Quicklogic Corp (QUIK) 2002 Q2 法說會逐字稿

Please stand by. Good day everyone and welcome to the QuickLogic Second Quarter Earnings conference call. Today's call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Mr. Tom Hart, Chairman, President and Chief Executive Officer. Please go ahead sir.

Well, good afternoon from sunny northern California here at Sunnyvale. Welcome to our second quarter 2002 earnings conference call. Thanks for taking the time to hear about QuickLogic and our leadership of the embedded standard product marketplace. Today I would again like to extend a special welcome to any V3 Semiconductor shareholders who may be joining us. We hope to have you as QuickLogic shareholders soon.

OK. Let's get started. First Art Whipple, our CFO, will take you through the numbers and then I will share my perspective on our business. Finally, Art will share our guidance for Q3 and then we will take questions. Take it away Art.

Thank you Tom. Before I get started, I would like to read a short Safe Harbor statement. During this call, we will make statements that forward looking. These include statements concerning future results, financial metrics, visibility, the competitive environment, acceptance of our products going forward, economic conditions, the timing of our returned profitability and market opportunities generally. These forward looking statements involve risks and uncertainties and QuickLogic's future results could differ materially from such forward looking statements. We refer you to the risk factors listed in our annual report on Form 10K, quarterly reports on Form 10Q and prior press releases for a description of these and other risks that could cause actual results to differ materially from our forward looking statements. QuickLogic assumes no obligation to update any such forward looking statements.

Our revenue for the second quarter ended June 30, 2002 was $8.4 million, an increase of 12 percent sequentially. In our last conference call, we projected that our sequential revenue increase would be in single digits. Revenue for the quarter was up 3 percent year over year from $8.1 million in the second quarter of 2001. Our revenue for the six months ended June 30, 2002 was $15.8 million, a decline of 16 percent from the same period a year ago.

Information on the composition of revenue is included in our press release issued earlier today. Some of the highlights Embedded Standard Product or ESP revenue increased by three percent in the quarter and represented 32 percent of revenue in the second quarter, down from 35 percent in the prior quarter. ESP revenue increased by 11 percent over the same quarter a year ago. As a percentage of total revenue our Instrumentation and Test segment increased from 34 to 45 percent sequentially, while our Datacom telecom segment declined from 31 percent to 20 percent. Military revenue more than doubled to 16 percent of revenue this quarter. During the second quarter revenue increased sequentially in North America and Asia and was flat in Europe.

We had a net loss in the second quarter of $3.1 million, this compares to a loss of $3.7 million in the prior quarter and a loss of 7.8 million in last year's second quarter. Our loss per share for the second quarter was 13 cents, compared to a loss of 16 cents per share in the prior quarter and 38 cents a year ago.

Second quarter's gross margin was 45 percent, compared with 41.6 percent sequentially and 37 percent a year ago. The 37 percent figure was a pro forma figure that excluded a $3.7 million inventory write-down. It is important to note here that our product costs and selling prices remain relatively stable. The gross margin change is due primarily to fixed overhead costs being amortized over a changing base of business.

Production rates increased slightly in the second quarter but remained well below historical levels. This results in under-absorption of overhead costs and, therefore, a reduced gross margin.

Research and development expenses in the third quarter were up - I'm sorry, research and development expenses in the second quarter were up $114,000 sequentially to $3.4 million. This increase was driven by the reinstatement of salaries that had been reduced in the fourth quarter of last year. Sales, general and administrative expenses were up $131,000 sequentially to $3.8 million. This increase was also driven by the reinstatement of salaries.

On the balance sheet, cash at the end of June was $21 million. Our accounts receivable balance was $5.3 million, representing 57 days sales outstanding. Our inventory was $11.5 million, down $933,000 from the prior quarter. Fifty-nine percent of our inventory is in die form, the least costly and most flexible way to hold our inventory.

Finished goods and work in progress represent 74 days of sales and distributors' inventory was an all time low of six days at current sales rates.

Our cash balance declined by $3.5 million in the quarter. During the quarter we invested an additional $3.7 million in Tower Semiconductor for the purchase of common stock and wafer credits. Our loss, net of non-cash charges, was $2.2 million. We increased accounts receivable by $713,000 and purchased $546,000 in capital assets. The cash outflows were partially offset as we reduced inventory by $933,000.

At our last conference call we believed that we would be able to renegotiate our agreement with to allow us to avoid or defer one or more of our committed investments. During the quarter, it became clear that our continued participation in the program was much more important to than the amount of the investment would indicate.

We did finally make our scheduled $3.7 million investment last quarter, but released us from the lock up on 700,000 of our shares. While we are not currently planning to sell these shares, we have the option to sell them if required to raise cash. During the quarter, we signed a $12 million credit facility with Silicon Valley Bank. The facility includes an $8 million revolving line of credit, and a $4 million equipment financing line. At the end of the quarter, we had drawn $1.8 million against the line of credit.

We had 197 employees at the end of the quarter, a net decrease of nine people from the end of the first quarter. I have one piece of additional news that I would like to share with you. Effective August 5th, I will be turning the CFO role at QuickLogic over to a fine gentleman by the name of . has extensive experience as a semiconductor CFO from his 13-year stay at WSI. I will be taking on a new executive operating role in QuickLogic to drive our new product offerings in the Web-enabled standard products space.

This initiative involves a new twist in the intellectual property level, with a much-improved financial model. Stay tuned for future developments. Now, let me turn it back over to Tom.

OK. Thank you, Art. Well, as you've heard from Art, Q2 was a real breath of fresh air for QuickLogic from many perspectives. Our continued strong bookings and our 12 percent increase in sequential revenue are the most obvious to all. Our traditional competition has already announced their revenue increased only 4 to 6 percent sequentially, and they are guiding for very meager growth -- even down in one case, for next quarter. Yes, we are still losing money, so we're not doing high-fives around here. But revenue growth is the major determinant for our return to profitability.

Let me point out this is our third consecutive quarter of accelerating revenue growth with the actuals being 4 percent, 10 percent, and now 12 percent. The pace of new orders continued at the blistering rate of Q1, with a growth of 32 percent over Q4. If you remember last quarter, this means sequential growth. Q2 over Q1 was basically flat. Two great booking quarters in a row means we actually grew backlog and our turns rate for the quarter, that is orders received and shipped in the same quarter actually dropped to a recent record low of 60 percent.

Again, if you remember, we typically run 70 to 80 percent turns each quarter. This is yet another indication that we grew our order book for Q3 and Q4. Now, I know I've always said backlog in the semiconductor industry is mostly smoke and mirrors, but let me now say that real backlog is a good thing.

As we look at the mix of new orders, we continue to be encouraged for all three product categories, mature, new, and ESP product families. They all maintained the strong booking run rate of Q1. Having said that, an even more positive note is that QuickPCI new orders were up 32 percent sequentially and revenue was up a whopping 39 percent over Q1. These orders and revenue were across a broad base of customers and design . Yet another very encouraging sign that we have seen the bottom of our part of the tech and it was Q3 of last year.

Now from a geography perspective, on a sequential comparison basis, European new orders were up 18 percent with North America down 2 percent and Asia Pacific down 7 percent. Of course Europe was up 37 percent with North America up 24 percent and Asia Pacific up 42 percent with compared to Q4. To end this part of our call, just let me say that we are seeing new order across a broad range of products, geographies, channels and customers. We are getting new order for both old and new designs and for mature and new products.

Now our revenue growth is also positive, certainly relative to the industry and are generally considered competitors. The facts are that our revenue has growth 27 percent since our bottom in Q3 last year. While the collective revenue of , , and QuickLogic have only grown 17 percent. Further, we have actually gained share of market 5 of the last 6 quarters. Now while I would certainly not characterize our mood relative to revenue and new order as euphoric, the current picture certainly looks a lot better than it did a year ago when we were experiencing a dearth of new orders and the largest backlog cancellations in our history. Actually at that point, I was very glad to have a ground floor office.

In news on the front, Quicknips continues to gain design and traction in many markets and applications. You asked before so I will save you the trouble of asking again, we have customers designing Quicknips into a broad range of applications. From voice over IP gateways to residential virtual private networks, to controlling solid state hard drives for video on demand systems, to compact disc duplication equipment, to secure communications on trains, to digital imaging for vegetable sorting and to securities systems for face recognition to name just a few. However, there is no significant revenue to report yet. But it is coming. Quicknips offers the best of both worlds to our customers. Standard product features to reduce risk, reduce development and production costs and accelerate speed to market coupled with a means to differentiate their equipment from others, namely our high performance logic fabric. This is truly disruptive technology in the finest sense of Clayton book, the Innovators Dilemma.

Let me shift directors her for a moment. Art mentioned it but we have a new member of the management team to announce today, Carl . Carl has joined us as our new Vice President of Finance and Chief Financial Officer. He relieves Art Whipple who is going to run a new business unit for us that I will tell you about in just a minute. Carl Mills is a gentleman known to many of you as a consummate finance professional. Carl is also well known quantity to us having been the CFO at WSI for many years where one of our board members, Mike Callahan was the CEO, and our Chairman Emeritus Irwin Federman was the chairman of their board.

We all anticipate that the transition between Art and Carl will be smooth and will be executed flawlessly. Please welcome Carl on board. We're very glad he's chosen to join us.

Now in this unstable financial climate I think it's truly outstanding that we've recently been able to attract three additional independent board members to join the QuickLogic Board of Directors. Several weeks ago we announced that Gary Tauss, CEO of TollBridge Technologies, and the Senior Telecom Industry Executive, joined our board.

Today I'm very pleased to announce the addition of two more independent board members. This brings our board to a total of seven members with five independent members and two internal members, our Co-Founder H.G. and myself.

First, Marv , known to many of you as the former CFO of Advanced Micro Devices, that is AMD, was elected to our board last week. Marv brings us a wealth of experience and a seasoned judgement in the finance, administration, and strategic planning end of the semiconductor business. Marv will also serve as the chairman of the QuickLogic audit committee. Indeed, a very fine addition to our team.

Our second new board member is Alan Lefkof. Alan is the CEO of Netopia and is the a seasoned senior executive in the datacom industry. Alan was also elected to our board at last week's meeting. Alan's background as a datacom and a software guy brings a strong compliment to our team of hardcore hardware guys. A fine man with clearly demonstrated high-quality leadership capabilities, Alan is an equally fine addition to our team.

Press releases which provide background details are being issued on both these gentlemen.

With the addition of Marv, Gary and Alan to our board we believe we have the bench strength, which when coupled with our executive staff give us the leadership muscle to enable QuickLogic to capitalize on the potential of our embedded standard product vision.

Well, thank you.

And now, Art, will you give us more specific guidance on Q3?

OK, Tom.

Our ability to reliably predict revenue for the next quarter is still limited. Since our turns rate is typically 75 to 80 percent our new orders rate is our best indicator of sales in a given quarter. Our new orders rate for the second quarter was about equal to what we saw in the first quarter, but still about 32 percent above the fourth quarter of 2001. New orders in the first few weeks of this quarter are slightly below Q2, but we expect that revenue for the third quarter will improve over the second quarter.

Revenue in our third quarter is typically challenged by seasonably weak demand in Europe. However, we are providing guidance for a sequential revenue increase of high single digits.

Current low unit production levels will continue to result in under-absorption of operations costs and will continue to hold down gross margin. We expect that increasing revenue will produce gross margin in the 45- to 55-percent range over the next few quarters. We maintain our view that on return to profitability our gross margin will be in the low 60 percent range.

In October 2001 we reduced salaries for our employees by 10 to 30 percent. We reinstated those salaries in mid-April. We had a company-wide shutdown for the first week of the third quarter, the combined effect of these items will still enable us to reduce research and development spending by $1-200,000 next quarter. We also expect that SG&A spending will decline by as much as $100,000 for the same reason.

Interest income and other net includes interest income on invested cash, foreign exchange gains and losses, interest expense on borrowings, and a gain or loss incurred on the company's executive deferred compensation investments. During the first quarter, interest income was $100,000. We expect that interest income will stabilize at current labels.

We expect to be cash flow positive in Q3. We will make another investment of $3.67 million in in Q4. We are continuing to reduce inventories and tightly control capital spending. The combination of cash needs to fund declining operating losses, the new Silicon Valley Bank credit facility, and the option to sell shares, should have reduced any concern that others may have had for our adequate cash reserves to face an uncertain near term future.

Last August, we delivered 2.5 million QuickLogic common shares to acquire assets. To the satisfaction of the creditors, and the subsequent distribution of any remaining QuickLogic shares to shareholders continued to be priorities for management. To facilitate the QuickLogic share sale, we filed an S-3 shelf registration that became effective on July 17th. The bankruptcy court has approved plan of distribution, and we expect that over the next few months, will carefully manage the sale of sufficient QuickLogic shares to raise the approximately $4.5 million that is needed to satisfy their creditors.

After these shares are sold, any remaining shares will be distributed to the shareholders on a pro rata basis. Updates will be available from time to time at . Please remember that we have made forward-looking statements in our presentation, and we will likely make others in the question and answer period following our prepared remarks. Our actual results could differ materially. Please review our SEC filings for specific information on the risks and uncertainties that we face. Tom, back to you.

Thank you, Art. Now, before we open the call for questions, I wanted acknowledge -- publicly acknowledge Art's contributions and significant accomplishments here at QuickLogic as our CFO for the last four-plus years. Art got us ready for the IPO and successfully took us public in October, '99.

Then he prepared us for the secondary offering, which was successfully completed in April of 2000. All the while, he led and managed his fine team of finance professionals in the flawless execution of the myriad of details that must be done as a public company, you know, the little things like 10-Ks and 10-Qs and annual reports and our acquisition and on and on and on.

Through our partnership here, I've always found Art to be a gentlemen on a very even keel with a keen sense of humor. And therefore, given this glowing description of Art and his capabilities, you might ask how I can let him go. Good question. First off, he isn't going anywhere, just a couple of offices down the hall. Art is passionate about our potential for delivering more value to our customers in the form of QuickASSPs. And I learned a long time ago the reason folks that are passionate get things done. Our S base competition can not do Quick ASSP's because they do not have a non-volatile interconnect technology like our . You will hear much more about our Quick ASSP activity as we move forward with it. Please stay tuned because this is very exciting as Quick ASSP's capitalize on our embedded standard product strategy to offer unique products with a superb bundle of benefits to our customers. Well thank you very kindly Art.

You are welcome Tom.

We expect big things from you with Quick ASSP's. OK. For scheduling purposes, our Q3 2002 earnings conference call is currently scheduled for Wednesday, October 23rd at 2:30 p.m., pacific standard time.

whipple(?): Yes.

OK. So, Julian, Operator, let's now open up the call for questions please.

Thank you gentlemen. The question and answer session will be conducted electronically. If you would like to ask a question, simply press star one on your touch-tone telephone. Once again, to ask a question, please press star one. And we will pause for just a moment to assemble our roster. And we will take our first question from John at RBC Capital Markets.

Thank you. Art, first of all, you can not leave yet. We are not done with you.

I am not leaving John. I am just going to go do something that needed to be done. Sometimes you whine loud enough you get to do something that you ask for.

Yes and congratulations on your new position.

Thanks.

I was wondering if you can give us some more color on which sector was driving the growth in the Quick PCI market? Was it the military, was it the military? And finally, yes, let me let you answer that first.

It was really across all of them. We did have one nice military order in the military section. But the PCI was really across segments.

So, it was a broad range? There is no particular sector that you can point to on the . . .

No. I think they were in line with our breaks by of our total revenues. And actually our traditionally largest PCI customer was not there in the quarter which is also really good news at least from the perspective that it still grew so well and our big guy was not there.

Oh, OK. So then circling back to the military question that I had. Are the military - are the rise in military revenues one of the catalysts for the increased backlog that you mentioned and what type of visibility do you have going forward on the order books? Thank you.

Well, our backlog - we only claim backlog for six months for the next six months. Financial backlog. And no it is not the military, it is across, again across a very broad range. Our military customers by the way, the bulk of what we ship into the military is not 883 anymore but is in fact either military plastic or industrial temperature grade plastic. So, you do not have the long lead times for military that you used to see. So the short answer is no it is not just the military, it is across a very broad range of all segments, all geographies, all channels and lots of customers.

I think it is lumpy too. Those pieces of business come and go quarter by quarter. It was - they were - military revenues were 8 percent of our revenues in Q1 and 16 percent this quarter. But they were 15 percent in the same quarter a year ago. So I think it is more the lumpiness that you are seeing.

OK. Great. Well, congratulations. Thank you.

Thank you John.

And we will take the next question from Alvin with FBR & Company.

Hi, guys. It's actually Carter Driscoll speaking for .

Art, I just wanted to say I'm happy that you're getting back to your engineering roots. I'm sure the two of you will be causing much havoc in the future.

Yes.

Couple of questions if I could. First of all, could you break down a little bit - I saw that ESP's were up, obviously, as a percent of - down as a percent of sales even through there were up on an absolute basis. Could you just, you know, talk about the difference between where you saw strength in the newer products versus ESP? And, you know, just across your product offerings if you could just comment in one or two places?

Well, I think the - you know, overall we grew about 12 percent and the mature products actually outgrew those by about 14 percent. But they've been depressed so I think it's again a little bit of what you see in the kind of the lumpiness of the numbers going forward.

I think the new products in general grew slightly below 12 percent, they grew at 10 percent. So I think we're reasonably happy with how that went. But it's basically across all product lines.

OK. How about could you - could you address just, you know, kind of for modeling purposes - I know you've given - you've given a range of guidance for gross margin, but could you talk about incremental gross margin, you know, like possibly in lots? Like if you, say, grew your revenue to say 10 to 15 top line on a sustainable basis you might leap to the low 50's or is you got above 20 million revenue run rate ...

Yeah, let me give you kind of a model that maybe give you some feel for it. Our variable gross margin is in the 60 to 70 percent range. So as you add, depending on product types and where the revenue comes from, those sorts of things - you know, so as you add revenue and we maintain spending you'll see about 60 cents of every dollar drop to the bottom line.

OK.

So that will give you an idea. It gets us - you know, by the time we're fully absorbing our overhead costs in production we should see margins go into the low 60 percent range.

I guess - I guess that's kind of what I was trying to figure out is ...

Yeah.

... exactly where the full - the fixed-cost absorption basically falls off at ...

Well, it's probably in the - somewhere - depending on how things work out - I'm, you know, back of the envelope here - somewhere in the $11-and-a-half to $13 million range.

OK, so that hasn't changed dramatically.

Yeah.

And then just lastly if you could talk about when you anticipate to start to contribute, maybe not necessarily the level but when you can - next quarter, two quarters?

Well, I think we'll see - begin to see some significant revenue we believe in Q4, which is pretty consistent with what we've said all along. We're seeing dribs and drabs before that. You're seeing sample quantities, which we charge for. You're seeing - certainly you're seeing system development boards go out. But the actual revenue from silicon we're looking at right now we believe in Q4.

OK. And then one - a couple final questions just maintenance. I know you gave them Art and I wasn't writing that fast, depreciation and cap ex?

Doing right around a million dollars a quarter in depreciation and amortization and we did 500 - just over 500,000 - 540 something last quarter. Probably be a similar amount this coming quarter.

Right. Congratulations on a good quarter guys. Thank you.

Thanks.

Thank you.

And the next question will come from Tim with Vista Capital.

Yeah, thank you, good evening. Can you just clarify in early 2001 you purchased some certain assets of - let's see, Semiconductor. Can you specify which assets they were?

Sure. It was basically all of their assets save their cash and accounts receivable. So we bought inventories, we bought fixed assets. We basically bought the business without buying receivables and cash ...

And intellectual property.

And intellectual property.

Software.

Yes. So basically all of the business save accounts receivable and cash.

Thanks.

You're welcome.

And the next question will come from with .

Art ...

Hi, .

Congratulations.

Thank you.

Outstanding results. You hit this won out of the ballpark and also beat the guidance.

Great.

Well, can you please give us more color on pASIC 2 and pASIC 3, what you are seeing there in terms of sales and growth?

Sure, p1, well, you didn't say p1, but I'll give you all of them. P1 was actually up very nicely in the quarter, it was up -- it looks like about -- you don't have them separately?

I didn't do them separately, yes.

OK. Well, the combination of p1 and p2 are matured -- are the mature products, and those were up 14 percent quarter over quarter. You see that new products were up 10 percent, which was actually was -- was at a slower rate than products. And that primarily was due almost exclusively to what happened in QuickRAM. It was basically flat to the previous quarter.

So in general, we are very pleased with the life we're seeing out of the old products. Actually, maybe a different way of looking at this for you, although it's not by product category, we go back and we look at how the bookings come in, or the new orders come in as a result of when the design was done. We're at this point programming about 70-plus percent of all of the units that leave here. And so, with that programming, since we're programming as we can see the date that the programming file was created. We go back and look at that, and it turns out that our bookings last quarter, about 40 percent of our bookings, actually -- sorry, 35 percent of our bookings were stuff that were designed over two years ago.

So it's really a whole bunch of old designs that are turning back on, or where they're end equipment inventory is finally shipped out and they're having to build more units. So again, it's another indication of the fact that it's -- that the business is alive and well and we feel pretty bullish about what's going on here, even with the old products.

OK, and QuickRAM, are you still counting that as a part of ESPs?

Yes, we are.

OK, and you said ESP revenue growth was only 3 percent, then.

Yes, that's right. And that was primarily -- basically, that was a tradeoff between -- QuickPCI was up dramatically, and QuickRAM was relatively flat. Had a record quarter for QuickPCI in spite of the fact that we're down so far off our peak revenues.

OK, now coming to QuickPCI, what kind of applications are you seeing it being used in? Can you give us more color on that?

Well, it's a very broad range of applications. PCI, as you know, is used everywhere. And so we're seeing -- it's not just the , but it's also the bit. In this quarter, for the first time we saw some good orders come out of - somebody asked earlier about it, I think it was Carter who asked earlier about the military business - we saw for the first time some good orders come out of Northrop Grumman. They have designed our 6664 into the F15 and are now designing it into the F22. We are just beginning to see orders come out on the F15 and there should be some - I think we have got 8 design wins in the F15. So that is an upgrade package I believe in the F15. So, it is very hard to pin down for you. I think there is several . . .

some medical electronics . . .

hart(?): I would have to - I would have to break it out for you by segment and I have not done that unfortunately.

OK. Are you - do you feel you are gaining market share just from other companies or from non-PLD business?

hart(?): Both.

Both. OK.

Both. As a matter of fact, I do not think we are, we know we are. Look at the revenues that the other PLD or that the ASSP guys that participate in this market, what they have reported. Nobody has seen that strong a quarter.

And about your back log, is that also - is there a sizable Quick PCI in it or can you comment about the composition of your backlog?

Well, let me just look at it once here. I do not see - I do not have backlog broken out by product category. I have it broken out by customer unfortunately and by territory, not by product type. But I have new orders broken out by - and new orders laid in in a very similar fashion by product category than what we saw revenues laying in. As an example, the PCI - we talked about that - PCI bookings or new orders we said were up 32 percent on the quarter and revenues were up almost 40 percent. So I guess the only thing that was really down was the Eclipse product line and that is the result of two specific customers that ordered a lot in Q1 and have not ordered anything in Q2 and now will be ordering again in Q3. So again when you look at this to find a level, it is kind of like looking at batting averages.

If you look at a guys batting average on a monthly basis or on a season, you get a very different picture than if you look at it on a weekly basis or a per game basis. And when you make the window too narrow or the time slot too narrow, you get a very distorted view. So, sequential - looking at things sequentially, quarter-to-quarter, maybe one of the good things that will come out of all this is this obsession of looking at things on a quarter-to-quarter basis. Of course I guess if we stopped that we would not need analysts every quarter. So that probably is not a very good idea is it ?

And anything you would like to say on in terms of where you are pilot or samples to customers.

Well no. We have had product out since January. We have small thing that we fixed with that we fixed and that was fixed in March and we are sampling - we are good to go with the product that we have got.

Right.

And we are sampling that.

.

is fully fine.

Well, again, congratulations on posting the best growth among the PID companies.

Thank you.

And just another reminder that it's star-one if you have a question.

Moving on we'll take Quincy with Teton Capital.

Yeah, hi, guys, great quarter.

Hi, Quincy. Thank you.

Thank you, Quincy.

Couple of questions, on the inventory side, you know, inventories are going down. I would have expected them maybe to drop a little faster. What - where do you think they'll end up at the year end?

I think we're still expecting to be able to pull close to six million out of the inventories this year. It might not quite get there. But I think you can bet that was a big topic of conversation here as well. So operations guys are working hard on accelerating that reduction going forward. But I think we're still looking to try and get to about $1-and-a-half million per quarter, you know, probably in the million-two range next quarter, and more than that following on.

Funny, Quincy, your feelings about that were the same as mine.

Good, good, good. I'm glad to hear. We're at least thinking the same thing.

On the investment in Tower - so there's another one in the fourth quarter.

Yes.

Explain to me why we're continuing to make these investments. I mean, I know there's a contractual obligation but I thought you guys were attempting to re-negotiate that?

Well, we were. It was kind of a thing but it didn't actually work. I think we clearly bought into the concept of needing wafer capacity when we went into this arrangement back in December of 2000. If you remember, at that point they were starting to talk about allocation of wafer capacity and little guys like us get pushed out of the way in that kind of a situation. We need strong foundries to survive.

So we look at the situation and decided what we needed was an additional fab foundry to work with. And after a lot of work chose Tower to go in with their new Fab 2 facilities going in in Migdal Haemek, Israel. We made a commitment at that point to put up $25 million. I think it's absolutely worth doing this to get this capacity at both .18 and .13 and we're going to go forward and build a lot of new products there over the next few years.

So you have the 3.7 in the fourth quarter and then in '03 how many?

And so the total of - there's two more payments, both for 3.67 million.

And that's - and you're buying - what's you're doing is you're buying - and I know you guys have said this before. I apologize.

Yes. That's OK. We - yeah, the most recent - I mean, it changes with every deal as the deals get moved around a bit. But this most recent one was 60 percent of the proceeds went to buy common stock at the then current value and 40 percent went into wafer credits. These wafer credits we can begin to use immediately at a 7-and-a-half percent rate for the next - until 2005 when they go to a 15 percent rate.

So the wafer credits, where does that go on the balance sheet, just goes into other assets?

Other non-current assets.

So as you use - as you pull those down you should - that data count's going to decline?

Exactly.

OK. in full. OK. I think - let's see. Last question on - and I don't know if you guys feel comfortable talking about this, but I'm trying to get some sense of '03. I know, obviously, it would be a very broad range of potential revenue for , but can you give even just a really broad range for what you might be able to see in '03 for ?

It'd just be a wild - honestly, we've got-- we've got expectations, a set of expectations by customer. We've got bottoms up forecasting that we've done when we look at these opportunities, and these are constantly being refined. But I really would not want to give you -- not want to give you something.

We believe that there will be a -- we believe that this will be a very significant business on a forward-going basis, I can tell you that.

In '03, though? I mean, will it be significant in terms of revenue in '03, or further out in '04 and '05?

'04 and '05.

This is -- this is -- you know, you heard, or maybe you didn't hear, there's a very broad range of applications that people are designing this into, and -- and the typical volumes of this are between 5 and 25,000 units. There's some spikes to 200,000. There's customers that look like they're going to need 200 to 250,000 units. Obviously, when those hit, that's a really big deal. So -- but those aren't going to turn on, you know, in the short term. This will be, though, a very significant product line for us on a forward-going basis. We have consistently said this, and of course, you just got to -- you either got to believe or you got to move on, I guess.

We believe, and the people here are going for it, man.

OK. We will stay tuned. One last question, and I'm sorry. Could you explain a little bit more about what Art will be working on and any potential revenue -- is it licensing revenue opportunities, or what the revenue impact might be on what Art will be working on.

Here, I'll tell you that it's a -- what we're basically doing. If you think about the historical way of -- that people talk about FPGAs, it's been the FPGA compared to the ASIC. And the economic model was, if you were going to buy an ASIC, you had a large NRE but low unit cost. But if you were going to use an FPGA, you didn't have any NRE but you had a high unit cost. So there was a number at which, you know, a volume at which it made sense to either go with an FPGA or an ASIC.

Now, of course, that numbers been shifting north. ASICs are getting incredibly expensive to do so the number of units you need to buy to make an ASIC make sense has been going up dramatically and is expected to go up even more dramatically in the near future. So that's really -- if you think about that model between programmable logic and an ASIC, what I'm going to do is I'm going to bring that same concept to the ASSP space, where if you think about an ASSP vendor who has to be able to find a market where has to be able to sell $10 or $20 or $30 million worth of product in order to justify doing a new chip, I'm going to go after the market where we don't have to have that much because we're going to use programmable logic to create these devices.

You know, it's not -- we don't know yet how successful this is going to be. If you go to our Web site, you can look under -- there's an icon for Web ESP in the lower right of our homepage, and you can see what we've done there so far with Utopia, Bridges, and Gigabig Ethernet parts. I think that our intent is to bring out many new products in this space and to produce revenue by selling our silicon, and not through the -- but the trick is that we find ways to use intellectual property that we beg, borrow, or create, steal, whatever we have to do to -- and license to do this.

So the idea is to actually sell silicon containing IP as opposed to selling IP.

OK, great. Thanks, guys.

Yes.

And we'll take our last question. It is a follow up question from with Vista .

Yes. One follow up. Can you give an R&D guidance for the next quarter, the coming quarters?

Yes. In terms of spending, we expect that the R&D spending will be down somewhere between $100,000 and $200,000 when you compare Q3 to Q2.

OK. And one more question. Did you - is the Bangor, India design center, is that fully open for business.

It is. It has been actually - we actually opened the building in February of this year but we have actually had that crew together for several years. We were there working with somebody that assembled that team for us. So basically those folks have been working with us now for several years.

Thank you.

You are welcome.

And there are no further questions. I will turn the conference back over to Mr. Hart for any concluding comments.

OK. Well thank you for joining us for our second quarter. Obviously the market is a mess but I tell you were are - it does not seem to be affecting our customers and as long as we have ground floor offices, it does not affect us either. So thank you kindly and we will look forward to seeing you next quarter.

And that does conclude today's program. Thank you everyone for joining us.