Quicklogic Corp (QUIK) 2003 Q4 法說會逐字稿

Good day ladies and gentlemen and welcome to the quarter 4 and fiscal year 2003 Quicklogic Corporation Earnings Conference Call. My name is Kelly and I will be coordinator for today. At this time all participants are in listen-only mode. We’ll be facilitating a question and answer session towards the end of this conference.

If at anytime during the call, you require assistance, please press star followed by zero and a coordinator will be happy to assist you. I would now like to turn the presentation over to your host for today’s call, Mr. Tom Hart, Chairman, President and CEO, Quicklogic Corporation. Please proceed sir.

Good afternoon ladies and gentlemen and welcome to our 2003 and Fourth Quarter Earnings Conference Call. Thanks for taking the time to join us today and hear about Quicklogic and our leadership of this new category of semi-conductor devices we call embedded standard products. Carl Mills our CFO will take you through our 2003 and Q-4 financials and then I’ll share my perspectives on our business. Finally Carl will detail our guidance for Q-1 and for 2004 revenue and then we’ll take questions. Carl?

Thank you Tom. Before I get started, I’d 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, our financial metrics, visibility, the competitive environment acceptance of our products going forward, economic conditions, expected actions by Quicklogic, expected timing of our returning 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. I refer you to the risk factors listed in our annual report on Form 10-K, quarterly report on Form 10-Q and prior press releases for 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. For your information, this conference call is open to all and is being web cast live. It can be accessed from the Investor’s Relation area of the Quicklogic website locating at www.quicklogic.com.

We had excellent results for 2003 we (inaudible) the competition in 2003 and net revenues increased 29% of $42m compared to an estimated 16% FPGA industry growth for the year. Our ESP business grew by 42% during the year. Revenue from Asia Pacific including Japan grew by 76% while North America revenues increased 16% and European revenues increased by 5%.

Our segment growth came primarily from computing which doubled to $10.9m in 2003. Other areas of strength were military which increased 45% and instrumentation of tax which increase by 19% in 2003. Now we’d like to keep our investor’s informed of our channel mix and our programming activities.

71% of our revenue was sold through distributors in 2003. As many of you know, we recognize revenue through distribution upon the shipment of program products to distributors and upon the resale of blank products. 81% of our 2003 unit shipments were programmed by us with a customer specific code.

Our 50% gross margin for the years is up from 40% in 2002, we had excellent leverage from revenue growth in 2003. Gross profit increase by $7.9m on a $9.4m revenue increase during the year we reduced the cost of producing our parts significantly, primarily by reducing assembly and test costs saving about $2m during the year.

Research and development expenses were lower by $2.6m in 2003 compared to 2002, primarily due to lower payroll cost, lower assets write-offs and lower depreciation expense. Our SG&A expenses increase $500,000 in 2003 compared to 2002. We incurred higher bad debt reserves, legal expenses and (inaudible) cost in 2003 and offset the increases with savings in other areas.

We lowered our net loss by $26.6m year over year. A loss of $4.7m or 20 cents per share in 2003 compared to loss of $31.3m or $1.34 per share one year ago. This improvement is primarily attributed to the following items. The net loss improved by $10m due to the combined effect of higher revenue, higher gross profits and the changes in operating expenses that we mentioned above. We had a $700,000 gain on the sale of Tower shares in 2003.

Now we get to go back in time for a little bit, during 2002, we had $16m of total charges for goodwill impairment, restructuring cost and write down of marketable securities which we did not incur again in 2003.

Let’s move on to cash flow.

Cash flow and operating cash flow were positive, for each quarter of 2003 and for the year. Our cash position, including cash that was classified as restricted one year ago improved by $4.4m in 2003. Our debt free cash improved by $7.3m during the year. Our total debt at the end of the year was $6.7m, we reduced our debt by $2.9m during 2003. Now let’s spend a few minutes on the fourth quarter results.

Our revenues were $10.8m for the quarter compared to $11.2m in Q-3. Regardless that revenue will be flat down 9% sequentially, based on our largest customer contributing 5-15% of revenue in Q-4. While this customer contributed 4% of our Q-4 revenue, in it we finished towards the high end of our guidance down 3% sequentially with $10.8m revenue in the quarter. Fortunately, we have good bookings from the rest of our business but we’re not relying on one customer to make our numbers. Tom will provide insight of our bookings in a few minutes.

Q-4 revenue increased 28% compared to the fourth quarter of 2002. Our fourth quarter net loss included $1.5m of charges for the write off of inventory and long term assets. Q4 gross margin was 44% and $1m of write offs affected our gross margin by 9.7% of revenue in the quarter. The primary cause of this write off was a shifting demand to higher speed versions of our products during the quarter causing us to write off lower speed inventory. If there is a sliver lining to these write off, it is that vast majority of the inventory we wrote off was acquired in previous years. On the other side of the ledger the sale of previously reserved inventory contributed margin improvement equal to 2% of revenue in the quarter and 3.6% of revenue for the full year.

Q4 operating expenses were well within our guidance. Research and Development expenses increased $300,000 sequentially, compared to our guidance that expenses would be up $300,000 to $500,000. Q4 Research and development expenses included $414,000 of charges for the write off of long term assets. One asset designed software no longer in use accounted for most of the write off. Without the write off charges, research and development expenses would have declined by $100,000 sequentially. We spent less money for personnel and services than we planned.

Q-4 selling general and administrative expenses increased by $250,000 by sequentially compared to our guidance of a $200,000 to $400,000 increase. As expected, these higher expenses were primarily the result of new product marketing, Sarbanes-Oxley compliance and legal expenses. We continue to hold the line on our expenses, in general, there have been incremental expenses not necessary for new product development for generating revenue or required for compliance programs that have not increased our spending. We’re only planning a few head count additions in 2004.

To recap our sequential, results our revenue declined by $400,000 in Q-4 compared to Q-3, our gross profit declined by $1m due primarily to write offs that were $700,000 higher in Q-4 than Q-3 and due to lower revenue. Our R&D expense increased by $300,000 primarily due to $400,000 of R&D software write-offs SG&A expense increased by $250,000 as a result of these factors and other expenses. Our net loss increase $1.6m in Q-4 compared to Q-3.

Our net loss of $2.4m in Q-4 of 2003 compares to a net loss of $18.4m in the first quarter of 2002. The Q-4 2002 loss included charges for goodwill impairment of $11.4m, for restructuring cost of $800,000 and of $3m write-down of marketable securities. Otherwise our operating results are as follows. We had higher revenues of $2.4m. Higher growth profit of $700,000. Our gross profit was adversely affected by $1m of write offs this quarter. Operating expenses increased by $800,000, $400,000 due to write off charges affecting research and development by $200,000 for other R&D expenses and by $200,000 for other R&D expenses and by $200,000 for SG&A expenses, we had positive cash flow of $1.1m in Q4.

I’d like to reiterate that we had a positive cash flow and positive operating cash flow each quarter of 2003. Debt free cash increased by $900,000 during Q4 to $19.7m, this increase is due to $500,000 of positive cash flow from operations offset by $300,000 of capital expenditures, we had $700,000 of cash provided by the issuance of stock in our stock trends in Q4.

We will take a minute to dive into a little of detail on the $500,000 of cash flow from operations in Q4. Our net loss adjusted to remove the effective non-cash charges such as depreciation and asset write offs as a positive $200,000. Working capital contributed $300,000 in Q4. The components of working capital were inventory contributed $500,000 and accounts payable contributed $1.1m.

Accounts receivable increased to more normal levels in Q4 and used $1m of cash. Others assets and liabilities consumed approximately $300,000 of cash during the quarter. Above and beyond our cash flow from operations we used $300,000 of cash flow for the acquisition capital equipment in Q4 and as we stated by our financing activities contributed $700,000 for the issuance of stock and our employee stock plans and $200,000 beyond that.

We didn’t change the complexion of our debt during the fourth quarter, we borrowed $2.1m and during our long term credit facility with Silicon Valley Bank and we repaid $2.1m of revolving debt to the bank during the quarter. Total debt was $6.7m December 31, 2003 including $1.8m classified as long term obligation on our balance sheet.

As a result of these factors our Q4 ending cash balance increased to $26.4m from $25.3m at the end of Q3. In terms of balance sheet metrics we had 33 days of accounts receivable at the end of 2003 compared to 52 days of accounts receivable one year ago. Our long term model is to have 40-47 days of accounts receivable. We also had 78 days of inventory at the end of 2003 compared to 162 days of inventory one year ago and we only had 6 days of inventory distribution compared to 8 days one year ago. At the end of 2003, we had 162 employees compared to the 161 at the end of Q3 and 157 employees at the end of 2002.

Now let me turn the call over to Tom.

OK, thank you Carl. Well you already heard from Carl our seen in our earnings press release we had another very good quarter to end our fiscal year 2003 with a 29% growth in revenues over 2002. Again I must say about this quarter while we are not where we want to be mainly on our financial model of 20-26% operating margins, we’re headed in the right direction and in comparison to what has classically been our our direct competition, namely Altera, Zylog and Actel we grew revenue at almost twice the rate of their combined revenues for 2003. This means that we grew market share along with Altera. While Zylex held their own, and Actel continued to loose share as they have done each year since 1997.

Our strong growth rate is a direct result of our embedded standard products driving our revenue growth picture. In 2003, ESP’s accounted for 41% of total revenue and grew 42% year-over-year. QuikRAM products, our first ESP grew a whopping 61% year-over-year and accounted for 25% of total revenue.

Bookings were very solid for the fourth quarter, this Q4 was 33% actually ahead of last quarter and that booking strength came without the benefit of our large Chinese customer who actually has dropped below 5% of revenue for the first time since they became such a significant customer in Q4 of last year. Just another indication for you that our growth picture extends well beyond one customer, sequential bookings growth was driven our of Asia Pac with a good showing from Europe and with the US being basically flat to the prior quarter.

AsiaPac accounted for 38% of gross new orders in Q4. Turns in the quarter were 69% of total revenue up from 51% in Q3 and headed back to our more typical 75-80%. Owing to our fundamental business model of high velocity and high turns, we fully expect to return to our typical shipping turn’s rates and our customer’s benefit from our build to order model with guaranteed lead times. Ok well let me shift gears here and talk about new products, their design activity and some representative examples of design whims more specifically I’m talking about our Eclipse II and QuickMIPS II family of products. Q4 brought a significant increase in design opportunities for both families. The industry’s lowest power aspects of Eclipse II are proving to be a real winner for customers in many power and heat sensitive applications. As you well know, the demand for wireless applications is exploding.

At this year’s consumer electronic show, virtually everything is or will be enabled with Wi-Fi so companies risk loosing their business if they cannot migrate an existing wired application to the wireless world. Suppliers have made a significant investment in micro- controller software to supply wired solutions but often the controller does not communicate to a wireless module. Clearly, time to market is critical for these companies who need to take these wired applications to the wireless world.

How do we fit into this opportunity? Well for example we recently won a design with a new tier one customer supplying a low powered bridge between a micro controller and a wireless module. The key here was very low powered with embedded memory, that’s Eclipse II. This is significant and not only to the end customer, who can come to the market with a proven solution but to the micro controller supplier who would have lost the design to a competitor who could bridge to a wireless module. In this case the supplier is a top five semi-conductor manufacturer and we are working with them to expand the solution to other applications. We’ve now seen several of these types of applications and believe that providing a cost-effective, low powered bridge to wireless, enable to wireless enable a legacy system could be a very substantial opportunity for our QuickMIPS II products.

Another example of a low power design win is a handheld data logging application. A fortune 50 customer was looking for a very low power FPGA. We won this design over other FPGA suppliers by being one third the power of our closest competition. This design actually replaces the low power CPLD in the customers new product as it requires embedded memory which of course CPLD’s of course just don’t have. As you may remember the programmable logic in QuickMIPS II was actually a modified Eclipse II device. We have talked in the past about the bullet proof intellectual property security designed into our products. We have many results today of customers that have selected our products based on this most important consideration.

What’s changed you might ask, ‘cause we’ve always had these bullet proof IP security in all our products as a direct result of our patented ViaLink Technology. Why are customers more receptive to it now? Well the simple fact of the matter is that customers used to implement in ASICs their secret sauce if you will and they are now doing in field programmable logic owing to all of the disadvantages of doing ASICs today such as economic and time to market disadvantages to name just two of them. When you couple this with the increased awareness in customers that IP implemented in an S RAM based FPGA is an open book to their competition. They have an element of the ingredients for our increasing design win activity. I always say there is nothing like enlightened self interest.

This quarter we’re very pleased to announce a collaboration with Oasis Silicon Systems, an exciting company headquartered in Germany with a strong MIPs signal design team in Austin Texas. Oasis in conjunction with Mercedes, BMW, Audi and Harmon Becker have developed and implemented a plastic optical fiber based multi media networking architecture first used in automobiles. Their network architecture which is called MOST M-O-S-T, which is derived from Media Oriented System Transport was used in the production of close to a million autos in 2003. The MOST cooperation now consists of 20 vehicle companies and 50 automotive suppliers. MOST IP has been implemented in over 60 devices like DVD’s CD’s MD Media Players, car radios and sound systems, telephones, navigation systems, voice recognition systems, blue tooth and Cann interfaces to name just a few. Setting aside the technical benefits of MOST, the economics of MOST make it attractive in even low end cars like the smart car from Mercedes and Swatch using low cost plastic optical fiber based data buses to replace heavy expensive wire.

The opportunity MOST addresses is the fact that multimedia applications are being driven into all ranges of vehicles. More components are being installed in each vehicle and those components need to be networked together. Soon cars will be outfitted with multiple cameras, networked by MOST to enable automatic parallel parking of these big urban assault vehicles, that’s for those of us that are parallel parking challenged that is. Our contribution to the partnership comes from the benefits derived from the combination of having a powerful MIPs microprocessor, together with programmable logic on the same dye, our QuickMIPS II family of products. This is coupled with a bullet proof intellectual property security and very low standby and operating power, which convinced Oasis to select QuickLogic to be a partner in making MOST the multimedia standard for vehicles.

Today the BMW 7 series is probably the most highly networked car on the road containing 70 computing devices, 2 optical networks, 3 LAN networks both low and high speed and 3 sub-networks. The MOST network contains 15 devices or nodes including radio, CD, tape, MD, surround sound, speech recognition, navigation, TV, DVD, telephone, telematics and internet access. Our cars are becoming mobile networks that will enable a whole new series of safety, convenience and truly useful applications. MOST is basically a network that easily handles video, voice and data in a low cost implementation suitable for applications well beyond cars but first thing’s first. Oasis Silicon Systems has developed a device that basically acts as an intelligent physical layer to talk to the plastic optical fiber. This is a sophisticated mix signal integrated circuit that on one side drives and receives data from the plastic optical fiber and on the other side talks to the digital world through an interface called MLB or Media Linked Bus. By implementing the MLB in the programmable fabric of our QuickMIPS device we can easily bring the whole digital world to MOST based networks.

Okay well again shifting gears here let me touch on a different topic. A few of you have asked for a status of the Zylog 749 patent infringement litigation. Of course it is in our best interest to limit our comments on this topic. Why show your hand early basically? Zylog filed a suite in August of 2003 about 16 years after the patent was issued and the patent is due to expire in June of 2004. Our position has not changed since our last conference call. We do not believe this suit will have a material impact on our business and we believe we have meritorious defenses against their action.

Okay, thank you Carl, thank you and now Carl will give you the details of Q1. We’ll touch briefly on 2004, then I’ll wrap up and we’ll take some questions. Carl.

Thank you Tom. Before I talk about our forward guidance let me take this opportunity to tell you about our analyst coverage. We have been covered by RBC Capital for quite some time. Abgeet Wallia covering us for RBC is a great source of information. We welcome the addition of Gary Mobley with B Riley & Company who started covering QuickLogic a few weeks ago. On our last call we said we would have a turns rate of 70% to 75% of revenue in Q4 to have flat revenue for the quarter and our turns came in at 59% on slightly lower revenue. The good is news that our weekly booking rate improved significantly in Q4 and we came into Q1 with more backlogs than we had one quarter ago. We expect that to continue to have booking strength in Q1 2004 and to turn 70% to 75% of these orders into revenue for the quarter.

With this high turns model we’re providing guidance that revenue will be up 1% to 5% sequentially in Q1 2004. One customer contributed 4% of revenue in Q4 and 14% of our revenue in 2003. On earlier calls we let you know that revenue from this application may wind down in the first half of 2004 and at the present time we do not expect to ship additional product to this customer in Q1. We expect this customer to generate less than 5% of our revenue in 2004. Of course with our high turns model we have low visibility for 2004. We expect to ship for revenue this quarter what we believe will be the lowest power, most secure FPGAs available in the industry due to the significant progress we made on product (technical difficulty) in 2003.

We expect to benefit from this investment with revenue growth in 2004. We currently believe that our 2004 revenue will be about 20% higher than our revenue in 2003 with our new products generating significant revenue in the second half of 2004. Gross margin is planned to be between 46% and 51% of revenue in Q1. We expect that our sequential gross margin may decline after adjusting for the write-offs in Q4 since we had a few transactions with particularly high margins in Q4 and this business may not repeat in the first quarter. In addition our production relationship with power is in its early stages and we expect higher costs while we accelerate down the learning curve at Tower.

Our company’s new in factory strategy is to reduce the cost of producing our ESPs and FPGAs so that we can pursue higher volumes sales opportunities. We believe that fabricating products at Tower will reduce our unit cost. As you can see from our 2003 results, we have actively reduced the cost of assembling, testing and programming all of our products. We look forward to now applying these skills to reduce the cost of producing our Eclipse II and QuickMIPS II products at these parts move into production.

We made significant progress in our parts and development of Tower during Q4. We have provided product samples to customers and again we plan to ship Eclipse II production orders to customers in Q1. Early yield data is promising and headed in the right direction.

In terms of research and development expense for Q1 we expect increased expenses for new product tooling, pre production material and qualification expenses. With our Eclipse II product for instance we are taking a proven architecture, introducing low power and developing the parts for production on a new geometry adding the supplier. The expenses associated with these efforts are necessary part of bringing these devices to production and they are significant. We have made a financial commitment to bring these new products to market as quickly as possible because we believe they address a large opportunity.

Our guidance is that Q1 research and development expenses maybe (inaudible) up $300,000 compared to Q4 of 2003. We expect that telling general and administrative expenses will be $200,000 to $400,000 higher sequentially due to marketing cost associated with our new products and Sarbanes-Oxley compliance costs. Interest income and other net includes interest on invested cash, foreign exchange, gains and losses, foreign income tax expense and interest expense on borrowings.

During the fourth quarter the net expense was $57,000. We expect that interest income and other net will be in expense of less than $50,000 in Q1. We may use up to $2m of cash of debt free cash during the first quarter. We may invest in inventory in Q1 and AR will likely increase. In addition, the borrowed $2.9m under a revolving line of credit at the end of Q4 we may decide to repay these funds in Q1. Tower is an important partner of ours providing us with advanced manufacturing technology. Earlier this month Tower closed a follow on offering which raised additional funding. The proxy statement in foreign Tower investors to QuickLogic is not obligated to make the final $3.7m investment in Tower. We are now not planning to make this investment.

As a result of our previous investment in Tower we currently hold 1.3m Tower ordinary shares. We agreed to a 180 day lockup of these shares at the requested Towers underwriters. Tower closed their follow on offering at $7 per share and we have valued the shares we hold at $3.40 per share in terms of their potential impact on our statement of operations. Our balance sheet value is approximately $4.24 per share.

Let me take a moment to outline our strategy for achieving profitability, our primary financial goals to return the profitability by increasing revenues and gross margins dollars. We believe the parts moving into production at Tower will play a significant role in our revenue growth. Our sales team is enthusiastic about our new QuickMIPS II and Eclipse II products. We are generating significant sales opportunities for these products. The customers appreciate the time to market, security and low total cost of ownership delivered by our QuickMIPS II product and the security and industry reading low power of our Eclipse II FPGAs. As Tom mentioned to you earlier o the call the customers have started to qualify systems built with our new products.

As a result of our focus on profitability we continue to carefully manage our expenses. While we expect an increase in project expenses in a short term we are only selectively adding head count. In general, we must believe new hires are essential to our new product or revenue objectives.

On financial model, less than $25m of quarterly revenues as stated as a percent of revenue is to generate a gross margin of 60 to 62% of revenue to have research and development expenses of 17 to 19% and to have SG&A expenses of 19 to 21%. This would result in income from operations of 20 to 26% of revenue and earnings per share of at least 20 cents based on $25m outstanding shares.

Our current expectation is to break even from operating (technical difficulty) half of 2004 at $13.5m to $14m of revenue per quarter. We expect to be able to maintain break even operating cash flow at approximately $12.5m of revenue per quarter. 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 as specific information on the risks and uncertainties that we face. Let me turn the call back over to Tom.

Okay thank you Carl. Now for your scheduling purposes our Q1 2004 conference call is scheduled for Wednesday April 21st 2004 at 2:30pm pacific standard. If you have the opportunity we will be presenting at the B Riley and Company conference in Las Vegas March 17th and 18th, if you can’t attend them personally we do plan to do a web cast of this event. We will also be presenting again this year at the AEA Micro Cap Conference in Monterey, May 16 to the 19th. Now who knows maybe next year we won’t be considered Micro Cap anymore so see us now. Details for both of these can be found on our web site at www.QuickLogic.com. By the way we’ve update on our company web site you my want to check out the revised investor section. Always look forward to some feedback here. Okay Kelly now lets open up the call for questions.

Thank you sir. Ladies and gentlemen if you wish to ask a question please press star followed by one on your touchtone telephones. If your question have been answered or you wish to with draw your question please press star followed by two. Questions will be taken I the order received. Please pres star one to begin. We’ll hold for just a moment while callers queue. And your first question comes from Abgeet Wallia of RBC Capital, please proceed sir.

Thank you. First Tom I wanted to ask about the Asia customer and how you also count the low 5% revenue you’ve expected to be below that for this quarter. You expect it to be pretty much below that and point forward now is that something essentially less communicated to you or how do you base that forecast?

The problem is really one of visibility. I think we’ve described once before for you that basically our customers building these systems for the Chinese government. And they’re trying to decide what the rest of their deployment plan looks like. And so we’ve taken up a conservative view of what that’s going to be and I think you heard Carl said we expect no revenue in Q1 from them and we don’t expect more than ---we don’t expect them to be a 5% customer after the total here.

Right. Is there anybody else or any other 5% customers you think you have now or can foresee, do you have any even 5% customer now?

We continue to do a lot of business with Yoko Gao electric they were 6% customer to us last year. We have a great relationship with them. We think they are gaining some new designs in place and so we’re looking forward to continued strong business with Yoko Gao.

You think that 5% can go up then?

Well we’re not trying to look for more than that right now but it’s a nice piece of business.

And what exact products would those be? Where will that fall exactly?

They’re usually in our Eclipse I family of products and they use them in a high performance memory test system and it’s very well received.

Right. Just looking at guidance itself now, you said 69. What kind of chance is this guidance based on?

70 to 75.

And is that based on January 1st or is that based on today?

All of this we based on the beginning of the quarter.

Oh great. And going forward you said you expect 20% growth and all of a sudden we…

That’s right Abgeet but you got to recall that we had a 14% customer last year end. We’re saying that we can still be less than 5% in 2004. So there’s basically an 11% loss there and were not setting and growing.

Right, right. And then in terms of gross margins I don’t know if I ever spoke about this. This customer was that above corporate gross margin or below corporate gross margin?

Yeah we don’t quote on that we are pleased with the business.

Okay. Just looking at the fourth quarter now you see military and aero-space drop significantly, I mean obviously you have a great data com order is that--- is a specific reason, could you just comment on what happen next?

You know what happens here Abgeet we got several customers that could be 3, 4 or $500,000 of quarter of revenue. And if they kind of come in and go out of the quarter it gives us a little bit of lumpiness in our numbers so especially our segment like military, which is a relatively small percent of our business it could have a large percentage swing. Again overall, our military business was up 45% year-in-year so it’s great.

This is probably a time for me to go into my rant on sequential comparisons but I won’t do it.

No I agree with you there, this is definitely the longest technology flight. What exactly could you comment going back to Eclipse II, (inaudible) when should we I mean we talk about it times and times they have been extremely large and getting larger by the day, could you just talk, Tom just educate maybe some people on the Eclipse II, what kind of sell to bill market that is going forward?

Well it’s hard to access, to tie a specific number to it because you know as the as everybody has noted, you know, we’re not so much competing with these, with each other as much anymore. We are competing with the ASIC business. You know fewer and fewer people can afford to do these ASICs unless you’re building zillions of exactly the same thing and so the served available market for moderate density FPGAs is growing just by nature of the fact that the ASIC people can’t address those markets. So you know I can give you a range of numbers, the ASIC business you know is a $20b plus business probably easily 25% of that business is addressable by the kinds of products that we and the other FPGA guys make. So it’s a very significant marketplace.

We’ re seeing, just as an example on Eclipse II products we look religiously at our funnel at the business opportunities that we’re looking at, design win opportunities and we rank them by the size of those opportunities and we’re seeing lots of 50,000 plus unit opportunities. And we never use to see opportunities or very we saw them very infrequently compared to what we’re seeing now. We think it is fundamentally the security, the low power and we’re competitive price points. And that’s what’s driving a lot of interest and a lot of this interest is coming from new customers people that we haven’t been doing business with in the past. So we think it’s very encouraging.

: And when do you see Eclipse II generate some sort of significant contribution to revenues in terms of our second half of 04 or into 05?

We are really focused on the second half. It will show up in Q2 but we’re really focused on the second half.

: And (inaudible)?

Same

: Ok, great maybe I’ll come back for later questions.

Thanks, Abjeet .

The next question comes from Gary Mobley of B.Riley and Company. Please precede Sir.

Hi guys.

Hello Gary

Hi Gary

As a point of clarification could you go over our gross margin guidance for fiscal year 04?

We haven’t gone beyond the first quarter at this time, but you know as we said we expect to come down the learning curve pretty rapidly of tower and so I think on a term we’re getting as long end shipments in the second half of we will be in good position in margins.

Ok so the 46%, less than 46% guidance you gave relates to Q1?

Both. The guidance was actually 46-51% if that wasn’t clear, so the midpoint of that guidance would be high 40s.

Ok very good, very good. As the year progresses -- better asked as the year ends, what percent of your products do you think will you manufactured at Tower .18?

Oh we haven’t yet disclosed that actually good question though.

They have Eclipse II and Quick Mix II are the two primary products to be manufactured at Tower, correct?

Yes

Any change in competitive environment as it relates to (inaudible) components under that FPGA as Pear Zylex garnering any momentum in the space?

Well I’m, not sure exactly what you’re asking me Gary. We’re seeing a lot of interest in our product. I really am not in a position to speak for how successful Zylex or Altera has been. We don’t see them as direct competitors in this space primarily because we’re at very different price points and we’re really at very different applications. Now you can say that they have microprocessors and logic together, we have microprocessors and logic together. But that’s at a 400,000 foot level and you drill down to where the river really meets the road, we have an out of the box solution and theirs are a bunch of components on a piece of silicon. So it’s a very different solution that we supply to our customer than what they supply. And by the way our ASPs are at $50 and there’s are at $500 so 500 plus so it also very different from an applications perspective. I think they are really de-emphasizing that whole thing quite frankly and moving after the ASIC business which if you listen to their calls that’s what’s it they’re focused on.

Ok and you mentioned that Nokegala (ph)was a 6% customer last year, how significant was Terridine (ph) and more importantly how significant were the back end semi-conductors test equipment for you guys and the reason I ask the question is just the strong booking trends of 15% in that market.

The only two 5% customers that we had were the Chinese customer and Nokegala (ph) and the rest of our customers get 5% of the revenue. But you know it’s kind of misleading in a way, you know until we had those two guys we’ve never had I shouldn’t say never, as a public company we’ve never had 5% customers, but lets take Terridine as an example, we did more business with them in 2003 than we’ve ever done before. Now how can that be when they were down? Well the deal was we’re in their new products. So you know yeah they are not $2b a year, they are shipping $1b a year but we’re in their new products and those new products take good compliments. So while they’re not 5% customers, we’re doing good business with them and with Andoe and with LTX and in that whole semi-conductor equipments space.

Ok alright thanks guy.

Thank you Gary

And as a reminder ladies and gentlemen if you wish to ask a question please press* 1on your touchtone telephone. Your next question comes from Minose Nacarne (ph) of Tip Investor. Please proceed.

Congratulations on all the results for 2003 and a very good job of cash flow.

Thank you Minoese.

: Can you give us more color on the business in the (inaudible) how are you doing in China, with the other countries in the Far East?

Well clearly this last year China was the biggest country for us over there and we’ve made a significant commitment to it in terms of resources. We now have our region manager, our managing director of Asia Pacific is now based in Beijing and we have FAE talent there as well and so that’s significant for us. Korea is also probably the number 2 out of, if you leave Japan out of the equation for a minute. Korea for us is number 2 and then the rest of the countries are generally much smaller. The, so the biggest over there for us is Japan if you take Asia Pacific together is -- China lat year was number1, Japan was number 2 and we see both of those as our very strong markets.

: And are these mainly for a particular kind of products? ESPs? Are you seeing a broad based demand?

Most of this is for newer products. We were, as an example China didn’t use our old products. The pASIC, the mature products, pASIC 1 and pASIC 2 products. So most of this is, what we’re seeing and the design activity we’re seeing is for, falls into the category of what we call new products.

: Ok and coming to your new products Eclipse II and QuikMips-II, what kind of production ramp do you expect in 2004?

Well I hope it’s a good one. We haven’t disclosed that and so we’re just we’ve talked about that -- excuse me I was just distracted here for a minute -- we haven’t shared that and we talked as Carl mentioned we expect to see significant revenues out of those products in the last half of this year.

: Okay and margins wise, right now of course you are running low volumes but as they become high volume production part, what kind of margins would you expect on these products verses your other ESP’s and mature products?

But we don’t disclose our margins by product line, but we have designed our Esclipse II family to be competitively priced at high volume and give us decent margins.

Okay.

We don’t see it hurting our margins.

: Okay.

Hopefully it’ll help.

: Okay and yield wise you said you are moving up and learning curve with Tower semi-conductor, would you care to elaborate, give us any little more details?

Well the learning curve you know how the learning curve works you know the more product you run the more you learn and we’ve got a lot of product in line over there and we’re just going through the challenges of bringing that up. So we’re moving forward so we’re not holding back at all if that’s what the question is.

: Okay and you talked about MOST based automotive applications, what kind of market do you expect for the Quick logic chips?

Well we’re really at the front end of this Minoese actually so I can’t give you I would be--- it would be guess a wild ass guess quite frankly to pull it out of my ear as to what this market can be, but I have to tell you that there’s a lot of folks who think the next killer app is multimedia applications in cars. And if you looked at the new any of the new cars that are being brought out now you see a lot of multimedia, there’s a lot of flat panel displays in there, there’s a lot of things that are going into there that need that just cry for a multimedia network and that’s exactly what MOST implements.

So some of this is where people haven’t gone before, I can’t tell you an exact number for what I think SAM’s going to be, but my gut feel is that this is going to be a very significant business. If you look back at the track record of electronics components in cars it’s going up it isn’t going down and it isn’t forecast to go down anytime in the near future, so I think it’s going to be a great business. I think these guys have established -- part of the challenge of automobiles of course is the economics and what they’ve established using this low cost of plastic optical fiber and their scheme, which is I won’t go into all the technical aspects of it, but is basically a very low cost implementation of ATM that gives you the ability to easily manage multimedia applications which requires your ability to manage voice video data of the same network. They’ve done a superb job with that I think it’s brilliant and we want to be part of that so, we think it’s going to be significant.

: Okay let’s say this is a huge new market for the Semi-conductor industry where do Quick Logics chips sell, where do your products have an advantage with this competition whether it be from ASICs or other FPGA companies?

Well that’s a very good question as a matter of fact you’d say well jeez they’ve built a million of automobiles, how can you possibly compete there? Well they don’t build millions of the same model and that’s where you compete. You compete by the fact that they’re building a 100,000 of different models and we compete by being able to be programmable, so you take the same dye and program it for different models of automobiles. So you basically do a product like one of our QuickMIPs devices where the things that are common are done hard wired and therefore the lowest cost highest performance and then you use the programmable logic then to tailor that to specific automobiles and specific mix of components in that automobile. So that’s where we fit. It’s about flexibility, it’s about time to market and at the very lowest price the problem with ASICs is that you got to build zillions of exactly the same thing in order for that to make sense and that’s not what happens in these applications in cars.

: Okay well thank you very much.

Okay and I wish to thank you.

Your next question comes from Robert Katz of Sandhurst International, please proceed.

Hi Tom and Carl, nice to see some progress on your newer chips.

Thanks Robert.

I have a few questions, one is just going to harp on the gross margin side, if we back out the--- I guess the one time charge inventory write down, your gross margins for the quarter would’ve been sort of low 50%, 53%. The assets write off also come into gross margin or are that below the line?

$400,000 of that was R&D and it just and really hardly touched cost of sales at all, part of that $1m that we talked about.

So 450 comes out of the $1m?

No, no I’m sorry there’s a $1.5m total write off during the quarter and a little bit less there than one million fifty thousand in cost of sales and $414,000 in R&D and those are the two big pieces.

Okay and in terms of your guidance of the 46%, 51% gross margin, what causes the big swing in product gross margins going from roughly 53% down to 46% what would cause that?

Let’s take the mid point and go to 49, really what happened was just a lot of things lined up beautifully for us in Q4. One is we did have a few pieces business that were almost one time events were very high gross margin that had helped a lot in Q4, we had hardly any variances in Q4, in fact we have some variable variances. And as we peeled the onion on some of these variances we’re associated with this high margin business. And so we come back into Q1, we’re growing across the best of our products and these high dollar high margin opportunities don’t look like they’re going to repeat those specific ones and so we got to lower the dual standard product margin in the quarter, we expect to return to a kind of a more normal production variance level and in addition we’re going to see some cost because of our activity out of Tower and that’ll be new for Q1.

Okay so it’s pretty much the acquisitional cost of Tower and how much business comes out Tower?

That’s a part of it.

So the higher the revenue line you might be able to lower your gross margin might be this quarter?

Oh no, no nothing like that and we—our customers are excited about these new products, they’re looking forward to receiving them, but they are probably going to take enough product initially to get their systems going and test it and they’ll take their larger volumes as we say in the second half. So we don’t think that Eclipse II revenue is going to be big this quarter.

Okay so by the time the new product shifts there’ll be at least (inaudible) company gross margin?

That’s what we think.

And my second question is about the size of the sales funnel, the opportunities that you’re looking, (inaudible) that they’re driven than they’ve ever been, can you sort of quantify that maybe in terms of percentage of revenues that you’re projecting? Sort of the size of funnel compared to what you think you can actually pull in as that stands now verses where you were possibly looking at the same situation at the end of the quarter or beginning of last year?

Well we don’t really like to talk about our funnel but let me tell you this, this is the most interest we’ve ever had on a product before it was released.

And part of that is logical if you think about it because it Eclipse II is pin for pin compatible with Eclipse I at much, much lower power and at much lower price point. Eclipse I was larger gait, if you will, and now we’re going to supply products that go all the way down to 50,000 gaits and 25,000 gaits, which they’re still a lot of designs being done down there. So it’s a very different animal than what we’ve had in the last several years and one that’s getting a lot of fraction.

Great thank you.

Okay thank you Robert.

Your next question is a follow up question from Gary Mobley of B Riley and Company please proceed.

Hi I’m not sure if you did this already, but if you could break out the end market mix for the quarter?

Just for your own information it is in the press release by the way.

Okay that’s what I want to find out.

Instrumentation and test led the way at 38%, Datacom/ Telecom 26%, Computing at 18%, and that’s where our large customer resided in Computing. And Graphics, sorry Military at 10%, Graphics and Imaging at 8%.

Okay. And I want to walk through your Tower positions so 1.3 million shares roughly 300,000 of those are available for sale, correct me, roughly one million are held on your balance sheet at a cost of 340?

Yes.

And you said that you have 180 days lock up from the day that you were suppose to make your last payment is that correct?

It’s at 180 days in the under writer agreement that Towers has with their under writers.

Okay so at that point you will start carrying those shares will be available for sale is that correct?

Well we actually probably will carry those if available through out the end of the first quarter. Just technically we can’t move them out of – we have to move them out to restricted because the lock up with under writers is less than a year.

Okay alright that does it for me, appreciate it guys.

Okay Gary

Thanks Gary

Your next question comes from Joseph Afia (ph), private investor. Please proceed.

Good afternoon.

Good afternoon.

I’ve listened to your investment conference calls and this one sounds like the one two times ago and we were so happy and I appreciate – I mean I own a little bit less than 1% of your company so I appreciate the upbeat business.

I just have one question it’s not really so specific to QuickLogic, but I’m invested in chip stocks and when I see that Intel that they listed their major revenues this quarter, $20b in revenues, let’s say they come in 19.5. Doesn’t that bode well for the smaller company like you that things are booming so they miss it by $.5b but basically the cycle is booming so wouldn’t that translate into a much better for the smaller companies?

I wish it was that easy. You know the challenge of course is that the bulk of their sales are in very different segments than what we sell into. And the bulk of our sales are into embedded computing applications and that’s not where their strength has been. The bulk of their sales are in the desk top computing applications. And you don’t find very much program to logic near the desk top. So it will be pretty had to correlate their sales against ours with the exception of the overall sentiment of the industry. Obviously you know over the last couple of years the industry have been pretty badly beaten down and of course we were as well. But I think it will be very hard press to correlate Intel against – or us against Intel or them against us.

May be you misunderstood me I don’t mean Intel specific, but for major players when they miss a little bit, you know, I didn’t mean to put you against Intel and your niche, I mean I didn’t – in your niches with the major players when they miss by a little bit but basically the market has turned, isn’t that a better sign for the little players?

Well, I think that the fact that the overall market has turned it is obviously positive – I mean if you buy into the theory of a rising tide raises all boats, then certainly we’re better off in an up market than we are in a down market. I’m not sure – I don’t understand quiet what you mean by because they miss.

I mean when they miss it seems like – when they miss all the semiconductors, all the companies take new shifts could take a 8, 10% hit but it really shouldn’t happen when a major company misses, because since revenues are up so much it shouldn’t really on a smaller company shouldn’t follow their lead and drop so much that’s what I mean, if you understand what I mean.

Yes I guess I do now and you know that’s – if you ever figure out how all investors think let me know.

I’ve been buying in every dip, believe me, I’ve been buying in every dip in your stock.

Very good.

And if you come through with as you said on this call I’ll be a very happy person.

Good.

And good luck.

Thank you Joseph.

Once again ladies and gentlemen if you would like to ask a question please press star one on your touch tone telephone. Your next question comes from Robert Katz of Sandhurst International.

I have a follow up question if you have agreement with Miffs, do you have any other companies out there that you can similar type of agreements with from bedding technologies be it Blue Tooth or GPS or some other type of technology which would make sense to have to sort of hard wire the net and the programmable part surrounding it?

Yes it turns out that we don’t at this point with the exception of MOST, but most of that is available so if we wanted a great deal of DSPD as an example.

Right.

There are plenty of people out there who would be more than willing to license cores to us. If we wanted a great deal of Blue Tooth thing we could go find people that have done Blue Tooth and get licenses from them to do that. I have to be honest with you though that most of that stuff if it doesn’t, just take Blue Tooth as an example, for us to put Blue Tooth on a chip probably would make no sense at this point or for us to put Y-FY (ph) would probably make no sense because there are ASSPs that do that and do that very well and at very low cost. So because those are very specialized technology – you know you’re taking about mixed signal technologies that we don’t have the don’t have the specific expertise in. That would probably not be an efficient way for us to go do products. The best products for us are things where there is a lot of motion going on other words in standards.

Okay.

And it requires – that are very difficult to do. I just heard a story Robert just yesterday about a customer that is doing – that is trying to do an FPG – PCI implementation in an FPGA and they have been working on this big FPGA for almost a year and they still can’t get it to work. Now I have to tell you, we have one it’s called the 50604 you can it off the shelf today and it works this afternoon. Why would you do that? Why would a customer subject themselves to that? You know fiddling with it for a year I don’t know.

So we do the things in hard wire logic that very, very difficult to do and they don’t give our customer any way to differentiate themselves. However I would have to tell you this is a military customer and so it’s our tax dollars at work which you have to wonder about that at times. But at any rate -.

How are things like video standards?

That’s a good one. Yes H-Type 264 is some thing that – and Mpeg4 and Mpeg2, Mpeg2 of course is pretty much a commodity at this point. But certainly Mpeg4 and H-Type 264 are certainly ones that we’re very interested in and exploring. And of course that fits exactly into the multimedia activities with MOST.

And when do you think you’ll have something on the market with that type of technology?

We’re not ready to do product introductions hear on our earnings call.

Well good luck.

Thank you.

There are no more questions in queue at this time. Mr. Hart please feel free to continue with your closing comments.

Okay well thank you kindly for your attention and your interest in QuickLogic. We’re excited about 2004 and I hope you are as well and we look forward to seeing you at the next call take care.

Ladies and gentlemen this concludes this conference. Thank you for your participation and you may now disconnect. Have a good day.