Quicklogic Corp (QUIK) 2003 Q2 法說會逐字稿

Ladies and gentlemen, welcome to your QuickLogic corporation second quarter earnings conference call.

At this time all lines are in listen only mode. My name is David and I will be your coordinator.

If during this call you should require assistance, please key star 0 on your touchtone phone and we'll be happy to assist you.

As a reminder, this call is being recorded for replay purposes. I would like to now turn the program over to your host of today's conference, Mr. Thomas Hart, Chairman, President and CEO of QuickLogic Corporation. Please go ahead, sir.

Good afternoon, ladies and gentlemen, and welcome to our second quarter 2003 earnings conference call.

Thanks for taking the time to join us today and hear about QuickLogic and our leadership of this new category of semiconductor devices we call embedded standard products.

Carl Mills, our CFO, will take you through the Q2 financials and then I will share my perspective on our business. Finally Carl will detail our guidance for Q3. I will wrap up with an interesting new market development, think intellectual property security by the way. Then we will take questions.

Carl?

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 are forward-looking. These include statements concerning future results; financial metrics; visibility; the competitive environment; acceptance of our products going forward; economic conditions; expected actions by QuickLogic; the expected 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 10-Q and prior press releases for description of these and other risks that could cause our actual results to differ materially from forward- looking statements.

QuickLogic assumes no obligation to update any such forward-looking statements.

For your information, this conference call is open to all, and is being webcast live. It can be accessed from our QuickLogic investor relations website.

Our second quarter P&L was better than our first quarter results and better than our second quarter 2002 results in all significant areas. Our revenue, gross margin, income from operations and net income were the strongest that we have had since Q1 of 2001. We also had our second consecutive quarter of positive cash flow.

Our revenue increased 27 percent year over year and 13 percent sequentially. Our sequential revenue increase of 13 percent compares to our guidance of a 7 to 10 percent increase.

Two of our customers expedited shipments during Q2, that we had originally expected to ship in Q3. Without these customer requested early shipments our sequential revenue growth would have been 8 percent. Still a very healthy growth.

One customer contributed 27 percent of our revenue in the quarter, up from 13 percent of Q1 revenue. This customer purchased our EFP and FPGA products. Their use of our EFP products generated 21 percent of revenue and their use of our FPGA's, which is a new design for us, contributed 6 percent of total revenue. We had a second customer contribute 7 percent of our Q2 revenue. EFP products contributed 42 percent of revenue in Q2 which is the same as our Q1 revenue mix.

As you know, we sell our product to distributors and directly to OEMs. Our year to date distributor OEM split is 72-28 percent which is very close to our historic average. Our gross margin improved at 52.5 percent of revenue in the second quarter. There were several reasons for this improvement.

Early in the quarter we made significant reductions in the time and cost used to test our product and we negotiated lower assembly costs. Our production activity increased in Q2, resulting in higher overhead absorption therefore increasing our gross margin by more than 140 basis points. The sale of previously written off inventory improved our gross margin by 390 basis points in Q2, compared to 570 basis points in the first quarter.

As a company, we are focused on controlling our expenses. In general, if an incremental expense is not necessary for new product development, necessary for revenue or required for compliance. We have not increased our spending.

Our Q2 research and development expenses of $2.4 million were similar to our Q1 expenses of $2.3 million. Our SG&A expenses declined by approximately $300,000 sequentially.

Our bad debt reserve expense was approximately $230,000 lower than our Q1 expense. We also reduced our legal expenses from quarter to quarter.

To recap our results compared to Q1, our revenue increased by $1.2 million; Our gross profit improved by $700,000; and our combined R&D and SG&A expenses declined by $200,000.

These combined factors reduced our loss from operations to $700,000 in Q2, a $900,000 improvement over Q1. A new item affected our incoming expense in Q2. We sold approximately 400,000 ordinary shares of Tower Semiconductor, generating nearly $2.1 million of cash and producing other income of nearly $700,000.

In total our net loss in Q2 was only $24,000, a $1.6 million improvement over Q1. This net loss of $24,000 compares to a net loss of $33.1 million in the second quarter of 2002. Several factors contributed to this $3.1 million improvement.

One: Higher revenues of $2.2 million; Two: Gross margin of 52.5 percent compared to 45 percent of sales one year ago. Three: Operating expenses that were $900,000 lower than one year ago,and Four: the $700,000 gain on our sale of Tower securities.

We had a positive cash flow this quarter. Positive cash flow from operations, positive cash flow from investing and positive cash flow from financing. This was our second consecutive quarter of positive cash flow.

Cash flow from operations in Q2 provided us with $975,000 of cash. We have generated $2.4 million of cash from operations so far this year.

This is very good news for our company. And it compares to an approximately $5.7 million use of cash from operations during the first half of 2002.

Let me give you a little detail on our Q2 cash flow from operations Our net loss, adjusted to remove the effective noncash charges such as depreciation was a positive $500,000. We reduced accounts receivable by $1.1 million during the quarter, even as our revenues increased by $2.1 million sequentially.

Other balance sheet items, including an increase in inventory, and a reduction in accounts payable, consumed $600,000 of cash during the quarter. As a result, we generated $975,000 of cash from operations.

Our investing activities generated $1.5 million of cash from Q2. We generated nearly $2.1 million of cash from the sale of approximately 400,000 shares of Tower Semiconductor. And we used $600,000 for the purchase of capital equipment.

Our financing activity also had a significant impact on our Q2 cash flow.

During the quarter we renegotiated the terms of our credit facility with Silicon Valley Bank. Under the amended terms we are no longer required to have a minimum level of cash on hand at the bank.

And as a result, $8.8 million of cash that was classified as restricted at the end of Q1 is no longer restricted. This amendment has the effect of generating cash from investing activities of $8.8 million in Q2. I'm sorry, financing activities, pardon me.

We also generated approximately $500,000 from the sale of shares under our employee stock purchase plan and from the exercise of employee stock options.

During Q2, we used cash to reduce our debt by $1.5 million, Silicon Valley Bank received $1.2 million of this debt repayment. In total, a net cash flow from financing activity was $7.8 million in Q2.

As a result of these factors, our Q2 ending cash balance of $24.1 million compares to Q1 total cash position of $22.6 million. which is a $1.5 million increase in our cash position during the quarter in which we repaid $1.5 million of debt.

We had 150 employees at the end of the second quarter. Same number as Q1.

Now let me turn the call back over to Tom.

Thank you, Carl.

You have already heard from Carl, or seen in the press release that we had another great quarter by virtually all measures. Improved revenue and gross margin, coupled with reduced expenses, and positive operating cash flow. While we still are not reaching our potential, we are getting a lot closer.

Carl will share our model with you later in this call.

Now from a bookings perspective this quarter was 23 percent ahead of Q2 last year. However, we were behind, as expected, the blistering booking rate of Q1.

The bright spot for Q2, sequential bookings growth was North American distribution with the strongest bookings we have seen in over five quarters. Who knows, there may be life still here in North America after all.

As expected, the major drop in sequential bookings came from Asia PAC distribution and North American OEM customers.

Now, turns in the quarter, that is orders booked in the quarter that we ship in that quarter, were 68 percent of total revenue. Up from 61 percent in Q1 but still better than our typical 85 to 80 percent. You can see why visibility for our revenues is so difficult when you don't have it on the books at the beginning of the quarter and you need to turn it to generate the revenue.

In contrast to our direct competition, our sequential quarterly revenue growth rate has exceeded the total of the competition for nine out of the last ten quarters. In Q2, at 13 percent sequential revenue growth, we grew over three times as fast as our total competition.

Now. if you have listened to any of our previous earnings calls, you will have heard me disdain the sequential comparison game. So let me give you this metric which I find to be much more meaningful.

In Q2 our growth rate on a four quarter rolling average basis was over 2.5 times the competition. and by this measure, we have outgrown the competition for six out of the last six quarters.

If we look at our combined total revenue on a four quarter rolling average basis, 65 percent is from new products with 41percent coming from embedded standard products.

On this same basis, at the end of Q1 2002, new products were 54 percent and ESP's were 33 percent of total revenue. You can see EPSs are our fastest growing sector while our new FPGA families are doing very nicely as well thank you. So in a short time of six quarters, we are rapidly approaching ESP being half our business.

Actually, if Eclipse II takes off as like we planned, ESP revenue should level out at 45 5o 50 percent of total revenue in the 2004-2005 time frame.

Now all of this new productivity really points to a truism about the semiconductor business. Namely you don't come out of a down turn with old products.

This means that you must have the cash on the balance sheet to enable you to keep investing in R&D through the downturn so that you will have these new products when things turn around. This is exactly what we have done. We are now beginning to see the positive results in our current financials.

The really good news here, is that all of this revenue growth we have enjoyed to date still does not include anything meaningful from Eclipse II or QuickMix 2, both of which we'll begin sampling this quarter.

Both these product families, Eclipse II being our very low power high performance FPGA family and QuickMix 2, being the cost reduced version of QuickMix are being fabed at Tower Semiconductor and come from their new fab2. We have already seen a significant design activity from both families as they are PIN compatible with the earlier product versions but done in quarter micron silicon.

And speaking of Tower Semiconductor, in the next two quarters or less, when fabless companies are begging their foundries for .18 wafers, we will be very happy to have made the investment in Tower. Our investment in Tower provides for guaranteed capacity at favorable pricing which was a prime driver back at the end of 2,000 when we signed our agreement, lest some of us forget this is an industry that moves in cycles. I think you can all sense that it is now turning around.

The pendulum is beginning to swing the other way, the fun way that is. 'Cause this certainly hasn't been much fun.

As an industry, we only need about a 3.5 percent sequential growth rate to get to 15 percent annual growth. Well, that is enough for today's arithmetic lesson.

While we are talking about growth rates, again on a four quarter rolling average basis, let's take a look at the geographic perspective. Simply said, North America and Europe over these last six quarters, together have declined from almost 82 percent of our business to 65 percent with North America being the big looser from a percentage point of view.

During the same time Asia PAC, including Japan and China have moved from, yeah, you guessed it, 18 percent to 35 percent of our total revenue.

Now what percentages don't tell you though, and in fact can be downright misleading, is that the revenue of Europe and North America together was almost flat while the Asia Pacific revenue, more than doubled, which is just fantastic. I know you already know this, but the real message here is to be very careful about percentages in general and sequential percentages in particular.

Now, if we turn our attention to the market segment data, our major customer in China clearly distorts the picture. Although I have got to tell you, I welcome their kind of distortion, as we sit here at QuickLogic it is all about good revenue and good gross margins. Of course the computing segment shows an off the chart positive growth, mostly based on our business with our Chinese customer.

However, on a sequential basis you would correctly conclude that all the other market segments are down, both sequentially and year over year.

But, if you take the longer view, remember this is a very long-time constant business, and look at the four quarter rolling average, you will see strong growth in the mill aerospace and modest growth in graphics and imaging, and believe it or not, datacom /telecom. Of course the datacom / telecom sector is being driven by Metro and the Access business. The core and transport business is still clearly in the tank.

Now, of course, the good news about having a 27 percent customer is moderated by the realty of how long will they remain a 27 percent customer. We fully expect that their purchases will not be sustained at the existing rate.

They are not going away. We expect an ongoing stream of revenue from them but not at these super levels.

So you might ask, what are we going to do about it?

The answer is that we continue to introduce new products which attract new applications and new customers. In fact, we already have new designs in production with our 27 percent customer, that shipped last quarter.

We have a very broad customer base, and we continue to pursue many large opportunities. We are confident we will continue to increase total revenue with both ESPs and FPGAs making significant contributions.

Now, let's turn our view towards new design activity.

During Q2, the overall new design activity remained at the strong levels of Q1. Total value of the new designs in process increased, but the most significant activity was the increase in Eclipse designs.

We attribute this to the very positive reception of Eclipse II. For it is PIN compatible with the Eclipse family and offers higher performance at lower power and cost which sounds like a winner to me.

QuickMix design activity was basically level to Q1 but the newsworthy item here is that we now have several significant customers that are designing QuickMix into more than one project.

The broad range of applications is also very exciting from video servers and commercial entertainment systems, to packet-based military communications systems, handling voice, video, data, all together in a secure environment. Now your mind can only imagine the potential of what is basically a standard product system-on-a-chip.

A product family that blends the best of both worlds, standard product for low cost, reduced risk, and shorter time to market, coupled with the ability to customize the part by adding proprietary intellectual property. For the first time, customers have a cost-effective product offering true software and hardware programability on the same dye.

To borrow my daughter's phrase, simply awesome.

Now, before I turn this call back over to Carl and he dives back into the numbers all you analytical types love, I would like to share some news with you on the people front.

Henry Montgomery, a well-known seasoned financial type with a very broad background ranging from semiconductors to energy, joined our Board of Directors and will serve as the Audit Committee Chairman. We welcome Henry to our Board and are confident he will add wisdom to the financial operations of QuickLogic.

As you well know, getting public company Board members these days is a real challenge. Finding a Sarbains-Oxley qualified Audit Committee Chairman is like searching for hen's teeth. Well we've got a great one.

Welcome aboard Henry.

My second announcement should come to no surprise to those of you who know him.

Art Whipple is becoming our first Vice President of Business Development. Art has been with us over five years, first as our CFO where he drove the process of getting us to the public equity market back in 1999 and then most recently as the VPGM of our Logic business.

Art will work directly with me to drive the technology licensing, partnering, and acquisitions activities aimed squarely at enabling QuickLogic to maintain market leadership of embedded standard products. I welcome the benefit of Art's energy, intellect and enthusiasm applied to this most challenging aspect of our rapidly growing business.

Okay. Well now Carl will give you the details of our Q3 guidance. I will come back and close our call today with information I expect you will find to be most interesting.

Thank you, Tom.

As you know we historically depend on 75 to 80 percent of our turns business to make the current quarter. Our beginning backlog is higher than normal this quarter. And we are expecting our Q3 turns to be 71 to 75 percent of revenue.

With this higher visibility, we are providing guidance for sequential revenue growth of 1 to 5 percent in the third quarter.

As I mentioned earlier we shipped product in Q2 that we planned to ship in Q3. These shipments were 5 percent of Q2 revenues this basically will lower the appearance of sequential growth rate for Q3.

Gross margin which was higher than planned in Q2 is planned between 47and 52 percent of revenue in Q3. We expected our sequential gross margin may decline due to higher depreciation and amortization, lower overhead absorption and lower use of reserved inventory in Q3.

Let me dive into gross margin for a moment. One component of gross margin that we closely track is the standard cost of producing our product as percent of revenue. On a quarterly basis, beginning third quarter of 2002, the standard cost of producing products has been 42 percent, 47 percent, 41 and 43 percent of revenue respectively. Our total cost of sales has been 75 percent, 52 percent, 48 percent and 48 percent of revenue respectively during this period.

Difference between standard cost of sales and total cost of sales is composed of period costs, cost variances from standard, inventory writeoffs, and unabsorbed overhead. I apologize to all of you for this mass of numbers. If we don't give them in a public forum we can't share them with investors and analysts.

The message here is that the standard cost of producing product has generally been 41 percent of revenue or less. We are encouraged by these low standard product costs and believe they indicate the strong leverage that we can gain from revenue growth.

Our company's manufacturing strategy is to reduce the cost of producing our ESPs and FPGAs so that we can lower our prices in pursuit of higher volume sales opportunities. We believe that fabricating products at Tower will reduce our unit costs.

We are also actively reducing our other cost of sales by reducing the time and cost needed to test and program our products, and by negotiating low assembly costs.

We made significant progress with Tower since our last conference call. We have now taped up four production devices at Tower and we expect to ship engineering samples to customers this quarter on two of the products.

Let's turn our attention to expenses.

We expect our research and development expenses to be slightly higher in Q3, principally due to the purchase of preproduction material and qualification expenses. Our Q3 research and development expenses could increase by $300,000 to $500,000 over Q2 levels.

We expect that selling, general and administrative expenses will be within $200,000 at second quarter levels. Interest income and other net, includes interest income and invested cash, foreign exchange gains and losses, and interest expense on borrowings.

During the second quarter net expense was $21,000. We expect that interest income and other net will not be materially different from our second quarter results in the third quarter.

We plan to use up to $2.5 million of cash during the third quarter. Up to $1 million of cash for operations. Inventory levels, may be within $300,000 of Q2 levels.

And we do not expect a significant benefit from accounts payable, accounts receivable, prepaid expenses or other balance sheet items in the third quarter.

The capital spending associated with our new products is expected to be significant. We may spend up to $1.3 million for capital expenditures in Q3.

Tower remains an important source of advanced manufacturing technology to us. Tower is viewed as a long-term valuable partner to our company.

We are running our first preproduction lots at Tower today and plan to provide our customers with a sample product this quarter. We have a strategic investment in Tower, we are currently renegotiating the final $3.7 million payment. As a result of these negotiations, we may make an investment in Tower in Q3. This would increase our planned use of cash in the quarter.

Let me take just a moment to outline our financial strategy. Our primary financial goal is to return to profitability by increasing revenues and gross margin dollars. We believe the products in development at Tower will play a significant role in our revenue growth and that significant sales of these products will occur in the first half of 2004.

As a result of our focus on profitability, we continue to carefully manage our expenses. We are only selectively adding head count. In general, we must believe the new hires are essential to meet our new product or revenue objectives.

One example of hiring activity is Asia Pacific. We have experienced significant sales growth in the region.

We believe our ESPs and our FPGAs, which are among the most secure and the lowest power devices available today, are particularly attractive to the growing market. We are actively recruiting field applications engineers, and regional sales managers in order to pursue these opportunities.

Our target financial model, stated as a percent of revenue, is to generate gross margin of 60 to 62 percent, to have research and development expenses of 19- or 17 to 19 percent, and to have SG&A expenses of 19 to 21 percent, generating income from operations of 20 to 26 percent of revenue. This is our target. At $25 million of quarterly revenue.

Our current expectation is to break even from operations at $13.5 to $14 million of revenue per quarter and to have sustainable cash flow break even at approximately $12.5 million of revenue per quarter.

Please remember we have made forward-looking statements 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 S.E.C. 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. Well, enough of the numbers. It is almost mind numbing, isn't it. Of course, very necessary, however.

Let's now look at a very interesting issue that really became top of mind awareness for many equipment manufactures this last quarter.

I am talking about what I call the Sysco / WAWA debacle. If you are not familiar with this litigation and the injunction that Sysco won against WAWA, you must have been on an extended vacation. WAWA is the largest telecom OEM in China and allegedly copied several Sysco products.

If you are an OEM, putting significant intellectual property into S-ram based FPGAs, I'll bet I got your attention.

There are several items at issue here. But let me focus on one relating to the lack of intellectual property security. Specifically when OEMs put their secret sauce into an S-ram based FPGA. You know, in the good old days of smaller FPGAs when OEMs primarily implemented glue logic, and IO functions in the FPGAs, they put their heavy duty secrets into ASICs and the world was at ease.

But now the ASIC model is basically broken, from an economic perspective that is. For all but those few OEMs requiring millions of exactly the same device. More OEMs are putting their very sensitive algorithms into big S-ram based FPGAs with virtually no IP protection.

Of course the result is, that others, like ne'er-do-well competitors and outright thieves, can copy what you have worked so hard to invent and develop and then take away the gross margin you need to fund the engineering of your next generation of products.

While S-ram based SPGAs have been praised for their reprogramability they are also volatile. This means that just like your PC, when the power goes off, there goes the program. It then follows that every time the power is turned on, the S-ram based FPGA must be reprogrammed from an external memory.

Now this programming bit stream is the source of major vulnerability. This programming bit stream, by the way every S-ram based FPGA has one, can be easily captured and use used to copy or reverse engineer what is going on inside the FPGA.

This my friends is what I would call zero, Zip oh, Nada, no intellectual property security.

On the other hand, our V- line based FPGAs are nonvolatile. Once they are programmed, it is forever.

ViaLink is the registered name of our patented unchip metal to metal interconnect technology the heart of what it takes to build embedded standard products.

Since all our embedded standard products have a ViaLink based FPGA on board, it follows that they are also secure. Maybe we should call them, IP secure embedded standard products.

Any way. ViaLink design security is such that the National Security Agency used our ViaLink technology in the incription scheme they put forward for the masses in the early 90's.

Actually we licensed our ViaLink technology to VLSI technology and they did an ASIC for NSA. Some of you gray hairs may remember the program. It was called Clipper Capstone.

Now, I ask you, is there anyone more security conscience than NSA?

I was going to say end of story, but really it is just beginning for us. For example, last week we had a customer come into us with a completed S-ram based FPGA design that was in equipment slated for equipment offshore. Their engineering folks shared with us that their CEO had heard about the Sysco experience and he didn't want to ship product that invited, hell, opened the door wide to the competition helping themselves to their valuable intellectual property.

That is what I call top of mind awareness.and I love it.

So our parts have always been secure but now people are intimately aware of the vulnerability associated with not having security for your intellectual property. Okay, well, let me wrap up here by giving you some scheduling information.

Our Q3, 2003 earnings conference call is scheduled for Wednesday, October 22nd at 2:30 Pacific daylight time.

If you have the opportunity, we will be presenting at the Adams Harkness and Hill tech conference in Boston the first week of August.

We also plan to be presenting at the Soundview Tech conference in San Francisco the second week of August. Details of both of these tech conferences can be found on our website or websites of the respective investment banks.

Okay. Well, David, let's open it up now for questions.

Thank you very much, sir. Ladies and gentlemen, this is your question and answer session.

If you have a question or comment, please key star 1 on your touchtone phone. If you wish to withdraw your question or comment please key star 2.

All questions will be taken in the order they were received.

Once again, that's star one for any questions or comments.

One moment for the first question please. Our first question comes from Manaje Najkarni from Chip Investors. Please go ahead, sir.

Tom, congratulations on the outstanding results.

You exceeded the guidance and came close to the break even.

Thank you, Manaje.

Well, can you give us some more color on how you did in the ESP space, preplan, and QuickPCI?

I think the PCI revenues were essentially flat with the previous quarter, as a percent.

Yes.

Similar activity to the Q1.

Okay. And QuickRAM was similar to Q1?

Yes. (whispered voice)

Okay.

QuickRAM?

QuickRAM was up significantly to the quarter. That is a customer in China is using our QuickRAM product. So that was up significantly. We typically have not given a revenue numbers by family, however, just given directions.

Okay.

Next, coming to your new product, what kind of--what kind of applications are these Eclipse II designed into?

Well, they are like most of our FPGAs, they cross a very broad range of applications. I can tell you that what is particularly attracting customers is a very low power aspects of Eclipse II. As well as high performance.

So it is built on .18 which gives you speed improvement over 2.5, but we have the leakage current, which normally contributes a fair amount to the static power that the product draws, looks very, very good on what we have seen so far.

So, we think we are going to have something very exciting for our customers. They're already, as I indicated, beginning to design it in. As a matter of fact we have orders on the books for Eclipse II product.

And the way you characterize different market segments, such as instrumentation, computing, military aerospace, are these being designed into all different segments, can you shed more light?

Well, they are in fact being designed across--these are FPGAs.

Right.

Those are used in all those segments. FPGAs are a very horizontal product used virtually across all segments of the OEM equipment business. And our Eclipse II products are being designed across a broad range, broad spectrum of applications as well.

Okay. Excellent.

You talked about selling Tower Semiconductor stock. Could you, Carl, revue how much Tower stock you still have and I think you have the numbers, in terms of dollar value?

We had, at the beginning of the quarter 1.175 million shares of Tower of those 700,000 of those were available for sale. During the quarter we sold 400,000 roughly of those shares, we have 300,000 remaining that we could sell. We have no current plans to sell the shares. We could enter into the market at any time. We had Tower securities at $3.40 at the end of December and so our gain, during the quarter was, proceeds, compared to that $3.40 cost.

Oh, I see. Okay.

So you didn't--but you also sold some shares, right?

Sold about 400,000 shares out of that 1.75 million.

Okay.

Coming back to your China customer, other than that one customer using QuickRAM and other FPGAs, can you give us some color on how you are doing with other customers in the Asian market?

Well, as I mentioned when I talked about geographies, Asia PAC has been, I was going to say barn burner but I know the lawyers would give me a hard time with that term. But it has been very exciting for us.

AsiaPAC, in general, both Japan and China are doing very well in terms of revenue growth. In fact, I pointed out that over the last, I believe it is six quarters, that revenue out of Asia PAC has grown by a factor of 2.4, more than doubled. We are very pleased with what is going on over there.

Again, across a broad range of applications. We are in test equipment, systems over there. We are in games. We are in communications systems, primarily, though, the Access or Metro levels, as I mentioned, there is--nobody is doing anything at core or transport yet.

And, again, Manaje, it is a broad range of applications, it's not--we are even seeing some consumer things out of Singapore. It is very interesting and very, very encouraging.

Okay. Very good.

And finally, can you please elaborate on QuickMix activities, where you are and kind of summarize again when you expect revenue stream to begin from that product?

Okay.

Well, we shipped for revenue, shipped our first products for revenue in this quarter. We won't--we don't believe we will see any significant or meaningful revenue until probably Q1 to Q2 of next quarter. The design activity is coming along very nicely.

I mentioned that the number of new designs in Q2 were flat to Q1, which were significantly above Q4. So, we are very pleased with the number of designs that are starting.

I also commented on a call that we have several, what I would call tier 1 customers now that have multiple projects going with QuickMix. They are all looking , by the way at QuickMix, the 902, 3 or 4 which comes out of Tower. So QuickMix is moving along very nicely, and we think we're gonna have some significant revenue, as I mentioned in Q1 and Q2 of next year.

So the design process is typically 9 months to 12 months or even longer than that from the point that somebody starts working on a design to the point that it turns into production revenues?

Well, we haven't been to production revenues yet, so we don't know exactly what the timing is gonna be. There was a school of thought that said that it should be shorter than big FPGAs. There is another school of thought that said that it is going to be longer, because you have the hardware software co-design issue.

I can tell you that we have got a military customer that bought a development kit, probably two quarters ago. As a matter of fact, just, no, yes, right after the--right around the holidays, Christmas holidays. They are going to be demoing their system in August. So, it depends. You know, it is a variable window. I would say nine months is not a bad estimate.

Okay.

Well, again, congratulations on being the fastest growing PID company.

Thank you.

Thank you sir. And our next question comes form the line of John Lau from RBC Capital Markets. Please go ahead sir.

Thanks. Tom, you mentioned QuickMix 2 and Eclipse II. I was wondering, is that manufactured - where is that manufactured- in which geography and are there any new customers queued up for these new products yet?

Well, John. They are both manufactured at Tower Semiconductor in Israel. They are both built on .18 micron technology. We have seen both of the products at this point, where, as I mentioned, we have preproduction starts, or actually we've made a risk starts.

These are risks in front of the quals. The quals are not completed yet but we are pretty confident that, obviously, or we wouldn't be starting production of wafers. We are pretty confident that we're gonna pass the quals We've seen enough of the silicon, enough lots now to where we are very confident from a reliability perspective.

Quite frankly. We have some work left to do on the yield. Our folks are working through that. We are confident that that is something we will resolve without extensive delays.

So, in terms of orders and customers for it, yes, we have quite a few customers queued up for Eclipse II. The beauty here is that we have used Eclipse 1 as a vehicle for people to do designs, while they are waiting for, while they waited for Eclipse II to come into the market. So we started the design process sooner.

I think we will see the quickest turn around we have ever seen from an FPGA family.

We did the same thing with MIPS 2. MIPS 2 is actually, if you go back and look at it, is an improved version, if you will, but compatible, I believe is probably the wrong term. It really is basically a cost-reduced version of the 901, which was the first QuickMIPS device, which was done in .25 technology. So, we have had the opportunity tobe sampling parts and have parts out there of older generations of virtually the same thing.

Now when these new products come on, the new silicon comes out, we will be ready to meet those--the demand which was already there. As I have said we already have orders on the books for Eclipse.

Okay. Tom, given that I think you mentioned that some of the products, especially the Eclipse II is drop in compatible will this lower cost of product start to flow in the cost of goods in several quarters?

Absolutely, yeah, we expect that we will see, I think Carl commented, the real meaningful revenues is Q1, Q2 of next year. We think we will see revenue in Q4 of this year off of Eclipse II. There is a lot of interest in that product line. It is very unique in terms of it being as powerful a product as it is, from a performance perspective, and yet very low power.

Great, thank you.

Thank you, John.

Thank you, sir.

Our next question comes from Alex Cleaner from Late Link Partners. Please go ahead, sir.

Which quarter do you guys expect to become fully profitable?

Well, we haven't given guidance on that, but we think we think middle of next year.

Middle of next year, all right. Thank you.

Thank you, sir. Our next question comes from Richard Marshall from Canvest. Please go ahead, sir.

Hi, this is actually Robert Katz with Sunvest. Hi, Tom. Good quarter.

Hi, Robert.

I have a question about, I guess the backlog for that quarter.

Where did that stand last quarter going into the quarter and how much turn in business did you have to do in the past quarter and this quarter to make your estimates? I have a follow up question about the hard wire networking opportunity in the networking datacom market.

Well, we in Q1, we had 61percent turns. Q2, we had 68 percent turns.

You could see that we needed more bookings to make the quarter happen than we had in Q1. We did consume some backlog. Q3 we are expecting to have turns of 71 to 75 percent of revenue. So we expect our backlog, which is quite high right now to climb again in Q3.

And when do you start, actually shipping that backlog?

We are shipping it, absolutely, right away.

Shipping right away. Okay.

So it is just the opportunities keep growing faster than--because you are only predicting that revenues are going to grow 1 to 5 percent. Is your backlog growing faster than your revenue growth?

We did have--we did have kind of an anomaly last quarter. About 5 percent of the revenue we shipped, we shipped earlier than expected. If you smooth that out, then our revenue growth would be 6 to 9 percent this quarter. Kind of in line with the adjusted numbers last quarter. So we think our business is growing steadily. In fact, if you look at the numbers, our Q3 results would be at least 29 percent higher in Q3 than 2002 so we will have good growth in 2003.

In terms of the 27 percent customer from China, what is revenue expectations out of that account, when does that expect to, I guess, reach maturity or taper off?

It is a long term, we believe it is a long-term customer for us. We are already in our second design. It was an unusually high period in Q2. So we do expect it to come down a little bit in Q3 but we can't predict that number exactly, because just like our other customers, we depend on turns to make our numbers, we are expecting turns from that customer as well.

The rest of your business actually would been turning up at greater than 1 to 5 percent?

Correct.

(INAUDIBLE) Findings from growth. On to the--data networking opportunity that Tom spoke about at the end of the call. How do you plan on addressing that market? Obviously, you bring something different to the table than some of the PLD customers that -or suppliers that already address that market and they do certain things better than you do.

Are you going to try teaming up with them or is there a different type of chip design, or more of the IP goes into your chip and more of the programability goes into their chips?

We are really not at a position at this point to disclose what our plans are related to that, Robert. But you are-- those are all the things that you have talked about are along the right path. I mean, they have reprogramability. We have absolute IP security. So obviously, figure out a way to combine the best of those worlds would make sense. We will look at those options as well as other creative options.

So, the fact that we named Art as VP of Business Development activity ought to be a tipoff there.

Right. And how much business do you anticipate you will pick up in the short run, just in terms of people importing their company design--

No clue, to be honest with you. No clue.

Okay.

I was surprised when this guy came in, when these folks came in a week ago or week and a half ago now. Because we have always talked about this problem.

I guess, ART's analogy is just kind of an interesting one, kind of like an earthquake. You have a very low level of concern if you live out here in California that you could have an earthquake. But, by golly, the day after Loma Priata, you think people didn't think about earthquake preparedness? They thought a lot about it.

So, I think what this did, This Sysco / WAWA situation did, was raise it into everybody's conscience mind instead of just nagging, back of the mind security issue. Really confronted it. Coupled with the fact that, you know, I mean, it really is the case today, these great big FPGAs, people are putting very valuable encryption algorithms, compression algorithm, they're putting their secret sauce in that FPGA. That is something that you need to safeguard.

How many gates go into that how many gates do you have in your product? Can you accommodate that type of product in your hard wire--

You don't need to accommodate the whole thing. One way to do it would be to partition the design so you have both of them there for it to work.

Okay.

To answer your question though directly. We don't make the big 8 million gate devices that they make.

Right.

Our biggest device is about, I think, 700,000 gates. Because, actually, that is interesting.

We make devices that have more gates than theirs, but our gates are the embedded standard product gates, which are much lower cost gates.

That is why, you know, you take a look at our quick MIPS device, the MIPS side of that device, the ASSP side of that device, has roughly 1.5 million gates. If you look at the FPGA side, it is about, let's say 500,000. There are 2 million gates there. But we are going to sell that part for $30.

The equivalent 2 million gate device from our competitors is several hundred dollars.

And how difficult or easy is it to come up with a design that they are now doing importing it to you, your product. How long will that take? How quickly can you turn that around?

Well, the one that they brought to us, we turned around in the course of two days. So, it really depends on the design, there are some that you couldn't port, because they've used features that exist in (INAUDIBLE) that we don't have.

Right.

But the point I made to you is that you don't have to make the whole design secure in order to make the system secure. s, if you were to take and split off part of the design that was in the S-ram part and put it in our part, a part that made, that had to be there in order for the overall system to work, then you are secure as well.

Well, great. We have been hearing a lot about this for quite a while. Hopeful in the future quarters we can hear about a lot of progress in this area.

We hope so too.

Best of luck.

Thank you, Robert.

Thank you.

Once again, ladies and gentlemen, if you have a question or comment, please key star 1.

Okay. Well, if there are no more questions, thank you kindly for your interest in QuickLogic. We look forward to a--to seeing you at Q3, and having more good news for you.

Thank you kindly. Take care.

Thank you, sir. Thank you ladies and gentlemen. This concludes your conference call. You may now disconnect