Quicklogic Corp (QUIK) 2004 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q2 2004 QuickLogic Corporation earnings conference call. My name is Michelle, and I will 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 this conference. If at any time during the call you require assistance, please press star followed by zero, and a coordinator will be happy to assist you. At this time I would turn the presentation over to your host for today's call, Mr. Tom Hart, chairman, president, and chief executive officer of QuickLogic Corporation.

Okay, thank you, Michelle. Good afternoon, ladies and gentlemen, and welcome to our second quarter 2004 earnings conference call. Thanks for taking the time to join us today and hear about QuickLogic and our voyage toward our development and market leadership of this new category of semiconductor devices we call "embedded standard products."

Carl Mills, our CFO, will take you through the Q2 financials and then I'll show my perspective on our business. Finally, Carl will detail our guidance for Q3, 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 any 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.

We had our best revenue, gross margin, and operating income since the fourth quarter of 2000. Our revenue grew 8% sequentially and exceeded our guidance of a low single-digit increase. Our gross margin is 60.2%, exceeded our guidance of up to 51%. This improved gross margin fell right to our bottom line, and our net loss was only $529,000, or 2 cents a share. Our revenue of $11.2m and net loss of 2 cents per share surpassed the analyst estimate, which was $10.7m and 9 cents per share, respectively.

Other key points from our results include bookings, which have been strong since the beginning of March, were significantly higher in Q2 compared to Q1 for all of our product lines -- Mature, ESP, and Advanced ESP. We had a broad base of customers contribute to this increase with several customers, each contributing between 6% and 8% of our Q2 gross new orders. Our Q2 revenue was $11.2m, strong bookings and 68% turns allowed us to increase revenue 8% sequentially. ESP product revenue increased 15% and Mature product revenue increased 28% sequentially. As we expected, at the time of our last conference call, our Advanced ESP revenue declined quarter over quarter. One customer purchasing Advanced ESP products dropped to 4% of revenue in Q2 from 14% of revenue in Q1.

We expect our Advanced ESP products, which include our new Eclipse II and QuickMIPS product families to provide significant long-term revenue growth. Tom will discuss Advanced ESP design activity later on this call.

Total operating expenses were in line with guidance. We increased cash by $1m during Q2. This was favorable compared to our guidance that we would use up to $2.2m of cash in Q2. Our operating results and capital expenditures were favorable compared to our forecast. We spent less for pre-production masks and wafers than we expected, and we had great AR collections during the quarter. In previous quarters, Tom has spoken to you about not reading too much into sequential comparisons. We want to re-emphasize that significant sales to a few customers can cause a dramatic fluctuation in our sequential comparisons.

Nevertheless, there are a few particularly notable points from our sequential results. Our instrumentation and test business have been very strong. We overcame a $1m decline in revenue to one customer and still grew this business by $100,000 in Q2 compared to Q1. Our graphics and imaging business doubled quarter-on-quarter. There was 13% of revenue in Q2, as two customers had a significant upturn in business. In terms of a year-on-year comparison, you may recall that one customer accounted for 27% of revenue in Q2 last year. We are up $600,000, or 5.8% in Q2 compared to one year ago, despite a $2.7m decline in revenue from this customer. Revenue from our other customers increased 43% year-on-year and is up 34% on a year-to-date basis. Combined revenues from North America and Europe are up 11% sequentially and are up 52% compared to one year ago.

We sell our products through distributors and directly to OEMs. Distributors accounted for 74% of our revenue for the first six months of 2004. The products we sold in Q2 had a higher standard margin than we forecast. In addition, our production variances were favorable compared to our forecast. We benefited from the sale of reserved inventory and had better-than-expected yield variances and overhead costs. The sale of previously reserved inventory reduced our costs as a percent of revenue by 2.8%.

Our research and development expenses were $3.1m and declined by $200,000 sequentially. We had thought R&D expense could be as much as $200,000 higher compared to Q1. We had lower masking expenses and lower pre-production material expenses than we forecast for the quarter. Our SG&A expenses increased by $300,000 sequentially compared to our guidance of an increase of up to $200,000. We had one-time employee expenses that caused us to exceed Q2 forecast expense levels.

To recap our sequential results, our revenue increased by $850,000, and our gross profit increased by $940,000. We took almost all of this improvement to the bottom line and reduced our net loss by $840,000 sequentially.

Our net loss of $529,000 in Q2 compared to a net loss of $24,000 in Q2 of 2003. Our results one year ago included a $700,000 gain on the sale of Tower shares. Otherwise, we reduced our net loss by $190,000 in Q2 compared to last year. Our revenue increased by $600,000 and gross profit improved by $1.2m year-over-year. Our R&D expenses are $600,000 higher compared to one year ago, primarily due to higher expenses for Eclipse II and QuickMIPS, masks, pre-production material, and related qualification expenses. Our SG&A expenses are approximately $400,000 higher than one year ago. One-time employee expenses, higher charges for consulting related to IT projects, 404 compliance expenses, legal fees, and audit fees were the principal reasons for the increase.

We had a $1m positive cash flow in Q2. Our net loss, adjusted for noncash charges such as depreciation and inventory reserves was a positive $600,000 for the quarter. Changes in working capital contributed $300,000 of additional cash flow. We reduced our accounts receivable by $500,000 during the quarter and our AR is now 32 days. At June 30th, we had 129 days of inventory on hand and nine days of inventory in the channel. As a result, we had a positive operating cash flow of $900,000 in Q2 and $500,000 year-to-date.

Capital expenditures in the quarter consumed $300,000 of cash. We used $800,000 to repay debt during the quarter, and we received $1.3m upon the issuance of stock into our employee stock purchase and stock option plans. Primarily, as a result of these factors, our Q2 ending cash balance increased to $26.1m from $25.1m in Q1. Our cash position, less our interest-bearing debt, was $19.4m at the end of Q2. This is a $1.8m improvement over our March results.

We renewed our credit facility with Silicon Valley Bank effective June 28. This renewal includes an $8m revolving line of credit and $4m of this amount is available based on eligible accounts receivable. We also added $2m of borrowing capacity to our equipment line of credit with the bank.

I'd just like to take a moment to talk about the value of our Tower investment, since that's changed from December. 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 beginning of our fiscal year.

In January, we agreed not to sell any of our Tower shares under our 180-day lockup at the request of Tower's underwriters. This lockup expired yesterday. Therefore, as of today, we have no restrictions on the sale of the Tower shares. All of the tower shares we hold are considered available for sale and are valued at $5.72 per share on our balance sheet, the market value of Tower shares at the end of our fiscal Q2.

Since we are required, by agreement, to hold 450,000 shares in order to secure a favorable wafer pricing at Tower, the market value of 450,000 shares is classified as a long-term asset, or long-term investment. The market value of the remaining 895,000 shares is classified as a short-term investment. Our Tower stock was worth $7.7m at June 30th with $5.1m of this amount classified as a short-term investment.

We had 154 employees at the end of the second quarter compared with 159 at the end of Q1. And now let me turn the call back over to Tom.

Okay, thank you, Carl. Carl has already shared with you that we had a very good quarter. I'd say it was a great quarter except that we are not yet profitable -- much closer, but not there yet. But this comes as no surprise to us nor should it to you. We made a conscious, purposeful decision that we would keep the R&D investing up and keep the sales and marketing efforts cranking while we focused on managing cash flow from operations. Our operating cash flow is positive year-to-date and for all of last year.

Carl will again provide more detail on our financial strategy with you when he returns to the call. Basically, we are growing our revenue and gross margin while holding our below-the-line spending roughly constant. We remain convinced that our business can generate the operating income percentages put forward in our projected model. High revenue growth coupled with over 20% operating margins would be a very exciting future, from our perspective.

But, the future is not absolutely predictable. One thing you can do is look to the past and observe if the team predicting the future has a track record consistent with what they've said in the past. I suspect this is painful for you folks. None of you really seem very interested in the past. All right, maybe last quarter, but certainly guidance for the next quarter is clearly of more importance. But please suffer along with me here for just a minute.

Last year we grew our total revenue by almost 30% while the total semiconductor market grew 18% and Actel, Altera, Xilinks, and QuickLogic, all of us together, grew by 16%. So we grew almost twice as fast as all of us together. Last year, 2003, we grew our ESP business by 54% to the point that it was just over half our total business. One more historic growth number here to share with you -- we had our first ESP revenue in 1999 and for the five years through 2003, the compounded annual growth rate has been a whopping 73%. So even while the total semiconductor only grew a little less than 3% compounded for the last five years, we grew ESP revenue every year at a 73% compounded rate.

But that's history. What about the future? Well, the place to start looking at this is our new opportunity pipeline. The good news here is that our Eclipse II new opportunities in Q2 more than doubled over the prior three-quarter run rate of new opportunities. During Q2, we completed a worldwide sales training program for our representatives and distributors, and we're already seeing the very positive results from that effort. We also recently conducted a well-attended, low-power "Webinar" -- basically a seminar on the Web -- that has resulted in a significant level of interest from customers that are brand-new to us.

Having the lowest-power FEGs in the marketplace is, indeed, proving to be very exciting. However, our customers' design cycle seems to be a little longer than we had anticipated and that some of our customers had, in fact, forecast. But this product family is finding homes with existing and new customers in sockets that we anticipate will generate significant volume. We currently view production-level shipments of Eclipse II product in Q3 with significant revenue to follow in Q4 or Q1 of next year. About a one-quarter lag compared to our last forecast -- sorry -- compared to our forecast in Q4 of last year.

In terms of the types of opportunities we're driving with the Eclipse II family, it's all about low power while still providing great performance and bulletproof protection of our customers' intellectual property. Potential volume applications include toys with an interface to a TV set, and set-top boxes to enable wireless connectivity. A truly innovative application enabled by our much lower-power FPGAs is in medical ultrasonic probes replacing DSPs and resulting in much lower power dissipation and, hence, lower heat at the probe device that comes into contact with the patient's body.

As I've shared with you before, we are seeing much higher volume opportunities than we have typically seen in the past from customers brand-new to us. Now, we are being designed into applications that are out of reach of SRAM-based FPGAs, owing to their high surge current on power up and high operating current requirements. A specific example is a European company named KNC1. They design an Eclipse II into a USB-powered TV receiver that, when coupled with their software, turns your computer into a digital video recorder. We were selected because they required the lowest power programmable solution with memory on board. It was also a plus that their design could not be reverse-engineered, owing to our bulletproof IP security. You can read more about this design win on our website under "Success Stories."

We are also engaged with several tier 1 semiconductor companies to provide programmable bridging solutions for high-volume, handheld communications applications. We will share more on this front next quarter as they progress closer to production. Again, the key here is low power and quick time for them to get to market with the capability they currently can't offer with their existing devices.

Now, the QuickMIPS front during this quarter, we received a significant order for QuickMIPS to be used in a KVM, that is, "keyboard video mouse" application. We've talked about this before, but what this device enables is the capability to control computers over the Internet -- true control, now, not just an application running on the distant computer, but the ability to have operating system-level control from any distance. Think about being able to be here in Sunnyvale, for instance, and then control our service in Toronto, Tokyo, Bangalore, Munich, or London -- all of this enabled by our QuickMIPS device running a hardware-based compression engine and the programmable fabric and the MIPS processor managing the flow of graphics and text in and out over the two Ethernet ports, all on one chip.

We also had first shipments of QuickMIPS into an Asian customer that has developed a handheld Ethernet tester. This application benefits from our one-chip design owing to their space constraints, lowest power owing to their product being battery powered, and protection of their intellectual property.

Now, moving to a different aspect of our business, one we really haven't talked much about in the past is the area of our technology licensing. In the past, we did share the fact that we had licensed our technology to Aeroflex-Colorado Springs for them to become an FPGA and an ESP supplier to the satellite OEMs of the world. They know this business and call on these relatively small number of very large accounts and, quite frankly, we don't. It's a pretty specialized sales from our perspective, and one we felt would be best serviced by them. Last week Aeroflex announced the introduction and immediate availability of a radiation hard version of our Eclipse 6250 device. Aeroflex commented that the RadHard Eclipse will serve as a platform for future FPGA products including RadHard embedded standard products. We are very pleased to provide the technology that enables Aeroflex to bring some competition to the RadHard marketplace, as it's called -- go Aeroflex.

Okay, let me leave you with one thought today -- we are a business in transition. We are moving from being an FPGA supplier, and a very good one, I would add, but in a space dominated by two very large capable suppliers. Scaled by their respective four-quarter trailing revenues, we are talking about 1,000-pound and a 626-pound gorilla. These are heavyweight competitors. They have the vast majority of the programmable logic market share today and probably will have in the foreseeable future. But we're talking about the next step in this space, driven by tomorrow's economics not today's market share. We're talking about embedded standard products.

Let me give you a real-world example. Our embedded standard product architecture enabled by our patented ViaLink interconnect technology allows us to put 32 times more logic functionality on the same size die as the big gorillas. So if we make a die that has a million gates, real ASIC gates, that is, not system gates, and our die is 50 square mm, their die will be 1,600 square mm. And because die yield is inversely exponentially related to die size, and assuming we pay the same for a wafer -- don't I wish -- their die will cost substantially more than 32 times our die cost. So you can see here, we're not talking about 20% or even 50% lower die costs. This is order of magnitude cost savings, and that gets customers' attention.

So I think you can see that embedded standard products are, very clearly, about economics -- pretty simple economics, at that, and very exciting from our perspective.

Okay, well, thank you, and now Carl will give you the details of our Q3 guidance. Then I'll come back and wrap up.

Thank you, Tom. Our weekly booking rate increased in early March and has been strong since that time. This quarter is 14 weeks long for us, due to the timing of our 2004 fiscal period. Nevertheless, we do expect a normal European summer slowdown to take place this year. Given our backlog profile entering the quarter, and the bookings considerations mentioned, we are providing guidance the Q3 revenue will be up mid to single digits sequentially. As in Q2, we do not expect to have any 10% customers in Q3.

Gross margin, which was higher than planned in Q2, is planned to be between 49% and 54% of revenue in Q3. We believe that sequential gross margin may decline due to lower standard margins, high initial production costs for our new 0.1 micron products, higher production [inaudible] than we experienced in Q2 and due to a reduced benefit from the use of reserves inventory.

We expect to have the balance of our Eclipse II and QuickMIPS products in production by the time of our next conference call. We are making design changes to improve some features, and the introduction date for some of these parts is now a few months later than we had expected in April. We currently don't believe these changes will impact our ability to meet customers' demands.

We expect our research and development expenses to be sequentially higher in Q3 by approximately $300,000 primarily due to the purchase of masks, pre-production material, and qualification expenses associated with our new products and also due to the additional week of expenses in Q3. We expect that selling, general, and administrative expenses could increase by up to $200,000 sequentially due to marketing costs associated with our new products and the additional week of expense of this quarter.

Interest income and other net includes interest income on invested cash, foreign exchange gains and losses, and interest expense on borrowings. During the second quarter the net expense was $39,000. We expect that interest income and other net will be an expense of less than $50,000 in Q3. We may use up to $1.5m of cash during the third quarter. We expect inventory to increase in Q3, primarily for inventory of our Eclipse II devices, and we expect our days of accounts receivable to increase during Q3. We also expect to spend up to $500,000 for capital expenditures. In addition, we borrowed $2.9m under our revolving line of credit at the end of Q2, and we may decide to repay these funds in Q3. As we mentioned earlier on the call, our lockup on Tower shares with a market value of $7.7m expired yesterday. $5.1m of this amount is considered a short-term asset.

Let me take a moment to confirm our financial strategy. Our primarily 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. The interest from customers to use these products in their new designs is the highest we have seen in the history of QuickLogic, and we are adding significant opportunities to the design funnel.

Our 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 on smaller geometry technology at Tower will reduce our unit costs. We are also actively reducing our other costs of sales by reducing the time and cost needed to test and program our products. However, as semiconductor manufacturing capacity tightens, we may see some back-end cost increases or longer lead times.

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 headcount and carefully managing new hires. In general, we must believe new hires are essential to meet our new product or revenue objectives.

Our financial model, based on a goal of $25m of quarterly revenue and stated as a percent of revenue is to generate a gross margin of 60% to 62%, 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. Our current expectation is to achieve operating breakeven profit at $13m to $14m of quarterly revenue and to hit this breakeven in Q4 or Q1. We expect that our Eclipse II and QuickMIPS products will be a significant source of revenue growth required to achieve profitability.

Please remember, 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 the uncertainties that we face. Let me turn the call back over to Tom.

Okay, thank you, Carl. Well, for those of you who inquired about last quarter's conference call and my apparent lack of health, that was very true. It wasn't just the quarter that had set me into a funk -- I was ill. But I wanted to thank you all for the cards and the flowers and the chocolates. It was very much appreciated.

Okay, now for your scheduling purposes, our Q3 2004 earnings conference call is scheduled for Wednesday, October 27th at 2:30 Pacific Time. If you have the opportunity, we'll be presenting at the Adams Harkness Summer Conference in Boston on August 4th, and the B. Riley and Company Financial Conference at the New York Hilton on August 12th. Details of all these can be found on our website at www.quicklogic.com.

Okay, now let's open up the call for questions. Michelle, please.

[operator instructions]

Sir, your first question comes from Gary Mobley of B. Riley and Company.

Good afternoon, guys.

Hi, Gary.

Carl, I was hoping that you can go over that breakeven comment you made there toward the latter part of your prepared remarks.

Yes, we finished at $11.2m worth of revenue in the quarter, and we said our breakeven is between $13m and $14m of revenue per quarter, as we said in our earlier calls, and that we expect to hit that revenue level in Q4 or Q1.

Okay. And if you can provide a little more detail on why the lower mask and pre-production costs during the quarter.

Well, it turns out, we believe we didn't have to make one mask set that we had planned for the quarter. And so we're still looking at that, but we think we've saved that money, and that was almost a quarter of a million dollars, so that was good. And we didn't receive as much pre-production material from Tower as we expected.

Okay. And you're deferred gross margin to you [audio break] -- I would assume that's -- is that a function of perhaps an inventory bill that your customers -- because of a miss and/or just, you know, an indication that bookings are strong, and that's what you expect to ship during the quarter?

Well, bookings have been really strong and, really, what we've seen is, we've seen an uptick in the percentage of our business that is blank product. And, as you know, we defer the revenue recognition on our blank product until it sells through. There are probably a couple of factors that go into that increase in inventory to the distributors, and the primary one that we can tell is that we're doing a lot more business with gaming companies, and a lot of these companies like to program their own devices, and, as a result, there's some blank product in the channel for those customers.

Okay. All right, I'll put it back up for additional questions. Thanks.

Your next question, sir, comes from [Robert Katz] of [Sunvest].

Hi, Robert.

I had a question about the geographic breakdown and after that, about -- sort of average units shipped and the ASPs.

Okay, go ahead.

What was the geographic breakdown?

Oh, okay. Hold on just a second.

It is detailed for you, Robert, in the press release.

It's -- the geographic breakdown is North America is 52%, Europe is 22, Japan and rest of world are each 13.

And is Europe basically muting the growth in this quarter or is it also coming from the U.S. and are there any specific product areas that are slower or slowing down in this quarter?

Well, in Q1 we had a 14% customer, Robert, and that's an instrumentation and test customer in Japan. And they're revenue to them dropped by about $1m this quarter, and that was the biggest swinger in our geographic percentages.

So in Q2 the revenues were down $1m from that customer?

Yes.

Okay. Were there any 10% customers in Q2?

None.

None. That's very nice. And in terms of average units shipped per order -- has that been trending up?

You know, I should have looked at that before the call. I didn't. I've got to tell you, though, that the design funnel that we've got going is much higher opportunity size per design that we've really ever seen, I think. Is that a fair statement, Tom?

Yes.

Yes. So that activity is going extremely well. You know, the Eclipse II device is -- it's very low power, it's very high IP security, it's also very competitively priced. As we said on the earlier calls, we're not going to be the price leader in this market, but it's nice to be in the ball game, and we're definitely in the ball game, and we're winning a lot of designs.

Right.

We're winning designs not only with our traditional applications, but also in applications we did not have access to before.

Right. Your current cost structure -- what sort of is the cutoff between buying your type of product or going to an ASIC?

It depends strictly on volume. You know, if a guy is going to build 100,000 units, that's a fairly small device -- 100,000 gates or less is going to be pretty hard for him to justify building an ASIC.

Right. I'm trying to figure out what that inflection point is.

You know, the problem with that is, is that it's very much driven by what the likelihood is that they may have to change something. It's also driven by how fast they need to get to market. You know, it's still -- if you're going to build a significant volume of something, a very complex something, then it's always going to be cheaper to do an ASIC. But you're not going to be able to do that in months. That's going to take, you know, tens of months. So it's all about time to market, really.

Now, when you talk about, you know, 25,000, 50,000 gates, there you could get something to market -- a gate will raise to market fairly quickly, but nowhere near as fast as we could, as an example, with an FPGA. So it's -- you know, people used to say anything above 10,000 units, you go to an ASIC. That's nonsense. That whole thing has all been thrown up into the air and so there's no simple rule of thumb that says when you get above a certain unit volume that you now should do an ASIC. It's very, very dependent upon customer; dependent upon their time to market; dependent upon their willingness to assume risk; how sure they are that the unit volume is going to be what they think it's going to be. So there's a -- it's much more complex than it was five years ago.

Right. How many units did you ship this past quarter.

I'd have to get back to you on that, Robert, but I did want to say in terms of the MIPS, that there is a tremendous amount of activity in terms of MIPS designs as well. And we're seeing some very substantial volumes for our MIPS opportunities as well.

Okay. And what are the SPs like? Could you put a range on that for these products? Maybe that will give us a better feel for what size market or size opportunities you can go after.

We've typically talked about our MIPS part being a $25-plus device. We've got a whole range of products available in our Eclipse II product family -- some starting lower than $5 a part, going up all the way to $30. So it's quite a range.

But still, you can address quite a large opportunity with that price point?

Absolutely, and that's what we're seeing.

Okay, excellent. Good luck next quarter.

Thanks, Robert.

Your next question, sir, comes from [Darrell Todd] of Southwest Securities.

Hello, Tom?

Yes, good afternoon, Darrell.

Good afternoon. During the last conference call, we visited a little bit and you had made a comment that you felt like August/September that you would start to see order rates picking up for part sampling that you did in the October/November timeframe last year. The guidance a while ago that you gave us was something like a 5% to 9% increase sequentially to Q3. Are you kind of telling us now that that may slide off to the fourth quarter or is that what you expect for the 5% to 9%?

Well, that's in the range of our mid to upper single digit sequential increase of revenue that we just talked about on the call. So we really haven't changed our expectation in terms of growth for the third quarter.

I see. The -- and, you know, you're saying that fourth quarter, maybe Q1 next year, you're looking to achieve that breakeven level, and I'm assuming that you're still seeing good acceptance and expecting order rates to pick up not only in the third quarter but fourth quarter as well concerning the new part sampling out there.

That's correct.

Okay. Okay, thanks very much.

Thank you, Darrell.

Talk to you later.

Okay.

Your next question, sir, is a follow-up question from Gary Mobley of B. Riley and Company.

Hi, just a few, if I may. Would you characterize your current active design wins as being the highest in the company's history?

Yes.

Well, they're certainly -- let me back up for a minute here. They certainly represent the highest dollars that we've ever seen. I don't know that, by unit, by -- if you just cut a design win against a design win that they're the highest, but it clearly represents the greatest amount of revenue for us that we've ever seen.

I think, Gary, and that's important to note that we're talking about averages. We had customer that was 14% of revenue last year. We haven't quite seen anything that big yet.

Sure, sure. And if I could nail you guys down on a book-to-bill ratio for the whole quarter?

Greater than one.

And we're in the latter part --

That's as much nailing as we're going to let you do.

All right. How have bookings been going, so far, for the month of July?

Fine.

You know, we've heard a lot of semiconductor companies talk about bookings slacking off in May and June and picking back up a little in July. You guys seem to have bucked that trend.

Pretty nicely, and our quarter-to-date bookings rate is pretty comparable to our booking rate last quarter.

Okay. And a point of clarification -- the delay in Eclipse II -- was that mainly a function of you making some design changes to the chips or was this customers pushing back shipment timeframes?

In terms of shipments, definitely the customer is pushing back shipment timeframes.

Their ramp demand isn't as great as what they'd told us it was going to be. But the changes that we're making are changes we felt we needed to make. So as both of us have commented to you, we don't think the changes that we made will limit our ability to meet our customers' demand.

Sure. Okay, and I would assume, given your commentary about breakeven, et cetera, you would expect your operating expenses to decline sequentially in the fourth quarter.

I think that's fair -- in the fourth quarter, it's fair. We're still spending some R&D money in Q3, as you can see.

Okay, all right. Thanks a lot, guys.

Okay, Gary.

Once again, ladies and gentlemen, if you wish to ask a question, please press star followed by 1 on your touchtone telephone. Your next question, sir, comes from [Greg Samuels] of [Samuels] Capital Management.

Good afternoon, guys.

Good afternoon, Craig.

Last quarter you mentioned that you were kind of hit with a triple whammy with the new fab process in design. Can you provide an update as to where you stand there?

Well, we're much further along, I think, from the new fab standpoint. I think their defect densities are -- I was going to say "significant" -- they're clearly better. I guess I'd have to try and quantify what "significant" means -- but they're clearly better than they were, which is what we expect. Actually, I think they're ahead of their projections of what their defect density was going to be. And, of course, that's a big deal for us, because we have the biggest die in their fab, which means that we're kind of the canary in the coal mine there. Yield is inversely proportional to the die size, and it's actually exponentially related to die size. So it gets worse faster the bigger your die is, basically. So from that perspective, we're seeing good results.

From the perspective of their ramping their capacity -- they're not limiting us right now. So new fab, new process, I've addressed both those -- new designs -- I think we're through virtually all of the changes that we're going to make, and so I think we're feeling pretty good about the runway in front of us.

Okay. As far as the Eclipse II family, I believe it consists of five products. I've seen announcements on four of the five. Is it the 8150 that's taking longer to deliver than expected?

We're still sampling that part today so it's available for our customers to design in, but it hasn't been released yet.

Any thoughts on timing there?

Before our next call, certainly -- so probably late this quarter.

Okay, and then historically, I think, you've talked about Eclipse II consisting of five parts as well as new equipment product. Can you talk about, going forward, how you plan to complement your existing R&D portfolio, which I think is the most robust in quite some time for you guys.

Yeah, we actually are not prepared to -- we're in the planning stages for both -- actually, we're -- yeah, it's fair to say we're in the planning stages for both an Eclipse III family and the next generation Eclipse family -- sorry -- QuickMIPS family. But we're not prepared to make a product announcement. But, as you might expect, you know, this is a business of new products, and so we're doing this in conjunction with very close cooperation with customers.

And would you anticipate Eclipse III or next-gen QuickMIPS in, is that, like, 2005, 2006? What timeframe is that?

We'd have to get back to you after we finish our planning.

But that's not unreasonable.

Okay.

We're not talking 2007, if that's --

Okay, and then, finally, I believe you stated on the last call that in order to reach your targeted $25m, 20-cent futuristic quarterly results, that you would need several -- maybe it was four or five $5m-plus customers? The first question is do you have any, and the second question is -- if not, are you talking to any and, if so, are you close?

Well, I guess I'd say that we've got a lot of 6%, 7%, 8% customers going very well for us right now. And a lot of the opportunities we're looking at continue to be in that range. But they're in that range for single designs as opposed to multiple designs of the customer. So definitely our activity is up. We expect to significantly increase the number of large customers that we have as we start selling these production volumes of MIPS and Eclipse II.

How many large "customers" did you add to your existing customer profile this quarter?

We had one -- two really significant customers move into that range.

Two significant?

Yes.

And, actually, the last --

But that has been due to uptick in their business on their existing designs. It hasn't been due to new design activity. Again, we expect the significant revenues from Eclipse II and MIPS to be in Q4 or Q1.

Okay, and then the actual last question is a follow-up on a statement that you made, Carl, whereby you said that you plan to add significant operations to your design -- I can't read my writing -- it's either "tunnel" or "funnel" --

-- significant opportunities to our design funnel.

Yes, can you explain what that means?

Basically, that's presales customer engagements. So this is getting design activity in place with our potential customers. Does that help?

Yes.

Okay.

Thanks a lot.

Your next question, sir, comes from [Robert Katz] of Sunvest.

Hi, again. You mentioned that your book-to-bill is greater than one and bookings, so far, in July was tracking basically what you saw last quarter. And seeing that this quarter has one more month; that basically accounts for the upside in revenues -- I'm sorry -- one more week -- just another week of revenues at the same booking rate?

Well, we only have a -- generally, a three-week lead-time for our customers, and last quarter we had 68% turns. We're going to need to sustain a nice booking level here and turn business for the quarter. We fully expect to be able to do that. We won't be done filling in the quarter in a week or so. We'll be done filling in the quarter toward the end of August, toward the early part of September.

Right. So depending on how, I guess, we come out of the summer in terms of demand, it could really shape what your quarter will look like? You really don't have any visibility to that.

Well, just like every quarter, we talk to our customers, but until we get the orders, you know, our trust bubble really goes up once we get the order.

Right, but you do have visibility into what the pipeline is this quarter.

Oh, sure.

Or you should be.

Absolutely.

And our guys forecast their existing business every month. But, you know, Robert, you know that forecasts from customers are, at best, guesstimates. So it's not quite as bad as the weather -- well, I guess it could be. It depends on the customer. But -- as trying to forecast the weather, but it's not an absolute deal.

Right. But, in general, the parts that you're going into are being shipped in Q4 by your customers -- or late Q3. So demand really, for your part, shouldn't be slowing down. They should be picking during these months.

For those markets that are seasonal -- definitely.

For the markets that are seasonal.

Right.

But Europe, you know, stops ordering, you know, July and August get very, very quiet out of Europe, and it's almost 20% of our business.

Right. Have you started to see that yet in Europe?

I don't know, to be honest with you. Have we -- have you seen a slowdown in bookings? I don't think so. But the problem is that, you know, in some years they come back, in September they go like crazy and make the quarter, and other years they haven't. So it's not absolute. I wish I could tell you we had 80% of our quarter on the books, but we don't.

Right. What are you hearing, in general, about the industry -- the market's -- the stock market is reacting as if things are really slowing?

We're not seeing that, quite frankly. If you listen to Joe Osha at Merrill Lynch, we might as well bag it. The world is over. But we're not seeing that at all, and we're not hearing that from our customers, and we're certainly not seeing that in the design activity of our customers, either. So I don't know who he's talking to, but we're not seeing that.

Thanks a lot.

Thank you.

Ladies and gentlemen, this concludes the question-and-answer portion of today's call. I will now turn the presentation back to Mr. Tom Hart for closing remarks.

Well, thank you kindly, folks, for you interest in what we're up to here at QuickLogic and specifically our embedded standard product voyage that we're on. We're very excited about it, as you can tell, and I think somebody asked me last time, although it didn't come up this time -- are we more confident this quarter than we were the last quarter, and the answer is yes. We feel very good about what's going on with the acceptance of our products and how we're positioned to compete with other solutions that our customers could use to get their products to market. So thank you and we'll look forward to talking to you next quarter. Bye-bye.

Ladies and gentlemen, thank you for your participation in your Q2 2004 QuickLogic Corporation earnings conference call. This concludes the presentation. You may now disconnect. Good day.