Quicklogic Corp (QUIK) 2004 Q4 法說會逐字稿

Good day ladies and gentlemen and welcome to the QuickLogic Q4 and fiscal 2004 earnings conference call. My name is Bill and I will be your conference coordinator for today. [OPERATOR INSTRUCTIONS] I would now like to turn the conference over to your host for today’s presentation, Mr. Tom Hart, Chairman, President, and CEO. Please proceed, sir.

Good afternoon, ladies and gentlemen, and welcome to our fiscal year of 2004 and 4th quarter earnings conference call.

Thanks for taking the time to join us today and hear about QuickLogic, and our steady progress towards our development and market leadership of this new category of semiconductor devices we invented and we call Embedded Standard Products.

Carl Mills, our CFO, will take you through our 2004 and Q4 financials, and then I will share my prospective on our business. Finally, Carl will detail our guidance for Q1, and then we will take questions. Carl.

Thank you, Tom. Before we get started, I would like to mention a few things. Number 1 is a copy of our earnings release can be found on the home page of our web site www.quicklogic.com. Okay let’s get going.

I would 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, including but not limited to, stated expectations relating to revenue growth from our new product families and statements pertaining to our ability to convert new design opportunities into customer activity. 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 10K, quarterly reports from 10Q, 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 web cast live and can be accessed from the investor relations area of the QuickLogic website located at www.quicklogic.com.

Well, just a few minutes ago, we published a pro-forma profit and loss statement. This excludes certain items. It excludes gains on the sale of tower shares, the write-down of tower shares, and the write-off or impairment of long lived assets from our GAAP net loss. We believe these pro-forma results are helpful in analyzing our results and comparing our performance to comparable companies.

I would like to begin this review by talking about our Annual Results. Our annual revenue increase more than 6% to $44.6 million. Revenue for each quarter of 2004 was higher than the same quarter one year earlier. We are particularly pleased with our revenue growth in 2004, since revenue from our largest customer in 2003, a Chinese customer purchasing primarily ESP products, declined by $4.6 million in 2004. When you take this into consideration, the rest of our business grew 20% in 2004 compared to 2003.

Revenue from our mature part family increased 28% compared to 2003 as a result of higher use of products by our customers and due to the increased purchases under our pASIC 1 and pASIC 2 in the white program.

We had strong growth in Europe, which increased 50% to $10.4 million, and Japan, which increased 34% to $7.9 million. Revenue in North America increased 8% year-over-year to 22.2 million. Revenue in Asia backed declined 53%, primarily due to the decline in revenue from our largest Chinese customer.

Our revenue growth came primarily from two segments. Graphics and Imaging increased 61% to $4.8 million during the year and Instrumentation and Tests increased 49% to $20.9 million. In addition, our [Betacom Telecom] business increased 11% and was 21% of 2004 revenue, or $9.6 million. Revenue from our computing segment declined 65%, primarily due to the decline in sales from our largest Chinese customer.

We like to keep our investors informed of our channel mix and programming activities. 74% of our revenue was sold through distributors in 2004, and 69% of our 2004 results or units were programmed with a customer-specific code. As many of you know, we generally recognize revenue through distribution upon the shipment of programmed products to distributors, and they are programmed with a custom code and are not subject to a right of return. We generally recognize revenue upon the resale of unprogrammed products by distributors.

I would now like to discuss other elements of our P&L on a pro-forma basis. Our 53% gross margin is up from 51% in 2003. Gross profit increased by $2.5 million on a $2.6 million revenue increase, so we had great leverage from our higher sales. This improvement in gross margin is primarily due to revenue mix and lower product costs in 2004 compared to 2003. For example, during the year, we reduced the costs of testing and programming our products saving approximately $500,000 during the year.

Our R&D expenses increase $1.7 million during 2004, due primarily to higher charges incurred to bring our Eclipse II and QuickMIPS II products to production. Excluding project expenses, our R&D expenses increased $300,000 in 2004 compared to 2003.

Our SG&A expenses are $15.9 million, only $100,000 higher in 2004 compared to 2003, despite significantly higher expenses incurred during the year for Sarbanes-Oxley compliance. These combined results of interest expense and interest income and other net reduced our net loss by $70,000 in 2004 compared to 2003.

Okay, to recap our year-on-year pro-forma results - Gross profit improved by $2.5 million on a $2.6 million revenue increase, primarily due to higher R&D expenses to develop our new Eclipse II, PCI 2, and QuickMIPS devices. Our operating expenses increased by $1.9 million in 2004, and we have had a small benefit from other income and expense. As a result, we reduced our pro-forma net loss by $750,000, or .04 per share in 2004 compared to 2003. Our 2004 pro-forma net loss of $3.9 million, or .15 per share, compares to a net loss of $4.7 million, or .19 per share, in 2003.

I would like to discuss, for a moment, the key differences between our GAAP and pro-forma results for 2004. 2004 GAAP results included a $3.2 million long-lived asset impairment. The $1.5 million write-down of our tower investment and $170,000 of charges for the write-off of long-lived assets. By the way, 2003 GAAP results included a $720,000 gain on the sale of tower shares and $750,000 of charges for the write-off of long-lived assets.

Let me take a moment to describe the impairment charge. During the fourth quarter of 2004, as part of our annual budgeting process, we assessed the revenue potential for each of our products and the pipeline that we are building for our new Eclipse II and PCI 2 products. These products have proven to be useful to customers in large volume applications and are generating interest both from customers and from other semiconductor companies who wish to jointly market solutions in the low power applications requiring FPGA capability.

During this assessment, we also determined that certain products may not have the long-term revenue outlook previously expected. This revised revenue forecast caused us to evaluate, in accordance with GAAP, whether or not any of our assets had been impaired. As a result of this evaluation, we recorded a $3.2 million charge to operating expenses for long-lived asset impairment. This charge reduces the carrying value of our fixed assets by $2 million and our other long-term assets by $1.2 million. Tom will discuss this in more detail during his remarks.

During the fourth quarter of 2004, we also reported a $1.5 million write-down of our investment in tower marketable securities. During our last conference call, we mentioned that this write-down would be required if the market value of tower shares remained below our carrying value. A Q4 write-down brought the adjusted cost of our tower investment to $2.26 per share, the market value of tower shares at the end of our fiscal year.

For your information, on a GAAP basis in 2004 write-off of long-lived assets increased our cost of sales by $20,000 and our operating expenses by $150,000. The 2003 write-off of long-lived assets increased our cost of sales by $280,000 and increased our operating expenses by $470,000. After taking these charges into account, our GAAP net loss in 2004 was $8.8 million, or.35 per share, compared to a GAAP net loss of $4.7 million, or .20 per share, in 2003.

Let’s move on to some other topics.

As expected, our cash declined during the fourth quarter. This caused us to consume cash of $1.5 million during 2004. We had a positive operating cash flow of $400,000 for the year. We used $1.3 million for capital expenditures. We raised $2.3 million by issuing stock under our employee stock purchase plan and employee stock option plan, and net retainment of borrowings is $2.9 million of cash during 2004. Our debt-free cash of $19.6 million at December 31, 2004, compares to $19.7 million one year earlier.

Our total interest bearing debt at December 31 was $5.3 million. We reduced our debt by $1.4 million during 2004. Please note that during the first quarter of 2004 we entered into a $1.5 million capital lease obligation for design software and maintenance services. This obligation is recorded as a non-cash transaction on our Statement of Cash Flows.

Alright, so let's talk about the 4th quarter now in terms of our guidance. And this with the guidance that we gave in our last conference call. Our results were in line with our guidance for the 4th quarter, excluding the effect of the long lived asset impairments charge and the write down of marketable securities that were described earlier. Our bookings during the quarter were very strong. As expected, terms bookings were lighter than normal. As a result our revenue of $11.1 million was lower by 7.2% sequentially in line with our guidance the revenue would be lower by mid to high single digits.

We met our original revenue guidance during a quarter that was tough for many of our competitors. As most preannounced with updated down guidance. Our gross margin of 47.7% was in line with our guidance of gross margin between 47% and 51%. As expected on our last conference call, higher initial production costs for Eclipse II and QuickMIPS products dampened gross margin Q4. Additionally our fourth quarter gross profit was reduced by $310,000 as a result of charges for excess and obsolete material. Excluding this charge our gross margin would've been 50.5%. On the positive side, the sale of previously reserved inventory lowered our cost of sales by 2.1% of revenue in Q4.

Our operating expenses from R&D and SG&A were both favorable compared to our guidance. Research and development expense declined by $500,000 sequentially compared to our guidance that the R&D expense could decline by as much as $400,000. Third quarter R&D expense by the way, included $110,000 for the write off of long lived assets. Research and development expenses for compensation and appreciation were lower than we expected during the fourth quarter. SG&A expenses increased by $300,000 sequentially, due primarily for hard compliance and legal expenses. We had guided that SG&A expenses would be higher by $300,000 to $600,000 sequentially. Our proforma net loss for the fourth quarter was $1,303,000 or .05 per share. The analyst estimate for our fourth quarter results included revenue of $11 million and net loss of .06 per share.

So let's take a moment to talk about our Q4 results compared to Q3 and compared to the fourth quarter of 2003. The proforma net loss for the fourth quarter of 2004 was $1.3 million or .05 per share as we just discussed. This compares to a net loss of $1.9 million or .08 per share in the fourth quarter of 2003, and compares to a net loss of $734,000 or .03 per share in the third quarter 2004. On a proforma basis, compared to Q3 our revenue declined by $865,000 and our gross profit declined by $630,000. Operating expenses were $20,000 lower in Q4 and a $40,000 improvement in interest in other income net partially offset by a declining gross margin. The combined effect of these items increased our proforma net loss by $570,000 in Q4 compared to Q3.

Our GAAP net loss for the fourth quarter of 2004 was $6 million or .23 per share including the $3.2 million impairment charge with a $1.5 million write down of our tower investment. This compares to our GAAP net loss in the third quarter of 2004 of $899,000 or .03 per share. which included a $170,000 write off long lived assets.

On a proforma basis compared to Q4 of one year ago, our 2004 gross profit improved by $500,000 from a $300,000 or 3% revenue increase. Again we had great leverage from (indescernibel). Our operating expenses are flat compared to one year ago as other income and expense net improved by $90,000. The combined effects of these assets was to reduce our proforma net loss by $600,000 Q4 of this year compared to Q4 of last year.

Our GAAP net loss for the fourth quarter of 2003 was $2.4 million or .10 per share. It included a $450,000 charge and the write off of long lived assets.

OK, let's talk about a few other key developments during the quarter. We continue to experience strong design activity for our advanced ESP products, which include our new Eclipse II, and QuickPCI II product (inaudible). We expect these products to provide significant long-term revenue growth. Tom will discuss advanced ESP design activity later in the call.

As we mentioned earlier, our Q4 revenue was $11.1 million, strong bookings but low terms caused us to leave 2004 in a very high backlog position. Bookings were strong across our Advanced ESP, ESP, and mature product lines. We want to re-emphasize that significant sales to a few customers can cause a dramatic fluctuation in sequential comparisons, however, as we expected at the time of our last conference call, no single customer accounted for more than 10% of Q4 revenue. So our revenue during our last few quarters has come from a broad range of customers and industries.

Instrumentation and test revenue increased by $800,000 or 16% sequentially and our competing business increased by $400,000 to $1.2 million. We are also pleased to see strong sequential growth from the Pacific Rim. Revenue from Japanese customers increased $300,000 sequentially to $2.2 million and revenue from Asian Pacific increased $200,000 sequentially to $1.2 million.

Our ESP products and Advanced ESP products combined to contribute 36% of revenue during the quarter. Our pASIC 1 and pASIC 2 products contributed 46% or revenue in Q4.

So let's talk about cash flow for the quarter for just a minute. We did consume $2.1 million of cash in Q4. Our accounts receivable increased to 39 days of sales outstanding from 22 days at the end of Q3 accounting for much of the cash we used during the quarter. This change in accounts receivable was primarily due to timely shipments between the two quarters. This use of cash was favorable compared to our guidance that we could use up to $3.5 million cash in the quarter.

Let me take just a minute to explain our cash flow. Our net loss, adjusting for non-cash charges such as the long lived impairment, the write down of our tower investment, normal depreciation of inventory reserves, was break even for the quarter. $2.1 million of cash was used for higher accounts receivable and $500,000 of cash was consumed by changes in other assets and inventory.

These uses of cash were offset by $100,000 of cash provided by accounts payable and other liabilities. These combined changes in working capital caused us to use $2.5 million of cash for operations in Q4. In addition, we used $400,000 for capital expenditures and $300,000 for net reduction of long term debt. We used $500,000 for debt re-payments, which was partially offset by new borrowings of $200,000. The cash used for operations, capital expenditures, and re-payment of our long-term debt was partially offset by $900,000 in cash provided upon issuance of shares under our employee stock purchase and stock option plans.

At December 31st, we had 106 days of inventory on hand and 12 days of inventory at distribution. After considering all of these factors, our Q4 ending cash balance decreased to $24.9 million from $27 million in Q3. Our cash position, as we mentioned earlier, less our interest bearing debt was $19.6 million at the end of Q4. This is a $1.8 million reduction compared to our debt-free cash at the end of Q3.

We had 154 employees at the end of the fourth quarter, which is flat compared to the 153 at the end of Q3. Now, after all that, let me turn the call back over to Tom.

Thank you Carl. We're very pleased to share with you that since the major industry downturn in 2001, we've grown faster than the overall programmable logic industry. Also of note, Q4 was our 11th quarter in a row of revenue growth when compared to the same quarter of the previous year. Q4 new orders, by the way, were the strongest of any quarter in our history, and for the first time we have a strong backlog going into our first quarter.

Q4 closes a good year for QuickLogic, but not a great year. Our level of investment in both R&D and sales and marketing of our innovative embedded standard products, as well as high compliance expenses precluded returning to profitability at this revenue level. We are pleased with Q4 revenue, but mainly in contrast to the programmable logic market leaders, whose sequential revenue decline was much greater than ours.

But realistically speaking, I must say, however we measure our results for 2004, as an executive team we are disappointed with our overall performance for the year. Our new Eclipse II and QuickMIPS products went into production later and cost more to develop than we had planned owing to technical challenges, which we have now overcome. As a result of these factors, our revenue did not meet our plan, we spent more than we planned and we lost money for the year.

Okay, but all that is history now. What about the future? Well, we are looking forward to a very good 2005, and a return to annual profitability. Design activity for our low power Eclipse II and QuickPCI product families continues to be very strong. Eclipse II offers our customers the lowest power FPGAs on the market bar none. Now some of you may have seen various press releases from Xilinx claiming to have the lowest power FPGAs in the industry. QuickLogic architected and designed the Eclipse II family FPGAs targeting the high growth hand held and portable application segment. For every additional microamp of current negatively impacts battery life. The SRAM FPGA manufacturers know that SRAM based FPGAs consume too much quiescent power for these applications. Xilinx even states in their online FAQ for the Spartan-3L family, and I quote, “…felt that hand held and/or small battery systems are not target applications of Spartan-3L devices, since they typically require quiescent current in microamps rather than milliamps.” Eclipse II is the only FPGA that meets the quiescent current requirements of these applications. This is why we are consistently winning designs and high volume PDAs with Wi-Fi capability, wireless voiceover IP phones, hand held instrumentation and test equipment, and batter powered consumer devices. Again, we have the lowest power FPGAs in the business, period, end of discussion.

Now, as you would expect, we have done extensive analysis of our design activity pipeline. Some of this information we have shared with you in past calls. When we examine the opportunities for Eclipse II and QuickPCI II we find two very interesting facts. 1, the industry segment with the largest potential is consumer, and 2, the individual opportunities are potentially worth twice as much as the other segments. Now, we are still seeing many good opportunities in the industrial communications and military segments, which have made up a large portion of our revenue in the past. But the consumer segment is not one we have really ever derived much business from in the past. Very good news from our perspective and ties in directly with our prior observations about seeing larger opportunities than we have historically enjoyed. One of the conclusions we have come to after these months of interacting with customers, exploring the uses of and designing in Eclipse II, QuickPCI and QuickMIPS devices because what customers really want is solutions to their inter connect challenges. They do not want to buy just parts.

The history of our relationship with Renaissance highlights this very well. Back in October we issued a press release that showed our contributions in enabling connectivity between the Renaissance SH processors and Wi-Fi modules. Just last week we expanded on the information about our collaboration with Renaissance in a press released that details the first results of our efforts to date. Namely, a reference platform designed around the Renaissance SH 7720, which is a 32 bit risk microprocessor, and the QuickLogic low power programmable PCI interconnect solution. This reference platform provides a proven low risk solution for ODMs and OEMs to quickly introduce voiceover IP and voiceover wireless LAN global products. It can now offer connectivity to a variety of readily available Wi-Fi 80211 modules.

To share a little different view of the Eclipse II and QuickPCI momentum that is building might be useful for you. Of course, we all know that revenue is the ultimate proof, but design wins come first.

We did a joint webinar in December with Renaissance on Wi-Fi interconnect that had over 500 registered attendees from companies like Palm Chip, HP, Motorola, InterMac (ph), PortalPlayer, Trimbal (ph), Tellabs, Dell and Adjulant (ph) just to name a few. Our field sales team is currently running these leads to ground, if you will. We have already seen several very significant opportunities that directly leverage our design efforts with Renaissance.

Now another application area that bears some discussion is the use of micro hard drives in mobile products. These are rotating hard drives, not flash based drives. The clear advantage is cost and available capacity. Today the generally available flash drive maximum capacity is 4 gigabytes. For 60 gigabyte micro hard drives are now readily available. Even my old early Ipod had a 10 gigabyte hard disc drive. These drives use the IDE standard interface and this presents the opportunity for QuickLogic. For the challenge is not just IDE interconnect, but doing it at the lowest possible power to maximize battery operating life. And as we said, we have the lowest power FPGAs in the business. Hence, we are seeing many exciting high volume design opportunities where we can offer an IDE solution to a customer using an imbedded processor and a micro hard disc drive.

We have also been in close contact with other major semiconductor suppliers of imbedded microprocessors. Their customers need to have readily available proven interconnect solutions. Stay tuned as we will be releasing more detailed information in the form of joint press releases on these exciting collaborations in the next several weeks.

Okay, let me comment briefly on this $3.2 million asset impairment in Q4. In Q4 as we prepared for FY 2005 annual operating plan, we took a very hard look at forecasted revenue from all our product families. The reality of having announced an end of life program for pASIC 1 and 2 means that we would, in all likelihood, see a decline in their revenue in 2005, and worst case, 0 revenue from those products in 2006.

As you may remember, we made the decision to discontinue these product families based on a lack of assured (inaudible)capacity for these product families beyond 2005. We have discussed this challenge in past earnings calls, and our consistent belief has been that we would make up this revenue, and in fact exceed it, with revenue from our ESP and our advanced ESP families of Eclipse, Eclipse II, QuickPCI II and QuickMIPS. We still believe this and our plan forecasts it. Now while QuickPEPs design activity continues, we now believe that our time to revenue from this product family will take longer than we had planned, believed, expected and desired. When our new forecast is taken into consideration, GAAP accounting rules require that long lived assets associated with QuickMIPS must be viewed as impaired, and hence, written down. So while we have lowered our revenue expectations, we continue to support existing QuickMIPS design winds and will support new QuickMIPS designs just as we do with design opportunities for our other products.

Okay, on a slightly different note, I would like to get some feedback from you folks on a positioning issue for our company. We have surveyed the market and analyzed lots of the market trends. In addition, we have made contact with market leaders and appropriate and dynamic markets and companies. This has us convinced to brand QuickLogic products as imbedded standard products for intelligent, programmable, low power interconnect solutions; solutions that enable advanced features and additional performance in low power embedded systems. Now that's quite a mouthful I'd say but being an FPGA supplier it doesn't define us correctly either. While I've been partial to being known as the inventor and developer of embedded standard products, as the generic name for our devices ESPs seems to be too broad a term and it has a wide spectrum of meanings to customers. I welcome your feedback on this and you can communicate with me by email at hart@quicklogic.com. I appreciate your sharing your insights here.

OK Carl, back to you for Q1 guidance and I will come back and wrap up.

Thank you Tom. As Tom mentioned our bookings were very strong during the 4th quarter. We started the 1st quarter with significant and higher backlog than we had at the beginning of Q4. We expect Q1 bookings to be strong across our product line including, perhaps, the last quarter of significant orders into our new – into our p1, p2 end of life program. We received initial production orders from a few customers for Eclipse II parts during Q4 and we expect the order rate for these new products to become more meaningful through Q1 with revenue to follow in Q2.

Given our backlog profiling, entering the quarter and bookings considerations mentioned above, we're providing guidance that Q1 revenue will be up to 3-7% sequentially. A long-lived asset impairment that we had in Q4 will reduce our cost of sale by approximately $00,000 per quarter. In addition, we expect lower production variances in Q1 compared to Q4. As a result, gross margin is planned to be between 50 and 55% of revenue in Q1.

We expect our research and development expenses to be within $100,000 of our Q4 expense level. We expect that selling, general and administrative expenses will increase by $300,000 to $600,000 sequentially for legal expenses, Sarbanes-Oxley compliance expenses and our annual report.

Interest income and other net includes interest income on invested cash, foreign exchange gains and losses and interest expense on borrowings. During 4th quarter the combined effect of these charges resulted in income of $29,000. We expect interest income and other net will be an expense of less than 50,000 in Q1.

We may use up to $3 million of cash during the 1st quarter due to an increase in inventory of our Eclipse II and QuickMIPS devices and an increase in our accounts receivable scheduled repayment of long-term debt and capital expenditures of up to $1.1 million. In addition, we have $2 million outstanding and on our revolving line of credit at the end of Q4 and we may decide to repay these funds in Q1.

Let me take a moment to confirm our financial strategy. Our primary financial goal is to return to profitability by increasing revenue and gross margin dollars. We believe our new Eclipse II and Quick PCI 2 products will play a significant role in our revenue growth. The interest from customers who use these products with new designs is the highest we've seen in the history of QuickLogic. We are continuing to add significant opportunities to our key design pipeline. In addition, other semiconductor companies wish to work with us to gain new design utilizing their microprocessors and other components with our devices.

Our manufacturing strategy is to reduce the cost of producing our products so that we can pursue higher volume sales opportunities. Fabricating products on smaller geometry and technology pack power is reducing our unit costs. We are also actively reducing our other costs of sales by decreasing the time and cost needed to test and program our products. We continue to carefully manage expenses. We expect that our development expenses may decline in the short term. We are carefully managing new hires.

Our financial model based on a goal of 25 million dollars in quarterly revenue and stated as a percent of revenue, is to generate a gross profit of 60 to 62% of research and development expenses of 17 - 19% and to have SG&A expenses of 19 - 21%. This would result in income from operations of 20 - 26% of revenue. Our current expectation is to achieve break-even operating profit at approximately $12 million to $13 million of quarterly revenue and to be profitable for the year, excluding potential stock option expenses.

We expect that our Eclipse II and Quick PCI 2 products, again, will be a significant source of revenue growth required to achieve profitability. We expect the mix of our business to shift toward higher, advanced ESP revenue and lower, mature product revenue based on the expected growth of our advanced ESP business and the expected impact of our P1, P2 end of life. Well let me turn the call back over to Tom.

OK, thanks Carl. In closing, Alan Lefkof resigned from our Board during the 4th quarter. Alan was an active and valued director of QuickLogic and—and I will miss his keen intellect and his many contributions. We valued Alan's intensity and his insight into our target markets. Alan resigned, by the way, for personal reasons not related to QuickLogic. We are now in the process of actively recruiting new members for our Board. I also wanted to take this opportunity to thank our employees whose talent, skills and intellect and their efforts make our progress possible. Thank you.

OK, now for your scheduling purposes, our Annual Meeting of stockholders is scheduled for Tuesday, April 26th, 2005 at 10:00 a.m. Pacific Standard and that will be held here at our headquarters in Sunnyvale, California. Our Q1 2005 earnings conference call is scheduled for Wednesday the 27th at 2:30 p.m. Pacific Standard time and if you have the opportunity we will be presenting at the B. Riley Conference March 17th and 18th at the Venetian Hotel in Las Vegas. In the meantime if you would like to arrange a meeting with us, please call Carl Mills at (408) 990-4000. Details of these events can be found on our website at www.quicklogic.com. OK, now let’s open up the call for questions. Bill, please.

Thank you very much sir. [OPERATOR INSTRUCTIONS] Your first question comes from Gary Mobley of B. Riley and Company. Please proceed sir.

I just wanted to run over revenue scenarios for the back half of '05 still—I think in your commentary you mentioned that bookings for pASIC 1 and 2 should drop off in Q2 or Q3 and subsequently revenues drop off a quarter or two after that.

We said 'could'; we didn't say 'should'.

Yeah, we continue to be surprised by booking, that they have been very strong so far this year so we said in our earlier call that we expect p1 and p2 revenue to be significant during the rest of the year and that--that's still very much the case. It might come down from its current level but—but it's still going to be strong.

Disrupted 46% of your revenue though, if all that goes away, which presumably all of it won't, but most of it—most of it might, that would assume you to get the break even from $12.5 million of revenue that so you would have to back fill that with about $6.5 million in new product revenue. Do you think you can ramp products sales to that degree?

We're looking forward to doing that. But—but it's not quite that bad either. Just an example, as I've commented on before, a lot of the pASIC 2, not a lot, but many basic pASIC 2 designs, since they're pin compatible with pASIC 3, people have converted to pASIC 3 so we're not really losing all of that revenue and we're not having to start all over again with new designs, if you see what I mean.

Sure.

But when we look at the size of the pipeline we've got in place, we're encouraged by our prospects for the year.

OK, and are you guys gonna be more favorable with pricing terms? Is that—not pricing terms but payment terms, is that why you are seeing an [indiscernible]

No, no.

I don't know what you think Gary but we think 39 days of AR is pretty good. We--we think it's pretty competitive and we think we'll be long term in the 39 to kind of 44 range, we'll bounce around a little bit depending on the timing of the payments from our distributors mostly. We think that we are kind of back into the normal range and that the 22 of accounts receivable DSO's we had at the end of last quarter was really unusually low.

OK, so you're expecting an increase in accounts receivable with an increase in sales but not an increase in DSO's in Q1?

Correct. That's roughly right. We may increase a day or two but we're gonna be right about the level we've had.

And could you guys talk about your initial options yields, its power?

I can tell you that the yields are improving and we are not quite where we want to be yet but we are very close. So, we are really encouraged by what is happening there. Our cycle times are coming down, their overhaul yields are improving, and our yields are improving as well. So, we are pretty pleased at what is happening here.

And Tom did you say that you expect to be profitable on a full year basis for FY ’05. Did I catch that correctly?

Yes. The only caveat I want to put in there Gary, is we want to carve out the stock option expenses and our cash expenses for that, otherwise I am completely behind that.

Thank you very much sir. Ladies and gentlemen, your next question comes from Robert Katz of Sunvest [ph], please proceed sir.

What was the book to bill for the quarter and was the book to bill for the new products higher than the pASIC 1, and pASIC 2?

It is really interesting. The book to bill was strong across all our product lines. It was almost identical in fact.

And where does it stand, like how strong is strong, like 1.3, 1.4, 1.5 times?

Well we only count origin of six-month window. So, it wasn’t quite that strong. It was close.

That would suggest a pretty strong ramp in the first half of the year or even into Q2.

We are encouraged because, as Gary mentioned, we not only have to make up the half million dollars just to break even. So, we like the booking the trends that we are seeing.

And is that continuing into the first quarter, that booking trend?

Well so far it is, yes. We are five weeks into the quarter and it is very strong.

And you said you had six-months of what you consider a period, like consider booking. Isn’t most of your business sort of book ship types?

Yes and for the vast majority of our customers they all book within the three month window. The only thing that has changed that a little bit for us is the end of ive programs of p1 and p2. We have pretty significant back quantity in the third and fourth quarter already.

Of this year.

Yes.

So, pretty much it is at the end of ’05 that you might see a drop off of Q1 ‘06.

We may see some drops during the year but we think it will still be significant through the year and we are thinking now that we will have a drop in Q1 ’06.

Not a drop in overall revenue.

Just the old products.

Yes.

And in terms of you ability to migrate pASIC 1, and pAsIC 2 to the pASIC 3, how it that going?

Well first of all as I indicated, maybe you didn’t hear me and Gary’s remarks. pASIC 2 migrates very easily to pASIC 3 the only difference there is voltage. The pin out is identical for pASIC 2 to pASIC 3 and just the differences are; is the voltage of 3.3 volts versus 5 volts. And we are seeing quite a few customers that have done that. The people that are using pASIC 1 are typically now using, looking to designing in Eclipse II. Primarily because they can get a lot more logic for a lot less money off the newer technologies.

A little more technical question, why would a mini hard drive need you chip? Why wouldn’t someone like Marvel [ph] design that capability into their controller?

Well some people do have IDE built into controllers but a lot of people don’t. You look at a lot of embedded microprocessors there has been no reason IDE there. There were no disk drives in embedded systems for a long time. So, if you look at the vast majority of microprocessors that are out there for embedded applications, embedded control applications there is no IDE capability there.

It is no so much the hard drive, it is more the processor they had the issue with.

Exactly. Yes, that is by the way, the same thing that we have seen relative to Wi-Fi. The deal there is that all the Wi-Fi modules, you know, have been designed for PCI because they have been designed for laptops or the PC world. The PC world is all about the PCI bus interfacer with card bus or mini PCI and embedded processors don’t typically have that.

When will we start seeing revenues shifting from Wi-Fi?

Q2.

Q2?

Yes.

How many platforms have adopted that?

We haven’t stated that publicly yet.

When do you think you will proximate such information?

Next earnings call.

Next earnings call? Okay.

We are trying to do press releases before then actually and part of that challenge here is that you are typically working with three people, the microprocessor guy, and the Wi-Fi guy, and then the customer. So, you are kind of doing a tightrope walking act here between them to get them to do press releases. Renaissance has been very forth coming with that. Several other guys have not been as forth coming but we think they are going to move on this force in the next, as I commented on earlier, in the next several weeks.

That would be excellent, not just for the financial [inaudible] but also it can give your design credibility.

Exactly right. That is exactly what we want it for other people, and can see that, “Hey it has already been done over here” and then can come to us.

Thanks you very much, sir. Ladies and gentlemen, your next questions comes from Manoj Nadkarni of ChipInvestor, please proceed.

You mentioned that new orders were highest in history in the fourth quarter. Can you give some color and if you could compare it to, what they were before in Q4.

Historically I’d say, and I haven’t been here long enough, but it is pretty measurably on a new order basis, it is measurably higher than we’ve had, significantly higher. What do you say, Tom?

I think it is probably perhaps,

we didn’t say it was the highest Q4 we have ever had, we said it was the highest quarter we had.

Right.

And you also mentioned they were broad based, across different product types.

It was equally we had almost identical book to bill, if you take a look at our mature business and the rest of our business.

We had expected, quite frankly, that p1 and p2 would be very strong and it was but so was generally every other product line as well, which was very good news for us.

What are you expectations for revenue from Eclipse II and PCI2 in the March quarter, and also in calendar 2005.

Well I think what we said on the call was that we are looking for the booking uptic in Q1 to give us the good revenue in Q2, actually I think it is in our profile. Is that a fair statement Tom?

Yes.

And are you already shipping production quantities of the Eclipse 2 or PSI2?

Yes we have shipped tens of thousands of units to individual customers.

And you are recognizing revenues for that?

Yes.

You mentioned about breaking one level between $12-13 million a quarter and perhaps, I think you also mentioned when you would attribute but I missed it. So, if you could please repeat that.

Well, you know, we think, I think, we didn’t do profit guidance for Q1 and we talked about the new products kicking in revenue in Q2. So, I think the Q2, Q3 time frame is a good time frame, and again profitable for the year.

And finally questions about growth margins. Earlier you mentioned that there are approximately in the consumer segment and these would be high volume approximately for your new products but how does that affect your growth margin?

Well as we guided, we expect our growth margins to come up pretty significantly in Q1 from 47.7 to between 50-55%. We are feeling pretty good about our growth margins.

Yes, that is for the Q1 but long-term qualitatively if you can give some news. If you are selling into consumer markets will that hurt your growth margins because typically ESPs are lower, or does that help you also because of the volume?

Well we think what really is the key to our business is to expand our revenue and our gross profit dollars, and the opportunity is big enough, and we are competitive, so you can imagine that was a change for us, as Tom has mentioned. Many of these opportunities, on average, are twice as big as the other opportunities we’re seeing, and you can imagine there is price pressure there. We’re happy to take the business, and we are delighted, in fact, for the size of some of these opportunities.

Thank you sir. Your next question comes from Mike Barry of Gilesco (ph) Investments. Please proceed, sir.

Congratulations on that nice ramp in the backlog coming into this quarter. Could we get a little more color on that and particularly, Tom, in the last call you referred to the expectation of getting Eclipse II orders in the quarter, and it certainly shows that you did do that. I know from firsthand experience what a pleasure it is when the products been delayed to finally start getting the revenue cycle coming in. Could you comment on whether the order of flow in Eclipse II specifically exceeded your expectations or where that sits in that ramp.

No, it didn’t exceed our expectations, quite frankly, but I feel very good about what’s happening there. I don’t think I have had you on the call before so I am not sure you know how we track our opportunity pipeline, but we measure the discreet steps from when your first introduce -- you have a conceptual meeting with a customer until he finally places pre-production orders. There are probably 40 or 50 different discreet steps in there that we measure because quite frankly, what we’re trying to do is build a statistical model that will allow us to look at our pipeline and then get a better feel for revenue coming out of that pipeline, at least on a statistical basis. You can’t do it on a per customer basis, but perhaps, you can do it statistically.

So, what we’ve done it- here are two categories right at the end of the pipeline which are 90% completion and 100% completion, and we measure that and look at that in excruciating detail with each of the sales guys for each of their opportunities, every month, as a matter of fact. And so, we feel very good about what’s happening there. We haven’t seen everything that we thought would translate to orders in Q4, but we’re pretty confident that in Q1 it’s happening. We’re not losing any of this business. This is business based on really more of the uniqueness of Eclipse II and PCI 2, which, of course, is built on the p and the Eclipse II platform. So, we’re confident that it’s coming. It’s obviously taking longer than any of us, as I commented on, wondered, expected, believed, or forecasted, but it’s coming.

That’s very encouraging when you really do see the actual cash flow part. When you get to your long-life asset write-down, if I heard right, that was for the QuickMIPS PCI 2?

It was actually -- it was associated with QuickMIPS. There were assets associated with QuickMIPS. As I said, we took down our short-term revenue forecast and that then forces you into examining the assets, the long-lived assets.

I know how the process works. Are you able to give us a percentage amount of what percentage of that particular product’s assets was written off?

No, we haven’t put that out yet.

Okay. Last question. Back in the Needham conference recently, you mentioned Eclipse III, and can you give us any color of the timing on that, and are you going to be going to .13 or lower in the technology?

The marketing guys will shoot me if I talk about this so we’re not ready to do a product announcement on Eclipse III yet. In fact, it may not even be called Eclipse III when it comes, but we’ll be doing that in the second quarter of this year.

Thank you very much, sir. Ladies and gentlemen, your next question comes from Luke Williams of [Micro Capital]. Please proceed.

I wonder if you could tell us about new industries that may be open to you from your Eclipse II and PCI 2. Do you see any of those building up in any material way in your current orders?

Well, if you had told me that we would see parts in PDAs, I would have told you -- If you would have told me that a year ago, I would have told you you were crazy, and you’re going to see our parts in PDAs. So, I mean, that is clearly an opportunity that none of us ever believed, well I shouldn’t say none of us. I certainly never believed you would see us in a PDA, and you will now. We’ve talked about that.

I wouldn’t have expected to see us, quite frankly, in voice-over IP phones, primarily because most of the chip sets for voice-over IP phones are, overall, either full custom or are standard products. But what we’re enabling, really, is people to add Wi-Fi capability to these products very quickly, and if you look at what it would take to either change the Bus architecture on the Wi-Fi module or add PCI, or mini PCI, to the embedded processor, you’re probably talking 18-month kind of design times, if it made sense at all. The Renaissance people, as an example, tell us there is no way that they would put PCI on any of their SH family, and then they go back and re-engineer the existing devices to put PCI on there. So that’s an opportunity, and we think that there are lots more of those kinds of opportunities. I mean simple-minded things like, relatively simple-minded, like IDE, like enabling people to quickly take existing systems and add micro hard drive capability to it. I wouldn’t have believed that we would be in, and I-pod like devices on a foregoing basis either if you had told me this a year ago. The low power aspects of what we’re doing, coupled with providing really complete solutions -- by that I mean, the software drivers, as well as the interfaces that are necessary to make this happen so that we’re really supplying, more or less, turnkey solutions to original equipment manufacturers, rather than just giving them an FPGA. It’s a significant change in our business that I think has been very positive for us and focuses more on providing solutions rather than parts.

Will you be able to name some of the end users for these new products, particularly consumer?

Yes, but we can’t yet. Nobody wants to be named before they’ve introduced a product.

Okay, it will be about the time of product introduction. When do you think that might come…the early ones?

The earliest one that we’re looking at right now is April.

Thank you very much, sir. [OPERATOR INSTRUCTIONS] Your next question comes as a follow-up from Robert Katz of Sunvest. Please proceed.

I have a follow-up question on the distribution channel, and now that you have these products lower costs before and after mass markets? Are you going to approach the distribution channel more aggressively in how they promote your products? It sure sounds like a few or my other suggestions [would come as a bit views]. They sort of still see you as based on your older products.

Well, we have signed a worldwide agreement with Avnet, and this agreement really looks to them as being a primarily a logistics supplier for us rather than a design or demand creation agent for us. And so, we are changing the nature of how we use distribution and expecting less of them from a demand creation perspective, and therefore, paying them less margin.

And where’s demand creation coming from?

Demand creation comes from working with partners to develop reference designs like we did with Renaissance. Those boards, that reference design, we are going with Renaissance to customers to sell that, and we will be doing that with other microprocessor venders as well.

What other microprocessor companies would require that sort of, if that’s not, if you can’t answer that, what microprocessors don’t require this. Does Exscale (ph) require your type of technology or TI?

Well, Exscale does not have a PCI BUS, so if you wanted to connect that Exhale to a Wi-Fi, to a mini Wi-Fi, you would need to use something like our Quick PCI II part. Exscale does not have an IDE BUS, neither does FreeScale (ph), neither does NAC. So, there is lots, the inventor people did not have all the stuff that the, you know let’s face it, let me back up for a minute Robert, a lot of this is being driven out of the PC world. Okay? And that is where they drove the cost down on Wi-Fi. So that now it is accessible to hand held and the challenge then is how you get the damn thing hooked up. Well, then you have to have intelligent, really intelligent solutions to bridge between processors and modules, or hard drives, or whatever other kinds of IO devices that you might think of.

Okay, (inaudible)and until these processors are sort of respun with these types of internal capabilities?

Yeah, I do not think you will find many guys respinning things with PCI. I think what will happen is they will go the other way, and that is that if the volume is sufficient, you will see the Wi-Fi guys as an example, put a different interface on there. And like SDIO or, in fact if you follow that market sector, Cambridge Silicone Radio introduced a Wi-Fi chip set that has SDIO on it. Now there are some challenges there. There are some challenges there in terms of if you connect that now to a processor, most processors only have one SDIO port, and you very quickly consume all of the resources of even a fairly high speed processor managing the Wi-Fi traffic, and so, if you expect the processor to do something else like be a PDA at the same time you are receiving data, or if you are going to expect to receive video over this, then you have some real challenges. So, I think we are in this game not just for glue or a bridge, our bridges are pretty intelligent. Yes, there is certainly a glue aspect to it, or a bridging aspect to what we are doing, but there is a lot more as well. We are mastering memory as an example, memory controllers in there, and so there is a lot going on other than just connect the PCI or just doing what people used to call sex changers – PCI to local BUS, or PCI to SDIO, or IDE to local BUS. You see what I mean?

Yeah, I feel it is very important for that story to come out stronger.

Well, it will as we can begin to show examples, specific examples. That is why we are so hot to be able to show people, I mean that is why the Renaissance thing was a big deal for us, because you can look at that and you say, “Oh geeze, look you can instantly use an -- you already got a product piece on a SH processor, it’s very easy to add Wi-Fi capability to it.” That is a big deal.

Good. I look forward to seeing some of those products.

Right, so do we. Thanks Robert.

Thank you very much sir, and ladies and gentlemen we have no further questions. At this time I would like to turn the call back over to the speakers for any closing remarks they may have.

Okay, well thank you kindly for your attention and your interest. We will look forward to having a great 2005.

Thanks.

Thank you very much ladies and gentlemen for your participation in this evening’s conference. This concludes the conference call and you may now disconnect. Have a good day.