QuickLogic Corporation
Q2 2014 Earnings Call Transcript

Published: 30 Jul 2014

[Operator:]

Ladies and gentlemen, good afternoon. At this time, I’d like to welcome everyone to the QuickLogic Corporation second quarter 2014 earnings results conference call. [Operator instructions.] 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 related 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 customer 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 second quarter of 2014, total revenue was $6.8 million, which was above the midpoint of our guidance range. New product revenue totaled approximately $4.5 million and was at the midpoint of our guidance. Mature product revenue totaled approximately $2.3 million, which was above our guidance range due to higher than expected bookings. Samsung accounted for 40% of total revenue during the second quarter, as compared to 70% of total revenue during the first quarter. Our non-GAAP gross profit margin for Q2 was 45%, and was above our guidance. The increase in gross margin is primarily due to the mix of products shipped during the quarter. Non-GAAP operating expenses for Q2 totaled $5.4 million, which was just below the midpoint of our guidance. On a non-GAAP basis, the total for other income, expense, and taxes was a charge of $9,000. This resulted in a non-GAAP loss of $2.3 million or $0.04 per share. We ended the quarter with approximately $34.3 million in cash. Cash declined by approximately $2.8 million, which was better than our guidance due to timing of working capital commitments. Our Q2 GAAP net loss was $2.9 million, or $0.05 per share. Our GAAP results include stock based compensation charges of approximately $566,000. Please see today’s press release for a detailed reconciliation of our GAAP to non-GAAP results. Now I’ll turn it over to Andy, who will update you on the status of our strategic effort.

[Andrew Pease:]

I have some exciting updates to share with you about the progress we’ve made towards realizing our long term strategic objectives, but first, I want to cover the tactical initiatives that continue to drive our near term results during this transitional year. The branded Android and iOS tablet market continues to face declining unit volume. In Samsung’s preliminary Q2 release, it attributed the decline in tablet sales to two factors

[Ralph Marimon:]

For the third quarter of 2014, we are forecasting total revenue of approximately $4 million, plus or minus 10%. The $4 million in total revenue is expected to be comprised of approximately $2 million of new product revenue and $2 million of mature product revenue. The decline in new product revenue reflects reduced shipments of our display solutions into the tablet segment, as discussed earlier by Andy. We are forecasting a slight decrease in mature product revenue due to the expected booking rate from our aerospace test and instrumentation customers. As in prior quarters, our actual results may vary significantly due to schedule variations from our customers, which are beyond our control. Schedule changes for existing opportunities, and projected production start dates for new opportunities, could push or pull shipments between Q3 and Q4 and impact our actual results significantly. On a non-GAAP basis, we expect gross margin to be approximately 45%, plus or minus 3%. Gross margin is driven primarily due to the mix of customers and products shipped. We are currently forecasting non-GAAP operating expenses to be $6 million plus or minus $300,000. Non-GAAP R&D expenses are forecasted to be approximately $3.6 million. The increase in engineering expenses is due to outside services costs related to new chip development and new hires within the engineering organization. Our non-GAAP SG&A expenses are forecasted to be approximately $2.4 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 $0.08 per share. Our stock based compensation expense during the third quarter is expected to be approximately $500,000. We expect to use approximately $3 million to $3.5 million in cash. The forecasted cash usage is primarily due to the increase in operating expenses related to new chip development, which includes higher headcount and outside service expenses, as well as capital expenditures. 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.

[Andrew Pease:]

Given the unexpected decline in the display bridge revenue we are forecasting and the customer production timing of our smart connectivity and sensor hub solutions, I believe it will be difficult for us to report a significant new product revenue increase year on year. However, we continue to develop traction in smart connectivity and sensor hub applications, and I believe we are well-positioned to establish ourselves as a leading supplier in a rapidly growing mobile sensor hub market. Due to the quality of our team, the depth of our roadmap, and our engagements at top tier mobile OEMs, I remain very optimistic about QuickLogic’s future. We’ll now open up the call for questions.

[Operator:]

[Operator instructions.] The first question comes from Krishna Shankar with Roth Capital.

[Krishna Shankar:]

You talked about several design wins, towards which you may ship production shipments in Q4 in the sensor hub and also display bridge for a top-tier consumer electronics company. Will some of these new production shipments contribute to perhaps growth in new product revenue sequentially in the fourth quarter?

[Andrew Pease:]

Well, you know, we are not in the habit of trying to give guidance beyond Q3. We are encouraged about the momentum we’re seeing in our design win activity, especially in the areas of our new products, the sensor hub and the display bridges.

[Krishna Shankar:]

So most of the customers who are evaluating your sensor hub, it looks like they’re moving to the S2 platform. Is that right?

[Andrew Pease:]

A lot of them are moving to the S2, because of its increased value proposition that I tried to highlight in the call. That’s correct.

[Krishna Shankar:]

And then there have been a number of acquisitions in the industry by larger players acquiring standalone software and algorithm companies. One of them was Sensor Platforms, which you had a strategic relationship. So can you talk about the sort of industrial landscape going forward, with some of these independent software and algorithm companies being part of larger companies, and what your strategy would be?

[Andrew Pease:]

Sure. Our strategy has always been to do a mix of partnerships, outsourcing, and developing our own. As you hopefully gleaned from the conference call, we have been very aggressively increasing the depth and the breadth of our own group, as some of these acquisitions take place. I guess if I were to specifically comment on the SPI audiencing, all I can say at this point is we are having very interesting and good talks with audience executive management and it would really be premature to say where that will go in the future. But I can tell you, we are in conversations with them as we speak.

[Krishna Sankar:]

And in 2015, do you think sensor hubs or the programmable connectivity [unintelligible], what could contribute in terms of revenues to a larger extent in 2015?

[Andrew Pease:]

Well, I think again this may fall in the same category of trying to give guidance out beyond our current quarter. But it’s clear that our design activity is being dominated by sensor hub opportunities, and sensor hub opportunities that can in fact integrate more connectivity functionality.

[Operator:]

The next question comes from Gary Mobley from Benchmark.

[Gary Mobley:]

In your prepared remarks, you talked about your relationship with Samsung and having ongoing engagements with Samsung. Was that in relationship to additional video bridge use cases? And then maybe you can expand on that and talk about what, from a video bridge perspective, might be different for future design wins versus what you’ve done with them so far.

[Brian Faith:]

As you’re probably aware, we’re under a very tight NDA with Samsung, so we can’t really get into more specifics at this point about what the designs are including. But needless to say, as we characterized earlier, there are multiple ongoing engagements.

[Gary Mobley:]

And looking at your R&D expense guidance for Q3, I don’t know exactly what the percent increase is on a sequential basis, but there is an increase there, correct? And can you share with us what are the specifics on the increase? Is it relating to a specific development on the ArcticLink IV S3? Or is it algorithm development? Anything you can share with us would be helpful.

[Ralph Marimon:]

The engineering expense increase was driven by two factors. One is we are aggressively hiring in our engineering organization, so part of the increase is related to new hires. The second part is we outsource a lot of the back end design and development work. So when we’re doing a new chip, our outside services costs will go up significantly for anywhere from three to six months. And then it will moderate. So that’s what you’re seeing in the Q3 guidance related to the increase in engineering expenses.

[Operator:]

The next question comes from Robert West from Oak Grove Associates.

[Robert West:]

Andy, I wanted to start with a question on your ArcticLink III S1 catalog center hub revenue, or prospects, I should say. Is your revenue catalog center revenue coming up to expectations for the second half at this point? As I recall, the catalog sensor hub would be the lead revenue, you thought earlier, for sensor hubs in the second half. Can you give us some color on that?

[Andrew Pease:]

I think I tried to address this in my closing remarks when I said that we have been maintaining up until this call that we should see significant new product revenue increases 2014 over 2014. And we don’t believe that anymore. And there are two factors behind that. One is really what has been an unexpected decline of display bridges. And there’s also the customer production timing in both smart connectivity and sensor hubs. I can tell you that my opinion, we are executing on or ahead of plan on all our engineering tasks. The thing that we can’t control is customer schedules. But I can say that all customers that we’re engaged with continue, and we’re not losing any customers. It’s simply a matter of timing.

[Robert West:]

Okay, so it’s not any competitive losses here then?

[Andrew Pease:]

There’s no competitive losses.

[Robert West:]

I wanted to ask a question on your new product revenue guidance for Q2. Given that Samsung was $1.8 million of revenue in Q2, it would appear that you’ll have [unintelligible] Samsung revenue or very little in Q3. Would that be a correct assumption?

[Ralph Marimon:]

We don’t break it out that way. We’ll give it to you on an actual basis as we go forward in the October call. But for guidance, we’re not going to break it out that way.

[Robert West:]

Okay, that’s fair. It sounds as though you’ve made tremendous progress in the development of algorithms, but have been pretty quiet about it. You did address this also, Andy, but can you give us some more color on this and the engineers you’ve hired to expand the software group?

[Andrew Pease:]

Well, all I can say is that we’ve been aggressively hiring. I’d rather not give out the raw numbers. I don’t think that’s really appropriate. I can tell you that we probably hired more PhDs in this company than any single time since I’ve been here. And the talent we’re hiring, I am really impressed with. As you know, we’ve got a new VP of engineering, Max Bouvat-Merlin, who is doing a phenomenal job. As you may know, he comes from Qualcomm, and he’s bringing a lot of rigor of a large company into QuickLogic. And I couldn’t be happier. I can also say I think with pretty good certainty that we are well ahead of schedule in terms of developing our own algorithms than I thought we would be at this point in time. So I feel very encouraged about that.

[Robert West:]

Thank you. A follow-on question to that. You know, there’s been an enormous amount of intellectual property, patent type filings in this whole area of sensor hubs. So is this going to be a barrier to development in the future? How are you approaching your intellectual property protection, Andy?

[Andrew Pease:]

Well, needless to say, we have patent attorneys that back up our chief counsel, and we take a hard look at this. And I can also say that we also look for opportunities to do patent filings ourselves. And I think we talked about one that has already been filed in terms of our flexible fusion engine that’s used in both the S1 and the S2. So it’s something we are very mindful of, and I can tell you, so far, it’s not been an impediment at all in our development efforts.

[Robert West:]

My final question, I think, is this. Do you expect any ArcticLink III S2 revenue this year?

[Andrew Pease:]

I think I said in the prepared remarks that a couple of the designs that we have right now we absolutely do expect production in Q4, of this year. So yes. Like we said all along, we do expect sensor hub revenue production to start in 2014, and we are very much on target to make that a reality.

[Operator:]

The next question comes from Rick Neaton from Rivershore Investment.

[Rick Neaton:]

Have some of the customer decisions to move ahead with the ArcticLink III S2 from the III S1, do you see them pushing out some of their order forecasts that maybe you had expected to occur in the second half?

[Brian Faith:]

I don’t think they’re pushing out the orders because they’re trying to time that with the L III S2. The L III S2 is coming out, and it’s matching up with their own development schedules. So I think it’s more a matter of timing with our product schedules rather than the S2.

[Andrew Pease:]

I can also add to that and tell you that, like we’ve said, we have already sampled the ArcticLink III S2, and this has actually been for sample-able revenues. So this have been customers that have actually been buying that part. And this is actually ahead of what we initially planned, which was frankly an August sample day for the ArcticLink III S2. So we’re running about a couple of weeks ahead of schedule on a sample-able product.

[Rick Neaton:]

Okay, so the III S1 sampled last year, and some of the customers that sampled it now are moving to the III S2. So you’re seeing a more accelerated move to production from these customers that got their feet wet on the III S1? Is that what you’re saying?

[Andrew Pease:]

I think that’s fair. I think it’s also fair to say that the ArcticLink III S1 and the PolarPro III come from a similar development environment. And our plan always was to put some hardened features and really put out a specific product for sensor hubs, which is really the S2, and we always expected that that would help accelerate our growth.

[Rick Neaton:]

Do you see, as you continue to grow your library of algorithms, now more customer interest in your catalog versus non-catalog versions of these processors?

[Brian Faith:]

I would characterize it this way. I think there are customers that are always going to be interested in catalog, because they don’t have their own algorithm expertise in house. And so as we evolve our catalogs, there’s going to be continued [unintelligible] available market increase. There’s another set of customers that have their own algorithms. Those are going to continue to want to use our integrated development environment that we announced back in Q2. And so I think there’s going to be another set of customers that continue on that course as well. So both will be adequately served by different offerings that we have.

[Operator:]

The next question comes from Krishna Shankar with Roth Capital.

[Krishna Shankar:]

Andy, in the past call, you mentioned an existing Android smartphone at a top tier OEM, which was sort of an existing not incompatible, but you hoped to win that with features such as LED driver, infrared TV remote, and other set of connectivity features. Is that design win still on track with this top tier OEM? And will that count towards revenues this year?

[Andrew Pease:]

That was actually part of the prepared comments as well, when we said that we had the technical approval, and we have identified an opportunity, and we are now giving that customer our product. And once accepted, then that puts us in line for revenue opportunities. Right.

[Krishna Shankar:]

So that’s really the PolarPro connectivity platform, right?

[Andrew Pease:]

That would be PolarPro III, that’s right. Now, of course the timing of this is also something we’re not certain about. We’re not saying when exactly this will happen, because there’s still a couple of steps. But we are pleased that now a concrete opportunity has been put in front of us, which is very encouraging.

[Operator:]

The next question comes from Robert West from Oak Grove Associates.

[Robert West:]

Andy, this may be a follow up to the last question. Last quarter, you talked specifically about an intercept. And I presume that what you’re talking about here, and the way you answered the question, is that intercept from last quarter conference call. Would that be correct?

[Andrew Pease:]

Yes, that’s the same one, Bob. We try and keep giving you progress to events or significant design activity. Obviously, we’re not covering all of our design activity, only the things that we feel like are material and significant for our investors to understand. So I’ve attempted to update you on the progress on that event.

[Robert West:]

One final in that area. Has this opportunity slipped out any, or is it pretty much tracking what you had expected a quarter ago?

[Andrew Pease:]

I would say in all fairness that this is taking longer than what we expected. I think that is a very fair comment.

[Operator:]

At this time, I am showing no further questions. I would now like to turn the call back over to Andy Pease for closing remarks.

[Andrew Pease:]

Well, first, I want to thank everyone for your continued support, and I look forward to reporting our strategic progress on our next earnings call, which is scheduled for Wednesday, October 29. Thank you for joining us.