Quicklogic Corp (QUIK) 2002 Q3 法說會逐字稿

Good day everyone and welcome to this QuickLogic Third Quarter Earnings Conference Call. Today's call is being recorded. After opening remarks and introductions, I would like to turn the conference over to Mr. Tom Hart, Chairman, President and Chief Executive Officer. Please go ahead.

Okay, thank you. Good afternoon. Welcome to our Third Quarter 2002 Earnings Conference Call. Thanks for taking the time to hear about QuickLogic and our leadership of the embedded standard product marketplace. Carl Mills, our new CFO will take you through the financials and then I'll share my perspective on our business. Finally, Carl will share our guidance for Q4 and then we will open it up for questions. Carl?

Before I get started, I would like to read a short Safe Harbor statement. During this call, we will make statements that are forward-looking. This include statements concerning future results, financial metrics, visibility, the competitive environment, acceptance of our products going forward, economic conditions, expected actions by QuickLogic, the timing of our return to profitability and market opportunities generally.

These forward-looking statements involve risks and uncertainties and Quick Logic's future results could differ materially from such forward-looking statements. We refer you to the risk factors listed down 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 risks that could materially, could cause actual results to materially differ from our forward-looking statements. QuickLogic assumes no obligation to update any such forward-looking statements.

Our revenue for the third quarter ended September 30, 2002 of 8.3 million dollars was within 50,000 dollars of our Q2 revenues declining by one half of a percent sequentially or blowing 27 percent compared to third quarter of 2001. Revenue for the third quarter was inline with the guidance continuing in our October 10th, 2002 earnings pre-announcement. However, during our July conference call, we projected that sequential revenue growth would be in the high single digit.

Our revenue for the third quarter was lower in our earlier guidance owing primarily to a decline in our bookings rate in September. As you know we operate with a high trends rate typically 75 to 80 percent of revenues in a quarter. Our visibility is limited throughout the quarter as the current bookings to generate current quarter demands.

Our revenues for the nine months ended September 30th, 2002 was 24.2 million dollars which was 5 percent below the same period a year ago. Information of the composition of revenue is included in our press release issued earlier today. Some of the highlights include embedded standard product or ESP revenue increased sequentially by 7 percent in the quarter and recognized at 35 percent of revenue in the third quarter up from 32 percent in the prior quarter.

ESP revenue increased by 35 percent over last year's third quarter. Revenues increased sequentially by 7 percent in Europe and by 6 percent in Asia-Pacific, but declined 5 percent in North America. The decline in North America follows growth in Q2 of 16 percent. We had a pro forma loss in the third quarter at 3.4 million dollars. This compared to a loss of 3.1 million in the previous quarter and a pro forma loss of 5.5 million dollars in the last year's third quarter. Our pro forma loss per share for the third quarter was 14 cents compared with loss of 13 cents per share in the prior quarter and 25 cents per share a year ago.

Our GAAP loss was 6 million dollars for the third quarter of 2002 or 26 cents a share and included inventory charges and research and development expenses totaling 2.6 million dollars which were excluded from our pro forma loss. The 3rd quarter reported pro forma gross margin was 44.6 percent compared with 45 percent sequentially and 33.8 percent one year ago. Our product cost and our selling prices remain relatively stable. The gross margin change is due primarily to changes in sales mix.

Our production overhead remains unabsorbed and does affect our gross margin. Pro forma gross margin of 44.6 percent excludes 1.6 million dollar charges for inventory write-downs reported during the quarter. Let me take a moment to explain the two primary items causing these charges. First of all, during the quarter we launched a campaign to develop a new line of products based on our 0.18-micron wafer technology.

These development efforts utilizing our realistic technology are expected to significantly reduce our product cost and expand our product offerings to the effect of increasing our shares in market. During the third quarter we recorded charges for inventories that is expected to be excess as a result of planned development of these products. That's the first item that we charged this quarter.

Secondly, we reported reserves on two parts to reduce the carrying value of the related inventory to its net realizable value. We have currently cost reducing these two products. Our GAAP gross margin was inclusive of these charges was 25.1 percent of revenue in the third quarter.

Let's move on to operating expenses. Pro forma operating expenses for the third quarter declined sequentially by 199,000 dollars to 7 million dollars. Pro forma research and development expenses in third quarter declined by 465,000 thousand to 2.9 million dollars on essentially flat headcount. The decline in expenses can primarily be attributed to a 250,000-dollar non-recurring expense in the second quarter and to the impact of our shutdown in July.

During the third quarter our engineers in Canada completed work on their first QuickLogic product design. As a result of this experience and because of the changes we made in our product development process, we determined that certain emulation hardware and IC assets acquired from V3 Semiconductor one year ago should be written-off.

GAAP research and development expenses are approximately 4 million dollars and include one million dollars of asset write-down are merely associated with these acquired assets. GAAP operating expenses, which include these write-downs, were 8 million dollars during the quarter.

We are pleased with the purchase of V3 Semiconductors' assets one year ago. The former V3 employees, now members of our team have significant system-level engineering talent to accompany and a key role in our leadership of embedded generic products. Sales, general, and administrative expenses were up 266,000 dollars sequentially to four million dollars. This increase is primarily due to increase in selling expenses, in support of our QuickMIPS product line and even expenses incurred to demonstrate our compliance for the short-range of the assets.

On the balance sheet, cash at the end of September 2002 was 21.1 million an increase of 100,000 dollars over second quarter cash balance. Our cash receivable balance was 5 -- 5.3 million and represented 58 days of sales outstanding. Our inventory balance of 8.8 million dollars declined by 2.7 million dollars from the prior quarter. 66 percent of our inventories in dye form the least costly and most flexible way to hold our inventory. In a schedule work in process represents 45 days of sales substantial reduction and 74 days on hand at the end of Q2. Distributor inventory represents 7 days of sales at current sales rate.

Other assets declined by 1.4 million dollars during the quarter which includes a 1.3 million dollar reduction in the value of Tower share that we have available for sale. As the market price for Tower our shares fell during the quarter. For those of you who are familiar with our Altera relationship, we have engaged with them to produce our next generation of products.

As we mentioned earlier our cash balance increased by 100,000 dollars during the quarter. During the quarter we also increased our debt with Silicon Valley Bank by 700,000 dollars. We also get a cash decline net of debt of 600,000 dollars. Our pro forma and GAAP loss net of non-cash charges including these quarter's write-offs was 2.4 million dollars.

Let me breakdown the benefits that we received on our balance sheet this quarter, we reduced our inventory by 1.1 million dollars and decreased prepaid expenses and other assets by 300,000 dollars. We also increased our payables and accrued liabilities by 600,000 dollars had a 200,000-dollar increase in our deferred income on shipments to distributors.

During the quarter we purchased 600,000 dollars of capital assets. Our credit facility with Silicon Valley Bank includes an 8 million dollars revolving line of credit and a 4 million dollar equipment financing line. At the end of the quarter we had 1.95 million outstanding against equipment line and 500,000 dollars outstanding against revolving line.

Now let me turn the call back over to Tom.

Okay, thank you Carl. Well that you heard from Carl Q3 was a disappointment for us from our bookings perspective, which led to basically flat sequential revenue for the quarter. Bookings in Q3 started off very strong and through August they were 15 percent ahead of the first two months of Q2. As our Q3 is normally soft in the first two months of the quarter we took this as a very positive sign that we could meet and perhaps even exceed our revenue guidance for the quarter, which was high single digit growth. Normally, September is our strongest booking month in Q3, as Europe comes back from vacation and people all over the globe get back to work and order products. This year September bookings were 12 percent below July and August run rates owing to a very slow start to the month.

Since we have a very strong turns oriented business, 77 percent turns in Q3, bookings towards the end of the quarter in our revenue directly. Of course you know, we have a bill-to-order manufacturing model and a quoted three-week lead times on new orders for well over three years. Of course we would rather have another quarter of sequential revenue growth to extend our strength of fourth quarters of growth in a row coming out of last year as a whole. Flat revenues of the previous quarter is however better than a down quarter, which are major competition has just announced and we did have 27 percent revenue growth compared to Q3 of last year.

The interesting aspect here is that our matured product business is now a 19 percent higher than year ago levels. New product revenue growth of 33 percent and ESP revenue growth of 35 percent are most encouraging. ESPs now account for 35 percent of our total revenue and 60 percent of new product revenue. A very positive trend from our perspective, which directly adds credibility to our ESP market leadership.

Now at this point, three weeks into Q4, we are pleased with the new order bookings rate. Clearly this doesn't make the quarter given our high turns requirement and with 10 weeks remaining in the quarter. But getting a good start on the quarter is better than the alternative. Carl will give you the details of our guidance later in the call.

As we look at the mix of new orders, we continue to be encouraged from all three product categories, mature, new, and ESP product families. Well, orders for mature products dipped 11 percent sequentially, both new and ES products grew very nicely. In fact, new product orders grew 24 percent sequentially. QuickPCI new orders in the quarter more than doubled, while QuickPCI revenues grew a whopping 42 percent sequentially. The QL5064, our 64-bit/66MHz true PCI controller, still the only one like it on the market by the way is clearly gaining market traction. The reality is that the time required to move from market acceptance to revenues is taking much more time than any of us planned. Of course none of this planned on Intel being two years late to market with their 64-bit microprocessor. Well, that's all behind this now and we are going for it.

From a geography perspective, on a sequential comparison basis, Asia-Pacific new orders were up 23 percent with North America flat and Europe down 13 percent. Revenue on a sequential basis shows Asia-Pacific up six percent, North America down five percent, and Europe up seven percent. In my opinion, sequential comparisons for a company of our size are questionable value to analysts or investors. For example, if we look at the segment matrix, on our four quarter rolling average basis, instrumentation and test is basically constant at 36 percent of revenue. In spite of the fact that this segment declined significantly in Q3 from Q2. In the Datacom and Telecom market segment, the long-term trend over the last eight quarters, shows a steady decline from 37 percent of revenue to 28 percent. This is in spite of the significant increase in Q3 over Q2.

Our military and our graphics/imaging market segments together have moved from fourteen percent to twenty one percent of revenues over the same eight quarters. Now if you ask me for information from my perspective much more than just sequential data from quarter to quarter where one or two customers or orders can swing the percentage and significantly color the picture but perhaps even distort the picture. To end this part of our call just let me say that we're seeing new orders across a broad range of products, geographies, channels, and customers. We are getting new orders for both old and new designs and for mature and new products. For example, 45 percent of Q3 bookings were for parts designed in by our customers two years or more ago. Another 31 percent were designed in over the last 12 months. Unlike our competition, we program the vast majority of parts for our customers and we know where the programming files, hence their designs were originated.

On the news on the QuickMIPS front, QuickMIPS continues to gain designer interaction in many markets and applications. Actually design activity is accelerated, Q3 bore a very significant increase in design activity in both North America and Europe. Another meaningful success indicator is that we're gaining clear interest for major accounts and not just those currently using the MIPS architecture but power PC and armed users as well. Why would this be you might ask. Well, customers care about performance, cost, and time to market in that order. Performance comes first because if the part doesn't run fast enough to meet the system requirements they don't care if it's free. Cost includes design and non-recurring engineering costs, which could amount to millions of dollars for a complex system on a chip with the features set of the QuickMIPS product. Of course unit cost is also important, but it's swamped out by the fixed cost unless the customer requires millions of exactly the same device. Time to market is also very important, which is the reason why FPGAs became so popular in the first place.

Given that these three elements are in the primary decision tree for our customers, QuickMIPS offers the best trade off to our customers. Standard product economics and features to reduce risk reduce development and production costs and accelerate speed to market. All these benefits coupled with a means to differentiate their equipment from their competition, namely; our high performance programmable logic fabric. Our Vice President of Worldwide sales, Jeff Sexton, begins new meetings with potential QuickMIPS customers with the following questions; What if we could get you to market 6 months earlier, shrink your development time and efforts by 70 percent, lower your NRE to almost nothing and allow you to respin your design in days or weeks versus months or quarters. From my perspective, this is a very powerful message; virtually everyone has been willing to hear the rest of the presentation. So, let me give you a real world example.

Last week, I visited a local customer that commented he needed 400,000 parts of his system on a chip. On deeper discussion what he really needed was 20,000 parts each of 20 slightly different variants to accommodate different markets he wanted to serve. QuickMIPS is ideally suited to address this kind of application. The primary reason for this is that embedded standard products are really about simple economics. Simple economics in development, in production and are responding to change. QuickESPs really are the answer, when the customer requires system on a chip that is field programmable. Truly the programmable system on a chip solution. Changing directions here, I want to call specific attention to the award we received this last quarter from Inc. Magazine.

QuickLogic was named as one of the 50 most `innovative and entrepreneurial` companies in the United States. The `Innovation 50` listing ranks small and medium-sized companies that have been awarded the most patents between 1996 and 2001. During that period we were awarded 60 patents. We have now been granted and currently hold a total of 83 patents with 13 additional pending. We are very proud of our contributions to the industry and really appreciate the recognition. Finally, I wanted to share with you that two of our founders John Birkner, and H.T. Chua have been named to The Electronic Design Magazine's newly established Engineering Hall of Fame. Cited for their distinguished careers and exemplary achievements to the semiconductor industry. They are two of the twelve honoraries featured in the October issue of Electronic Design. As you may know, Birkner and Chua are credited with inventing the programmable array of Logic, the PAL, while they were employed by MMI (Monolithic Memories Inc) in the mid seventies. Their invention was seminal to the whole programmable Logic industry, as we know it today. Congratulations John and H.T. Okay well thank you and now Carl will give you a more specific Q4 guidance.

Tom thank you very much. Our ability to reliably predict revenue for the current quarter is limited which I translated as typically 75 to 80 percent of the quarter's revenues our bookings rate is the best indicator of sales in the given quarter. Tom already addressed our Q3 bookings. Bookings in the first two weeks of this quarter are comparable from the levels we saw in the Q3 quarter, we expect that revenues for the fourth quarter will be similar to quarter three. We have normal limited visibility. We are providing guidance for sequential revenue that is flat to down 5 percent.

Current low unit production levels will continue to result in under absorption of production costs and will continue to hold down gross margins. We expect that flat to down, flat to down revenues will produce gross margin in the 40 to 50 percent range over the next few quarters. Our business plan for this year was based on continued revenue growth, a 5 to 10 percent in a quarter. We expected the variable gross margins of about 60 percent and control and operating expenses would allow the company to become profitable by the end of the year. The inventory reductions, working capital management, new credit facilities, and limited capital expenditures were expected to produce a cash breakeven earlier in our revenue growth.

We had flat revenues in the Q3 and our expectation is that the Q4 can again be flat to down five percent. While we strongly believe that our long-term growth and profitability, we reexamined our short-term business model in light of current business conditions and concluded that we needed to lower our losses that of non-cash charges. We plan to reduce our operating expenses and fixed manufacturing costs in a variety of ways taking steps this quarter to produce significant savings in the first quarter of 2003 and beyond. However, we are expecting increased R&D expenses by 250,000 dollars to 400,000 dollars in the fourth quarter due to higher depreciation and new product development costs. We expect SG&A spending to be within 100,000 dollars of third quarter expenses. Interest income and other net includes interest income on invested cash, foreign exchange gains and losses, interest expense and borrowings and to gain or loss included in the company's executives deferred compensation investments.

During the third quarter the net expense was 414,000 dollars. We expect interest income and other net will be at current levels in the fourth quarter. We expect to consume more cash in the fourth quarter than we did in the third quarter. Reasons for this include a 3.7 million dollar payment made to Tower Semiconductor. We expect to have a higher operating loss in net of non-cash expenses. The inventory reduction will be 300,000 dollars to 700,000 dollars this quarter, a little less than last quarter.

Pre-paid expenses are expected to increase by 500,000 dollars or more this quarter. On the other hand we expect to reduce our accounts receivables this quarter. We made a schedule of 3.7 million dollar payment to Tower Semiconductor on October 1st, 2002. Our final payment of 3.7 million dollars due to Tower in February 2003. Tower is an important partner with QuickLogic. Tower will supply the [Inaudible] capacity at a cost structure important to our success in QuickNip in the [Inaudible] 18 micron products. We are running engineering [Inaudible] a day and trying to provide our customers with sample products in the second quarter of 2003. In August 2001, we delivered 2.5 million QuickLogic common shares to acquire V3 Semiconductors' assets to facilitate QuickLogic share sale dissolving S3 self-registration that became effective on July 17th. The bankruptcy court had approved V3 line of distribution, we believe that approximately 1.8 million of these shares were sold to raise fund needed to satisfy V3 creditors, all these will be available from time to time at www.vcube.com. Please remember, we've made forward-looking statements in our presentation and we will rightly meet 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 uncertainty that we face. Let me turn the call back over to Tom.

Okay. Thank you Carl. For your scheduling purposes, our Q4 2002 earnings conference call is now scheduled for Wednesday January 22nd, 2003 at 2:30 PM. Okay, operator let's open up the conference call now for questions please.

Thank you. The question and answer session will be conducted electronically today. If you do have a question, please press star one on your touch-tone telephone. We will take your questions in the order that you signal and we will take as many questions as time permits. Once again that's start one to ask a question. And our first question today will come from John Lau with RBC Capital Markets.

Hi Tom.

Good afternoon John.

I was wondering if you can give us some more color on the growth that you had experienced in the Datacom and Telecom sector, I saw that it grew sequentially, is that specifically in terms of the sector or more in the storage related area, Metro or Datacom? Thank you.

Essentially, it's not, it was. That's the problem with looking at these things sequentially, believe it or not one of the big customers, for the big growth customers was Nortel Networks, sorry, Emulex Corporation was probably the biggest single growth in the period and as Q2 had been pretty quite for them. So, you really need to average more than one quarter together to really look at what's really going on. When you say that Datacom/Telecom was up by 35 percent at quarter-over-quarter that's pretty spectacular. If you average it over several quarters though, you'll see that it is, as I commented earlier in my presentation that it has dropped from about 37 percent of our revenues to about 28 percent on a four quarter rolling year-end average basis. That answers your question John.

Okay on a relative basis, you did see some companies, you just mentioned Emulex come back and do some real ordering?

Yes. They ordered in 2-1-2, so that's kind of their pattern. Other customers as an example, Nortel in Q2 was very strong and we are down about half of that in the Q3. Century Systems, which is a company in Japan in the Datacom/Telecom space was their run rate was up by about a factor of 4 over that time. So it's that's the problem with looking at these things sequentially is that, it's, you know, one or two customers, one or two major orders really swing this thing around and really don't lend any real insight into the business that you get out and looking at it overall, by averaging more quarters than just looking at one quarter.

Moving on to more of the QuickMIPS going forward, what type of applications are you seeing that into the traditional areas or is there any specific sector that shows up on the QuickMIPS application front?

John, if you remember, let me just take you back for a bit. When we did QuickMIPS originally, we designed QuickMIPS primarily to be focused on VPN (Virtual Product Networks) and Voice Over IP and of course when the product came out that marketplace was really down. What we are seeing now is a very broad range of applications. Let me just read some of them to you. The video gaming is an example, home gateways, wireless access points, video capture equipment, ADSL access equipment, CD duplication equipment, finger print recognition, secured communication are sorts of very very broad diverse range of applications. It's basically a very good 32-bit embedded controller that supports all of the popular operating systems from Wind River to API to Green Hills, it is a very good general-purpose 32-bit embedded microprocessor, embedded controller really.

Thanks. In terms of the design cycle for that for the QuickMIPS product would you believe that that would be turning up in terms of volume in the, maybe Q2 time frame next year, would that be fair?

Yes. I think we will see some significant shipments in Q1 but Q2 would be I think it is a fair statement to say that's where we will turn up.

Great. Thank you.

Thank you.

And once again if you do have a question, please press star one. We will now hear from Alvin Kressler with FBR.

Good afternoon gentlemen. I apologize if this has been answered. I have a couple of technical difficulties. The first is can you just elaborate a little bit about which are the products, if I had heard you correctly, is that mature products that ticked down slightly in the quarter? Can you tell me specifically, which one showed the most weakness?

Yeah. It was p1 actually. We don't normally break this out by family, but I can tell you that it was the p ASIC 1 family but again looking at this thing on a sequential basis is really dangerous because last quarter it was just backwards, p2 was down and p1 was up.

Okay, so we shouldn't read too much into it. Could you also just refresh, of the new products what outside of ESPs constitute new products?

Yeah, the definition of new products is all of -- let's say it starts with p3, the p ASIC 3 family, QuickRAM, QuickPCI, let me see the list I'm not sure I get this right. It is on the bottom of the press release. Mature is p1 or p2, new products is p3 eclipse together with all of the ESP families.

Okay, so it is a clear PSP and p3. Correct?

Correct.

Okay. Could you also just Carl or Tom help us walk through; there was a fairly wide range in gross margin guidance you gave. Could you talk about what you think is impacting? Is this really in an under absorption factor as you trend towards your breakeven which is probably sort of few million dollars higher or is this a lot of ASP pressure we are seeing this lack of demand?

No, ASP pressure its just on account that are prices are very stable. What we are seeing is that some other parts of the chain has reduced the cost set in power are now hitting volume and it is starting to effect our gross margin a little bit and that is why we lowered the bottom end of the range to 40 percent.

Okay, okay. Couple of housekeeping questions, if I may Carl, you guys used to break our long-term investments and other assets, the recent in 10-Q. I was wondering if you could do so now for me?

Sure. Our asset sales 11.4 million dollars of goodwill, 1.7 million dollars of prepaid license fees, deferred competition from the executive program of 800,000 dollars, and 9.6 million dollars for Tower. Let me give you the breakdown of that.

Sure.

We got securities from Tower showing on the balance sheet of 6.4 million dollars and 3.2 million dollars of wafer credit.

Okay. Great. And then lastly you mentioned a number of components in your interest and other line. Could you tell us what specifically caused it too turn negative this quarter, net negative?

It was just a swing in the how we book the FX and we don't [Inaudible] it's a recurring event because it goes away for us.

Goes away next quarter or just the modeling overtime?

It goes away for modeling overtime.

Okay. Thanks very much gentlemen.

Thank you.

We will now hear from Princy Lee with Steadman Capital.

Hi guys. I know you mentioned that you've mentioned that you are going to try and control operating expenses little more going forward, but I am a little confused, because it sounds like R&D will be up next quarter and SG&A will be flat I guess, comment on that and then more generally, given the anemic outlook for revenue growth and the current profitability picture, you obviously can't go like this forever, what are the kind of the end goals for operating expenses?

My end goals are to reduce our production cost and our operating expenses in total by 800,000 dollars to 1.2 million dollars a quarter from the levels that we saw in Q3.

And how, and over what period of time?

Effective for Q1.

So, that should come into play from Q1?

Right.

Okay and then on the inventory, I think you mentioned inventory down sequentially going a little, I don't know whether the exact number was 4 or 500,000 dollars?

Yes, we had great news for inventory, last quarter as you know 2.7 million dollars reduction, of which 1.6 million dollars was write-off, so we were able to drain and benefit on our cash by 1.1 million dollars from our inventory. We've taken our inventory down in a good way and right now our projection is that we'll save 300 to 700,000 dollars per quarter in Q4 aiming Q1 from inventory reductions.

So, given, I mean still, you know relatively speaking inventory is relatively high in given current revenue run rates, why can't, why is it that your inventory can't come down faster than that? And what do you think given today's current revenue run rate just assuming, you know we stay what would be, what would an appropriate level inventory level be?

You know what's happened is that we, we've had good growths in sectors of our business; we don't have a lot of inventory on. For instance the PCI has grown about 40 percent a quarter for two quarters in a row. We have to build some product to support that. We've also had good shipping side of our Quick's product, so we had to build product as a buy back with that for a revenue base as well. Those were really the principle drivers calling us to start, to start wavers right now. The long-term I would expect to, we can be able get, our inventory down to roughly 5 million dollars.

So, I shall take in the other, obviously there is other portions of the inventory mix that aren't selling hardly at all?

Well, you know we have a tremendous value in our inventory, we will be able to sell our products for a long periods of time, a lot of parts we're selling now were introduced in 92-93. So, we think that our inventory has tremendous value, is it going to go up a shelf over night, no we don't think so, but is it valuable? Absolutely.

Okay and then, you mentioned cash drain in Q4 would be a little more than Q3, do you have a cash balance projection for, I guess net of, I mean given that stage were it is today, a cash balance projection for Q4?

Sure, but let me lead into that little bit before I just hit you with the numbers, is that all right?

Sure.

So, we're talking steps to reduce our cash consumption right? We're reducing our operations, engineering and SG&A expenses; we've got further cups in our planned capital expenditures except to the extent of we need to like push snaptech to produce new products. We've got shut downs going in the fourth quarter. We're focused on increasing our revenues; we're focused on increasing our gross margin. With high-end sales personnel we think it will really help accelerate the acceptance of our quick look in other products. We're negotiating improved wafer cost with our suppliers; we are reducing our other variable manufacturing cost part of it. We're extending our PCI product offerings; we see that revenue is going to continue to grow better some time. And we are accelerating introduction of our 0.1meg micron ESP and FPGA products. This will reduce our product cost; it's going to increase our shared markets. So from on operational point of view that's what we've got going. The big phase that are going to hit our cash this quarter is we are going to have about three points, but we've already made a 3.7 million dollar payment to towers. I believe that our cash consumed by operations and capital expenditures will be 3 or 4 million dollars this quarter. And we'll offset that to the extent that we can borrow it against our credit facility from Silicon Valley Bank and perhaps through the sale of Tower semiconductor sales, that we have available for sale. So at the end of Q4, I still will expect our cash balance is going to be identical to what we've got now, but we will have a higher debt component to our balance sheet.

So, but had debts up 6, 7 million dollars?

Right.

Okay and the, so and you have one more tower, tower payment next year and is absolutely nowhere to get out of that, is that correct?

Yeah, now we've looked this hard a number of times, we are contractually committed and they are an important partner to that so it looks like we are going make that payment.

Okay good luck guys.

All right, thank you.

As a final reminder, if you do have a question, please press the star one. And there appear to be no further questions at this time. So, with that, I would like to conclude today's call and thank you everyone for your participation.

Thank you [Inaudible] .

Thank you.