QuickLogic Corporation
Q4 2007 Earnings Call Transcript

Published: 31 Jan 2008

[Operator:]

Welcome to the QuickLogic Corporation fourth quarter year 2007 earnings conference call. Today’s conference is being recorded and will be available for playback beginning one hour after the completion of the call. To access the replay, please dial 719-457-0820 and enter the pass code. At this time for opening remarks and introductions, I would like to turn the conference to Mr. E. Thomas Hart, Chairman, President and CEO for QuickLogic. Sir please go ahead.

[E. Thomas Hart:]

Good afternoon ladies and gentlemen. Thank you for joining us today. Carl will take you through our fourth quarter and fiscal year 2007 financial results and then I’ll share my perspective on our business. Finally, Carl will detail our guidance for the first quarter of 2008 then we’ll take questions.

[Carl M. Mills:]

Before I get started, I’d like to read a short Safe Harbor statement. During this call we will make statements that are forward-looking. These forward-looking statements involve risks and uncertainties including, but not limited to, exceeding expectations relating to revenue growth from our new products, statements pertaining to our ability to convert new design opportunities into customer activity, market acceptance of our customers’ products, the expect of our Customer Specific Standard Products or CSSPs on our expected results and our financial expectations for revenue, gross margin, profitability and cash. QuickLogic’s future results could differ materially from these statements. We refer you to the risk factors listed in our annual report on Form 10K, quarterly reports on Form 10Q and part of our press releases for a description of these and other risks that could cause actual results to differ materially from such forward-looking statements. For your information this conference call is open to all and is being webcast live. It can be accessed from the Investor Relations area of QuickLogic website located at www.QuickLogic.com/Investors. We are going to discuss our fourth quarter financial results and then touch briefly on our annual results. Overall for the fourth quarter of 2007 on a non-GAAP basis our revenue of $10.7 million increased 19% sequentially and was at the high end of our guidance. Our new product revenue of $3.5 million increased $1.9 million compared with Q3. This 117% sequential growth was driven by CSSP sales to Asia-Pacific for the portable navigation market. A customer purchasing CSSPs in this market space accounted for 21% of our total revenue in Q4. As we mentioned on earlier calls, we introduced the concept of CSSPs in the first quarter of 2007. CSSPs are complete solutions which we design and implement for target customers on our [inaudible] platforms. We believe our CSSP revenue in the second half of 2007, $2.9 million, is a strong indication that CSSPs are resonating with customers in our target markets. Our non-GAAP gross margin up 48.8% was significantly better than our guidance. It had a more flavorful mix of part sales than we expected and we endured more overhead than expected. In addition, the sale of previously reserved products improved our gross margin by 6.5% of revenue in the fourth quarter which was higher than expected. Our operating expenses, both R&D and SG&A were lower than guidance in Q4. Our cash of $20.9 million was flat sequentially and better than our guidance. Several items led to this improvement. First, our accounts receivable with 22 days of sales outstanding was lower than we expected. Second, our operating expenses were significantly lower than we expected. Third, cash outlays for inventory were lower than expected due to timing of inventory receipts in the quarter. And fourth, capital expenditures were lower than we expected in Q4. A few other comments on the quarter follow. New products as noted earlier contributed $3.5 million of revenue in the fourth quarter representing 33% of total revenue and increasing 117% sequentially. Our total fourth quarter revenue increased $3 million year-over-year a 39% increase. New products contributed $2.3 million of this growth driven by the sale of CSSPs to mobile device manufacturers. Let me take a moment to comment on operating expenses on a non-GAAP basis. Research and development expense of $2.4 million increased $200,000 sequentially and was favorable compared to our guidance. Expenses expected in the fourth quarter are taking place in the first quarter of 2008. SG&A expense of $2.9 million increased $280,000 sequentially and was favorable compared to our guidance. Competition expenses were lower than expected in the quarter. We continue to carefully manage our operating expenses of writing the customer design activity needed to increase our new product revenue. Other income expense contributed income of $90,000 in the first quarter primarily due to earnings on our invested funds. Our non-GAAP net loss was $1.1 million or $0.04 per share in the quarter compared to a net loss of $1 million or $0.04 per share in the 3rd quarter of 2007. Our Q4 non-GAAP net loss was $2 million favorable compared to our net loss of $3 million or $0.11 per share one year ago. Our gross profit was $1.8 million higher year-over-year. Our revenue increased 39%. We sold more reserved inventory than one year ago. We had lower charges for inventory reserves and we had higher [inaudible] overhead. Operating expenses were $330,000 lower than one year ago due primarily to lower G&A expenses. We had $220,000 of lower interest in other income net compared with 2006. Results for the fourth quarter of 2007 on a non-GAAP basis excludes stock-based compensation of $443,000 and $161,000 of a write-down [inaudible] assets. Now let’s summarize our fourth quarter GAAP results. Our fourth quarter GAAP net loss was $1.7 million of $0.06 per share compared with a net loss of $1.5 million or $0.05 per share in the third quarter of 2007 and a net loss of $3.3 million or $0.12 per share in the fourth quarter of 2006. On a GAAP basis our fourth quarter gross margin was 46.8% of revenue. R&D expense was $2.5 million and SG&A expense was $4.2 million. I’d like to spend just a moment now on an overview of 2007 and a quick discussion of our 2007 results. We entered 2007 with a focus on mobile device manufacturers and implemented a tiered customer strategy for the year. In the first quarter we introduced the concept of CSSPs which are complete solutions that we customize for top customers in our target markets. Throughout the year we [inaudible] our sales organization with a focus on the talent needed to sell complete solutions to top-tier customers in our target markets. Also during 2007 we changed our design and manufacturing approaches to enable low-cost, high-volume revenue. As part of this focus we significantly reduced the time to test and program our devices which also had the effect of enabling the sale of [inaudible] and reducing the need for higher capital expenditures. These changes in our sales organization, art development and operations enable us to serve high-volume, mobile device manufacturers with CSSPs. Our revenue increased sequentially each quarter of 2007 growing from $6.2 million in Q1 to $10.7 million in Q4. CSSPs account for most of this growth contributing $2.4 million of our Q4 revenue. For the full year on a non-GAAP basis revenue of $34.4 million compares to revenue of $34.9 million in 2006. While our new product revenue was only $6.3 million in 2007 we are pleased that nearly half of this revenue came from CSSPs in our target markets. I’d like to note the geographic breakdown of our 2007 new product revenue

[E. Thomas Hart:]

Well, what can I say? A good quarter if I do say so myself with total revenue up 19% over last quarter and up 39% compared to the same quarter last year. Yes, another growth quarter from an overall revenue perspective but the real story here is that new product revenue including Customer Specific Standard Products improved by almost 2.2 times over last quarter to almost 33% of total revenue. New product revenue was 19% of total revenue for the whole year. It’s also important to note that 73% of new product revenue in the quarter was shipped into Asia-Pac and Japan. This compares to 28% of revenue for the rest of our business. And now just to close out the picture on pASIC 1 and pASIC 2 they were only 5% of total revenue for the quarter and just less than 6% for the total year This is now the end of the story on p1 and p2 families. They were good for our customers and good for us. Quite frankly I’m tired of talking about the product transition and living it and I’m sure you’re tired of hearing about it. The real excitement here though at QuickLogic is coming from our future prospects which a future based squarely on this concept we call Customer Specific Standard Products, or CSSPs. Our CSSPs are aimed directly at the fastest growing segment of the semiconductor market, namely consumer electronics and more specifically at the portable battery-powered handheld products such as smart phones, portable media players, personal navigation devices and wide-band data cards. Some of you have asked just how big is this market? Well we believe the total available market, the TAM, exceeds several billion units a year. Yes, that’s a billion with a capital B. We believe our served available market, our SAM, in 2009 is easily over a billion units and even if the average selling price of our products were only $3 to $6 say, depending on the complexity of the solution, you can see that what we’re talking about here is a very substantial market. At this point I’m sure it’s clear to all that the consumer market is moving away from one of mass production towards one of demanding mass customization. Everyone wants it their way and while ordering pickles and tomatoes, hold the mayo is easy at your local burger joint providing unique smart phone feature sets for multiple markets and geographic regions represents a considerably larger and different challenge; namely the challenge of mass customization. It’s very clear in the semiconductor industry that fewer ASIC and ASSP design starts are occurring. So how do you get product customization if all the OEMs are using the same silica? Well software, controlling microprocessors can clearly be used to offer customers a measure of customization and it is used, regularly. The bind occurs when the desired customization requires silicon or hardware-based features that don’t exist in the original product design. Whoops; time for a redesign which requires time and engineering dollars neither of which, by the way, are in long supply with companies doing products for the consumer electronics marketplace. CSSPs give our customers the opportunity to design platforms not just products. We partner with them to easily spin off design variance, products if you will, to meet their customers’ unique feature sets and geographic requirements. This flexibility yields mass customization with rapid time to market, lower engineering costs and longer time in market. When you couple these benefits with the lower risk derived from using our proven system blocks and lower power for longer battery life we believe CSSPs are a clear winner. Now let me address an area of investor analyst concern that I’ve been asked about several times over the last few quarters. The semiconductor market has consistently demonstrated the ability to integrate more and more functionality under one dye. It’s almost a corollary to Moore’s law, namely more functionality at the same price point or the same functionality for fewer and fewer real dollars. Following this line of thinking, the question then is how can we build a growing, thriving business if our value proposition is constantly being absorbed into the embedded or application processor? Well, let’s dig into this a little bit. When a semiconductor supplier like Marvel is making decisions about what to include on their next application processor, the pressure is really on. The tendency would be to include it all but this drives up the costs. Many customers don’t want it all, and they sure don’t want to pay for it all. So what does Marvel include on the dye and what do they leave off? Well these decisions represent a major challenge and I urge you to ask your Broadcom, Intel, Freescale or Marvel application processor folks how they make these decisions. Not enough with the right functionality and the SAM for the product is too small. Too much functionality and they’re priced out of the market. The wrong functionality and they need to redesign their silicon or they miss the market completely. CSSPs, however, offer these companies the ability to expand their served available market with their existing products by being able to do just what the customer wants and needs using our companion device, no more and no less. Or as they say, have it your way. Now let me touch on the great activity we had at the Consumer Electronics Show in Las Vegas the second week of January. We had a meeting room on the show floor where we demonstrated actual customer solutions and met virtually non-stop all four days with customers, partners, analysts, investors and both the technical and business press. It was a great trade show and now we’re gearing up for Mobile World Congress, formerly called Three GSM in Barcelona the second week in February. We’ll have a booth and a meeting room there. These two trade shows represent the highest concentration of the people we need to meet with to share the CSSP story, name tier-one OEM and ODM customers, their customers, existing and potential partners and the press. Our revenue numbers and the product mix are really beginning to show what we’ve been sharing with you for quite a while now. We’re gaining significant traction with new products and CSSPs are winning in the marketplace. We appreciate your patience and are looking forward to a good growth year in 2008.

[Carl M. Mills:]

Now let’s turn to our non-GAAP guidance for the first quarter of 2008 and some comments on our business. As Tom mentioned, our CSSPs are resulting revenue with major customers in our target markets. These customers are embracing our value propositions. We expect our focus on these accounts to result in significant revenue as a result of the good design traction we are generating. The new sales talent we have attracted to QuickLogic is clearly having a positive impact on our success. We expect these new hires to generate increased new product revenue in our target markets in the second half of 2008. We have strong demand for the first quarter including high demand for end-of-life products and strong demand for certain packages of mature products. Our expectation is that total Q1 revenue will grow to $11.2 million plus or minus $200,000. In the first quarter we do expect a decrease in new product revenue which is mainly attributable to non-P&D customers. As a result, we are counting that new product revenue will be $2.4 million plus or minus $200,000. We expect a sequential improvement in gross margin. During Q4 we shifted relatively high-cost inventory to the P&D market and future shipments will be at lower cost. Based on the mix of products we expect to ship in the first quarter and prime cost reductions we are guiding that gross margin will be 57% plus or minus 2%. We expect a sequential increase in our R&D expenses of $600,000 to $800,000. As noted earlier we have worked with top-tier customers in our target markets to find future generations, ArcticLink solutions platforms. We are purchasing Associated Intellectual Property in the first quarter. We expect first quarter SG&A expenses to be up $400,000 to $600,000 sequentially due primarily to higher need for our customer facing ] position and seasonal expenses associated with our annual report and proxy. Interest income, interest expense and other net include adjust income and invested cash, foreign exchange gains and losses and interest expense on borrowings. Due to expected levels of interest income and higher interest expense associated with new debt we expect these accounts will contribute income of up to $50,000 in the first quarter. We expect our tax provision will not be significant in the first quarter. At the present time we expect that some of the demand for our end-of-life products and mature product special packages will be satisfied in the second quarter of 2008 rather than the first quarter of 2008 as we prioritize the production of new products and respond to customer feedback with the timing of our end-of-month shipment. We may use $4 million of cash flow or more in Q1 based on expected increases in accounts receivable and prime spending for wafers purchased in Q4. Let me take a moment to mention a few other points. Stock-based compensation is expected to be about $600,000 in the quarter and to be included in cost of revenue, R&D and SG&A expense. Our manufacturing strategy is to continue to reduce the cost of producing our products so that we can pursue higher volume sales opportunities. We believe that our new PolarPro architecture has reduced our cost-per-unit and that our ArcticLink solutions platform represents significant additional value to the market-leading customers in their platform design. We are also actively reducing our cost of sales by price negotiations and by decreasing the time and cost needed to tech and program our products. Our target financial model based on a goal of $25 million in quarterly revenue has gained as a percent of revenue to generate a gross profit of 60 to 62%, to have research and development expenses of 17 to 19% and to have SG&A expenses of 19 to 21%. This would result in income from operations of 20 to 26% of revenue. We believe that lower costs associated with our PolarPro architecture and ArticLink solutions platform and the development of new products will be significant factors in achieving the gross margin objectives in this non-GAAP model.

[E. Thomas Hart:]

This quarter I’d like to thank all of our employees and especially our operations team who responded to the challenge of supplying a tier-one customer with five times the unit volume that we supplied in Q3. Actually we shipped over twice as many units this past quarter as we’ve shipped in any quarter in the last three years. Great job team! On February 11th, we’ll be presenting at Security Research Associates Fourth Annual Winter Technology Conference in San Francisco. I hope you can join us. Our annual meeting of stockholders is scheduled for 10

[Operator:]

(Operator Instructions) We’ll take our first question today from Edwin Mok, Needham & Company.

[Edwin Mok:]

I’ve got a question regarding the quarter, I saw that your mature product actually declined sequentially a little bit. Can you maybe break it down and tell me which product sell less in that quarter?

[Carl M. Mills:]

Sequentially, Edwin, we had a slight decrease in our pASIC 3 business actually which was not fully offset by gross in our [inaudible] business.

[Edwin Mok:]

You mentioned that first quarter you expect that group to be a little bit stronger, can you break it down? Is it a rebound case through your other product expect to have higher sales?

[Carl M. Mills:]

Yeah, we expect slightly higher growth in both mature and end-of-life products.

[Edwin Mok:]

In the end-of-life products you guys still showed some growth last quarter. How do I visualize that going forward? Do you guys have some kind of guidance of when you expect those to basically complete fade away?

[Carl M. Mills:]

We think they’ll continue to be an important part of our revenue through the first half, but not be significant in Q3 and thereafter.

[Edwin Mok:]

On your new product, did you recognize any revenue from ArcticLinks? And, how do you guys visualize that new product ranking throughout 08?

[Carl M. Mills:]

We have a smart phone PDA company that’s using ArticLink in a platform from which they want to spin multiple products and that was part of our revenue in Q3 and Q4. So we think that that’s a great example of somebody using a platform design to enable multiple products. We look forward to more designs like that hitting production.

[Edwin Mok:]

One thing that you guys mentioned, this GPS alternative which sounds like it was a great opportunity for you guys. But it was not reported as a consumer product in your end markets and I was just curious where it was reported? And, are you guys working with that specific company on other platforms as well?

[Carl M. Mills:]

Well, just to let you know we’re going to re-spin our market segments and we’ll have new market segment data in our 10K and you’ll see we’ll break out the consumer piece then, but it’s showing up in instrumentation and test today.

[Edwin Mok:]

Regarding the customer platform, are you guys working with them?

[Carl M. Mills:]

Yes, we continue to get new design opportunities at that customer.

[Edwin Mok:]

One final question and I’ll leave the questions for others but, in terms of new design, how many new designs are you guys working on right now? And, I imagine that part has increased from the third to fourth quarter and how much was that increase from the third to the fourth quarter?

[E. Thomas Hart:]

We really haven’t shared that kind of metric with the public in the past, Edwin and the reason, quite frankly, is because there’s such a broad variance in terms of what working with means, where you are in the sales process, or where you are in the design process. We haven’t really felt that that’s been meaningful in the past. We track that pipeline rigorously internally. By the way, we’ve recently brought up www.SalesForce.com and have every opportunity that we’re working on in the field in that system and it’s reviewed with our sales guys every Monday. But we don’t share that with the outside world.

[Edwin Mok:]

Maybe a different way to ask it then, besides the GPS product and also the smart phone product that you guys talked about before, any new product you guys can share with us? That would be great.

[E. Thomas Hart:]

I don’t think we’ve talked about the WiFi storage product, specifically a product that uses WiFi for productivity to be able to give you basically a hard disk drive. There’s already a product that was announced quite a while ago in the market you may be aware of called [DAVE ICGate]. We’re not in that first product, but we are working with guys who are building those products and I would expect in the next several quarters you’ll see products introduced in the market with us in that solution or to implement solutions in that product.

[Operator:]

(Operator Instructions) Next, we’ll hear from Paul McWilliams, Inning Research.

[Paul McWilliams:]

You made a comment in there, if I copied it down right, that 2008 would be a good growth year. Did I understand that correctly?

[E. Thomas Hart:]

Yes, you did.

[Paul McWilliams:]

Oh good. So we’re envisioning growth year-over-year for 2008?

[E. Thomas Hart:]

God, I swore I’d never do this again. You know I got burned on this pretty badly in 2006.

[Paul McWilliams:]

I remember, I was there.

[E. Thomas Hart:]

Yeah, so was I. Our plans are that 2008 will be our revenue will increase over 2007, yes.

[Paul McWilliams:]

Very good, very good. I see the cards stacked appropriately. You mentioned in your press release that your growth in CSSP was due to what I took as a GPS design. Did I take that correctly?

[E. Thomas Hart:]

No, not really. It’s a platform, so there’s multiple products. It is with one customer.

[Paul McWilliams:]

Would that be a tier-one customer?

[E. Thomas Hart:]

It is. In fact, we commented that it was a tier-one.

[Paul McWilliams:]

Okay. Do you see the design that they’re using in that platform proliferating throughout the rest of their product line?

[E. Thomas Hart:]

Well, it already has and actually now it’s moving onto other products. The challenge here is that we’re under pretty strict NDA with these guys and so they don’t like their suppliers, just like Apple as an example, they don’t like their suppliers talking about what they’re doing with them and this guy doesn’t either. So, it’s difficult for us to talk about specific plans with this customer. I can just tell you that this is not one product and it’s not one section of their product offering, it’s across a broad range of products and we’re seeing more and more of their products embrace us in different applications.

[Paul McWilliams:]

The PDA design that you have, did that drive any revenue yet? Or when do you see that kicking in?

[E. Thomas Hart:]

It has driven some revenue. We see the real revenue though coming in late Q1, Q2 of this year.

[Paul McWilliams:]

Okay. The GPS would probably ramp towards late Q1 maybe?

[E. Thomas Hart:]

Jesus. It ramped like hell in Q4. How big a ramp do you want?

[Paul McWilliams:]

I want more.

[E. Thomas Hart:]

Well so do I.

[Paul McWilliams:]

Let me try to word this question to where it’s a good question to answer. How many CSSP platform designs did you have active in Q4?

[E. Thomas Hart:]

I don’t know. I can tell you that the bulk of the revenue came out of a relatively small number. We’ve got a hell of a lot more in process, but the bulk of the revenue we’ve seen to date have come out of a relatively small number of CSSPs.

[Paul McWilliams:]

Do you have a number that you could envision of the number of platforms that will be active in production in either Q1 or Q2 or some point in time in the future?

[E. Thomas Hart:]

I’d rather not answer that off the top of my head. We have a model that we’ve looked at to forecast to get our arms around revenue or to get an outlook on what revenue potential could be from these opportunities. And so, yeah we know how many platforms and products we expect out of the tier-one guys, the tier-two guys and the various market segments of PPS or a PND, portable media players, smart phones. But we haven’t shared that with the outside world. But if you look at the TAM and the SAM for those segments, the smart phone/PDA is huge from a unit volume perspective and from a product proliferation perspective compared with all of the other segments. So we’ve got a lot of focus on that as you’d expect.

[Paul McWilliams:]

Oh, I bet. One last one, and I do appreciate you guys reiterating your target operating model and that’s at $25 million a quarter, I trust. When do you think you might hit that?

[E. Thomas Hart:]

Can’t do that. Can’t do that. But, We’re betting on the fact that it’s going to be in my lifetime.

[Operator:]

(Operator Instructions) We’ll now take a follow-up question from Edwin Mok, Needham & Company. Edwin Mok – Needham & Company You mentioned that there was a part of your revenue for last quarter that comes from previously written down product. How much does that help your gross margin for this fourth quarter?

[Carl M. Mills:]

6.5% of revenue. Edwin Mok – Needham & Company 6.5%. And, you expect to see some of that in the first quarter as well?

[Carl M. Mills:]

It won’t be as high in Q1. It’ll be probably more to our historic levels. There was a big pop that went out the door in Q4. Edwin Mok – Needham & Company So that 57% gross margin guidance has already factored in although it’s a much smaller contribution there, right? Is that correct?

[Carl M. Mills:]

Correct. Absolutely right. Edwin Mok – Needham & Company Another housekeeping question, you mentioned that R&D expense basically rose less than expected, but you expect R&D expense to increase $600,000 to $800,000. Is that the same IP investment that you guys were planning that you guys basically pushed out for fourth quarter last quarter?

[E. Thomas Hart:]

Not exactly, but it’s close.

[Carl M. Mills:]

What we came up with in the quarter was a much more cost-effective design which didn’t take the exact same set of IP, but we’ve pulled the trigger on that IP this quarter so that those expenses will go up this quarter. Edwin Mok – Needham & Company So this quarter at least you guys expect that expense to come in?

[E. Thomas Hart:]

Correct. Edwin Mok – Needham & Company Finally, Tom, you mentioned pASIC 1 and 2 is only 5% of your – I think you said 5% of your revenue. I just want to verify that and also do you guys expect to see any revenue in the first half of this year?

[E. Thomas Hart:]

Edwin, I said that was end of story. I’m not going to talk about pASIC, Edwin. Edwin Mok – Needham & Company That’s a good way to answer that.

[Operator:]

I see no further questions at this time, gentlemen. I’ll turn the conference back over to you for any additional or closing comments.

[E. Thomas Hart:]

Okay. Well thank you for your interest in QuickLogic. We believe CSSPs are our future and we’re working very hard to make us be a significant business of lasting value. Thanks for your patience and sticking with us. Take care.

[Operator:]

That does conclude today’s QuickLogic fourth quarter year 2007 earnings release conference. I thank you all for joining us.