Quicklogic Corp (QUIK) 2004 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the quarter one 2004 Quick Logic Corporation earnings conference call. My name is Rachel [ph] and I'll be your coordinator for today.

At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference. If at any time during the call you do require assistance, please press star followed by zero and a coordinator will be happy to assist you. As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Mr. Tom Hart, Chairman, President and CEO of QuickLogic. Please proceed, sir.

Thank you, Rachel [ph]. Good afternoon, ladies and gentlemen, and welcome to our first quarter 2004 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 invented, have pioneered and call Embedded Standard Products. Carl Mills, our CFO, will take you through the Q1 financials and then I'll share my perspective on our business. Finally, Carl will detail our guidance for Q2 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 forward-looking statements involve risks and uncertainties and QuickLogic's future results could differ materially from such forward-looking statements. We refer you to the risk factors listed in our annual report on Form 10-K, quarterly reports on Form 10-Q and prior press releases for a description of these and other risks that could cause 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 webcast live. It can be accessed from the investor relations area of the QuickLogic website located at www.quicklogic.com.

Our revenue grew 10% year-over-year but declined sequentially by 4%. However, our gross margin was higher than forecasted and, as a result, Q1 profit and loss results were stronger than the guidance we provided.

Some of the key points of our results are our Q1 revenue was at $10.4m. Revenue increased 10% compared to Q1 2003. Our sequential revenue dropped by 4% and was below our guidance of a 1% to 5% revenue increase. Bookings were lower than expected in Q1 due to the impact of a few large customers. In addition, bookings from our other customers were low during the first two months of Q1 and then improved in March to grow in Q1 compared to Q4.

We have had a substantial increase in bookings since the beginning of March and we expect revenue to increase slightly in Q2 compared to Q1. We will talk more about this in the guidance section of our call.

Advanced embedded standard products, our new revenue category, including our Eclipse and QuickMIPS devices, contributed 20% of revenue in Q1. Our ESP products contributed 29% of revenue in Q1. We will explain these new categories for the purposes of reporting revenue later in the call.

We shipped our first Eclipse II devices for revenue in Q1, in line with our guidance. Although these new products did not have a significant impact on our revenue for the quarter, we expect them to contribute significant revenue in the second half of the year.

As expected, in Q1 we did not deliver any units to our largest 2003 customer. One of our instrumentation and test customers accounted for 14% of revenue in Q1. This customer accounted for 8% of revenue in Q4.

Gross margin was 56% of revenue in Q1, higher than our guidance of 46% to 51% of revenue. Q1 operating expenses were favorable compared to our guidance by approximately $400,000. We used $1.4m of cash in Q1 for working capital requirements, debt repayment and capital expenditures, which was well within our guidance that we would use up to $2m of cash in Q1.

In previous quarters, Tom has spoken with you about not reading too much into sequential comparisons. Significant sales to a few customers can cause a dramatic fluctuation in our sequential comparisons. Our instrumentation and test in our military aerospace segments increased by 21% and 16% sequentially, offsetting a decline in our computing revenue.

Our revenue from Japanese customers increased 35% sequentially. Despite this growth, our revenue in the Asia-Pacific region declined by 9% sequentially. This decrease in sales to our largest 2003 customer-- the decrease in sales to our largest 2003 customer was a significant factor in this decline.

In terms of a year-on-year comparison, combined revenues from North America and Europe increased 17% while Asia-Pacific revenue declined by 5%. Our largest customer accounted for 13% of revenue in Q1 2003 and did not contribute any revenue in the first quarter of 2004.

We sell the majority of our products through distributors and also directly to OEMs. Distributors accounted for 71% of our revenue in Q1, consistent with our fiscal 2003 results.

Our gross margin was 56.1% of revenue in the first quarter and was higher than our guidance. The products we sold in Q1 had a higher standard margin than we forecast. In addition, our production variances were favorable compared to our forecast. We benefited from volume discounts with our suppliers, negotiated credits with some vendors and had better-than-expected yield variances. The sale of previously reserved inventory reduced our cost of revenue by 215 basis points and was more beneficial than we had forecast.

As a company we continue to focus on controlling our expenses. In general, if an incremental expense is not necessary for new product development or generating revenue or required for compliance programs, we have not increased our spending.

Our Q1 research and development expenses increased by $200,000 to $3.2m from $3m in Q4. We had guided that R&D expenses would be higher by as much as $300,000 compared to Q4.

We are bringing new products to market. We believe the features and price points of our Eclipse II and QuickMIPS products will expand our served market, allow us to pursue higher volume applications and drive revenue growth for the company.

These products are being built at Tower Semiconductor using advanced manufacturing technology. As expected, we had significant masks pre-production material and qualification expenses in Q1 associated with bringing these devices to market.

Our SG&A expenses declined by $100,000 sequentially compared to our guidance of an increase of $200,000 to $400,000. Expenses associated with marketing our new products and sales commission expenses were lower than forecast in Q1.

To recap our sequential results, our revenue decreased by $400,000, our gross profit improved by $1.05m, primarily because Q1 charges for inventory reserves declined by $900,000 compared to Q4, and our combined R&D and SG&A expenses increased by $100,000. The overall result of these factors was a net loss of $1.1m-- of $1.4m in Q1.

Our net loss of $1.4m in Q1 compared to a net loss of $1.6m in Q1 of 2003. Revenue and gross profit each improved by $1m year-over-year. Our R&D expenses are $900,000 higher compared to one year ago, primarily due to $800,000 of expenses for Eclipse II and QuickMIPS masks, pre-production material and related qualification expenses in the first quarter of 2004.

Our SG&A expenses are $200,000 lower than one year ago. Higher charges for IT and 404 compliance consulting, legal and audit fees were more than offset by a decline in bad debt reserve expense and lower depreciation expense.

Let me turn now to cash. We used nearly $1.4m of cash in Q1. Operations used $400,000 in Q1. Our net loss, adjusted for non-cash charges such as depreciation and inventory reserves, was break-even for the quarter. That's good news.

The primary factors causing an operating consumption of cash in Q1 were the items we mentioned on our January call. We used $900,000 to purchase inventory in anticipation of demand from our large customers, to replenish our mature product die (ph) inventory and for initial inventory on our Eclipse II devices. We used $500,000 for higher accounts receivable, due primarily to the timing of shipments in the quarter. These expected changes were partially offset by $1m of cash provided by accrued liabilities, accounts payable and other assets.

Capital expenditures in the quarter, net of new capital lease obligations, consumed $400,000 of cash in Q1 and we used $700,000 of cash to repay debt during the quarter. Primarily as a result of these factors, our Q1 ending cash balance declined to $25.1m from $26.4m in Q4.

Our cash position less our interest-bearing debt was $17.6m on March 31st, compared to $19.7m on December 31st. We financed the purchase of designed software and maintenance in Q1, increasing our March 31st debt by $1.3m.

I'd like to take a moment to explain the value of our Tower investment. As a result of our 2001 and 2002 investments in Tower, we currently hold approximately 1.3 million Tower ordinary shares. At the end of 2003, all of our Tower shares were considered a long-term asset. Approximately 1.1 million of these shares were restricted shares and valued at $3.40 per share. The remaining shares were available for sale at December 31st and valued at $7.32 per share, the market value of Tower shares at the end of our fiscal year.

Some of you may have noticed a new line item, short-term investment in Tower, on our March 31st balance sheet. The restriction on the 1.1 million shares expired in Q1 of this year and all 1.3 million Tower ordinary shares that we hold are now considered available for sale. As a result, all of our Tower shares are valued at $6.98 per share, the market value of Tower shares at the end of our fiscal Q1.

At March 31st, we classified a portion of these shares as a long-term investment and a portion of these shares as a short-term investment. Since we are holding 450,000 shares to secure favorable wafer pricing at Tower, the market value of 450,000 shares, or $3.1m, is classified as a long-term investment. The market value of the remaining 895,000 shares, or $6.2m, is classified as a short-term investment.

We have agreed to a 180-day lockup of all Tower shares at the request of Tower's underwriters, and this lockup will expire in July. Otherwise, we have no restrictions on the sale of the Tower shares.

We held the same number of Tower shares in December and March and so we did not have a realized gain or loss from these shares in Q1. The change in value for these shares from December to March does not affect our statement of operations or our P&L, as you would. The change is recorded in the equity portion of our balance sheet as accumulated other comprehensive income. If we sell Tower shares, the price we receive will be measured against $3.40 per share and the realized gain or loss would be recorded on our statement of operations.

We had 160 employees at the end of the first quarter and at the end of 2003.

Now let me turn the call over to Tom.

OK. Thank you, Carl. The good news about major customers is just that, they are major and account for a significant portion of total revenue. The bad news is that their requirements are not always aligned with what we, our analysts and our investors want to see in terms of well-ordered, sequential quarterly growth of revenue.

Some people refer to this characteristic as "lumpy." This is a highly technical accounting term, no doubt, but to refresh your memory and more closely examine this lumpiness, let's review the revenue situation with our largest 2003 customer by quarter.

Actually, we started shipping to this customer in Q4 of 2002 and they accounted for 13% of our total revenue that quarter. Then in 2003 they accounted for 13%, 27%, 11% and 4% each consecutive quarter. And, as Carl has already shared with you, we shipped them zero revenue this last quarter. Now their project is not yet complete, but we don't expect to see them as a greater than 5% customer this year.

OK. Well, that's the story with our biggest customer, so what's happening with the rest of our business, then? Well, from a revenue perspective it was basically flat, quarter-over-quarter. Total bookings were, however, slow in January and February, which led to flat revenue growth quarter-over-quarter even as we grew total revenue 10% year-over-year.

So let's think about this for just another minute. Our largest customer was 13% of Q1 revenue last year and 0% of Q1 revenue this year and we still grew total revenue 10% in the face of that most significant decline. If you do the math, this says we grew our other business over 26% year-over-year.

So, as we predicted, we're coming out of the effects of having a program wind down at a very large customer and become a much smaller portion of total revenue. With our forecasted turn-on of Eclipse II and QuickMIPS, we're looking forward to a strong second half of this year.

The really good news I want to share with you today is how well our new Eclipse II product family is being received in the market place. The combination of the lowest power field-programmable logic on the market and the most secure from an intellectual property perspective, is being shown to be a real winner.

We're seeing design wins across a broad range of applications where low power is important and these are not just in battery-powered designs. We're enjoying design wins, for example, in USB 2.0 applications where power supplied by the USB port is strictly limited. In another line-powered design win, the low power dissipation allowed the customer to eliminate a fan, which yields a quieter, more reliable system and reduces his cost.

Overall designing activity for the quarter was very robust. New designs during the quarter came from many different market and application segments. We delivered first prototypes of an ultra-low-power bridging solution to a tier-one semiconductor partner targeting wireless voice-over-IP products. The combination of our ultra-low-power Eclipse II family and our turnkey design services provided the best solution available. We also began shipments of a PCI bridging solution to a tier-one medical instrumentation company based on our new low-power QuickPCI products.

In a remote server management application, our ability to protect customers' intellectual property with the use of our Eclipse II products versus SRAM-based FPGAs led this customer to select QuickLogic. This customer's previous design, implemented using SRAM-based programmable logic, had already been copied and so they were very sensitive to the reality of the fact that there is no design security associated with SRAM-based devices.

In addition, we began new business with customers in the gaming segment, avionics, handheld instrumentation and handheld consumer, to name just a few.

The other most significant aspect of Eclipse II turn-on is the size of the opportunities we are now seeing. Many customers are basically using these products as a replacement for what used to be done in moderate-volume custom circuits, ASICs. And why is this? Because we fundamentally look to our customers like an ASIC supplier. They get a device that has their custom circuitry implemented in it with no upfront costs, zero non-recurring engineering expense, no delays in waiting for parts to come back from custom production, no work-in-process liabilities and the flexibility to change their design on a moment's notice.

So I hope you can see that what we have here is not just another FPGA. The fact that our devices are one-time programmable had been viewed by some in the past as a disadvantage. The reality is that our ViaLink technology, which all our products are based on, offers Eclipse II customers some very compelling advantages in terms of low power, low heat dissipation, small form factor, instant-on and intellectual property security since we program about 70% of the devices we ship with the customer's proprietary code. Therefore, from the customer's perspective they're receiving a quick-turn ASIC without all the disadvantages of the ASIC, especially financial, which we just talked about. The bottom line here is that we think we're still on track to see significant revenue from Eclipse II devices in the second half of this year.

Now design activity for QuickMIPS devices is also proceeding very well. As we have shared with you on previous earnings calls, we're focused on applications that require video, graphics and text over Internet protocol to large-screen displays and video projectors.

During the first quarter we were able to demonstrate a system based on QuickMIPS using a proprietary compression algorithm implemented in the programmable logic. This demonstration serves as a powerful message to customers, letting them see high-quality graphics and text delivered to a plasma display or projector over standard Ethernet cable.

QuickMIPS offers these customers compelling improvements in picture quality and rapid time to market. Virtually every week we hear about new potential opportunities across a wide range of applications. End use for these kinds of applications include digital signage, video kiosks, KVM and digital displays, including plasma, LCD and DLP projectors. In case you don't know, KVM stands for keyboard video monitor and mouse and what this product does is allow you to control multiple PCs over Ethernet using just one keyboard, monitor and mouse.

We've talked a lot about the value of QuickMIPS and what it brings to our customers. Our ViaLink technology enables us to combine complex ASSPs and field programmable logic on the same die. Our customers benefit from very fast time to market, low total cost of ownership and intellectual property security.

Now let me share with you some additional insights into the value of our new QuickMIPS devices for some of our other customers. We've talked about the unique value of our offering a powerful microprocessor and field programmable logic on the same die. This capability offers system designers a way to trade off doing system functions implemented in software driving a microprocessor versus a much more power-efficient way of doing the same functions in programmable logic. This approach to whole system design enables higher performance systems at the lowest possible power and the designer can accomplish this using standard products.

We've also discussed several customers implementing proprietary and standard encryption algorithms in the QuickMIPS programmable logic and using the microprocessor to manage the encryption/decryption process. Now investors may wonder why a customer couldn't just do the same thing by buying an ASSP microprocessor and an FPGA, putting them next to each other on a printed circuit board, and get the same benefit. Well, aside from the intellectual property protection, which we've discussed before, like many things in life it's all about timing.

Consider this, if you will. It'll take a signal about 10 thousand picoseconds -- which is 10 nanoseconds -- to leave a microprocessor, travel across the printed circuit board and arrive inside the FPGA. In our QuickMIPS device, that signal can cross the die and get to the FPGA in about 100 picoseconds, or 100 times faster, using our embedded standard product architecture enabled with ViaLink.

Now let's talk about what you get to see if you-- sorry, now let's talk about how you get to see if we are really making progress, from a revenue perspective that is, on our ESP vision. Effective this quarter we've implemented new product revenue categories. The details are shown in the press release, but what we've done is break out advanced embedded standard products into their own category for higher visibility.

We have grouped our product families into three new categories for purposes of revenue reporting. These are called mature products, embedded standard products and advanced embedded standard products.

Based on these categories, advanced ESPs have accounted for 2%, 5% and then 10% of total revenue in the years 2001, 2002 and 2003, respectively. In the latest quarter, advanced ESPs accounted for 20% of total revenue, up 49% sequentially and almost 5 times the revenue compared to the same quarter one year ago.

ESP products accounted for 29% of revenue in Q1 and for 29%, 37% and 41% of total revenue in 2001, 2002 and 2003, respectively. Just for completeness purposes, our mature products account for 51% of our revenue in Q1 and right at about half our total revenue for all of 2003.

Now, of course, the ultimate proof will be in the revenue and we believe we're on track for significant revenue in the second half of this year from both Eclipse II and QuickMIPS families of products.

Thank you and now Carl will give you the details of our Q2 guidance and then I'll wrap up.

Thank you, Tom. We mentioned that our bookings rate for Q1 was lower than forecasted. Bookings for the first two months of the quarter were soft, however bookings have been much stronger since the beginning of March and carrying into April, compared to our bookings rate in January and February. Q1 turns were 64% of revenue and we are counting on similar turns in Q2.

Given our backlog profile and recent higher level of bookings activity, we are providing guidance that Q2 revenue will be up low single digits sequentially. We plan to offset an expected decline in revenue from our Q1 14% customer with growth from our other customers.

Gross margin, which was higher than planned in Q1, is planned to be between 46% and 51% of revenue in Q2. We expect that our sequential gross margin may decline due to lower standard margins, high initial production costs for our new products, higher production variances than we experienced in Q1 and due to our reduced benefit from the use of reserved inventory.

Our company's manufacturing strategy is to reduce the cost of producing our products so that we can pursue higher-volume sales opportunities. We believe that fabricating products at Tower will reduce our unit costs. We also-- we are also actively reducing our other costs of sales by reducing the time and cost needed to test and program our products and by negotiating lower assembly costs with our vendors.

We made significant progress in our products being developed for production at Tower in the first quarter. We released four Eclipse II devices to production and shipped these devices for revenue. We also delivered QuickMIPS and Eclipse II engineering samples to customers during the first quarter.

We expect our research and development expenses to be sequentially higher in Q2 by up to $200,000, primarily due to the purchase of masks, pre-production material and qualification expenses associated with our new products. We expect that selling, general and administrative expenses could increase $200,000 sequentially due to marketing costs associated with our new products and higher selling expenses.

Interest income and other net, includes interest income on invested cash, foreign exchange gains and losses and interest expense on borrowings. During the first quarter, the net expense was $20,000. We expect that interest income and other net, will be an expense of less than $50,000 in Q2.

We plan to use up to $2.2m of cash during the second quarter. We expect inventory to increase in Q2, principally for our Eclipse II devices, and we expect to spend up to $1m for capital expenditures. In addition, we borrowed $2.1m-- I'm sorry, $2.9m under our revolving line of credit at the end of Q1 and we may decide to repay these funds in Q2.

As we mentioned earlier on the call, our lockup on Tower shares with a market value of $9.4m will expire in July 2004. $6.2m of this amount is considered a short-term investment.

Let me take 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 our new Eclipse II and QuickMIPS products will play a significant role in our revenue growth and that significant sales of these products will occur in the second half of 2004. Customers in various stages of design activity are enthusiastic about these products and we have identified numerous significant sales opportunities.

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

Our financial model, based on $25m of quarterly revenue, and 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 20 cents based on $25m-- or 25 million outstanding shares.

Our current expectation is to achieve operating break-even at $13m to $14m of quarterly revenue and to achieve this revenue level in Q3 or in Q4. We expect that our Eclipse II and QuickMIPS products will be a significant source of the revenue growth required to achieve profitability. We expect to be able to maintain break-even operating cash flow at approximately $12.5m of revenue per quarter.

Our revenue results for the first quarter and our revenue outlook for the second quarter are both lower than we expected in January. While it is possible-- while it is impossible for us to know exactly what our annual revenue growth will be, developments such as these might impact our former guidance of 20% annual revenue growth. Owing to these considerations, we have decided not to provide annual growth guidance going forward.

Many of you track our sales by product category. In terms of our new categories, details of Q1 2004 and Q4 2003 are available in our press release. For Q1, Q2 and Q3 of 2003, advanced ESPs were 5%, 10% and 10% of revenue. ESP products were 42%, 42% and 41% of revenue. Mature products were 53%, 48% and 49% of revenue.

Please remember that we have made forward-looking statements in our presentation and we will likely make others in the question-and-answer period following our prepared remarks. Our actual results could differ materially. Please review our SEC filings for specific information on the risks and uncertainties that we face.

Now let me turn the call back over to Tom.

OK. Thank you, Carl. Now for your scheduling purposes, our Q2 2004 earnings conference call is currently scheduled for Wednesday, July 21st, at 2:30 p.m. Pacific Daylight Time.

If you have the opportunity, we're going to be presenting at the AEA micro-cap financial conference in Monterey May 17th and 18th. We'd love to see you. Details for both of these events can be found on our website at www.quicklogic.com.

OK. So, Rachel [ph], now let's open up the call for questions.

Ladies and gentlemen, at this time if you do wish to ask a question, please press star, followed by one, on your Touch-Tone telephone. If your question has been answered or you wish to withdraw your question, please press star followed by two. Questions will be taken in the order received. Please press star-one to begin.

Your first question comes from Gary Mobley of B. Riley & Company. Please proceed, sir.

Hey, guys.

Hi, Gary.

Is it fair to assume your book-to-bill ratio is greater than 1?

For March, certainly, but not for the quarter. We're very encouraged by the book-to-bill in March and confident of our ability to grow revenue in Q2.

OK. On the computing front, down dramatically and I'm wondering, you know-- I don't recall that you guys were forecasting any revenues from your largest customers in '03 to return in Q1. Now where, then, did the other shortfall come from in the computing division?

We had one instrumentation and test customer that's in Asia and we had an aero customer in Europe and we had expected significant orders from both of these customers in the quarter and while the demand is still intact long term, it didn't materialize in our bookings for Q1 and, as a result, it impacted our profile of shipments for the quarter.

OK. Was the instrumentation and test Yokogawa?

Couldn't say.

OK. You don't think you've lost any design sockets there, do you?

We haven't lost a single design socket.

OK. All right. I will pass it on for additional questions and I'll jump back in the queue.

OK.

Your next question comes from Darryl Todd (ph) of Southwest Securities. Please proceed, sir.

Tom, the -- earlier you made the comment that you were expecting a strong second half using your Eclipse II and your QuickMIPS as being your growers in the second half to give you that growth. What are the end users for that?

It's a very broad range of customers. There's got to be-- in the pipeline I would wager that there's over 100 customers in various stages of design. So this is not one or two guys. This is a very broad range of what we believe will be significant customers.

I think a couple of examples would be useful. One is that we've got an application where the customer wants to go to a wireless voice-over-Internet protocol phone from being a wired phone and our Eclipse II has been designed into that as a bridge between the wireless module and the existing handset. And the beauty of our part is it's very low power, its very small form factor and, as a result, it fit for the application.

Kind of another example is a network-attached storage company which had been cloned in the market place, as Tom mentioned on his portion of the call. They did not want to be cloned again and so they went from a SRAM-based FPGA system design to a ViaLink based FPGA system design using our Eclipse II parts.

So there's a tremendous amount of interest in the parts from both a power perspective and from a security perspective.

That's in communications, power, that kind of thing. Anything in other industry groups that might be new to you?

Well, we've participated in the gaming business for quite a long time, actually, owing primarily to the security aspects of the product. And we're seeing new designs there, as well. We've got some significant customers in Japan that we think will turn on in the second half for Eclipse II product in gaming, as well.

So there's a -- the military particularly likes the aspects of Eclipse, but their design cycles are typically longer, so we don't expect to see significant revenue from Eclipse II devices out of the military segment.

We do expect to see some significant QuickMIPS revenue out of the military. We've talked about them in the past. That's our customer Northrop Grumman and they're very pleased now and I believe we now are up to four different designs with them for various kinds of systems, including primarily what amount to voice-over-IP systems for air traffic control systems.

So it's a broad range of applications. Eclipse II is finding a lot of homes, again, based on low power and based on the ability to safeguard people's designs.

OK. Carl, I didn't understand exactly what you said when you were looking at revenue for Q2. You said single digit and I'm assuming that was sequential to quarter one. Is that right?

Exactly. Up single digits sequentially compared -- low single digits sequentially compared to Q1.

OK. Thank you.

Sure.

Thank you.

Gentlemen, your next question comes from Mitch Metzman [ph] of Metzman Capital [ph]. Please proceed, sir.

Hi, Tom.

Hi there.

A couple questions. This view of lowered revenue in the first quarter and also the second quarter, does that-- just clarify this for me. Does this change the view of the back half of the year as to when you're going to achieve break-even?

No, we'll still achieve break-even in the back half of the year. It could be Q3; it could be Q4.

OK. So really-- but now you did say that you're not going to give a revenue growth projection for the year. Is that correct? Did I hear that right?

Yes. Correct. But we also said that our break-even was $13m to $14m of revenue per quarter.

And we expect to achieve that in Q3 or Q4.

OK. So the-- this slower start to the year -- what you're telling me right now this slower start to the year isn't changing what you projected a quarter ago, before you went through this slow spot, about where you think your business will be in Q3 and Q4?

Well, it hasn't changed our goals of breaking even in Q3 or Q4. That remains intact.

Well, it seems to me that the-- your-- I mean, a budget based on or a projection based on customer activity and a goal are two separate things. It depends on what they're based on and it seems to me that to achieve those-- to achieve those projections or that expectation is going to be a little harder now, given the fact that business that you expected to be able to incrementally build on has disappeared and so I'm trying to get a sense for you.

I mean, are you guys still as confident as you were before on the back half of the year or are you beginning to hedge a little bit about where you-- where things are going. It sounds to me you're hedging because you're removing your growth, you're removing your revenue growth expectations and you're-- now you're labeling it as a goal instead of really based on where the customer activity is, unless I'm misunderstanding it. And if this is the case, then I'd like for you to clarify that.

I think you are misunderstanding and I think the problem is, we don't think we're going to be able, necessarily, to make up the first half revenue in the second half to make the total year.

Right, but that's not what I'm saying. I'm saying-- I'm saying forget about-- that's water under the bridge. This quarter's done already. Next quarter you're talking about very, very little growth and higher expenses for the June quarter. I can live with that. But starting with the third and the fourth quarter, if you're telling me that, well, you know, if we're going to start to creeping up to next quarter, you say well, our bookings are slipping off, our stuff isn't selling as well as we thought, we're not getting-- you know, that's something that really is still in expectations a bit, that you guys are going to hit those benchmarks.

And I just-- the basic question is, how is the loss of momentum in the business now going to affect Q3 and Q4?

We think the-- a lot of the-- maybe to characterize it as a loss of momentum is not a fair characterization. Because really we're lumpy because of large customers and what happened to our bookings in the first quarter we had no large customers -- that we consider large, historically -- to book orders. And yet we still have demand intact for those customers for the rest of the year.

So it's a question of timing. As I mentioned to Gary, in terms of that one account, we have not lost a single socket.

I mean, do you anticipate that the-- as these new two product offerings begin to garner more of a percentage of your revenues-- you had mentioned earlier that in some of these cases you had products where they'd be 100 customers for a product and they would be diverse in nature. Do you expect that as those new products garner greater percentage of revenues that this characteristic of lumpy revenue will persist or whether it will begin to tail off as you move towards the middle and back half of this year?

It could be lumpy because our goal, of course, is to have 20-30 significant customers. By significant, we're talking about maybe more than $1m a quarter in revenue. That's a long-term goal for us. As we come to that goal, we'll have some lumpiness along the way as these customers enter and leave quarters.

OK. So you expect-- Well, by the nature, if you have $30 million customers versus $5 million customers, I mean, that in itself would set the table for less volatility as opposed to more volatility.

Right.

But my question--

But all that 30 don't show up at once, right?

Pardon?

It takes a long time to build up to 30 significant--

Well, I'm just saying, that's by definition that if you have greater number of customers that you're going-- you have more-- you have more flexibility not to rely on any one of them to deliver. But the question that I want to make sure that I understand is that-- I mean, is this a characteristic of this company going forward for the next four or five quarters or however many quarters you can define that, that we're going to be having these lumpy situations where, you know, you turn around and, oh geeze, you know, we're two weeks, we're two, three, four weeks from the end of the quarter that, oh, we don't-- we didn't get that big order? Is that something that's going to be-- that this is a part of QuickLogic's makeup for the next year or so?

I wouldn't characterize it as a makeup due to the size of our customers, but it's a high turns business and we depend on turns. We depend on bookings in the quarter to make our revenue. And let me just say one other thing, when I talk about million dollar accounts, I'm talking about a million dollars per year as opposed to a million dollars per quarter.

Very well. OK.

If you look at the past, maybe there's some clue here for you. Up until the last year we had no 10% customers. As a public company, I don't think we've ever had anybody over, probably 5% or 6%. And so what's happened in the last year is we found some applications that are significantly larger than others that we've seen. I think we'll see more and more of that on a forward-going basis and so they'll be a transition from-- where we will be impacted, probably, by big guys where we were not, in the past.

You know, if you've got 3,000 customers doing a 100K apiece, you know, on an average, that's very different than having, you know, a handful of guys that are doing over a million a quarter.

OK. Thank you.

Yep. Thank you.

Gentlemen, your next question comes from Minosh Natacarni [ph], a chip investor. Please proceed, sir.

Hi, good afternoon.

Hello, Minosh.

Why do you think your bookings were low in January and February? And what changed in March?

They were low in January and February primarily because of large customers. Otherwise, you know, they really did turn on in March, so we can't really explain why they booked in March and not January and February.

OK. But when you say large customers, you-- in the December quarter your largest customer was, what, about 10% or so?

We had a 4% customer and an 8% customer.

OK. So we are talking about less than 10 percent customer, still, on a sequential basis.

Right.

OK.

But go back another quarter that 4% customer was 11. The quarter before that, that customer was 27. So there's a pretty good pattern there.

OK. Coming to Eclipse II, how much revenue did you have in the first quarter from Eclipse II?

You know, not a significant amount of revenue, not worth breaking out.

And we don't break out revenue by family to that level of detail anyway, Minosh. But it was not meaningful in Q1. But we did not plan for it to be meaningful. We've said for about the last three quarters that we believe that Eclipse II and QuickMIPS will have significant revenue in the second half of this year.

Yes, but I'm just trying to fathom how you will reach that. Do you see yourself-- I mean, will it be a gradual rise or will it be a step function change in the second half of the year? What do you expect?

No, I think you're going to see-- we'll see more revenue now in Q2 than we saw in Q1. It's not going to be-- you know, go from zero to x overnight. It'll grow. I mean, that's the way customers grow, but the thing that excites us about this is the very broad range of applications and the large number of customers that we're seeing for a new product. We've never seen this kind of turn-on before.

The other exciting thing is the size of the opportunities that we're getting exposed to are much greater than we're used to in terms of annual volume.

But does it take time to build volume applications? What is the--

Sure it does. But the good news is, we've been sampling these parts-- we sampled these parts during the second half of last year. So there's been a lot of design activity underway.

OK. And between the two families, Eclipse II and QuickMIPS, are you more optimistic on one versus the other?

Nope. I think there's different timing with them. I think QuickMIPS will take longer to design in because you're-- because you're dealing with microprocessor as well as programmable logic design. You get engaged earlier in the project with customers for QuickMIPS designs than you do with a more conventional ESP-- sorry, FPGA designs.

You see what I'm saying? The fact that you've got a microprocessor there means you get involved earlier in a project. If it's an FPGA you get involved very late in the project. Those are-- classically architectural decisions aren't made on-- around FPGAs, but they would be made around an ESP product like QuickMIPS because it has a micro on it. Are you with me?

Yes. You have this new category, advanced ESP group. Can you go through again what products are included in that, versus your normal ESP group and also your mature group.

Sure. It's very easy. Our ESP group is essentially unchanged, the way we've always reported it. We have-- in the mature group we added pASIC 3 to what was pASIC 1 and pASIC 2. So that's how the mature group has changed. We didn't have a third category. We had always reported new products. Our third category is advanced ESPs and that includes our Eclipse devices, both Eclipse I and Eclipse II, our QuickMIPS devices, as well as the tools that we sell, because the tools that we're selling are associated with the design activity around Eclipse and around MIPS.

I see. And QuickMIPS II-- if you sell those, they will go in that advanced ESP?

Absolutely. Not if we sell them, when we sell them.

When you-- OK. What's-- what's happening with pASIC 1 and pASIC 2?

The revenue from that has been terrific. It's high margin business. We like it a lot and the booking activity's been good and the revenue's been good.

All right. Well, good luck to you for the second quarter and for the year.

Thank you.

Thank you, Minosh.

Ladies and gentlemen, again, to ask a question, please key star-one on your Touch-Tone telephone. You do have a follow-up question from Gary Mobley of B. Riley & Company.

On this expectation of higher revenue in the second half of the year, driven by these new products, what-- what should we expect in terms of gross margin and normalization of operating expenses? You know, assuming you've taped out the products, et cetera?

OK. So we think that, you know, during Q3 we hit a lot of our goals in terms of operations for these new devices and that Q4 our margins are very good. The-- we also think that a lot of our project-related expenses around these devices are kind of in that same timeframe. So, again, by Q4 our project-related expenses will have gone down dramatically. That's our expectation.

OK. You're certainly going to have a greater mix of products manufactured at Tower and I mean, your strategy is to bring to market lower-priced products because the products will be manufactured more cheaply at Tower, but there's probably a good chance that gross margins, you know, could hit new highs. I mean-- new highs, by that I mean over FY '03. Is it reasonable to expect, you know, north of 50% gross margins for the second half of the year?

You know, they'd have to go back a ways for us to be less than that, so probably it's fair, although we don't really give guidance in that kind of detail, Gary.

OK. And how conservative-- there's really no good way to ask this question, but how conservative do you guys think you're being in terms of the timing of these new products, the QuickMIPS and Eclipse II? I mean, there's certainly a long implementation cycle for these guys. You've been showing them for a while, but what worries you most about whether or not the timing of these two products ramping-- you know, what could, essentially, go wrong?

Well, you never really know -- the customers never really know how rapidly they're going to turn on. You know, these are not-- this is all forecasted on a project-by-project basis. So this is not Kentucky windage where a guy is looking at his territory and saying he's going to grow 20% this year and doesn't know exactly where it's going to come from. These are all-- every design socket for Eclipse II and QuickMIPS devices is forecasted and our guys are in touch-- this is not us dealing through a distributor. Our region managers and FAEs are dealing directly with the customers on these. So we think we have the best information that's available.

Having said that, customers don't know exactly what their sales are going to be. So that's my only concern in this. But we've got so many designs working, I think-- We've got a lot more in the hopper than we're planning on.

OK.

So I feel pretty good about it, I guess, is the bottom-line way of saying it.

OK. And how much cannibalization is going to take place? I mean, in other words, how incremental is Eclipse II and QuickMIPS over existing--?

Not a lot, as it turns out. There were people who did some Eclipse I designs. Eclipse II is pin-for-pin compatible, but it's also smaller devices, it offers smaller devices than were available in the Eclipse I family. But you won't see-- I don't believe you'll see a lot of cannibalization. We're seeing a lot of new sockets, things we never saw before.

We're competing now, instead of against FPGAs, conventional FPGAs, we're competing against CoolRunner, as an example, which is a CPLD, which is in low-power applications. We've never competed against that before and we're winning designs there because CoolRunner is a CPLD, does not have onboard memory and our Eclipse II devices do have onboard memory.

So it's really served to increase our served available market, Eclipse II has. So it isn't just going to cannibalize what's gone before.

OK. Thanks, guys.

OK. Thank you, Gary. OK, we got time for one more call if anybody--

OK. Your last question comes from Peter Conrad of Kopp Investment Advisors.

Hi, gentlemen. I just wanted to circle back to a prior question. Considering we're kind of coming off a little lower base than anticipated in the first half of the year, yet you're 90 or more days into-- further into the design cycle, has your degree of confidence in hitting your goals for the second half increased or not increased?

Increased in terms of Eclipse II and QuickMIPS II.

And, therefore, your degree of confidence in hitting some of the financial metrics of, you know, break-even, has increased, as well?

Well, that isn't going to account for all of our revenue. So, you know, if the rest of the revenue were to, you know, go to hell, I have no idea. The--

But we don't see that happening.

We don't see that happening. We see a very solid turn-on and if you look at our mature products, accounting for half our revenue, those things are booking along very nicely. So I-- you know, we don't anticipate the market going into the tank, so, in general, I mean, our guys are all very optimistic about our older design business, but they're also excited about what's going on with Eclipse II and QuickMIPS II.

So, Peter, I guess the answer is, we're more confident about the second half, clearly, than we were about the first half.

And more confident now than you were a quarter ago?

Correct.

Correct.

OK.

Yeah, those designs have-- we track our design activity pretty religiously and where we are in the process and those designs are advancing and they're advancing very nicely.

Pretty much at the point of no return for the customer? They need to keep marching down that path and, you know, their volume expectations are solidifying?

They're not going to want to return. These are good products.

I mean in terms of them anticipating success for their product and moving forward with yours.

Yes.

OK. Very good. Thanks, guys.

Thank you, Peter.

Gentlemen, we do have one more question from Tom DeMoor [ph] of the State of Wisconsin.

OK. Tom, good afternoon.

Good afternoon, gentlemen. Just a point of clarification. You commented in your press release and on the call that since orders from a few large customers did not materialize the revenue growth didn't meet expectations. You are forecasting low single digit revenue growth in the first quarter sequentially due to growth from other customers.

That suggests that a few customers that you were anticipating getting sales from in January at this point you're not even expecting them to be customers in June and I just wondered is that the correct implication and, you know, what about longer-term? I mean, why this delay and why are you confident you'll be able to, at some point, capture those customers?

Well, you know, it's very difficult to explain on these calls all the time, but I guess the message we're trying to convey is that a couple big guys didn't hit in Q1 that we expected to hit. You know, we had specific dollar targets for those accounts and they're big accounts.

You strip those out and you look at the rest of our business, we were up quarter-on-quarter and the bookings were kind of a modern record for the rest of our business for the whole quarter. So, you know, we-- you know, somebody asked me, did we have a positive book-to-bill? No, because of the big guys. But were a lot of the things that we saw in the first quarter good from a bookings perspective? Definitely. Is that momentum carrying into the second quarter? Yes. Do we expect the big guys to come back this quarter? Yeah, we expect them to start coming back in Q2.

So there's-- there are a lot of good signs and it's just hard to portray what happened with those big accounts and not lose sight of the fact that there's a lot of good things going on with our business.

OK. Thank you.

Thank you, Tom.

OK. This will be the last call we take or question we take. From Craig [ph].

Can you hear me?

Craig Samuels [ph], gentlemen.

Yes, we can hear you, Craig.

So I just had a couple of quick questions. What's your average revenue per customer? Any idea?

It's pretty small. How many customers do you think we had in 2003, Tom?

We probably had 2,500 customers that we dealt with, 2,500 to 2,800 customers we dealt with in -- remember we do most of this-- most of this business is done through distribution. So it's about 2,500 customers and so if you did $42m divided by 2,500 customers, what are you looking at, Carl?

Eighteen-twenty grand.

Yeah. But it's a very-- you need-- to get to half the revenue, you've got to get-- I haven't looked at it lately, but it used to be that you had to go to about 40 customers to get to half the revenue and then all the rest of them amounted to the other half. So--

Yeah, that's my next question. Just give me the revenue range, so if 10 or 5-10 grand's on the low end, what's the high end?

Well, I think Tom is--

Excluding the large 14% customer from last year.

Yeah, we have regularly several customers that are 3%, 4%, 5%, sometimes 6% of revenue. So we have a lot of those. And, again, 40 guys accounting for about half our revenue.

And then in order to, perhaps, better clarify some of the negative associations with the quarterly revenue, can you kind of guesstimate what your revenue would have looked like had these, quote/unquote big guys hit?

Well, we would have been within our guidance.

Would you have exceeded your guidance?

No, probably not. A lot of that demand would have been for out quarters.

And then the last question, you guys talked at length about this targeted model of 25m revs equals 20 cents. Can you draw either-- both a timeline and a game plan to achieve that?

Well, we haven't given-- we haven't given guidance on what that is. We typically, when people have asked us, you know, over what reasonable period of time do you believe you can get to that kind of a run rate and we've felt that it's about two years out.

So to get there in two years is essentially doubling your business, implying a growth rate north of 30%.

Right.

Will that be fueled by the current products that you are offering or will it require a host of new products? Can you shed some light there?

I think the bulk of that increase will come from the existing products that we've got in the market, that we have in the market when these are finished rolling out. In other words, Eclipse II and-- Now we're also, as you may or may not have seen, we've announced a QuickMIPS-- sorry, a QuickPCI product based on our Eclipse families and so you'll see other products come off of -- or derivative products off the ones we've got, but I think the bulk of getting us to 25m is-- probably comes from our existing products.

And what needs to happen for your growth rate to move from whatever it is today, just call it for the year 20% or less, to north of 30%?

Turn-on of the Eclipse II and QuickMIPS II.

Which is really, you know, part of that is gated by the release of the products. We released parts in Q1. We'll be continuing to release parts, both Eclipse II and MIPS II. So that's really the gate for our growth, we think.

Do you have any data points to date to suggest that that type of revenue growth is achievable?

I don't know what kind of data points you would mean. Do we--

Customers-- Thirty customers that say we need $2m to $3m plus your existing business. I mean, is there a-- if your core historical revenue range is some guys that are 4%, 5%, 6% of total revenue, so $2m, do you have significantly more guys stating that they would require QuickMIPS and/or Eclipse II products?

Yes.

OK. Thank you.

Um-hmm [affirmative]. Thank you, Craig.

At this time you have no further questions.

OK. Thank you, kindly. We look forward to seeing you-- or chatting with you in July. Bye-bye.

Ladies and gentlemen, this now concludes your presentation. You may now disconnect.