Quicklogic Corp (QUIK) 2002 Q4 法說會逐字稿

Good day everyone. Welcome to the QuickLogic Fourth Quarter and Fiscal Year 2002 Earnings Conference Call. Today’s call is being recorded. Now, at this time, I’d like to turn the conference over to Mr. Tom Hart, Chairman, President and Chief Executive Officer. Please go ahead, sir.

Okay. Good afternoon and welcome to our Fourth Quarter and Fiscal Year 2002 Earnings Conference Call. Thanks for taking the time to hear about QuickLogic and our leadership in the Embedded Standard Product market place. Carl Mills, our CFO, will take you through the financials and then I’ll share my perspective on our business. Finally, Carl will share our guidance for Q1, then we’ll take questions. Carl.

Before I get started, I’d like to read a short Safe Harbor statement. During this call, we will make certain statements that are forward looking. These include statements concerning future results, financial metrics, visibility, 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 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 10 K, quarterly reports on Form 10 Q and prior press releases for a description of these and other risks that could cause our actual results to differ materially from our forward looking statements. QuickLogic assumes no obligation to update any such forward-looking statements.

Let me take a moment to give a high level overview of the fourth quarter results and touch on the annual results, then dive into more detail on the quarter.

Our operating results for the fourth quarter were strong last quarter. Our revenues and gross margins were up sequentially and these items, combined with lower operating expenses allowed us to cut our sequential net loss by $1 million to 2.4 million on a pro forma basis.

Certain charges were recorded during the quarter that are not in our pro forma results and which are in our GAAPs net loss. Since these items reflect both the quarter and the year, let’s talk about them at this point.

We took two large charges in Q4 that were triggered by external factors. First of all, a decline in our stock price during the quarter caused us to reassess the value of goodwill on our books. While evaluation of the company takes on this kind of cash flow would not trigger a goodwill write-off this quarter, the change in our market cap during the quarter caused us to completely write-off our goodwill, resulting in a $11.4 million charge.

Secondly, the value or Tower Semiconductor common stock was $3.40 at year-end. We wrote down our investment in Tower to this value, which resulted in a $3.8 million write-down in Q4. At least one other Tower strategic investor took a similar charge against their Tower holdings in the fourth quarter.

In addition to the goodwill write-off and the marketable security write-down, we recorded in restructuring charge of $800,000 during the quarter. This charge was associated with a reduction in force we announced November 4, 2002. It is consistent with the guidance we gave and the 10- Q that we filed with our third quarter results.

Our fourth quarter net loss, which was $2.4 million on a pro forma basis, was $18.4 million with these three items included.

Now let’s recap our performance for 2002. Despite a very tough environment for semiconductor companies, our revenue was up 1% in 2002 compared to 2001 and our quarterly revenue has recovered by about 28% since the third quarter of 2001, which was our low revenue point during the down cycle.

The ESP product revenue, which includes our QuickRam, QuickPCI, QuickFC and Quick[DSP] and V3 products increased 28% year-over-year and represent 37% of 2002 revenue. Asia Pacific revenue increased 43% year-over-year and represents 25% of 2002 revenue. Our distribution channel accounted for 70% of 2002 revenue compared to 67% in 2001.

Pro forma gross margin was 45% of revenue in 2002 compared to 44% of revenue in 2001. Due to continued focus on expense controls, pro forma operating expenses of 27.3 million was $3.8 million lower than 2001 levels, despite our acquisition of V3 Semiconductors late in 2001.

Pro forma research & development expenses of 12.1 million are 2.2 million lower than 2001 levels. And SG&A expenses of 15.2 million are $1.6 million lower than 2001 levels. Combined effect of our pro forma gross margin improvement and expense controls allowed us to reduce our operating loss by $4.2 million in 2002 compared to 2001. This improvement was partially offset by the net effect of interest and other income resulting in a reduction of our net loss by $2.7 million or $0.17 a share in 2002 compared to 2001.

Let me just recap some of the differences between our net loss and our pro forma net loss for the year. Pro forma results in 2002, excluding the effects of an inventory write-off of $1.6 million and an asset write-down of $1 million, both taken in the third quarter as well as the fourth quarter charges for goodwill, restructuring and the write-down of our Tower investment mentioned earlier. Included in these charges our net loss was $21.3 million or $1.34 per share in 2002.

Pro forma results in 2001 excludes a $3.7 million inventory write-down taken in the second quarter, a $600,000 restructuring charge recorded in the fourth quarter and a 6 million – $8 million write-down of our Tower equity investment recorded in the third quarter of 2001. Excluding these charges, our pro forma net loss in 2001 was $15.3 million or $0.71 per share. Our net loss, including these charges, was $26.5 million or $1.24 per share.

Now let me turn toward our discussion of our fourth quarter results. [Indiscernible] for the fourth quarter of 2002 was $8.4 million, an increase of 1.3% sequentially and a 24% increase compared to the fourth quarter of 2001.

Revenues slightly exceeded our expectations for the quarter and [indiscernible] our guidance that revenue would be flat to down 5% sequentially.

We had significant EFP revenue growth during the quarter. [EFQ] revenue increased $1 million or 33% sequentially and EFP revenue accounted for 46% of fourth quarter revenue. This increase in sales is an example of our EFP products being used in high volume applications. Our EFP revenue increase was partially offset by a reduction in other product revenue, primarily attributable to our mature products.

Our GAAP and pro forma margin was 48% of revenue in the fourth quarter, an improvement over our pro forma third quarter results of 44.6% of revenue and at the high end of our guidance for the quarter. A sequential improvement in gross margin is primarily the result of reduced overhead costs and the shipment of inventory that was written down in the third quarter. Third quarter 2002 pro forma gross margin of 44.6% excluded the $1.6 million inventory write-off mentioned earlier.

GAAP gross margin of 48% in the fourth quarter compares to 37.4% in the fourth quarter of 2001. Fourth quarter pro forma operating expense of $6.3 million was $700,000 lower than the third quarter of 2002. On November 4 we announced a reduction in force that affected 55 employees, and this action, together with our holiday shut downs in November and December and our continued control of expenses reduced operating expenses in the fourth quarter.

Research and development expenses of $2.5 million declined by $400,000 sequentially to [indiscernible] our pro forma third quarter results. This reduction was primarily due to the impact of our reduction in force, holiday shutdown and certain other expenses. Research and development expenses in the fourth quarter were $1.5 million lower than fourth quarter of 2001.

Selling General and Administrative expenses of $3.8 million declined by $200,000 sequentially. SG&A expenses were lower, primarily, as a result of reduced salaries and outside service expenses. Fourth quarter 2002 Selling General and Administrative expenses are $200,000 greater than the fourth quarter for 2001.

Our pro forma fourth quarter 2002 net loss of $2.4 million or $0.10 a share represents a sequential improvement of $1 million or $0.04 a share in our result of operations. Fourth quarter results are $2.5 million improved compared to our pro forma net loss in the fourth quarter of 2001. GAAP fourth quarter 2002 operating expenses of 18.5 million include the $11.4 million goodwill write-off and the $800,000 restructuring charge mentioned earlier.

GAAP fourth quarter 2001 operating expenses of $8.1 million include approximately 600,000 of restructuring charges. Our fourth quarter 2002 GAAP profit and loss also included a $3.8 million write-down of our Tower investment that was mentioned earlier.

Our fourth quarter 2002 GAAP net loss was $18.4 million or $0.78 a share compared to a net loss of $5.5 million or $0.24 per share in fourth quarter of 2001.

Let’s talk for a minute about the balance sheet. We finished the quarter with $22 million of cash and equivalents. We increased our debt with Silicon Valley Bank by $6.5 million during the quarter. We invested 3.7 million in Tower Semiconductor during the quarter, acquired approximately 440,000 shares of common stock and additional prepaid V3 credit. Otherwise, we used $2 million of cash during the quarter.

In terms of other balance sheet news, our accounts receivable balance was $4.9 million representing 54 Days of Sales Outstanding. Our inventories declined by $900,000 to $7.9 million during the quarter.

Fifty-nine percent of our inventory is in [dye] form and distributor inventory represents six days of sales at current sales rates.

Prepaid assets increased by $400,000 during the quarter and machinery and equipment net declined by $900,000 during the quarter as a result of depreciation. Other assets declined by $10.7 million during the quarter, which is the net effect of our October Tower investment of $3.7 million offset by the changing of Tower stock price to $3.40 and the write-off of goodwill, totaling 11.4 million.

At year-end other assets include $6 million in Tower securities and $4.7 million of prepaid [reefer] credit. Our credit facility with Silicon Valley Bank includes an $8 million revolving line of credit and a $4 million equipment financing line. At the end of the quarter we got $2.2 million outstanding against the [equipment] line and 6.8 million outstanding against the revolving line.

We obtained waivers from Silicon Valley Bank to attain these funds since our changeable net worth was less than the $49 million required under our agreement. We are currently in discussions with Silicon Valley Bank to amend our agreement and expect to lower the changeable net worth requirement as a result of these discussions.

We finished the year with 148 employees. Now let me turn the call back over to Tom.

Thank you Carl. A truly mind-numbing array of numbers. Q4 was, in fact, a breath of fresh air for us, from a bookings perspective, which led to a 24% increase in revenue from Q4 of 2001. Bookings in Q4 started out very strong in October, the best booking month year-to-date. Bookings then were relatively weak in November and then came on like gangbusters in December, which wound up being the best booking month of the whole year. A great way to finish the year, I might add.

We believe this could be a precursor to a bright new year. From a revenue perspective, we were sequentially 1.3% Q4 over Q3, very modest growth, but positive growth, nonetheless. It’s clearly better than no growth or negative growth. For the record, we’ve grown faster, sequentially, for seven out of the last eight quarters than the total of our competition, which is another way of saying we’ve been gaining market share. I must acknowledge we’re not going to surpass the competition, at least in the short run. But gaining market share is certainly better than losing it.

Sequentially, new product revenue growth of 17%, and ESP revenue growth of 33% continue to be most encouraging. ESP has accounted for 46% of our total revenue in Q4 and we’re now at 37% of revenue for the whole year. That’s up from 29% last year, a very positive trend, from our perspective, which further demonstrates our progress in the Embedded Standard Product market place. This is just another way of observing the value that customers get from Embedded Standard Products and our high velocity order-driven business model.

We’ve talked in these earnings calls before about the nature of our business being very turns oriented. In fact, turns in Q4 were 84% of total shipments. Strong December bookings give us a higher than normal backlog going into Q1. It’s very nice to have backlog going into this first quarter. I say this, even though you’ve heard me disparage the myth of semiconductor backlog in previous earning calls.

The difference here is that most of our customers purchase products from us, programmed with their unique code. A standard part customized to their exact needs. Their orders are accepted by us and our distributors on a non-cancelable, non-returnable basis. This means they are real orders for real customer demand.

Our business model is very different from commodity standard products purchased through distribution where double ordering and / or other channel conflicts can occur that may lead to unreal or inflated backlog, an industry phenomenon we’ve all observed in the past.

At this point, a little over one month into Q1, we’re pleased with the new-order booking rate. Clearly this doesn’t make the quarter, given our high turns requirement, and with nine plus weeks remaining in the quarter, but getting a good start on the quarter is better than the alternative. Carl will give you the specific details of our guidance of Q1 later in the call.

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. While new orders from mature products actually dipped 6% sequentially, orders for both new and ESP products grew very nicely. In fact, new product orders grew 46%, sequentially. ESP product orders in the quarter almost doubled, while ESP revenues grew 33% sequentially.

From a geography perspective, on a sequential comparison basis, Asia Pacific new orders were up 89% with Europe up 41% and North America down 7%. Revenue, on a sequential basis, shows Asia Pacific up 38% with Europe and North American down 6 and 12%, respectively.

As I’ve shared with you in prior earnings calls, sequential comparisons, for a company our size, are of questionable value to analysts or investors in my humble opinion. For example, if we look at the market segment metrics on a four-quarter rolling average basis, instrumentation and test is basically constant or flat at 34 to 36% of revenues, in spite of the fact that this segment declined significantly from Q3.

And the datacomm telecomm market segment, the long-term trend over the last eight quarters shows a steady decline from 37% of revenue to 25%. The fact that we are growing, overall, in spite of the declining datacomm telecomm sector is very positive from my perspective.

Our computing segment has increased from 11 to 17% while our military and graphics / imaging marketing segments, combined, have moved from 14 to 22% of revenues over the same eight quarters. Now that’s meaningful information from my perspective, much more than just sequential data from quarter to quarter or year to year where one or two customers or orders can swing the percentage and distort the picture.

This is a business with long time constants and real trends are best observed by taking the broader view of the metrics. I know you’re all addicted to quarterly and sequential comparisons, so we’ll continue to give them to you, but this business is like a marathon, not a sprint. Okay, end of my harangue. Let’s move on.

In news on the QuickMIPS front, QuickMIPS continues to gain design and traction in many markets and applications. Actually Q4 design activity was strong despite the fact we had three holiday shutdown weeks in the quarter. In this next week, we expect to announce the seasoned industry executive coming aboard to lead our QuickMIPS efforts. This announcement will be closely followed by an exciting roadmap of new products, FPGA and QuickMIPS devices, with various feature sets and at price points that truly offer customers a viable option to ASICs, especially for mid-volume demand requirements.

As you are no doubt aware, ASICs, Application Specific Integration Circuits, which are basically custom devices, are being priced out of the reach for many applications, unless the customer requires millions of exactly the same device. This reality is caused by the very same economics that generally benefits standard precuts, namely bigger wafers and smaller geometries to combine to enable putting more functionality on a single dye, all of which yield lower unit costs at very high volume. That is, after amortization of ballooning, non-recurring development in other fixed costs. And that’s the rub. Unless you’re going to build millions, you can’t amortize the astronomical fixed costs. This leads to the reason for customers using Embedded Standard Products.

Our customers buy a standard product that they can customize. No huge fixed costs, no minimum volume requirements, no delays waiting for custom manufacturing. Embedded Standard Products are really about simple economics, simple economics in development, in production and in responding to change. QuickESPs really are the answer when a customer requires a standard product system on a chip that is field programmable, truly the programmable system on a chip solution.

Let’s now move forward to an overview for what you can expect we will accomplish this year. Let’s look at this from a perspective of, first of people and then products. From the people point of view, we expect very little growth in our head count this year.

Engineering additions will primarily be made in our system design center in Toronto, Canada or the software design center in Bangalore, India. We will be adding field applications engineering resources in selected markets to support increased customer design activity, most notably, China, where we’re seeing strong acceptance of our Embedded Standard Products.

Speaking of products, as I previously mentioned, we’ll fill out the QuickMIPS product line with an exciting array of new products. These new products will extend the product line along the dimensions of more programmable fabric, which, when coupled with additional hardwired features, will enable their applicability to more performance demanding applications. Products with less programmable logic at fewer hardwired features will also enable us to be competitive at price points in the $25 arena.

Another very exciting area for QuickMIPS product line extension is centered on getting more overall compute power at lower clock speeds. This means lower overall power consumed and, therefore, less heat generated, which is a good thing. For the standard microprocessor to get higher performance it means running the processor at higher clock speeds. This consumes more power. But, what if we could get higher performance at the same, or even better yet, at lower clock speeds? Sound impossible? Well, we’re not trying to fool Mother Nature here, that never works. What we are doing is augmenting the standard microprocessor architecture by using the onboard programmable logic to implement what were software intensive routines.

Moving what was implemented in software to hardware reduces power consumption, easy to say, but very tough to do, unless you have a great microprocessor architecture and high-speed programmable logic on the same piece of silicon. Voila, we have both. The MIPS microprocessor architecture and our own patented proprietary programmable logic, enabled with Via-Link, the programmable metal to metal interconnect solution required to make literally the thousands of connections between the processor and the logic.

Now, in addition we will capitalize on the very low power characteristics of Via-Link based programmable logic to introduce the industry’s lowest power, highest performance line of FPGA’s. The product family will be called Eclipse II and will be formally announced this Monday, February 3. Now, if you’re a student of the programmable logic space, you’re probably thinking right now, how can these folks at QuickLogic possibly compete with the giants in the programmable logic industry? The answer comes from the benefits enabled by Via-Link, namely, our FPGA’s operate at much lower power and at higher speeds than SRAM-based FPGA’s. Via-Link-based devices also offer unprecedented levels of design security, an essential characteristic not available from SRAM-based devices.

And, finally, SRAM-based FPGA’s require reprogramming each day when they’re powered up. Via-Link-based devices remember their tasks and offer instant on capability, a crucial requirement for many real-time applications.

Well, I predict 2003 will be a very exciting year for us here at QuickLogic. And, if the industry demand really does pick up, as many of the forecasters have prognosticated, it will also be a lot more fun than it was the last two years.

Okay, well thank you and now Carl will give you more specific guidance on Q1.

Thank you, Tom. We typically have low visibility in the current quarter revenue and depend on 75 percent to 80 percent of our turn’s business to make the current quarter. As Tom mentioned, our Q4 turns were higher than normal, 84 percent of shipment, but strong fourth quarter bookings associated with our Asia Pacific ESP business is providing better than normal visibility into the first quarter. With this higher visibility we are providing guidance for sequential revenue growth of 2 percent to 6 percent.

Current low unit production levels will continue to result in underabsorption of production costs, and will continue to hold down gross margins. Based on our projections, we expect that our revenue will produce gross margin in the 40 percent to 50 percent range over the next few quarters. We have significant new product development programs underway, as Tom mentioned. We expect that these programs, a lack of plant shutdowns and higher payroll taxes could result in research and development expenses that are as much as $150,000 higher sequentially. We expect SG&A spending to be within $100,000 plus fourth quarter expenses.

Interest and other income net, includes interest income on invested cash, foreign exchange gains and losses, interest expense on borrowings and the gain or loss incurred on the company’s deferred compensation investments. During the fourth quarter the net expense was $129,000. We expect that interest income and other net will be at current levels in the first quarter.

We expect that the benefits of our reductions influence and our continued focus on expense control will result in lower cash consumed in operations during the first quarter. Inventory levels are expected to decline by $200,000 to $500,000 during the quarter. We plan to tape out two new products this quarter and the capital expenditures and expenses associated with this effort are significant. We expect to consume approximately $2 million of cash during the first quarter.

As you know, we have a strategic agreement with Tower, under which additional payments could become due to Tower. Based on the current agreement with Tower, a $3.7 million payment could become due in the middle of 2003. Tower may decide to offer more favorable terms in exchange for acceleration of this payment. We would, of course, need to access this acceleration if such a proposal is received from Tower and any acceleration of payment to Tower in this agreement could cause a change in our short-term cash flow.

We are running and [unintelligible] lots at Tower today and plan to provide our customers with stable product in the middle of 2003.

In august 2001 we delivered $2.5 million QuickLogic common shares to acquire V3 Semiconductor’s assets. To facilitate the QuickLogic share sale, we filed an S3 [unintelligible] registration that became effective on July 17 last year. The bankruptcy has approved V3’s plan of distribution and we believe that approximately 2 million of these shares were sold to raise funds needed to satisfy V3 creditors. Updates will be available from time to time at www.vq.com. 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.

Let me turn the call back over to Tom.

Okay. Thank you, Carl. For your scheduling purposes, our Q1 2003 earnings conference call is scheduled for Wednesday, April 23, 2003 at 2:30 p.m. Pacific Standard Time.

Okay, operator please let’s open up for questions now.

Thank you very much, sir. The question and answer session will be conducted electronically today. If you’d like to ask a question, please press star, one on your telephone keypad at this time. And, once again that’s star, one to ask a question.

And, our first question comes from John Lau with RBC Capital Markets.

Yes, hi, thank you, Tom. Good afternoon. I was wondering if you can give us a little more color on the strength that you saw in the ESP product line. You know, you mentioned a couple of different areas, but I see some strong growth in the computing area. I was wondering if you can just give us an overall view of what was strong in the quarter for ESP. Thank you.

Yes, well, we have -- we had several areas that were strong. But, the strongest really came from QuickRAM and from a specific application in China that we -- a very high volume application. Actually, it’s the highest volume application that we’ve ever seen in our history for a single socket use. We’re being exposed to a range of high volume applications that we’ve never been exposed to before. By high volume I mean in excess of hundreds of thousands of devices. In the past, I think the biggest we’ve ever seen is probably 150,000 or 200,000, and this is larger than that. Although, it isn’t all been booked at this point.

I think what’s different here is that ASIC’s have priced themselves out of reach of people who aren’t going to build millions of exactly the same thing. And, we are talking about hundreds of thousands then FPGA’s become a very partial alternative or a viable alternative to ASIC’s, offering a lot more flexibility, of course, as you’re well aware. And, giving the kind of turnaround that you’d never get out of an ASIC. We turned orders from the beginning of the quarter to the end of the quarter very quickly using our model, our high velocity model. So, there’s -- certainly, Q4 was -- the strength of Q4 was in some ways driven by that one customer. I believe they accounted for 12 percent of revenues in the quarter, which is the first time we’ve ever had a customer that was more than 5 percent in any given quarter. They’re not over 5 percent for the year, by the way, but they were 12 percent of the quarter.

So, very positive and we see more of those on the horizon. Does that answer your question, John?

Yes, and could you tell us what type of application broadly that was in China?

Well, actually the application is PCI, interesting enough. It’s a PCI interface that was put into our QuickRAM device.

Okay. Great. And, do you see -- continue to see further design if it’s in China that are going to be accelerating over the course of 2003?

Yes, we do. And, in fact, we’re going to put to design resources, FAE’s into China to, in fact, aid that process.

That was a good one. Thank you very much.

Yes. Thank you, John.

And, just a quick reminder, that’s star, one if you do have a question. And, we’ll now go to Charles [Bushae] [phonetic work] with Bear Stearns.

Hi, Tom.

Hi, Charles.

A quick question for you on the ESP. I heard the last response. I’m just wondering what kind of breath of penetration you’re seeing? The numbers are growing pretty strongly off of a relatively small base. But, the -- how many customer -- how many programs, just ballpark, really account for that revenue? Is it -- are you seeing a pop coming from one or two major programs that are just ramping from prototype to volume? Or, are you actually starting to see a little bit of a broader array of customers that are contributing to the growth?

We’ve continuously seen a broad array of ESP customers. I don’t have a number off the -- an exact number. But, I would -- we do business with something in the order of 2,500, 2,900 customers worldwide, and I would wager that at this point that there's probably between 800 and 1,000 customers buying ESP products from us.

How many of those guys are actually buying in volume at this point? I’m just trying to get a sense for how much growth you might be able to generate over the next, you know, year, year and a half.

I’d say probably 20 to 40 because we have some very good volume applications in our PCI product line, as well as QuickRAM.

In QuickRAM and QuickPCI are [technical difficulties] the two earliest families, are those the ones that are generating the real volume shipments at this point?

They’re the ones that are generating the structure and excitement; QuickMIPS is going to generate the long-term [unintelligible].

Okay. When do you think QuickMIPS might actually start to become, you know, meaningful or material chunk of the group’s revenue?

The second half of the year.

Okay. That’s great. Thanks. A nice quarter considering what everybody else turned in.

Thank you, Charles.

And our next question comes from [Nanotes Nancarny] [phonetic work] with Chip Investor Dot Com.

Tom, Carl, good afternoon. Congratulations on exceeding the guidance.

Thank you, Nanotes.

It was a pleasure.

[Nanotes Nancarny] Yes, can you tell us more about design wins during the quarter, particularly for QuickPCI and QuickMIPS?

Well, in terms of -- I talked briefly about the momentum. We don’t specifically talk about design wins for competitive purposes. And, for two purposes really, sometimes competitive purposes, but the other is that some customers don’t like you talking about the fact that they’re using your product for their competitive purposes. The QuickPCI is, as a product line, is coming very strong. Art Whipple, I think you know, was our CFO and has gone off to run our Logic Division. He and his guys have come up with a strategy in PCI that I call the Burger King strategy and that is have it your way. These guys are introducing devices at a phenomenal rate. We’re going to have something in excess of 12 or 15 PCI devices in the marketplace, really blanketing 33-megahertz, 66-megahertz, 32-bits, 64-bits in the course of by the end of the first quarter. I think there’s already about seven or eight devices and they’re set to introduce another five or six.

These devices, by the way, are at [PricePunch] [phonetic work], we haven’t gotten [unintelligible]. So, their very competitive products.

The target ones specifically are now down in the single digits, ASP’s which we had not been able to get to before. And, which we are to now, which we believe will open up a very significant market for us. You know, it turns out that PCI, we believe represents a very significant opportunity, primarily because it’s one of those things that Art says it’s like payroll, if you do it right a jillion times, you know, nobody ever says anything to you about it, but you screw it up one time and you hear about it. Well, a PCI’s the same way. You’re not going to get any credit from you boss of doing a great PCI design because, you know, what are you going to contribute there? But, if you screw it up, you’re going to be in deep trouble if you’re a young engineer.

So, the point is, why not buy a safe solution, one that you know that works and then concentrate on what you need to differentiate your products from your competition. So, we think PCI represents a very significant growth opportunity on a forward-going basis. And, that’s here now. We’re seeing revenues, immediate revenues from that. Long-term QuickMIPS is, we believe, is the answer. And, of course, we’ll be back to talk to you about that one when the revenue starts to roll in.

Okay. And, recent announcements from leading telecom companies like Nortel and TelLab seem to indicate that the communication sector may be at bottom. What do you hear from your customers?

Well, if I had to wait for the datacom and telecom guys, we’d be older and grayer. I think it’s going to be a while before they come back. You know, I haven’t said that though, by the way, their sales are not zero. And, in fact, Nortel in Q4 was in our top 10 as a customer. We happen to be in one of the products that is actually selling for them. So, they’re buying product from us. But, other guys that were very good customers in the past are not buying much these days.

So, as you saw by the fact that our revenue is now on a four-quarter rolling average basis, datacom, telecom segment is only 25 percent of revenues, down from 37. You know, we’re obviously much more buffered by what they do then, you know, than our competitors were. But, they’re still in the 70 and 80 percent of their revenues come from telecom guys. I hope they come back. I don’t think you’ll see them come back the way they did, though. I think that was part of the bubble.

Okay. And, what’s the status of your profit qualifications at Tower Semiconductor, if I may ask?

We’re running engineering wafers there now. We’re set to tape out our first product. As a matter of fact, it should tape out tomorrow, which is the next generation QuickMIPS. And, then we’re set to tape out FPGA’s there in February. I think the third week in February. So, we’re moving right along.

Okay. And, finally, a question for Carl. What is your breakeven on cash flow basis and on earnings basis?

Breakeven on a cash flow basis was about $12 million, and earnings is about $14 million.

Okay. Thank you.

Sure.

And, one final reminder, that’s star, one if you’d like to ask a question. And, we’ll now go to Robert Katz [phonetic work] with Sinvest International.

Hi, Tom. Nice quarter, nice to see an improvement in the backlog.

Thank you, Robert.

I have a question about the [unintelligible] market space. We’re starting to see companies like LSI talking about rapid chip. And how do they compare with your technology and your offering?

Well, the easiest comparison to make is first at the top and that is that theirs is -- rapid chip is fundamentally a custom chip. And, our products are standard products. So, the implications there are, of course, that you buy standard products you can buy one with no NRE’s. You can’t buy one rapid chip with no NRE. So, it’s a very different model. It’s a different way of -- basically what they’re doing is they’ve figured out a way to do ASIC’s that don’t have as large a NRE’s as full custom ASIC’s.

Right.

So, it’s a...

So, they’re still withstanding the market opportunity for the ASIC’s, it’s not -- they’re still making it cheaper to make an ASIC?

They’re making it cheaper to make an ASIC, but it’s still full custom, okay?

And it still has a minimum volume requirements.

Okay.

Minimum volume and NRE’s, you know, you got a non-recurring engineering cost there. You know, you’re looking at multiple millions of dollars for full custom ASIC’s today, standard cells you’re looking at something in the neighborhood of 300K for rapid chip.

Okay. Okay. On the balance sheet, where are the Tower shares held again, is that in the cash and equivalence or is that in other assets?

It’s in other assets actually.

In other assets. Okay, that’s for the March just happening. Okay. And, what was the guidance for the bottom line?

We didn’t provide the bottom line guidance.

You didn’t? Okay. We’ll just have to run the model of it ourselves. All right. Nice quarter, and best of luck.

Thank you, Robert.

Thank you.

And there appear to be no further questions at this time. Gentlemen, I’ll turn the conference back over to you.

Okay. Well, thank you very kindly for your time and your attention and your interest in QuickLogic, and we’ll see you next quarter. Thank you. Bye-bye.

And, that concludes our conference call. We thank you all for your participation and have a great day.