QuickLogic Corporation
Q3 2013 Earnings Call Transcript

Published: 31 Oct 2013

[Operator:]

Ladies and gentlemen, good afternoon. At this time, I’d like to welcome everyone to the QuickLogic Corporation’s Third Quarter Earnings Results Conference Call. During the presentation, all participants will be in a listen-only mode. A question-and-answer session will follow the company’s formal remarks. (Operator Instructions) Today’s conference call is being recorded. With us today from the company are Andy Pease, the President and Chief Executive Officer; Ralph Marimon, Chief Financial Officer; and Brian Faith, Vice President of Worldwide Sales and Marketing. At this time, I would like to turn the call over to Ralph Marimon, Chief Financial Officer. Please go ahead sir.

[Ralph Marimon:]

Thank you and good afternoon. Before we get started, let me take a moment to read our 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 stated expectations relating to revenue from our new and mature products, statements pertaining to our design activity and our ability to convert new design opportunities into production shipments, market acceptance of our customers’ products, our expected results and our financial expectations for revenue, gross margin, operating expenses, profitability and cash. QuickLogic’s future results could differ materially from the results described in these forward-looking statements. We refer you to the risk factors listed in our Annual Report on Form 10-K, quarterly reports on Form 10-Q, and prior press releases for a description of these and other risk factors. QuickLogic assumes no obligation to update any such forward-looking statements. This conference call is open to all and is being webcast live. For the third quarter of 2013, total revenue was $9.1 million, which was above the high end of our guidance range. New product revenue totaled $7.1 million. The increased revenue was primarily due to production shipments of our ArcticLink III VX platform to Samsung. Approximately, 1.5 million of new product shipments that we originally scheduled to ship in Q4 were shipped at the very end of Q3. This earlier than scheduled shipment will affect our Q4 new product revenue, which we are now forecasting to be above $5.7 million. Mature product revenue in the third quarter totaled $1.9 million, which was slightly above the Q2 level and at the midpoint of our guidance range. Samsung accounted for 68% of total revenue during the third quarter as compared to 46% of total revenue during the second quarter. New product revenue generated by other customers increased by more than 30% during the quarter. Our non-GAAP gross profit margin for Q3 was 34% and was below our guidance. The decrease in gross margin is primarily due to the mix of customers and products shipped. We are forecasting higher gross margin in Q4 and over the long-term, we continue to expect to realize non-GAAP gross margin of approximately 50% as our strategic initiatives build traction. Non-GAAP operating expenses for Q3 totaled $5 million, which was at the high end of our guidance. On a non-GAAP basis, the total for other income, expenses and taxes was a charge of $64,000. This resulted in a non-GAAP loss of $2 million, or $0.04 per share. We ended the quarter with approximately $14.9 million in cash. Cash usage during the quarter reflects the operating loss, higher working capital requirements specifically in the timing of payments and collections and the purchase of an asset, which was partially offset by $1 million in borrowing from our Silicon Valley Bank line of credit. Our Q3 GAAP net loss was $2.3 million, or $0.05 per share. Our GAAP results include stock-based compensation and restructuring charges of approximately $300,000. Please see today’s press release for a detailed reconciliation of our GAAP to non-GAAP results. Now, I will it over to Andy who will update you on the status of our strategic efforts. Following this, I will rejoin the call to present our Q4 guidance.

[Andy Pease:]

Thank you, Ralph. Moving into this year, I commented that we expected to see significant new product revenue growth in 2013. I am very pleased that we are on track to roughly triple new product revenue this year. While it is too early to provide formal Q1 guidance, our current customer forecast suggests we will see a sequential increase in new product revenue for the seasonally soft first quarter of 2014. This increase will be largely driven by new designs moving into production. These include, tablet design for our ArcticLink III, CSSP, display bridge platform will be used in conjunction with processors from Broadcom, MediaTek, Marvell, Qualcomm and Rockchip. During Q3 we have received QVL approval for our ArcticLink III display bridge platform from Broadcom for use with its BCM21653 application processor. This helped us continue our design win momentum with China-based independent design houses and drove one of two new designs at Water World. In addition we have received initial production orders from a leading PC manufacturer for display bridges used in two tablets that are scheduled for release this quarter. As discussed on our July conference call, we continue to work on an application with a Tier 1 consumer electronics company to support a RGB to MIPI bridge in a new digital still camera design. This design continues to progress and I expect it will move into production in 2014. We are excited about opportunities for CSSPs in smart connectivity segment. During Q3 we continued to ship CSSPs to support Kyocera’s dual big Note II smartphone as well as its HoneyBee 5 and Stola PHS handsets. We also won a new smart connectivity CSSP design with another PHS handset supplier. As we forecasted last quarter we initiated shipments during Q3 to support two new handset designs both of which used two CSSPs. Last quarter I said we had e several new active engagements for smart connectivity designs. I believe we will get into production commitments from these customers during Q4 and that the designs will move into production next year. Our catalog CSSP strategy gained momentum during Q3. Our first customer for our initial (indiscernible) solution is designing new products that will use our catalog CSSPs. Our second customer, a Tier 1 consumer electronics company is using one of our new catalog CSSPs in a mobile enterprise product. Since our last conference call, we have introduced three new catalog CSSPs. The first was a follow-on camera solution that complements our existing solution. In addition, we introduced two new catalog CSSP solutions based on our newly announced PolarPro3 and ArcticLink 3 S1 CSSP platforms. These catalog CSSPs provide mobile device manufacturers with turnkey solutions designed to help them accelerate the introduction of Always-On Context Aware mobile devices. My primary thrust as CEO has been to significantly change our engineering strategy to increase the cadence of our silicon platform introductions and to fully fund an office of the CTO with the marketing and engineering talent necessary to establish a long-term strategic vision for QuickLogic. We have supplemented this effort by hiring two of the top business development consultants in the country. Recently we unveiled the initial results of this new strategy. At the foundation is our new in system reprogrammable logic technology, which is used in both our new CSSP platforms and can be manufactured using a standard CMOS process at any major foundry in the world. It is also compatible with the unique architecture we developed from our existing WiLink programmable logic technology. This means our existing development tools and proven system blocks carry forward. We also continue to enjoy significantly higher logic cell utilization efficiencies when compared to other programmable logic architectures. Our new architecture allows us to address the growing need to implement smart connectivity solutions in applications, where interfaces are often undefined and in some used cases unpredictable. In addition to revealing our new in-system reprogrammable technology, we launched two new CSSP platforms, Polar Pro 3 and ArcticLink III S1. From these platforms we introduced two new catalog CSSP solutions that dramatically reduce the power consumption required to utilize the full potential of sensors in mobile devices. We believe our unique always on ultra-low power context awareness solution gives us a distinct competitive advantage. Our solutions include the development tools, the operating system drivers, firmware, and function libraries. Most importantly, we have partnered with Sensor Platforms, a leading innovator and 2013 EE Times ACE Awards finalist for sensor solutions. The combination of QuickLogic’s ultra-low power platform and silicon and Sensor Platform’s best-in-class sensor fusion and context aware algorithms enables a whole new generation of capabilities and applications that previously were impractical. We bring dozens of industry journalists on our new in-system reprogrammable technology and CSSP platforms. And we demonstrated our new catalog CSSPs. The response has been overwhelmingly positive. Max Maxfield from EE Times wrote, I think QuickLogic has cleverly positioned itself to be in the perfect place at the perfect time. I would now like to turn the call over to Ralph who will give our Q4 guidance followed by my closing remarks.

[Ralph Marimon:]

For the fourth quarter of 2013, we are forecasting total revenue of approximately $7.5 million plus or minus 10%. The $7.5 million in total revenue is expected to be comprised of approximately $5.7 million of new product revenue and $1.8 million of mature product revenue. New product revenue reflects continued shipments to Samsung as well as shipments to other display and smart connectivity customers. We are forecasting a slight decline in mature product revenue due to lower bookings from our aerospace, test and instrumentation customers. As in prior quarters, our actual results may vary significantly due to scheduled variations from our customers, which are beyond our control. Scheduled changes for existing opportunities and projected production start dates for new opportunities could push or pull shipments between Q4 and Q1 and impact our actual results significantly. On a non-GAAP basis, we expect gross margin to be approximately 38%, plus or minus 3%. Gross margin is driven primarily due to the mix of customers and product shift and continued unfavorable absorption of fixed cost. We are currently forecasting non-GAAP operating expenses to be $4.9 million plus or minus $300,000. Non-GAAP R&D expenses are forecasted to be approximately $2.2 million. Our non-GAAP SG&A expenses are forecasted to be approximately $2.7 million. Our other income expense and taxes will be a charge of up to $60,000. At the midpoint of our guidance, our non-GAAP loss is expected to be approximately $0.05 per share. Our stock-based compensation expense during the fourth quarter is expected to be approximately $550,000. This increase is due to the timing of our annual employee stock refresh grants. We expect to use approximately $2 million in cash. The forecasted cash is primarily – cash usage is primarily due to our working capital needs and the operating loss during the quarter. Before we move to the question-and-answer section of today’s call, let me turn the call back over to Andy for his closing remarks.

[Andy Pease:]

Hi, I am very pleased with the revenue traction we have demonstrated and our outlook as we move into 2014. The strategic investment we initiated in 2011 has created the most exciting tangible solution roadmap we have had since we have introduced customer-specific standard products to the mobile industry. The initial response to our sensor initiatives from potential customers, partners and the technical press has been overwhelmingly positive. And I look forward to updating you on our progress in future calls. In addition, I am very pleased Max Bouvat-Merlin joined QuickLogic at the beginning of October as our Vice President of Worldwide Engineering. Max most recently comes from Qualcomm and has extensive mobile engineering and management experience at Qualcomm, Broadcom and Texas Instruments. Max is already proving to be a great addition to our team. I hope you can understand why I am more excited today about QuickLogic future than I have ever been. This concludes our prepared remarks. We’d now like to open it up for questions.

[Operator:]

(Operator Instructions) Our first question comes from Krishna Shankar with Roth Capital. Your line is open.

[Krishna Shankar:]

Yes, congratulations on the nice results. As you look at Samsung elite customer, can you give us some sense for the sell-through of that product? How that business will shape up in Q4 and also the potential for fanning out into other Samsung products over the next 12 months?

[Andy Pease:]

Krishna, we are under very tight NDAs with Samsung and we are not really at liberty to comment on our business activity other than what we can publicly disclose, which I have done during our prepared remarks. I guess the only thing I would add is there has been several press announcements saying that the 7-inch tablet is one of the best sellers in the overall tablet line. So we are fortunate that we are in that model in the Tab 3.

[Krishna Shankar:]

Okay. And then in China, will you have some of these white-box tablets get revenues for you in Q4 based on the white-box at the design wins that you had with the China design houses?

[Brian Faith:]

Yes, this is Brian, I will take that question. So yes, we continue to see a lot of design activity with the Chinese IDHs. It’s definitely helpful that we are continuing to add to our QVL list like the one with Broadcom and we expect to see that moving forward. We can’t comment specifically on the amount of revenue for those guys, but the design activity is definitely there to support it.

[Krishna Shankar:]

Okay. And on the new sensor hub, do you have any customer engagements or are there any design wins that you can talk about here? And what’s kind of the roadmap to get this to production and what types of customers will you engage with on the sensor hub product line?

[Andy Pease:]

Well we have – we just announced the product in October 15. And I think we alluded to or certainly we have said to the press that part of the engagement process or part of the market evaluation was a deep dive with customers and partners as well as SoC suppliers. So we are certainly been working with specific customers. Obviously, we can’t talk about who they are. And in terms of when we expect to see revenue, I think you will have to wait till future calls before we get a little more definitive on that.

[Krishna Shankar:]

Okay. And my final question is on connectivity, you mentioned two additional design wins in Japan, can you talk about how the connectivity business with some of the PHS phones in Japan how that could shape over the next few quarters?

[Andy Pease:]

We didn’t say specifically what geography those two new connectivity designs were in. We did say that there was another PHS, when which obviously would be Japan, which is where the PHS market, but we really weren’t clear on what geography that was in.

[Krishna Shankar:]

So you have two additional connectivity design wins, not necessarily in Japan?

[Brian Faith:]

Yes, in the prepared remarks we said that we have committed for two additional ones to go to production in Q3 with two CSSPs in each of those and that did happen. What was new on this prepared statements were the new PHS supplier that we did get a design activity started with. So we are happy about that progressing more into the PHS business.

[Krishna Shankar:]

Great, thank you.

[Operator:]

Our next question comes from Brian Coleman with Hawk Hill Asset Management. Your line is open.

[Brian Coleman:]

Great, thank you. Andy, would you look at the sensor hub market, can you give us an idea of what you think the TAM there might be for you?

[Andy Pease:]

I think in the latest press briefings that we put out. We actually put it in some cynical 00

[Brian Faith:]

Yes, I think in addition to that, we have several press releases, blogs and also a video of the journalist briefing that we did and some of the graphs are definitely covered in that briefing, so...

[Brian Coleman:]

Okay.

[Brian Faith:]

If you go to our website, you can find that.

[Andy Pease:]

Yes, all this is linked on our website.

[Brian Coleman:]

I will take another look at them. Okay, when the sensor hub market I don’t know if it’s coincidental or not, but it seems like a number of your would be competitors have quickly followed on with around sensor hub announcement identifying their hubs as low powered without actually giving any numbers to backup the low power claims. I am just curious if you could comment on how sustainable you think your architecture is behind the S1 in terms of giving you an advantage on that front?

[Andy Pease:]

I will let Brian answer that.

[Brian Faith:]

Yes. So as we talked about in the briefing with the press, the way we went about solving this problem is fundamentally different than any other company has done before. And because we are using our hardware programmability, we think there is a lot of sustainability to the architecture that we launched recently. And to our knowledge, you are right a lot of people came out with announcements over the past couple of weeks, it’s a very hot market, I think that’s why people are doing this, but I think that the power levels that we can achieve the completeness of our solution with the collaborative work with Sensor Platforms really means that what we are delivering to customers is the only complete solution that meets that 1% to 2% of system battery life, which is the key criteria that we heard back during the course of that market research that we did. So it’s not a specific answer about how long this window is for us, so we do think it’s sustainable for sometime.

[Brian Coleman:]

Okay.

[Andy Pease:]

Okay. Yes, we think that our power differential brand is absolutely huge. And if you listen to the presentation that Brian and I gave to press, by the way the video recording of that presentation is on our website. We actually state that our power is 130, that’s one over 30 of microcontrollers today. So it is really a disruptive number.

[Brian Coleman:]

Right. And so a competitor just announcing something this week is not following your footsteps, but following their own process node shrink and that sort of thing that doesn’t get them close to the numbers you are talking about, is that the right understanding?

[Andy Pease:]

Well, we have seen the press announcement like you have seen it. I guess, all I will say is what we are delivering is we are really a complete solution. And not only that, we actually did a demonstration of our solution in front of the press with working silicon. So I can’t say what the competitors did do, I can’t say that what we have is a real catalog CSSP that actually can enable our customers to connect really quickly.

[Brian Coleman:]

Okay, alright. I know you are not providing any forecast on the timing of S1 revenue, but 2 to 3 years out looking at the display side versus the connectivity side, which is the bigger market for you in 2 to 3 years and by what kind of relative size?

[Andy Pease:]

So if I understand the question you are asking, 2 to 3 years out, do I see sensors or displays being a bigger market for us, is that the question?

[Brian Coleman:]

That’s it, that’s exactly it.

[Andy Pease:]

Okay. So I actually in that timeframe I definitely think that sensors will be the bigger market for us.

[Brian Coleman:]

Okay. And then I guess the final question on that is what size or what size of relative to the display business does the sensor or connectivity, smart connectivity market need to be to generate your 50% target gross margins?

[Ralph Marimon:]

We really haven’t gone that far publicly as far as what the margin would look like down the road with sensors. We will just go back to we need that balance portfolio and it doesn’t have to be $100 million business, but it has to be a substantial business with a balanced portfolio between the smart connectivity in mobile enterprise maybe some display in the mature business and then we can get to that 50% gross margin.

[Brian Coleman:]

Do you have a timetable that is this late 2014 and 2015, when you think you can achieve those kind of target margins?

[Ralph Marimon:]

That’s not something we publicly disclose. And I don’t think we are prepared today to go out that far.

[Brian Coleman:]

Okay, alright, fair enough. Thank you very much and congratulations.

[Andy Pease:]

You’re welcome.

[Operator:]

(Operator Instructions) Our next question comes from Gary Mobley with Benchmark. Your line is open.

[Gary Mobley:]

Hi guys, thanks for taking my question. This is my first time, in a long time in a QuickLogic earnings call, so I apologize if I don’t ask questions in just the right way, but…

[Andy Pease:]

Welcome back.

[Gary Mobley:]

Thanks. I am assuming that pricing to Samsung is – it has to be pretty aggressive. And I am just wondering what the puts and takes are there to drive down your cost of wafers and did having to accelerate shipments in the third quarter, probably should have to pay for wafers, wafer supply. And then I have a follow up question to that?

[Andy Pease:]

We didn’t expedite anything different. The acceleration at the end of the quarter was really due to the fact that there is the Chinese national holiday, the first week of October. And we didn’t want to have any disruption in the supply chain, so we made sure product went out before then. So we didn’t have any – we didn’t pay from our wafers. We didn’t expedite anything during that time period.

[Gary Mobley:]

Okay. What looking forward in terms of wafer pricing or die shrinks is going to enhance that Samsung related business, the gross margin (indiscernible)?

[Andy Pease:]

All I can tell you is that I spent a considerable amount of my time working with our partners because they are our partners, they help us to accelerate our business and part of accelerating the business because there is obviously some price elasticity is helping us out on the cost side. So I – we work with channel partners, we work with manufacturing partners and we work with IP partners. So all three of those dials are constantly being tweaked by myself, Ralph, and Brian.

[Gary Mobley:]

Okay. And now if I recall correctly, your WiLink technology and your programmable logic, due to the nature of the technology requires maybe a few additional layers, photomath [ph] layers versus standard CMOS process does that make it difficult to ratchet down the pricing to fit into the pricing scheme that Samsung demands?

[Andy Pease:]

Well, first of all the Samsung product is not using the special CMOS process. The Samsung product is actually in 65 nanometer, you are referring to all of our tower products and so that is really none of those tower products are actually being designed in at Samsung.

[Gary Mobley:]

Okay, that’s it from me. Thanks guys.

[Ralph Marimon:]

Thank you.

[Operator:]

Our next question comes from Robert West with NI Research. Your line is open.

[Robert West:]

Hello Andy.

[Andy Pease:]

Hi Bob.

[Robert West:]

Congratulations on a great quarter.

[Andy Pease:]

Well, the thanks goes to the team. It that really was a superior team effort.

[Robert West:]

Well, the first question I would ask Andy was Samsung the only call-in in the quarter for you?

[Andy Pease:]

Yes, it was Bob.

[Robert West:]

Would you be surprised that if you had some pull-ins between Q1 and Q4?

[Andy Pease:]

I really have no idea. I guess I frankly I haven’t even thought about that, but now Q1 is a seasonally soft quarter. We know that also Chinese New Year this year occurs at a more typical time than last year which is really the end of January. So it’s hard to say what will happen at that timeframe.

[Robert West:]

Sure. Next question I have is on 7-inch tablets are just tablets in general? Is that market a good candidate for hubs?

[Andy Pease:]

Yes. My view is that if the 7-inch tablet is going to be the primary mobile device for an individual, then I would say yes, to the extent in this country and many developed countries that it seems like the Note 3 or Note 2 form factor, we are talking roughly 5-inch seems to be about as big as the commonly used smartphone growth, I would say the 7-inch maybe a bit too large, because what you see and if you haven’t watched this video, I really encourage you to watch it, because Brian gives some understanding used cases on why, what we are doing is so important. And so it really dictates that these sensors will really be dominant in whatever the primary handset that consumers want to carry all the time. That’s why we talk about always on context awareness. So my view is 7-inch tablet, for instance, I carry a 7-inch tablet with me obviously, but I only bring it out when I am in meetings, not so much on my person when I am going around on personal activity.

[Robert West:]

Okay. So do you have tablet connectivity engagements?

[Andy Pease:]

No, we don’t have any tablet connectivity engagement outside the display bridge. You could argue that the display bridge is connectivity as well. And again, I will go back to the comments that we made to the international press and the importance of us having in-system reprogrammable logic architecture to actually deal with the variability on a connectivity side. We are seeing good success with our WiLink which by the way we are not obsoleting that at all, because WiLink has some very good characteristics that are necessary for the mobile market, but when you get into that I/O connectivity side, where there is a lot of variability and unpredictability really you need to have a reprogrammable logic technology, not just a one-time programmable logic technology. And so to the extent, when we bring out our new architecture, we believe we will see a lot more connectivity opportunities for us in the future.

[Robert West:]

Okay. So have you announced when your Polar Pro 3 and ArcticLink III S1 will be production ready?

[Andy Pease:]

I think we have – I thought we said that it would go this quarter. It will be production ready this quarter and it is sampling now. And as I have said, we actually physically demonstrated it to the press 10 days ago or two weeks ago.

[Robert West:]

Okay. Turning to your collaboration agreement with Sensor Platforms, if you could, I would be anticipating some flavor on that relationship? How you go to market that’s you are constantly talking about that? And how the sales of products would be handled? Those kind of things.

[Andy Pease:]

Yes. I am not comfortable with the details of our go-to-market strategy other than to say that what we are coming out with if you notice we have said two platforms Polar Pro 3 and ArcticLink III which can form the platform for a CSSP engagement with an individual customer and our Sensor Platforms’ catalog CSSP, so the fact that we are going to have catalog CSSPs and CSSPs that very much isn’t keeping with our business model that we have got Brian to play over the last six years. So there is no real business model that we are developing for the sensor engagement beyond what we have already been doing.

[Robert West:]

Next question if I may, Andy as to the last few quarters you have characterized your display product activity as continuing to accelerate, how would you describe it now?

[Brian Faith:]

Bob this is Brian, I will take that question. So I would say we see it continuing to accelerate and I think that’s evidenced by the fact as in the prepared remarks we talked about the new PC OEM launching two tablets this quarter, the new Broadcom QVL and the continued activity with the Chinese IDHs. So I have categorized it the same way that we have categorized it in the past.

[Robert West:]

Okay, good. Then maybe one or two just kind of cleanup questions, you have got a shelf registration out there and you have had very accelerated revenue growth are now dipped into the bank line is just a little bit. Do you have any plans for secondary offering or anything you can share with us on that, Andy?

[Ralph Marimon:]

Well, Bob this is Ralph. We are not going to comment on the timeframe or schedule for that. We put the shelf in place to allow us to raise funds for working capital if and when we decide it’s appropriate. We are working with our bankers. We are looking at our long range forecast. And our goal is just to make sure we ensure that we have a strong balance sheet to support our working capital demand, especially when you get into these high volume applications. So we are looking at it. We looked at it constantly. We have got the Silicon Valley Bank line of credit and we will take action when we think it’s appropriate on it.

[Robert West:]

Thanks Ralph. I guess one final one. You have got two Tier 1 IDH or white box vendors in China, is the revenue for that customer category coming in kind of in line with your expectations?

[Brian Faith:]

Bob, this is Brian again. I think that it’s a little under our expectations at least my expectations right now. But I like the activity that we see on, especially ones that are derived from getting on more of these QVLs and I am optimistic about that in the future.

[Robert West:]

Okay. Well, listen, thank you for taking the questions and again congratulations on a good quarter.

[Andy Pease:]

Thank you.

[Brian Faith:]

Thank you.

[Operator:]

This ends our Q&A session. I will turn it back to Andy Pease for closing remarks.

[Andy Pease:]

Great. Well, I really appreciate the support that you have shown us. Our next conference call will be on Wednesday, February 5, at 2.30 PM that will be Pacific Standard Time. Thanks again for joining us. And I look forward to talking to you again in the near future.

[Operator:]

Ladies and gentlemen, thank you for participating in today’s conference. This concludes the call. You may all disconnect.