While some issues will linger into the first quarter this year, I am as positive as ever about the fundamentals in our business and believe we will achieve profitability in 2020.I want to first cover a few items that have happened in the last couple of months and then move into a more detailed discussion on the growth drivers for 2020 and beyond. Later, Sue will review our financial results and provide our near-term outlook.In December, we announced the passing of Board Chairman Tom Hart. Tom had a long history with QuickLogic, serving as the Company’s CEO for 15 years and a board member for 25 years. His insight into the company and semiconductor industry were valuable to me and his presence is missed by all of us at QuickLogic. Current Board member Dr. Michael Farese was subsequently named as the Chairman of the Board of Directors. Mike has been immensely helpful to me and the company as we refine our long-term strategy.Next, two weeks ago we announced a significant restructuring of our business, which is scheduled to deliver about $4 million in annualized savings once fully implemented in the middle of our second quarter. There will also be a positive impact to our COGS, which will help the gross profit margin line.The decision to make these changes came as a result of our year-end strategic planning efforts. During the process we reviewed our current product development plans and market position for the EOS™ S3 SoC and eFPGA technologies. Through the review it became clear that the vast majority of the software development to support our announced EOS SoC design wins and near term SoC growth strategy was completed. We believe the future expansion into new markets and applications for our SoC will be driven from engagements with our numerous voice software partners and recently announced relationship with Flextronics. In addition, our eFPGA products will leverage the open source software initiative being developed in conjunction with a mega-cap cloud service provider.The headcount reductions were across all business functions. With the many partnerships we have put in place, we believe we now have a more scalable business. In fact, we will be announcing a new authorized design partner, OptimusLogic, for the development of customer embedded system hardware and software in the coming days. This led to the conclusion that we don’t need to take on engineering for everybody and can operate more efficiently with fewer personnel. As we continue to bring large multi-national partners into our ecosystem, we are working with them on new product development and will use the platform that we have already developed to expand our reach.One result of the restructuring and refined go-to-market strategy with partners, is that we were able to streamline and reset our sales organization including eliminating the role of vice president of sales. We felt the structure of the organization needed to reflect a deeper collaboration with ecosystem partners to drive our long-term growth.The bottom line result of these actions is that our leaner organization puts us on a trajectory to achieve our profitability goals, which is by far our highest priority this year.Sue will provide additional details on the restructuring later in the call.With these items as a backdrop, I want to shift the discussion to review the growth drivers we see for 2020 to help everyone understand our plan for getting to profitability this year.The key drivers that we expect to lead our revenue growth in 2020 include the following

[Dr. Sue Cheung:]

Thank you, Brian. Good afternoon and thanks to everyone for joining us.For the fourth quarter of 2019, revenue increased sequentially to $2.9 million, within the guidance range we provided. Our Q4 revenue compares with revenue of $3.2 million in the fourth quarter of 2018.Within our Q4 revenue, sales of new products were $720 thousand. This compares with $1.3 million in the fourth quarter of 2018. The lower new product revenue from the prior year was mainly due to the ongoing decline in display bridge sales and approximately $500 thousand in revenue from a large, initial eFPGA license.Our mature product revenue was $2.2 million, an increase compared with $1.9 million in Q4 last year.In the fourth quarter of 2019, we had three customers who each accounted for 10% or greater of our sales.Non-GAAP gross margin in Q4 was 65.6%, compared with 52.6% in the same quarter last year. The increase was mostly due to the higher mix of mature product revenue and additional SaaS business.Non-GAAP operating expenses for Q4 were approximately $4.2 million, down slightly from $4.3 million in the fourth quarter of last year.Within our Q4 Operating Expenses, R&D was $2.2 million, and SG&A was $1.9 million. This compares with R&D and SG&A of $2.3 million and $2.0 million, respectively, in Q4 last year.The net total for other income, expense, and taxes in Q4 was a charge of $135 thousand, compared with a charge of $13 thousand in the fourth quarter last year. The increase was mainly due to interest expense and adjustments to tax attributes associated with SensiML at the end of 2019.Non-GAAP net loss in Q4 was $2.4 million, or $0.29 per share. This compares with a net loss of $2.6 million, or $0.38 per share in the fourth quarter of last year. The per share calculation for both periods reflects the one-for-fourteen reverse split that went into effect December 24, 2019. Total share count used for calculation purposes in Q4 2019 was approximately 8.3 million, compared with 6.8 million in the same quarter a year ago. The stock offering we completed in June 2019 accounts for most of the difference.Finally, the total cash at the end of Q4 was $21.5 million, compared with $24.8 million at the end of last quarter. Our cash balance also includes the full draw from our $15 million line of credit.Before moving to our guidance, I would like to expand on the recently announced restructuring plan. We expect the approximately 30% headcount reduction, and the closing of some facilities, to generate about $4 million in annualized savings when compared with fiscal 2019. The restructuring should be completed in the May timeframe. Within this $4 million, approximately $3.75 million will be in the operating expense line with the remainder in cost of goods sold.We expect to incur approximately $600 thousand of restructuring expenses, of which about $500 thousand will be cash expenditures with the majority coming in the first quarter of fiscal 2020.When factoring in these changes, we believe non-GAAP operating expenses will be at a quarterly run rate of approximately $3.5 million starting in the second quarter of 2020.Now turning to the full-year fiscal 2019 results. Total revenue was $10.3 million, down from $12.6 million in fiscal 2018. New product revenue was $3.1 million, compared with $5.7 million in the prior year. Lower display bridge revenue was the largest component of the decline. Mature product revenue was $7.2 million, compared with $6.9 million in fiscal 2018.For the year, we had two customers that each accounted for greater than 10% of our total revenue.Gross margin for 2019 was 58.0%, up from 51.2% in 2018. The higher gross margin in 2019 was primarily driven by revenue generated from sensor processing, SensiML AI SaaS, eFPGA IP licenses and mature products.Even with the acquisition of SensiML at the beginning of 2019, our operating expenses for the year were $18.2 million, which were flat with the prior year. Our net loss for 2019 was $12.3 million, or $1.60 per share, compared with $11.9 million or $1.87 per share for 2018. The share count used to calculate EPS was 7.7 million for 2019 and 6.4 million for 2018.Now moving to our forecast for the first quarter of 2020, which will end on March 29th

[Brian Faith:]

Thank you, Sue.With 2019 behind us, our focus is squarely on the future. We know revenue growth will be the key to delivering on our profitability goals. 2019 was a year when we made great strides in building the foundation for improved financial performance. I am confident 2020 will be the year we begin to see the benefits from the heavy lifting we did last year as we execute on our plans for creating a sustainably profitable business.Before opening the call for Q&A, I want to let everyone know we are scheduled to participate in the ROTH Conference in March in Newport Beach. We look forward to seeing some of you at that event.That completes our prepared remarks. Operator, I would now like to open the call for questions.

[Operator:]

Thank you. [Operator Instructions] We will now take our first question from Sujeeva. Your line is open.

[Sujeeva Desilva:]

So on the new product -- well, let's start with the mature products first. What's the run rate you think about for the matured products as they recover here from your 1Q guidance of $1.7 million?

[Dr. Sue Cheung:]

So Suji, as of model it's 1.7 million plus or minus 10% each quarter.

[Sujeeva Desilva:]

That's a good run rate. Okay. And then, if that's the case, then your kind of teens guidance, high teens guidance would indicate that new products would tripled roughly year-over-year at that rate. So, just talk about the three areas and which one do you think will help it grow from 700k per quarter seeing now across eFPGA, SensiML and then core EOS S3 opportunity?

[Brian Faith:]

Yeah. So, the biggest growth area is going to be from the EOC S3 because that is a higher ASP, we have been designing that in for some time. And again, this outlook for 2020, we've taken a more conservative approach and we're looking primarily at multinational OEMs. So one from Kyocera, from the streaming TV provider -- from what we're getting out of the Flex and Infineon deals that they've been pushing the modules and systems to the market, so we're really benefiting from their channel. That's the primary driver for new product. Secondarily, we do see a lot of opportunity coming to fruition with SensiML now starting with their partners, so that will be the second area. And then the third area will be the eFPGA. We didn’t give a lot of airtime to those just because the script was long today, but there’s opportunities that we talked about last time continue to move forward. I think one of them is going to take out in March, on one of their test chips. So we're thinking that those will also have a material contribution to revenue in this year from new products.

[Sujeeva Desilva:]

Okay. And then, can you specifically size the Kyocera opportunity best you can for us to understand the TAM and the contribution opportunity in 2020?

[Brian Faith:]

From a TAM point of view, I think they probably be somewhere between 10 million and 20 million phones per year. We're focusing on the domestic market with them. If we are successful in doubling the number of phones that we’re in with them, that would put us somewhere between 6 and 8 tons this year. Typical phones for them are few hundred thousand units up to 1 million units each. So, I think we're modeling Kyocera for us this year somewhere between -- around $2 million worth of business, depending on when phones are launched throughout the year, could be higher.

[Sujeeva Desilva:]

Understood. 2 million?

[Brian Faith:]

Right.

[Sujeeva Desilva:]

Okay. Great. And then last question, the gross margin very high here, nice mix, can you talk about how sustainable this 64 level your guide is and what the puts and takes might be there? Thanks.

[Dr. Sue Cheung:]

So, we think we estimate at the mid 60% for 2020. So, I want to model at that range. So, 64 is right on the mid-point.

[Sujeeva Desilva:]

Okay. Alright guys. Thanks.

[Operator:]

We will now take our question from Richard Shannon, Craig-Hallum.

[Richard Shannon:]

Brian and Sue, thanks for taking my question as well. Maybe I’ll follow up on the topic of -- kind of looking at the view in 2020 here, just following on Suji's question. I think you talked about EOS being the kind of biggest driver for the year. Obviously, Kyocera would fit in that well. Maybe if you could help us understand the contribution you’re expecting from hearables and how much did the kind consumer view from China and the buyer stuff impact that outlook? And how would you compare that versus what you thought about two or three quarters ago, when we started hearing about the Amazon compliance testing dynamics?how would you compare that versus what you thought about maybe

[Brian Faith:]

Lot of questions in one question. So if I forget to answer one of them, just hit me on it. So in general, so for the hearables. Actually let me step back. So for the voice recognition, that’s the dominant use case driving a lot of these outside of the [indiscernible] this year. And I think that's probably on the order of few million dollars of revenue that we think would be voice enabled.Previously, to your question, we do think the hearables is a component of that and a lot of that were Chinese OEM hearables. That was probably just in China alone was going to be more than $5 million to $6 million this year in revenue. As we said on this call, we've tempered that view back because of the uncertainty created by the coronavirus. I mean, there's still customers of ours that are not going back to the office for work yet. And so there's going to be some impact, we just haven't sized that yet.That being said, we do see some of the other hearables for export out of China into U.S. and other markets are moving forward. And we're expecting that would be a couple of million dollars of revenue contribution to the new products this year. I know you mentioned to me with respect to Amazon. So our solution now is certified and qualified to match the specs for Amazon. We shared in our CES suite. One of the headsets from customer of ours called 1MORE. I clearly showed it connecting to my phone and accessing Alexa. And our solution has passed all the requirements that AVS dictates.That product is still not yet on the ODM page for Amazon. I think this is actually one of the challenges with the Coronavirus is that, 1MORE is located in China, that's pushed out some other development for that. So we're still fully expecting that will land on that page and that will drive revenue for us. Just from a solution point of view that we put into the market, we are now certified and qualified to match the specs of Amazon.

[Richard Shannon:]

That’s helpful. Thanks for that feedback. Maybe a question on SensiML. You talked about ending year with 44 customers if I remember currently. Mostly still on the [indiscernible] platform. Maybe if you can kind of give us a sense of what you're expecting from the certain terms of the customer funnel, you think you can double or triple or even more of that customer base? And then I guess more importantly, how do you see that converting some of these existing and new customers into the full SaaS platform?

[Brian Faith:]

Yes, so I’m going to give you a near-term answer and then an answer that I think will be reflective of what you’ll see later in the year. So in the near-term, we're putting a lot more emphasis on our current funnel, assigning a little bit of our data sciences to these customers, because we're seeing some of them are getting lost in how to collect data correctly, which seems to be a common problem in the AI space right now. We are seeing, when we do that, we have a higher hit rate. In fact, we just got a sign [indiscernible] agreement earlier this week from a customer, it’s really big one, in fact, in India doing the wearable, and they needed to be gesture recognition for the wearable. So when we get our guys involved a little bit, we see it come smoother. We're going to keep doing that in the near-term.That helps close things to fruition in the forecast in the near-term. What we want to do is build out a more scalable model from a SaaS business point-of-view. So we're actually going to be in the process of bringing in some web specialists to do work around SaaS to make sure that we're getting better hit rates coming through the region, from the web, and hopefully some of that results coming in later in the year.The other thing I mentioned is that, it's very different when we can get on other people's platforms, the other microcontrollers and have their sales force selling. So part of our thesis and plan for this year's revenue growth in SensiML is to make sure that these partners are trained very well in the solution, like St Micro and Nordic, that’s getting this word after their sales force, and leveraging them to be selling it. So that we’re not having to do a lot ourself. I think all those efforts are going to result in pretty significant revenue growth for that line this year.

[Richard Shannon:]

Okay. That's helpful. So Brian, maybe one fundamental question and I'll jump over to Sue for quick financial one. So, this mega cap company, you called service provider company you talked about for quarter and talked about at CES as well. I think you mentioned in your prepared remarks that you moved that over an open-source development platform which has helped you to be able to send some internal resources and cut cost here. I guess I want to make sure that I understand kind of the full strategic nature of this move. And ultimately, what do you expect from this customer, this year, especially in context with all the other customers and dynamics you talked about before on the call?

[Brian Faith:]

So, let me start with the strategic value. Firstly, I think in IoT space, it’s a very fragmented market, and not everybody is a developer in that market. It's hardware savvy to the extent that they can actually go make hardware changes to things like FPGAs. They want to start with a very easy to use development kit and design primarily in software. And what we're doing in the open-source tooling side, with the help of this mega-cap company is going to be to put open-source tooling in place that is more – its what these engineers are more accustomed to, this new generation of engineers. The result is that we should see a significant increase, a couple of order a magnitude increase in the people that can design in our product, they couldn't have done that otherwise. And so, we feel as a TAM expansion, the benefit of working with a company like this mega-cap company is that, they can help to fund the development of all. So that's happening. And then the last thing I would say is that, at some point in the near future, they're going to be putting us out through their channels. And I wouldn’t say distributors because they’re not a semiconductor company but they're going to be getting these web kits out into channels, in fact, they’ve committed to take 2,000 of these systems and put them on in the hands of customers. And so, we're planning on that increasing our sales funnel by virtue of their muscle and their reach. Hopefully that answers your question.

[Richard Shannon:]

Yes. That was helpful. Thanks Brian. Last question, Sue, maybe just the detail of the breakeven model looks like. You’ve given us some numbers of OpEx after the restructuring is completed. Just want to get your -- just kind of put the math together here, just to make sure I understand what breakeven point looks.

[Dr. Sue Cheung:]

So, our breakeven now at the revenue level up about 6 million per quarter, with the gross margin at above 60 level or mid-60 level. And with OpEx at mid 3 million. So, we said I think on call today, it's 3.5 million at that OpEx. So, it should be at breakeven. And, we can see that in our model. It's a revenue achievable.

[Operator:]

[Operator Instructions]. We will take our next question from Rick Neaton from Rivershore Investment Research. The line is open now. Please go ahead.

[Rick Neaton:]

Thank you. Hello, Brian and Sue. In Q4 did you burn any cash paying back for fractional shared and the reverse split?

[Dr. Sue Cheung:]

Rick, yes, we did. But it was like so minimal amount, not even arrived to mature level, I can tell you it's about 2,000 or 3000.

[Rick Neaton:]

Okay. In the restructuring that you announced at the end of last month. Does it include, already the cuts you announced to the QuickAI program back in August?

[Brian Faith:]

I don't remember what cuts we had at QuickAI program back in August.

[Rick Neaton:]

You said, you were going to [mass ball] the program? The module.

[Brian Faith:]

That was a module that we were going to do, that was already factored in earlier. So everything that we just talked about in the last month and the reductions was in addition to what we had taken back in the middle of last year with QuickAI module.

[Rick Neaton:]

In Q4, what percentage of the new product revenue was SaaS?

[Dr. Sue Cheung:]

I will say close to 10%. Yes. Close to.

[Rick Neaton:]

Do you know if the Board is going to be appoint a replacements for Tom Hart?

[Brian Faith:]

We don't currently have a plan to do that. As I said on the prepared remarks. Mike Farese was elected to be Chairman of the Board. And I think we were appropriately sized and with the right experience levels for the Board to operate as company that we need to have.

[Rick Neaton:]

Okay. I want to ask you some questions about the general outlook -- revenue outlook you gave for 2020, where you the targeted revenue in the mid to high-teens. In that outlook, are you assuming any revenue from Flextronics or Infineon for actual sales of S3s?

[Brian Faith:]

Yes, we are.

[Rick Neaton:]

Are you assuming any revenue from the mega-cap cloud service provider?

[Brian Faith:]

Yes, not a huge amount. But yes, we are.

[Rick Neaton:]

So you will get some revenue from the development kits.

[Brian Faith:]

Not for sure, but I'm counting on more than that for the year.

[Rick Neaton:]

Does the upper end of your revenue target for 2020 assume the revenue from the Chinese ODMs and OEMs that you said you’re conservatively not counting on?

[Brian Faith:]

The upper end of that range, that has been a little bit, but not nearly as much as what we had forecasted last time when we spoke.

[Rick Neaton:]

Okay. What percentage of new product revenue in your 2020 target are you assuming to come from SensiML?

[Brian Faith:]

If we get them to be at the 10%. After this year, I think that would be a good target for that.

[Rick Neaton:]

When you talk about the product from the streaming service customer. Is that the voice remote control product that you talked about in the past?

[Brian Faith:]

Yes, it is. It is the remote controller voice enabled. That's correct.

[Rick Neaton:]

And in your outlook for 2020, in the general range that you set as target. Are you assuming any license revenue from your eFPGA initiative?

[Brian Faith:]

Not for the year. Yes we are. On the same order of magnitude as SensiML.

[Rick Neaton:]

Okay.

[Brian Faith:]

[Indiscernible].

[Rick Neaton:]

Is that coronavirus having an effects on your relationship with [indiscernible] or however you would properly pronounce is semiconductor effort?

[Brian Faith:]

It doesn't impact the relationship with them. We're certainly, we're in contact with folks. It does reduce any of our face to face time that we spend with them. And I think they have had extended time off and the fact I think the Hangzhou province in fact was even more strict about when people should be going back to the office to work, which is where Cisco and Alibaba are located. So, I'm sure from the schedule point of view it’s impacting that, but as far as the relationship goes, no, I don't think so at all.

[Rick Neaton:]

Okay. Hey, thanks a lot Brian and Sue. I appreciate it.

[Brian Faith:]

Operator, are there any more questions?

[Operator:]

It appears there’s no further questions at this time. Mr. Brian, I'd like to turn the conference back to you for any additional or closing remarks. Thank you.

[Brian Faith:]

So, thank you for you participation in today's call and continued support. We look forward to speaking with you again when we report our first fiscal quarter results in May. Thank you and good bye.

[Operator:]

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