Quicklogic Corp (QUIK) 2005 Q1 法說會逐字稿

Good day ladies and gentlemen, and welcome to the First quarter 2005 QuickLogic Corporation Earnings Conference Call. [OPERATOR INSTRUCTIONS]. I would now like to turn the presentation over to your host for today's conference Mr. Thomas Hart, Chairman, President & Chief Executive Officer. Please proceed sir.

Well, good afternoon ladies and gentlemen, and welcome to our Q1 2005 earnings conference call. Thanks for taking the time to join us today and hear about QuickLogic and our steady progress towards the development and our market leadership of this new category of semiconductor devices, we call embedded standard products. In case you haven't seen our earnings press release yet, I'm most pleased to announce we had a very good quarter from our revenue perspective and more importantly we've returned to profitability. Carl Mills, our CFO will take you through our Q1 financials. I will now share my perspective on our business. Finally Carl will detail our guidance for Q2 and then we'll take questions. Carl?

Thank you Tom. Before I get started like to read the 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 period expectations related to revenue growth from our new product families.

Statements pertaining to the ability to convert new design opportunities in the customer activity and our ability to replace PH1 and PH2 revenue, which we expect the decline due to the announced end of life of this product family. QuickLogic's future results could differ materially from such forward-looking statements. We refer you to the risk factors listed in our annual report on Form 10-K, quarterly reports on Form 10-Q and prior press releases for 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 opened to all, and is being webcast live. It can be accessed from the Investor Relations area of QuickLogic website located at www.quicklogic.com.

Our first quarter financial results were terrific. Our revenue increased 13% sequentially and 21% compared to the same quarter of last year. We are pleased to report a profit of $864,000 for the quarter as a result of this revenue growth and lower production variances. This was our first profitable quarter since the semiconductor downturn began four years ago. Q1 revenue and gross margin were our best results since 2000. Gross margin was 61% in Q1. Our Q1 gross profit improved by $2.4 million and a $1.4 million sequential increase in revenue. Operating expenses were within or better than our guidance for the quarter. Our $2.4 million improvement in gross profit was offset by a total of $200,000 in higher operating expenses and provision for income taxes on a pro-forma basis.

Our first quarter GAAP and pro-forma net income of $854,000 improved by $2.2 million from a pro-forma loss of $1.3 million in Q4. Our Q1 net income improved by $6.9 million compared to our $6 million GAAP lost last quarter. By the way, our fourth quarter performance statement of operations excludes power shares and the 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 against comparable company.

Our first quarter net income per share of $0.03 improved from a Q4 pro-forma net loss per share of $0.05 and a GAAP net loss per share of $0.23. Let me provide a little bit more insight into our first quarter results. Our 13% sequential revenue growth is favorable compared to our guidance that revenue would improve by 3% to 7% sequentially. This was altered by revenue from our matured products, which was higher than planned in Q1.

Our revenue increased by $1.4 million sequentially to $12.5 million. Material products contributed $1.1 million of this revenue growth. Sales of our pASIC1 and pASIC2 devices represented 49% of Q1 revenue. As many of you know, we have announced an end of life for these product families, which we will discuss in more detail later in the call. Revenue from North America increased 25% and Europe increased to 16% over Q4. Our Instrumentation and test and our Military aerospace customers represented the largest sources of our quarter on quarter market segment revenue growth, increasing by 17% and 35% respectively. But Q1 gross margin of 61% was higher than our guidance that gross margin would be between 50 and 55% of revenue.

Our gross profit improved by $2.4 million dollars sequentially due largely to the higher sequential revenue levels and product mix, which contributed $1.3 million. Lower production variances as we expected on our last call accounted for the remainder of the gross profit improvement. In Q1, we had $100,000 of lower charges for inventory reserves and approximately $280,000 of lower overhead expenses due largely to lower depreciation and amortization as a result of the charge for the impairment long lived assets that we recorded in Q4.

During the first quarter, we improved our .18 Micron production yields and lowered other variances associated with this product line which also contributed to our sequential gross profit improvement, and less than 2 quarters since introduction, we have achieved standard yields for Eclipse II and QuickPCI II products. The sale of previously reserved inventory improved our gross margin by 2% of revenue in the first quarter.

Research and Development expenses of $2.5 million were within our guidance and were lowered by $100,000 compared to the first quarter of 2004. SG&A expenses increased by $200,000 sequentially to $4.3 million. This increase is favorable compared to our guidance that SG&A expenses would be higher by 300 to $600,000 sequentially. In Q1, our legal expenses were lower than we expected and we lowered our reserve for bad debts by $140,000 as a result of collecting previously reserved amounts.

Let me just take a moment to highlight our year-on-year results. Our revenue increased 21% to $12.5 million from $10.4 million in the first quarter of 2004. Our gross profit increased by $1.8 million, compared to the same period last year. R&D expenses of $2.5 million are $800,000 lower, compared to one year ago, to lower charges for pre-production material and other expenses associated with the development of our .18 Micron products.

SG&A expenses are $400,000 higher than a year ago, largely due to higher compliance, legal, commission and promotional expenses. In summary, our net income improved by $2.2 million year on year due to $1.8 million of higher gross profit; $800,000 of lower R&D expenses offset by $400,000 of higher SG&A expenses. Our Q1 net income was $864,000 or $0.03 per share compares to a net loss of $1.4 million or $0.06 per share one year ago.

We finished the first quarter with cash at $24.6 million. Our cash declined by only $300,000 sequentially. Operations contributed $600,000 of cash. Capital expenditures consumed $400,000 of cash and financing activities consumed $500,000 of cash in the quarter. We had guided the cash could be lower by as much as $3 million. Our positive operating cash flow including net income was higher than expected and capital expenditures were lower than expected in the quarter.

Our debt free cash was $20 million at March 31, compared to $19.6 million at December 31. Our total interest bearing debt at March 31 was $4.6 million. In terms of some balance sheet items, our accounts receivable increased to 43 days of sales outstanding from 39 days at the end of Q4 and it is within the range of typical DSO for our business.

We had a $700,000 increase in inventory net of new inventory reserves for excess and obsolete material during the quarter, due largely to purchases of .18 Micron material. We currently have 139 days of inventory on hand and 6 days of inventory in the channel.

The value of our Tower investment was $1.82 per share at March 31, compared to $2.26 per share at December 31, a decline of $600,000 in the value of our investment. The value of our investment remains below $2.26 per share - we will incur charge for the write down of this investment in Q2.

In summary, we are extremely pleased with our first quarter results. We returned to profitability and our balance sheet remains strong. Other key developments during the quarter include, we continued to experience strong design activity for our advanced ESP products, which include our new Eclipse II to and QuickPCI II product families. We expect these products to provide significant long-term revenue growth. These products are also generating significant interest from other semiconductor companies. Our first quarter press releases include calls from Intel, Atheros Technologies, Renesas Semiconductor. As Tom indicated on our last call, during Q1, we the list of suppliers who a co-marketing their processors with our Eclipse II and QuickPCI II solutions. We expect to further expand our announced partnerships in Q2. Also in Q1, we were selected as the top 5 provider of Logic products by the readers of EETimes for our microWatt Eclipse II product used in conjunction with the Renesas SuperH family of processors. Tom is going to discuss advanced ESP design activity later on this call.

Now, let me turn the call back over to Tom.

Well, actually you have all heard the great news by now. QuickLogic is back to profitability, what can I say. You know, some folks might argue that it has been too long in coming. Our management and Board of Directors made a series of well-reasoned, thoughtful decisions back when the semiconductor market collapsed and that we would continue to invest in R&D and sales and marketing activities. I am planning to come out of this downturn with a stable of new products, new customers, and new designs. This business is one of long cycles for, as you know, we enjoy significant revenue today from our mature products.

No one envisioned however back in 2001, or could even have imagined that the industry downturn would go on for 48 months, twice as long as any previous semiconductor industry recession. Okay, but now that's behind us and we now officially declare the wicked recession, which is dead for us, here at QuickLogic. And long live our Embedded Standard Products. If you have looked at the Q1 2005 earnings press release, you will have seen that our revenue was up 21% year-over-year, and 13% sequentially. So, here another quarter, we have grown faster than our major competitors, that's four quarters in a row. From a sequential growth perspective, our mature and advanced ESPs grew quite nicely, up 16% and 32% respectively, while our ESP family revenue was basically flat with a slight 2% decline.

New order activity in Q1 reached an all-time record for us, following on our previous all-time record in Q4. Based on our announced lifetime buy program, Q1 was the last quarter for pASIC1 and pASIC2 orders for, as you know, we announced the lifetime buy on both those product families over a year ago. The lifetime buy program was driven principally by the uncertainty of the long-term supply for those families and products from our wafer foundry. As we expected, we are continuing to receive orders for P1 and P2, albeit at much reduced rates.

For our financial planning purposes, however, we have modeled that our revenue from both these families will go to zero in 2006. We plan to make up this lost revenue by growing revenue from our existing and new product families. And speaking of new products, I am pleased to report that their design activity continues to build across a broad array of applications, applications that make critical use of the strongest competitive aspects of our products, namely the lowest power FPGAs and programmable bridge controllers on the market for . Eclipse II to and QuickPCI II are enabling partners like Intel, Renesas and Atheros to penetrate markets previously not available to them owing to our low power instead on high bandwidth solutions.

I have commented several times on our capability to interconnect peripheral devices originally designed for the PC market through processors designed for embedded systems. You have seen our announcements of our capability to interconnect the industry-leading Atheros single chip 802.11a/b/g Wi-Fi device to both the XScale processors from Intel and the SH series of processors from Renesas. Today we announced our May 4th TechOnline Seminar with Intel on enabling wireless and storage connectivity solutions for mobile and portable applications. This is one of the new exciting collaborations I talked about in our last call. We have also talked about adding IDE connectivity to enable the use of micro hard drives in embedded systems, like personal video recorders, portable medical devices and games as an example.

And now, for the first time this last quarter, we were seeing customers that have devices originally designed for cell phones, want to interconnect those devices in the PCs. One example I can use here is a customer wanting to enable 3G or EDGE-connectivity along with UMTS and Wi-Fi and a PCMCIA card. Clearly good news for QuickLogic. Another important aspect to be using our devices in these intelligent interconnect applications is the way our parts been enabled lower overall system power solutions. This is achieved by clever design of the system architecture to take advantage of allocating tasks to our product where they are done more efficiently instead of doing them in our processor.

For example, using of better processor to directly manage the data coming from a micro hard drive can consume up to half the capacity of the processor. Instead, if we create a design that offloads the bulk of those tasks to our intelligent controller, well-off, you can either run that processor slower and save power or add more functionality to the system implementing that in the additional processor cycles you have gained. I hope you can see that what we are providing here is clearly more than just being glue or a bridge between disparate interconnect standards.

We are truly providing system-oriented solutions by closely working with the customers during the design of the system architecture to enable the customer to affect these beneficial kinds of design choices. So system performance becomes a function of both system architecture and the fundamental benefits of ViaLink. Truly, win-win collaboration.

So let me summarize here because it is very important that you understand what we are bringing to the party that cannot be done by our PLD competition. Our low-power advantage is directly a result of our patented metal-to-metal on-chip interconnect technology, which we call ViaLink. ViaLink cannot be matched from a power perspective by the SRAM technology used by the PLD market leaders. No way, no how.

For example when they speak of low power, they are talking about milliamps. We are talking about microamps, has 3 orders of magnitude difference or said in another way, the use a 1000-times the current we use. And our part is fully functional and instant on they must reprogram their part after they wake it up. Requiring precious time to recover from their so called low- current state. For portable battery-powered applications we win hands-down end of story. Let me share one last one sort P1and P2 revenue.

I know, many of you are concerned about the hole that will be created in our overall revenue as P1 and P2 revenue winds down this year. We share your concern and have focused our sales and marketing team on the opportunities that we believe will fill-in this hole. These kinds of transitions are never see, as customers are not always predictable and certainly not controllable. What we do know is that our Eclipse II and QuickPCI II families are being very well received as solutions to crucial problems for our customers. Our design activity and design win funnel is very closely managed and is of the highest priority here at QuickLogic.

Based on our detailed knowledge of the funnel, for us it is not equation of is, but win. We believe is and is getting closure all the time. One thing our favorite to keep in mind here is that we are not waiting for an industry to adopt a new standard, like PCI-Express or RapidIO. Our customers are designing and building products today-- We see additional peripherals which require our intelligent interconnect solutions now, Carl?

As Tom mentioned, our Q1 bookings had a new record for us. And as we expected during our last call, this activity included substantial lifetime buy orders for our pASIC1 and pASIC2 products. Although the first quarter maybe the last quarter of significant orders for these devices, we expect to have significant revenue from these products through the end of the year based on firm backlog and some additional new orders. We currently expected sequentially higher ESP and advanced ESP revenue will more than offset the plan to climb to P1 and P2 revenue in Q2.

We are conservatively guiding the total second quarter revenue to be flat to up low single digit. Interest in our Eclipse II and Quik PCI II products is very high. Design activities continue to be strong and customers on low power and varied applications require low power and high bandwidth. Our solutions can win the design over competitors. Despite the strong design activity our time to revenue for the Eclipse II and Quik PCI II products is longer than we anticipated and we currently expect that significant revenue from each products will occur in the second half of this year.

Based on our expected mix of products contributing revenue in Q2, we are guiding that gross margin will be between 53 and 58% of revenue. We expect our Q2 research and development expenses to be within $100,000 of our Q1 expense level. We expect that Q2 Selling General and Administrative expenses will be within $200,000 of our Q1 expense level as well. Interest income, interest expense, and other net include interest income on investing cash, foreign exchange, gains and losses, and interest expense on borrowing.

During the first quarter, we have combined effect resulting in income of $27,000. The expected interest income, interest expense, and other net together with our tax provision will be of less than $75,000 in Q2. We may use up to $2.25 million of cash during the second quarter due to an increase in inventory of our Eclipse II and Quik mix devices, scheduled repayment of long term debt and capital expenditures of up to $1.5 million. In addition, we had $2 million outstanding under our revolving line of credit at the end of Q1 and we may decide to repay these funds in Q2. This line of credit will expire in June and we may decide not to renew this credit facility. The value of our shares remains below $2.26 per share, we will be required to report a write down of this investment.

We currently hold 1,344,543 tower . Let me take a moment to confirm our financial strategy. Our primary financial goal is to maintain profitability by generating revenue in gross margin dollars and controlling expenses. We believe our new Eclipse II and Quik PCI II products will play a significant role in our ability to overcome the expected decline in our pASIC1 and pASIC2 revenue. The interest in customers to use these products and their new designs is tremendous and we continue to gain confidence in the revenue potential of these products. In addition, other semi conductor companies wish to work with us to pursue new customer designs for them utilizing their microprocessors or other components and our Eclipse II and Quik PCI II devices.

Our manufacturing strategy is to reduce the cost of producing our products, so we can produce higher volume sales opportunities. We achieved standard deals from many of the 0.18 micron products in Q1 and we believe that developing mix generation products at tower will continue to reduce our unit cost. They are also actively reducing our other cost of sales by price renegotiation, by decrease in the time and cost, needed to test and program our products. While we continue to carefully manage expenses we intend to add to our headcount during the second and third quarters primarily to ensure that we maximize the revenue potential of our Eclipse II and Quik PCI II products and to ensure the on-time delivery of products under development.

Our financial model based on a goal of $25 million in quarterly revenue and stated as a percent of revenue is to generate a gross profit of 60 to 62%, to have research and development expenses of 17 to 19% and to add SG&A expenses of 19 to 21%. This would result in income from operations of 20 to 26% of revenue. Our current call is to maintain breakeven operating profit at approximately 12 to $13 million of quarterly revenue and to be profitable for the year excluding any charges associated with the writedown of our investment. We expected our QuikTools will be a significant source of the revenue dollars required to maintain profitability.

Our plan is to shift the mix of our business to a higher advanced revenue and lower material product revenue based on the expected growth of our ESP business and the expected impact to our P1 and P2 end of life. Now, let me turn the call back over to Tom.

Okay, thanks Carl. In closing our prepared remarks today, let me repeat a statement from my stockholders letter in our recent annual report. The journey of a pioneer is not precisely predictable. But, persistence is crucial. We are clearly pioneering in better standard products. And with each passing day, we see more evidence to support that we are headed in the right direction. ESPs are favorably aligned with the major trends of the semiconductor industry today. Higher performance at lower power through advanced architectures.

Quicker time to market with cost competitive solutions and greater demand for security of our customers' intellectual property. Now, in another matter, and although we will be issuing a press release, I am very pleased to announce now that at our Board of Directors meeting yesterday, we elected Michael Jay as our lead director. Mike has served as a QuickLogic board member since July of 1997 and has a long distinguished career of significant leadership positions with Motorola, MMI, Advanced Micro Devices, and Wafer Scale Integration. He also currently serves as the Chairman of the board of Technovas, a privately held fabulous semiconductor supplier of communications chipsets for subscriber access networks.

On a personal note, I look forward to Mike's continuing contributions to QuickLogic and his expanded role on our board. Special thanks for an order to our finance team for they completed our Sarbanes-Oxley 404 requirements with flying colors. We passed with no problem as in zero problems. Very nice work, folks. And thanks for all the effort you took to get us through this.

I would also like to take this opportunity to thank all of our dedicated employees, whose talent, skills, intellect, and tireless efforts make our accelerating progress possible. Thank you one and all. Now, for your scheduling purposes, our Q2 2005 earnings conference call will be held on Wednesday, July 27, at 2:30 pm Pacific daylight time. If you have the opportunity, we will be presenting at the AEA financial conference May 17 at the Monterey Plaza Hotel in Monterey Bay, California. Details of these events can be found on our website at www.quicklogic.com. Okay, now let's open up the call for questions. Michele, please.

[OPERATOR INSTRUCTIONS] Our first question, sir, comes from the line of Shinton Sarkar of . Please proceed.

Really stunning numbers. Congratulations, I did have a couple of brief housekeeping questions. First, what are you expecting your Sarbanes-Oxley costs to be this year?

Outrageous.

Well, that I know. But, I was hoping you will give me a number?

Yes, we have but we are not putting that out, I guess. But they will be significantly low in the last year.

So, you feel like the other handle around the problem is not going to be much higher than you expected and there's not going to be any surprises down the road at this stage?

We don't like it. We don't expect any surprises and we came through that very well last year.

Okay. And, what was the book to bill this quarter?

We don't typically share that since so much of our business comes through distribution that bookings in distributions are pretty meaningless. I can tell you, we booked a lot more orders than what we shipped.

Okay. And the last question I had was, regarding the inventory profiles that is the revenue profiles for this year, if I can just sort of paraphrase the comments you made earlier, would it be fair to say you are looking at sort of a flattish to slightly up first half and then some more significant revenue ramp in this second half?

We haven't provided that level of guidance. Sorry.

Gary Mobley, B. Riley & Company.

Clearly a good quarter and I want to congratulate you guys on that. And since you guys , I'm most concerned about the one or two drop off. The questions there, some of you guys give a much more detailed brick against revenue, the call is opening over the exact mix between the Matured vendor than advanced embedded standard products?

Oh, sure. Let me just do that for you Gary. The revenue for the quarter was 66% Mature, 22% Embedded, and 12% Advanced Embedded Standard Products.

And the Embedded Standard Products and Advanced Embedded Standard products seem as though after the second half '04 fall off, we haven't seen recovery there. .

Mainly, we've had a lot of growth in the past from our larger customers. They hit a fairly stable patent right now. And I think what's really going to move that line for that product will finish our new products.

In case one or two of numbers taken, it was about 45% of revenue last quarter, is that correct?

It was 46 last quarter and 49 this quarter.

So, that is a substantial increase.

3 points.

When would you expect that revenue to start dropping off?

We expect to be lower this quarter in fact. We haven't quantified that but it will come down.

So, you are -- obviously betting on something you coming on perhaps QuickPCI II or some of the other standard products?

Yeah, we think we'll make up both in our combined, Embedded and Advanced Embedded Standard Products. And wish we had this comp P3 and all P3 is ten for ten comparable with P2 and there are people at our switching designs rather than doing end of Wi-Fi's.

Tomy mentioned in your commentary that your modeling internally for the pace of one or two revenues to go away and there is always choices as you mentioned the P3, P10 for ten comparable, how is that going and would you expect to keep much of that revenue due to the choice of equipment can offer?

I can tell you that we initially thought we are going to have larger conversions than what we are seeing. Actually, what we've seen now is more people are buying P1 and P2, sort of designing in the end, P3 they are designing in favor of Eclipse II and QuickPCI II. So, customers are always predictable. They told us originally they are going to convert to P3 and then when they look at it, they find see we can save some money if we did the Eclipse. Obviously cost per gate is lower for the Eclipse II, then it is with (pASIC III). So, it's a dynamic moving kind of target, Gary, and obviously, it has your concern, it certainly has ours as well.

Okay, great. Congratulations again.

Orean Hushman, AICH Investment .

Congratulations on breakthrough quarter. I'm, certainly, it sounds like an Eclipse II that there is a lot of design that you already have. Is that accurate, its just a matter but we don't know when they are going to ramp and we are hoping that some of them will ramp in the current quarter and not quite ramping just .

I don't think we really planned, we really haven't planned unlike in the last 2 quarters, we are going to see significant revenue in Q1 out of these designs. We believe we are going begin to see more revenue in Q2 and build the rate of growth will be faster in the last half of the year than it is in the first half.

Have you actually seen the number of designs wins or you would comb excellent design in already increase in the last 3 months?

Yes.

I mean, actually finish designs as suppose to just customer interest.

Yes. We have a very elaborate and I think thorough way of looking at this design formal and this distinguishes very clearly between people who are just kicking tyres and that's should have laid our board in parts -- laid our boards for our parts and they entered doing pre-production kinds of activity. So, we inspect the out of this.

you meant some applications including these portable video players, etc. You actually have designed in Santa , that is an area where people are doing design still but they are not finished?

They have not finished with the designs. But they are in fact doing those designs. You're asking specifically about our portable video or personal video recorder?

Yes.

That design is in process. Even as we are speak and our VP of sales visited them last week when he was in Taiwan.

Is there more than one design potentially for that application?

Yes. That's going to be a very hot product. Now people are talking about it. If you haven't heard the buzz already, they are talking about video iPods basically.

Thank you so much.

You're welcome.

Manoj Nadkarni, Chip Investor.

Congratulations on the outstanding results.

Thanks, Manoj. Nice talking to you Manoj.

Can you please give some color on the bookings? What product size did you see strong bookings for and what geographies are you seeing strength?

Well, as expected on our last call, we had good strength in bookings across our business and especially strong bookings in P1 and P2. As we mentioned earlier on.

How about QuickPCI, other ESPs?

We had good strength in both our mature business and audio business.

Okay, and so if I understand, you are expecting some revenue from Eclipse II and QuickPCI II, beginning the June quarter? Correct?

We are expecting revenue this quarter. We expect significant revenue in the second half.

And would you care to quantify in any way?

We've said in the past that significant is 10% of our total revenue.

Now, how about manufacturing capacity? Any color you can give on manufacturing of these Eclipse II and QuickPCI II if the demand picks up later as you expect?

We see no issue. And in fact, if you have heard in the call, if you have noticed our inventory went up, all of that, virtually all of that increase in inventory is Eclipse II and QuickPCI II products, and a very strong operations group that got this thing ready to roll.

And any thing you would like to elaborate on the yields you're getting at Tower?

They met to exceed their expectations for the quarter. They did a very good job.

They have come along very nicely. I think Carl indicated to you. We have got into what we considered to be our standard yields in just the last two quarters. And that's kind of direct result of us working very closely with them and then being

a very deliberate and very thorough at flushing out all the details of getting the kind of yields we need off our fuse. So, we are very pleased with what has happened there.

That's what I say, in how many facilitates we have brought that up in near term?

We have -- this is the first time we brought up 0.18, but we've implemented ViaLink in probably 6 different Fabs and 7 or 8 different technologies in our history. So, this isn't the first rodeo, but this was a new product, a new Fab for us and a new process technology for them. So, this was a kind of the triple storm and we have come through it very well, I think.

Would you continue to see improvement in yields on these lines?

Only think there's a lot of room.

The semiconductor business only goes one way and that's you work to make yields better all the time in those. So, this is like we are constantly scrubbing for in our test and programming times and final test yields and programming yields. So, this is always an ongoing activity.

Okay. And then I have a question for Carl. There is an item called Deferred royalty revenue, can you give some details?

We have a licensing agreement with UTMC Aeroflex. We have licensed our ViaLink technology, specifically our Eclipse architecture, we want to compete with that in the aerospace market. So, they paid us $750,000 when we signed the deal, they pay us a portion of the wafer purchases since that time going to prepaid royalties, we'll take that as revenue. Once they start to sell product and we are in the royalties out of that prepayment.

So, any kind of timeline you think when you will recognize these revenues?

You really have to talk to them about that, UTMC, that's their product plans.

[OPERATOR INSTRUCTIONS]. Robert Catts, Sunwest .

A question about some of these new designs you are getting for the new products in terms of volumes and the average price. How does that compare with the pASIC's that's been replaced, and so what are the volume opportunities through your products and may be can you elaborate a bit on the product road map in terms of getting your average price downs, go after more and less market products?

Just what we've said is that we find these parts attractive for opportunity that can be in 100 to 1000 of units either, and that seems to be -- and those volumes in below they find as a compiling solution.

Right. Would you be going into, I can't help, so we may products or is that market too high volume for?

Specifically we're on cellular, although you probably find us in PDA's in their future where basically smart phones, combination PDA's and sorry they are telephones, but I think you'll find us in cheap and dirty cellular phones.

But the high end PDA smart phone market is sort of becoming a larger markets in terms of number of phones, shifting within any given program, going into millions, however 2 million, 3 million in some cases. What price points you need to fit get into that, those type of designs.

Sub $5.

Sub 5, and you current product is there or is that sort of on the Comps .

It's there. If you look at our press releases we have had a lower less than $5 in those releases.

And if you don't get the target margins on those type of products?

We wouldn't be doing that if we get that -- I'll tell you. We set our target margins on a forward going basis of 25 million bucks will be between 60 and 62 and that includes the fact that we're going to be selling devices at 5 bucks.

In terms of the second half ramp, is that because you're in a lot of more consumer oriented products that sort of have their for refresh in the second half?

No, think it is more in the function of the -- I think this year it's more a function of where they are in the design cycle. There are guys that are sensitive to the Christmas season, but I don't think that's the primary issue. I'm sure I think it's just where they are in their design cycle.

Right, okay. In terms of the right now, how does that break out in between pASIC1 and pASIC2 or any newer products.

Well, because of lifetime box strong for pASIC1 and pASIC2. As you know we have a high turns model typically for our business. We are generally going to have turns of 70% roughly or may be even 80, and so break it in two pieces. Right now going forward we expect to have low turns in pASIC1 and pASIC2, and typical turns on the rest of our business.

Okay. In terms of, I guess new -- in terms of the design activities with new products, how is that. Can you show just some color on how that's increased over the past quarter or in terms of number designs or the opportunities that those designs represent for the Company?

When we measure, we actually have a program that looks at where our design is in terms of the customers cycle. And we analyze or we estimate the annual usage of that socket, if you will or of that design when it goes into production. And then what we do is we wait, the total Funnel by where it is in that process, where it is in their design process. And so we will come up with a number then that quantifies, which is kind of a weighted average of where they are in their design cycle plus this, at times the total size of the opportunity of the annual estimated revenue from the opportunity. And then, we have that altogether from all of the territories and this is tracked on an individual socket by socket basis by our region guys and then rolled up for the total company. And we don't share what those numbers are because they are meaningful to us in terms of indicating the direction of change, now I can just tell you that it is very positive.

Right. And it sounds like this funnel in the second half certainly started to using the revenue, revenue fraction in a strong way starting at Q3?

Yes, let me just quantify for you a little difference then, to give you a flavor. Let's assume that last year, our Funnel activity yielded x dollars in the Funnel. We are about, that's for 12 months of last year. We are about at 60% of that number already through 4 months of this year. So, let's accelerate it significantly.

In the first 4 months let's say you achieved 60% of what you did in total last year in the Funnel.

You got it.

Excellent. Good luck.

Thanks .

Ladies and gentlemen, this does conclude the question and answer portion of today's conference call. I would like to turn the presentation over back to Mr.Thomas Hart for closing remarks.

Profitability, isn't it sweet. Thanks for your interest in hanging in there with us. We think, we have got something really exciting year, and we are going to drive it as hard and as fast as we can. And thanks for staying with us. We appreciate your confidence in us. Look forward to seeing you at Monterey or wherever our may cross, and if not we will see you in July at our conference call. Thanks.

Ladies and gentlemen, thank you for your participation in today's conference call. This does conclude your presentation. You may now disconnect. Good day.