Quicklogic Corp (QUIK) 2005 Q2 法說會逐字稿

Welcome to the QuickLogic second quarter 2005 earnings conference call. Today's call is being recorded and will be available for playback beginning one hour after the completion of the call. To access the replay, please dial 617-801-6888 with the passcode 17940220.

At this time, for opening remarks and introductions, I would like to turn the call over E. Thomas Hart, Chairman, President and CEO of QuickLogic Corporation. Please go ahead, sir.

Okay. Carol, thank you. Good afternoon, ladies and gentlemen. Welcome to our Q2 2005 earnings conference call. I appreciate you taking the time to join us today and hear about QuickLogic's solid financial results and our continuing progress toward the market leadership of this new category of semiconductor devices we call Embedded Standard Products, now enhanced by the world's lowest power FPGAs.

In case you haven't seen our earnings press release yet, I am again pleased to announce that we had a very good quarter and more importantly, we now have 2 quarters of profitability in a row. Dare we call this a trend? Well, I sure hope so. As we've said in the past, we believe we can be profitable for the overall year.

Carl Mills, our CFO, will take you through our Q2 Financials and then I'll share 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 including, but not limited to, stated expectations relating to revenue growth from our new product families, our ability to convert new design opportunities into customer activity, changes in our customers' plans after we have invested our resources, our ability to replace pASIC 1 and pASIC 2 revenue, which we expect to decline due to the previously announced end-of-life of these product families, and profitability for the full year.

QuickLogic's future results could differ materially from such forward-looking statements. [Inaudible] to the risk factors listed in our annual report on Form 10-K, quarterly reports on 10-Q, shelf registration on Form S-3, 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 all and is being webcast live. It can be accessed from the investor relations area of the QuickLogic website located at www.QuickLogic.com.

Q2 revenue was solidly within guidance and our second quarter financial results were terrific. [Audio gap] we expected to find of our pASIC 1 and 2 revenue was consistent with our guidance. Our gross margin was 64%. Our non-GAAP net income was $1.8 million, or $0.06 per diluted share, which is a $900,000 improvement from Q1. Q2 revenue and non-GAAP net income were our best quarterly results since 2000. And our Q2 gross margin of 64% was our highest since our initial public offering. The difference between our second quarter GAAP and non-GAAP Statement of Operations is a $1.5 million write-down of Tower Semiconductor shares. Tower is one of our FAB partners.

We believe these non-GAAP measures are helpful in analyzing our results and comparing our performance against comparable companies. Our second quarter GAAP net income was $320,000 or $0.01 per share, even including the $1.5 million write-down of our investment in Tower. This write-down equates to $0.05 per diluted share.

Cash increased $500,000 to $25.1 million during the quarter.

I'd like to provide some additional details on our second quarter results. Revenue for the second quarter was $12.8 million, an increase of 2% sequentially, which is within our guidance that revenue would be flat to up in the low single-digits.

As expected, revenue from our pASIC 1 and 2 product lines, for which we have announced an end-of-life, declined sequentially. The pASIC 1 and 2 product families contributed 40% of Q2 revenue, compared with 51% of revenue in the first quarter.

As we mentioned earlier, higher pASIC 3, ESP and Advanced ESP revenue during the quarter more than offset the $1.4 million, and are expected to climb in our pASIC 1 and 2 business.

Revenue from our computing segment increased by 37% sequentially, and military-aerospace revenue increased by 24% sequentially.

Our record Q2 gross margin of 64% was higher than our guidance. The gross margin would be between 53% and 58% of revenue. This was due to several factors. First, we had a much more favorable product mix then we expected. Second, the sale of previously reserved inventory reduced our cost of sales by 2.9% during the quarter. This was a higher benefit than we expected. Third, production variances came in more favorably than our forecast and, finally, our inventory growth improved or absorbed the overhead. These factors combined to deliver gross margin that was better than the high end of our guidance. As you can see from these results, our operations group did a great job in Q2.

Our Q2 profit improved by $500,000 sequentially, due to these same factors for gross profit, improved by $500,000 sequentially, due to these same factors, as well as due to higher revenue.

Research and development expenses of $2.3 million were within our guidance and were $120,000 lower than in the first quarter of 2005. SG&A expenses decreased by $260,000 sequentially, to $4 million, which compares favorably to our guidance. The SG&A expenses would be within $200,000 of Q1 levels.

In Q2, we were able to significantly lower our compliance and legal expenses. Also, you may remember that in Q1, we recorded a $140,000 reduction in our allowance reductable accounts, that reduced our SG&A expense. If we take this into account, our other Q2 SG&A spending decreased by almost $400,000 compared with Q1.

In summary, our non-GAAP net income improved by $900,000 sequentially, due to $500,000 of higher gross profit and $400,000 of lower expenses. Our Q2 non-GAAP net income of $1.8 million, or $0.06 per diluted share, compares with net income of $864,000, or $0.03 per diluted share in Q1. Due to the write-down of our Tower investment, our GAAP net income was $320,000, or $0.01 per diluted share in the second quarter.

Let me just take a moment to compare our year-end year results. Our revenue increased 14% to $12.8 million from $11.2 million in the second quarter one year ago. Our gross profit increased by $1.4 million on this $1.5 million increase in revenue. In total, non-GAAP net income improved by $2.3 million year-on-year, due to the $1.4 million higher gross profit and $900,000 of lower expenses. Our Q2 non-GAAP net income per diluted share of $0.06 compares to a net loss per diluted share of $0.02 one year ago.

We are very pleased to have been profitable in both quarters of 2005, as we had targeted. Our year-to-date net income is $2.7 million on a GAAP basis, and $1.2 million on a non -- on a GAAP basis, sorry -- 2.7 on a non-GAAP, sorry.

We finished the second quarter with cash of $25.1 million, which is an increase of $500,000 sequentially. This is much better than our previous guidance that cash would be lower by as much as $3 million sequentially.

Our operating cash flow, including net income, was higher than expected and capital expenditures were lower then expected in the quarter. Specifically, operations used $300,000 of cash for two reasons. First, our net income adjusted for non-cash items, such as the write-down of our Tower investment and depreciation was a profit of $2.6 million. Second, we used $2.9 million for working capital, including $1.1 million used for higher inventory, $600,000 for higher accounts receivable, and $1.1 million to reduce our accounts payable during Q2.

Capital expenditures consumed $300,000 of cash in Q2. Financing activities contributed to $1.1 million during the quarter. We raised $1.1 million by issuing shares into our stock plans, borrowed $550,000 of long-term debt during the quarter and made scheduled repayments of $600,000 in Q2.

Our debt-free cash of $20.6 million at June 30th compares with $20 million at March 31st. Our total interest bearing debt at June 30th was $4.5 million.

In terms of some balance sheet items, our accounts receivable increased to 46 days of sales outstanding, from 43 days at the end of Q1, and is slightly above our target DSO, due to the timing of shipments in the quarter.

As expected, we had a $1.1 million increase of inventory during the quarter, due largely to purchases of .18 micron product, pASIC 1 and pASIC 2 material. We currently have 169 days of inventory on hand and 6 day of inventory in the distributor channel.

The value of the Tower shares we own was $1.17 per share at June 30th, compared with $2.26 per share at December 31, representing a decline of $1.466 million, that was a recorded as a charge [inaudible] operations in Q2.

In summary, we are extremely pleased with our second quarter results. Revenue was solid and within guidance. Our gross margin was very strong. Expenses was the lower end of our forecast and our balance sheet remains strong.

Other key developments since our last earnings call include, we continue to experience strong designing activity for our advanced ESP products, which include our new Eclipse II low-power FPGA and our Micro-Watt Programmable Bridges. We expect these products to provide a significant long-term revenue growth. These products are also generating significant interest from new potential selling partners and we expect to announce new co-marketing relationships in the second half of the year, such as we did with Intel, Atheros Technologies, Renesas and Inova Semiconductor in the first half.

We renewed our bank line of credit, and the facility now runs until June 26, 2006. The line has an $8 million revolving facility and allows us to borrow up to $3 million against equipment and software purchases during this period.

We also filed a $30 million shelf registration earlier this month, under which we could offer common stock and other equities and equity equivalent securities. The shelf registration statement does not include convertible GAAP. The shelf registration, by the way, became effective yesterday. We believe that having the opportunity to add to our cash balances from time to time is important, as it gives us flexibility in a number of areas, such as strategic investments in technology, partnerships, and sales opportunities. Currently, we do not have specific plans for any cash that we may raise from the shelf, so the cash will be used for general corporate purposes, working capital requirement, capital expenditures and perhaps the repayment of our revolving or long-term debt.

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

Okay. Thank you, Carl. Well, what do you think -- 2 in a row, profitable quarters, that is. It's been a long time since we've seen this and we're looking forward to a lot more of them. So, as Carl mentioned, our full revenue was up 14% year-over-year, and 2% sequentially. From a sequential growth perspective, our ESP and advanced ESP products grew very nicely, up 44% and 10%, respectively.

Predictably, our mature family revenue was down 11%, owing to a 21% decline in P-1 and P-2 total revenue. Although I do not believe that sequential data, when used by itself, is useful in evaluating our business, I do believe that sequential information in conjunction with a 4-quarter rolling average, can give you a good view of the direction of our business.

As we've said many times, this programmable logic business has very long time constants. If we look at the total revenue of Actel, Alterra, Zylinks and QuickLogic on a trailing 4-quarter rolling average basis for Q2, the revenue was flat compared to Q1's trailing 4-quarter average. In contrast, that same measure for Q2 shows our business has grown by 3.3%, which says we're growing faster than the market. Using the same measure, our mature product revenue actually grew 2.8% and our ESP product revenue grew 4.3%. We believe we have a solid business here and are encouraged by the new opportunities we are seeing, especially for our low-power Eclipse II, QuickPCI II and QuickMIPS product families, which using the same trailing 4-quarter metric, grew 68%, Q2 over Q1.

Overall, new order activity in Q2 was less then Q1, which was expected, due to the end-of-life pASIC 1 and pASIC 2 orders. We do, however, continue to book P-1 and P-2 orders even after the cutoff for the end-of-life purchases, which was the end of last January. For financial planning purposes, we have now modeled that we will generate revenue from both of these product families for a longer period than we had originally anticipated. We now do not expect revenue to go to zero until Q3 or Q4 of 2006, versus the end of this year, as previously expected. We continue to believe we can make up the lost revenue, owing to a strong design pipeline and a stream of new opportunities, especially for our new products. Therefore, we've modeled total revenue in 2006 to be higher than total revenue in 2005.

As many of you know by now, we make the lowest power FPGAs in the world, bar none -- no, ifs, ands or buts about it. In the world of power sensitive applications, low power performance is essential. The low power capabilities of our products uniquely allow our FPGAs to be prime candidates for applications that were previously off limits to FPGAs. We believe that this low power advantage and our ESP approach to solving system problems are opening up great growth opportunities for QuickLogic.

We've shipped our newest products to about 60 unique customers, many with multiple applications, supporting their design-in, pre-production and production requirements. These customers are using our products in many different applications. The largest segment of our pipeline comes from portable consumer applications. In portable consumer applications, we solved the connectivity challenges associated with adding new peripherals to embedded systems. We provide complete solutions that combine preventable bridge fabric with known good interfaces, such as PCI, IDE, etc., and a software driver support.

In addition, we are now engaged with customers building battery powered products to stream data from a mini PCI WiFi module directly onto a hard disk drive, a micro hard disk drive, through its IDE interface, without turning on the embedded processor. Our device also manages the data coming off the micro hard drive to reduce the load on the embedded processor.

Our Micro Watt Programmable Bridges offer unique benefits to help customers increase system performance, offload the embedded processor and prolong battery life.

It's very important for you to understand that what we're bringing to the customer cannot be done by our SRAM-based FPGA competitors. 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 two current market leaders. And the fact that they use the most advanced FAB technology to get smaller die sizes just exacerbates their problems, for as we all know, leakage current gets much worse, the smaller visiometry. So independent of how much money they have to spend for R&D, even they can't fool Mother Nature, or the laws of semiconductor physics.

So for the first time in our 17 years of being in the programmable logic business, we are not looking down the figurative gun barrels of the 2 FPGA market leaders. Our biggest competition now become ASICs, which, as you know, are custom integrated circuits that have a much longer time to market and include non-recurring engineering costs that could be millions of dollars. This is clearly good news for QuickLogic.

We are also seeing benefits from our new products for existing customers. The attributes of our ViaLink technology that have been attracted to them -- that have been attractive to them are now enhanced by our ultra low power capability.

Okay. And now for the news that you all have been waiting for -- we fully expect to book our first high-volume production orders for our .18 products in the next several weeks, albeit later than we had originally planned.

Let me close with some final thoughts on pASIC 1 and pASIC 2 revenue. If we'd been confident in our ability to secure guaranteed FAB capacity for these product families, we would never have issued an end-of-life notice to our customers. We were still winning new designs with these products, for they're both 5 volt powered and many industrial customers still live in a 5 volt world. Given this as background, many investors have asked why we didn't just move these families, 8 different mask sets by the way, to a different FAB and continue to sell them.

Well, that sounds great in theory, but not in practice, as most of the customers would need to re-qualify these products from a new FAB, which is very undesirable and an expensive thing to do. We would also have to make significant R&D investments in bringing up another FAB, and our choice was to invest our R&D dollars in our new products and not sustain the life of old products. We will continue to support additional orders for pASIC 1 and pASIC 2 as long as we can. That is why we changed our guidance as to when we expect shipments for these products to cease.

Okay. Now I'll turn the call back over to Carl.

Thank you, Tom. We are entering the third quarter with a strong backlog in place. Given this backlog in our expected Q3 bookings, we are guiding that Q3 revenue will be flat to up in the low single-digits sequentially. We expect sequentially flat to higher revenue from our pASIC 1 and pASIC 2 product families.

In terms of our new Micro uWatt Eclipse II, QuickPCI 2 and QuickMIPS products, as we have said in the past, we expect these products to contribute significant revenue in the second half of 2005, specifically in the fourth quarter. Based on our expected revenue mix of products in Q3, we are guiding that gross margin will be between 58% and 63% of revenue. We expect our Q3 research and development expenses will be higher by as much as $300,000 sequentially, due primarily to pre-production expenses associated with new products currently under development.

We expect that Q3 selling, general and administrative expenses will be higher by $300,000 to $600,000 sequentially, due to expenses associated with our shelf registration, 2005 stocks [inaudible] for compliance expenses, and higher selling expenses associated with recent hires and marcom activity around our partnerships and new products.

Interest income, interest expense and other net includes interest income on invested cash, foreign exchange gains and losses, and interest expense on borrowings. During the second quarter, the combined effect of these charges resulted in income of $37,000. We expect this will be an expense of less than $50,000 in Q3. We also expect that our Q3 tax provision will be $50,000 or less. We may use up to $1 million of cash during the third quarter, due primarily to the scheduled repayment of long-term debt and capital expenditures and other investments of up to $1.7 million.

In addition, we've had $2 million outstanding under our revolving line of credit at the end of Q2, and we may decide to repay these firms in Q3.

Let me take a moment to mention a few other points. Our manufacturing strategy is to reduce the cost of producing our products, so that we can pursue higher volume sales opportunities. We achieved standard yields on many of the .18 micron products in the first half of 2005. We believe that developing next generation products at Tower will continue to reduce our unit costs. We are also actively reducing our other costs of sales, our price negotiations and by decreasing the time and cost needed to test and program our products.

Our financial model based on a goal of $25 million in quarterly revenue, and then stated as a percent of revenue, was to generate a gross profit 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.

Tom, back to you.

Thanks Carl. In closing, let me again repeat a statement from our recent annual report, "The journey of a pioneer is not precisely predictable, but persistence is crucial".

We are clearly pioneering embedded standard products, and with each passing day, we see more evidence to support that we are headed in the right direction. We offer significant benefits to our partners and customers when it comes to providing low power, known, good interconnect solutions between embedded processors and the peripheral devices like WiFi and micro hard disk drives. The design cycles still look to be in the order of 9 months, on the average, and we can all count the number of times projects are completed early, versus being later then planned.

So, again, I say, we believe that the marketplace is showing us that our .18 new products are winners. We need to see this enthusiasm translated to orders, revenue and gross margin. Now, there are virtually no guarantees in life, but we believe the financial success of our new products is not a matter of "Will it happen," but rather, "When will it happen?" We're still betting on the second half of this year, based on our intimate knowledge of our design activity pipeline.

Okay. On another matter, I'm very pleased to announce Christine Russell, the CFO of OuterBay Technologies, and the former CFO of CEVA, Valence and Persistence, joined our Board of Directors during the second quarter and is our Audit Committee financial expert and an Independent Director. We're looking forward to Christine's knowledge, experience and contributions.

During the quarter, we also engaged with Moses Communications for investor relations. You may have noticed Christine Moses' contact information on our earnings press release. We welcome Christine to the team and look forward to her ability to contribute to our investor communications.

I would also like to take this opportunity to thank our dedicated employees whose talent, skills, intellect and tireless efforts make our accelerating progress possible. Thanks, folks.

Now for your scheduling purposes, our Q3 2005 earnings conference call is scheduled for Wednesday, October 26, at 2:30pm. That's Pacific Daylight Time. If you have the opportunity, we plan to present at the [Annenberg Philbin] Investor Conference in San Francisco on August 10th and at the Silicon Valley Bank Investors Forum on September 8th at the Four Seasons Hotel in San Francisco. We'd love to see you there. Details of upcoming events can be found on our website at www.QuickLogic.com.

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

Thank you very much, sir. [Operator instructions]. And your first questions comes from the line of [Ramish Mizrah] with Centerberg.

Hi, good afternoon, gentlemen.

Good afternoon, Ramish.

Good afternoon, Ramish.

Hi. Your growth margins in the quarter -- I forgot -- they're 64%. That's well ahead of your target and congratulations on that. But you've been saying that that is kind of the level that you had hoped to hit at the $25 million mark. Can you go into the reasons why -- what enabled you to get at those levels and if your gross margin guidance for the current quarter is rather conservative?

Well, I'm known as conservative by nature, Ramish, but our gross margin was spectacular last quarter, really for several reasons. One is that we had a much better product mix than we forecast. That accounted for about half of the improvement in our gross margin of the high end of our guidance. We also sold a lot more reserved inventory then we expected. That contributed almost a point. And then our absorbed overhead and our variances contributed a point or two as well. So, we've had a lot of great news, so as I think about it, it's just -- really, we've done a great job in our operations group. They've done a fantastic job. We've got good cost achievements on our .18 Micron products and on the -- in the [inaudible] that we're running to our facility right now. So it's been very good. But we think it was unusually good last quarter and that our return will -- our mix will return will to normal next quarter. Our variances may go up a little bit. We don't plan to sell nearly as much reserved inventory.

Okay. Can you talk a little bit about the pricing environment and in the foundry space?

Sure. Pricing has gone down in the foundries.

Can you quantify that?

Well, no, not really, because those -- that's proprietary information between us and the foundries. But I can just tell you that the trend is down and not up.

That -- as part of our agreement with Tower Semiconductor, we are entitled to favorable wafer pricing and we continue to work with Tower to achieve most of those cost calls. So we think that we're well positioned.

Okay. Can you talk about any developments with your new partners, over at Intel and Atheros?

I guess what I would say is that we're delighted to be getting many sales leads from the guys at Intel. We were starting to see them originally in Europe and Asia. We're also starting to see them in North America now. And as you can imagine, the size of the opportunities that you get referred from Intel are generally bigger than the ones we would otherwise deal with. So it's been really a good relationship for us. We think they're promoting our solution in their sales offices now and that will continue to result in referrals.

Okay. All right. Thanks very much.

Thank you.

Thank you.

And your next question comes from the line of Robert Katz with SunVest International. Please proceed.

Hi, Tom and Carl.

Hi, Robert.

Hi, Robert.

A very nice quarter. I had a question about the guidance. You said you expect pASIC 1 and 2 to be up sequentially?

We thought it would be flat to up.

Flat to up? And the guidance overall is flat to up?

Yes, it is.

And the new products, is that all in the same type of guidance or do you expect that to be a mix shift, I guess, in Q3 over Q2?

That will be a mix shift that masks what we expect be an uptick in our new product revenue.

There should be an uptick in your new product revenue?

Right.

Is that simply a higher margin than your old products or a lower margin than your old products?

We haven't commented on our margin by product line, so we don't disclose that.

Okay. This quarter there seemed to be an improvement in that mix as well in your margins on top. Can you talk about a product mix being responsible for half the margin improvement? I don't quite see the correlation between the two, if you continue to see that there will be a favorable mix from old to new products.

I think some of our product lines have different margin levels than others, and depending on the mix of the product lines that we're shipping, it can influence our margin. Last quarter, it pushed our margin by about 3 points.

And that -- I guess the mix within in your new products have a different margin?

It's a combination of new and old.

I'm just trying to get a better -- more clarity on whether -- well, from the new product category, there is a wide variance in margins or whether it's more new versus old.

Most of what we shipped in the last quarter really was our older products. We haven't really seen the influence of our new products on our margins yet.

When you define new products, it's .18.

Right.

Okay. What was the breakup between .18 versus older generation products in the last quarter?

We feel good about talking about our .18 revenue when we cross the significant threshold, which we consider to be 10%. Right now it's still way below -- it's far below the 10% threshold of significant revenue.

Okay. [Inaudible] questions for other people.

Thank you, Robert.

And your next question comes from the line of Luke Williams with MicroCapital. Please proceed.

Good afternoon, Tom and Carl.

Good afternoon, Luke.

Good afternoon, Luke.

Do you think you'll be able to identify some of your larger clients before the end of the year?

Yes.

We hope to. Some of the big ones have pretty strict NDAs with us.

But I think we will be able to identify some. We've already identified one for you, which was OptionWireless, by name. The others are -- a lot of them are very -- the ODMs in Taiwan, in particular, are very, very secretive.

Could you comment on the industries being served by your new products? Is it working out as you expected with a lot of consumer in there?

The biggest opportunities that we're looking at are currently consumer opportunities. That's correct.

Would that include telecom or would it include games?

Well, how do you define smart phones? Is that telecom?

I guess it's close.

More communications oriented than games oriented.

Also, mobile consumer applications, battery operated handheld devices.

Right.

Like portable media players, as an example.

Okay.

You're going to see a whole plethora of video -- portable video applications come out over the next year, actually even starting in time for this Christmas holiday, that enable people basically to have TiVo on the go. So you'll be able on a handheld device, be able to tap into digital video, over the air digital video, or they call it DVD terrestrial or DVD handheld in Asia, where you can watch a show and tape another show just like you do with DV, in a handheld device.

That's why a lot of our customers are looking to add micro drives to their systems, so they can store that video.

Well, you're going to be of some size in this market you're serving to be noticed in the marketplace. You mentioned you'd be pacing more ASICs than your larger, traditional competitors, FPGAs. What kind of response are you seeing out there?

Well, the challenge for the ASIC guys is, unless you're going to build jillions of exactly the same thing, it's tough to do ASICs, and it get worse. The finer the geometries, of course, it gets even worse. So now that we -- they've never had the opportunity in the past to be able to build these devices with FPTAs because they really didn't have the ultra low power that we offer them. So, you can argue that, well, you should have known this all along and maybe if we'd been stronger marketers and less -- we would have anticipated all this and been there, but the fact is we were better engineers and better technology developers. And so we -- unfortunately, we found each other and now we're enabling the the whole series of applications that we would never have envisioned we'd be near a year ago. If you told me a year ago that Intel would be taking us into accounts to help them sell x-scale processors, I would have told you that would not be possible. That, in fact, is happening all over the world today.

Clearly, I did not have that foresight for you. Well, good luck. I'll get off the queue.

Thank you.

Thank you, Luke.

Your next question comes from the line of Joi [McCurdy] with the State of Wisconsin Investment Board. Please proceed.

Hi. Congratulations on a good quarter.

Thank you, Joy.

Thank you, Joy.

Now that we've had about a month in the first quarter, has there been any changes or do you pretty much see [inaudible] an improvement in that first month?

In what sense?

In terms of order flow.

Well, this is traditionally our slowest time of year. July and August are traditionally the slowest, owing primarily to the fact that Europe goes on vacation, so we haven't seen anything out of the ordinary and it's about what we'd expect this time of year.

Okay. I think there was a comment made about new orders in the second quarter. I didn't quite catch that. Was that lower, given lower pASIC 1s and 2s?

The comment that I made is that we're about to book our first production orders for .18 material, not in the second quarter -- in this quarter.

Okay.

And that was what I was kind of tongue-in-cheek doing a hurray about because we've been waiting for some of those for a while now.

Okay. In terms of challenges that you face in the sales process, have those kind of eased for the new products?

Well, I don't know exactly what you mean. I can tell you that we're not competing head-to-head with the leading FPGA guys, primarily because their current requirements are the -- their dissipation so much higher than ours. We had a guy in Europe do a head-to-head against us, against SRAM Technology and Flash Technology and found that we -- that they were three times worse then we were, in terms of power dissipation. Now that translates directly to how long the battery will live and when you start talking about these handheld kinds of things, you want something to last longer than two hours.

I guess I'd add that we did our tech-online seminar with Intel in May. We're just starting to see the uptick in referrals really from Intel and I think our sales team is pleased by the amount of solutions that we've been able to bring to market around Y-5 Bridging and on IDE Bridging. So we think the selling effort is easier than it was a quarter or two ago. We've still got a ways to go.

Okay. Thank you.

Thank you.

Your next question comes from the line of [Minoge Netcarney] with Tiff Investors. Please proceed.

Good afternoon and congratulations on receiving solid operating income and operating margins of 14%.

Thanks, Minoge.

Can you comment on ESP revenues? They went up from 32% of your total revenue in the March quarter to 41%. Can you give color on which segments and applications you saw growth?

We saw some really nice uptick in the computing segment in Asia for us. One of our larger customers came back and really helped to bring up our ESP revenue. But it was pretty broad based.

Okay. So, mainly Quick RAM and Quick PCI?

Yes, that's right.

Okay. Regarding pASIC 1 and pASIC 2, do you anticipate running these products at price list beyond the end of 2005?

If they'll run them for us, we sure will.

We think they will.

Okay. Very good. Finally, if you can give us some progress report of manufacturing and units you are getting at the foundries, especially at Tower?

We feel very good about the yields and what's happened at Tower. I think Carl indicated to you that for the first half of the year, we were at standard yields, so we've taken no hits to -- no negative variances against our manufacturing costs for the wafers we've built there or the die we built there. And recently -- I don't know if you saw the announcement. They've brought aboard a new CEO that we're also very enthused about. I think he's going to be able to contribute significantly to making Tower be a very viable foundry. We're very pleased with what's happening there.

In terms of TSMC, our yields of TSMC, our yields at TSMC, they're a machine. They know how to build silicon better then probably anybody in the world, although I will have to tell you that Tower yields from a defect density perspective are pretty comparable to what we see out of TSMC.

Okay. Very good. Again, congratulations.

Thank you, Minoge.

Thank you, Minoge.

And your next question comes from the line of Gerald Todd with Southwest Securities. Please proceed.

Tom, you made a comment a while ago that you're backlogs were up. Did I miss on how much they're up percentage-wise or are you commenting on how -- what the amount is of your backlog?

I think we said it was strong and we did not quantify it. We typically don't quantify backlog or bookings by number, only because it's just one more set of numbers that -- what you really care about are revenue and gross margin dollars and operating expenses. Those are enough numbers for us to try and forecast accurately for you.

Okay, thank you.

And your next question comes from the line of Tim [Vandeson] of Southern Associates. Please proceed.

Yes, hi. Can you comment on whether you have interfaces between the ARM and mixed embedded processors for hard drives and WiFi or whether you are working on that?

Yes, we are. Actually, X-Scale is ARM. X-Scale is the renamed strong ARM which Deck had an ARM ISA license, if you're familiar with that, Instructions Architecture License.

Um-hum.

They developed strong ARM off of that and then when Intel bought Deck, they renamed that family X-Scale and we have for the X-scale local bus, we have IDE, we have PCI, we have SDIO or virtually have it; it's almost complete. We're in the final debug stages of that. So we've got a pretty strong offering. We're also now beginning to work with another ARM embedded processor supplier, so we'll have very good ARM's solutions by the end of this quarter.

Okay. Thank you.

And your next question comes from the line of Paul Packer with Globis Capital Partners. Please proceed.

Hi, [inaudible] with Paul. Actually, as you go onto the consumer market, do you feel that with the strength you'll be able to hold margin if you look out 4, 5 or 6 quarters from now?

Absolutely. We haven't announced our next family yet. Carl talked about R&D expenses being up owing to pre-production activities, but we'll be announcing our next family in Q3 and that, in fact, is aimed at exactly that, that part of the issue -- how can we give you more logic on less silicone, at lower power.

In terms of pASIC revenues, you mentioned, in one of the last few questions -- I don't recall how many questions back -- that there is a strong possibility now that this will continue meaningful revenues and beyond the end of the year. Is that kind of a new feeling that you've gotten over the last 3, 4 months?

Well, what we did was, we modeled -- we took a very conservative stance. Our contract with the foundry ends the end of 2005. In 2003, they came to us and said they wanted to shut the foundry down and then they changed their mind. So we went out at that point because we obviously said, "You can't close it down. We have a contract with you that says you have to supply us product until the end of 2005." So, what we did do then is we tried to convince them to extend it beyond 2005 to guarantee us capacity so we could guaranty our customers supply. These are all sole-source products, and the only place they can get them is from us, and the only place we can get the pASIC 1 and pASIC 2 is from this foundry. They wouldn't do that. It turns out now they've changed their mind about closing the FAB and so they are going to continue to keep it open, and they've agreed to continue to process wafers for us, but they wouldn't make any guarantees on it. So it's being done on kind of an ad hoc basis, rather than a commitment. We can't make a firm commitment that we're going to be supplying products 3 years from now, or whatever, which is what we can do with the rest of our product offering.

On that signal, how are the customers responding to this change and how's it going in terms of next-generation pASIC designs replacing the first two generations?

Well, it was interesting. We expected more people to convert to pASIC 3 than we've seen. pASIC 3 is -- let me back up. pASIC 1 and 2 are both 5-volt products. They run on 5 volts, and their IO is 5 volts. pASIC 3 runs on 3.3 volts, but has 5-volt tolerant IO. So we had expected those guys who needed 5 volts to, in fact, go to pASIC3 because it is pin-for-pin compatible with pASIC 2. We didn't see that to the degree we thought. We saw stronger end-of-life offerings and that is why we are continuing to see people buy product now.

Actually, as it turns out, if you look at the trends in the original equipment manufacturers, one of the things that you notice is nobody does, or virtually nobody does cost reductions anymore for anything. So they don't do redesigns for cost reductions. They dump all their energy into the next generation of product. And so rather than -- and by the way, they're continually being hit with end-of life -- if they have long-lived product at all, they're continually being hit with end-of-life from some semiconductor manufacturer. These are products, by the way, Paul, that we put into production back in '91, '92. So we've building this pASIC 1 family. I got here in '94. I think we started shipping them in '94, so that's a pretty long time for semiconductor devices.

So to make a long story short, as long as they will continue to run wafers for us, we'll continue to meet customers' demands if they want that. We're seeing a lot of guys that, instead of designing in pASIC 3, are, in fact, designing in Eclipse II or QuickPCI 2, which is what you get a lot more logic for the dollar doing that.

Does this mean if I look at an overall basis, some major customers, with few exceptions, are going to continue to be those same customers with either Eclipse III or a new family?

We don't see our traditional customers going away, actually. We're very concerned about this. The folks who like our products, I think, will stay with us on a forward-going basis. Our new customers, though, are really customers we've never dealt with in the consumer world and they're attracted to us because of all the advantages of FPGAs, but at very, very low power.

I guess what I'm getting at is can we be hopeful that we're not going to lose that core revenue for 5 million or so from those existing customers, which were just nice designs. Are we hopeful that we can get, as the new generation designs come in, that we're going to get those new generation, that there will be some type of flow where that revenue just goes down to zero, so to speak. It's a [inaudible] to replace with pASIC 3 and Eclipse.

Well, we haven't modeled it that way, to be honest with you. I hope it works that way, but hope is not a plan. That is not what we've planned for. We've planned that we would have to make up that revenue and that's what our plans are built around. And in spite of that, we believe that we can continue to grow our revenues. So we're not looking at a huge hole, a revenue hole, as a result of P-1 or P-2 going away.

As you look at the design activity now with -- that's being done to next generation on the same products that has pASIC 1 and pASIC 2, the new designs of those products, are we winning those slots?

Yes. We're winning them with Eclipse II, as an example. A very large medical devices guy was a big pASIC 1 customer and has now redesigned and is becoming an Eclipse II customer.

Great. Congratulations on the quarter.

Thank you.

And your next question comes from the line of Bill McHenry with Tivo Capital. Please proceed.

Good afternoon. I'm not really familiar with your markets that much and cover a lot of things on the buy side, but just offhand, can you make any comments about your S-3 filing? I might just say from my general 50,000 for that flyover, it's -- one question is why is the timing now, considering the .18 product line, looks to variance out exceptional,and we just have to see how that goes. Is there any comments you can make in that regard?

Well, I think Carl outlined what was the overview of why we're doing -- why we filed the shelf registration. It's about options. It's about getting us options. One of the things that we learned was that in 2001, was that having cash on the balance sheet was pretty important. This is a cyclical industry. You may not remember it, but at the end of 2000, everybody forecasted that 2001 was going to be a 25% growth year.

Oh, yes.

And it turned out to be -- instead of a $250 billion year, it turned out to be $138 billion, just a slight screw-up.

Yes.

So if we hadn't had cash -- if we hadn't had a strong balance sheet, we'd be a very different company today. What our balance sheet allowed us to do was to continue to invest in R&D through the downturn. So now coming out of this thing, we've got the options of Eclipse II and QuickPCI 2 and QuickMIPS 2, and we believe we're very well positioned on a forward-going basis. So one of the things that directly contributed to that was, of course, having cash, and having cash now gives us options on a forward-going basis relative to, as Carl mentioned, technologies and partnerships, for advanced wafer FABS or for specific kinds of interconnect technologies that we might want to engage either teams of guys or even design services activities. So it's about having options is really what it's about.

Yes. Well, I completely appreciate, and don't underestimate being defensive. I guess mine was more like this month versus a couple months, but I know you've got to do it when you think that's in your best interest and you consider all the factors. What about -- what might it take -- what would be a catalyst that would be notable in the community that follows you? I would assume major designing wins,, which are your .18 product, or what are you most looking for?

I think the main thing that we focused on is revenue traction from our new products.

Right. So we're not going to know on that until quarter end or are you going to announce major design wins, or what's the MO for you folks?

The MO typically is that our customers put us under NDA because they don't want us to talk about their designs, typically. When they allow us to, we announce those wins, much as we did the [option] wireless. So we think it's going to show up in the revenue numbers, primarily.

So basically. things are set until we see at quarter end. Is that it?

Yes, pretty much it.

Okay. Thanks much.

And your next question is a follow-up from the line of Robert Katz. Please proceed.

Hi, I have a few more follow-up questions. Do you expect to be profitable in Q3? I know you said you expect your expenses to pull up an aggregate about $900,000, if you add everything up and your gross margins will be a little lower? And I was wondering if that all equated to still being profitable?

We didn't give guidance on Q3 or Q4 for profitability. What we did say is that we expect to be profitable on the year.

Okay. So there might be a quarter where you'd turn profitable?

Well, you could infer that or you could infer just what I said, and that is we'll be profitable on the year.

I won't harp on that.

Okay, Robert.

Do you have any like -- you sort of gave very bullish comments about Q4 in terms of -- you said the second half would be very strong turns in the guidance, but Q3 wasn't very strong, which [inaudible] that Q4 would be a very strong quarter. And what type of visibility do you have have into that or what type of design activity in Q3, Q4 can you talk about?

Well, we have a high turns modeling of typically 60, 75% of our revenue that we ship in the quarter, it's going to book that quarter. We think Q4 is going to be pretty similar to that model. So we'll go into the quarter without much visibility in terms of actual orders on the books. But we do have a lot of stuff in the design pipeline that we're staying right on top of and that's what gives us our optimism on the fourth quarter.

Sure. With that type of business model, it sounds like you'd have to ramp up your inventories in Q3 ahead of a Q4 product ramp if you're doing mostly turns?

Well, this quarter and last quarter, we built a significant amount of our new product inventory and we kept it in die form, which is the cheapest position in the inventory line for us to hold it. So we're well positioned in terms of inventory. We think we're well positioned in terms of capacity to be able to execute the revenue.

So I imagine by Q1, you should be drawing off quite a bit of cash if you convert the inventory into renvenues in Q4?

Yes, that would be great.

It certainly would be. Okay. I'll ask other questions offline. Thanks.

Thanks, Robert.

And your next question is a follow-up from the line of Paul Packer. Please proceed.

Hi, [inaudible] with Paul together.

Okay, hi, Aaron.

Hi. Just to go back and clarify to the questions that were previously asked, on the net of the shelf, is it fair to say that that's a flexibility issue, but there's no imminent reason why you would pull on that shelf? Is that what you're trying to make up?

Yes.

Okay. And just in terms of the turns issue, which is normal for your business model always for [inaudible] is it fair to say that even though it's booked and shipped within the quarter, they do give you production schedules/slash is what they're hoping to do, albeit it doesn't get formally booked in, so to speak?

Well, on our .18 stuff, we are inspecting this under a very high-power magnifying glass. So we probably have more visibility there in terms of where customers are. But the problem is that even customers don't know exactly where they are and I've never figured out a way to beat orders out of customers. So if you can help me with that, I'd like that. The thing that we maybe should review for a minute, we've gone to a high velocity model, where instead of having large finished goods inventory, like the other SRAM guys, we've gone to a high velocity manufacturing model where we go from die and wafer form to finished goods. We've quoted in the past 21 days; we typically do it in 13 days.

Wow.

But the challenge has been that -- I don't know if you've heard that AFC had a fire and they're the -- AFC is the -- AFC and Amcore are probably the 2 biggest -- not probably, they are the 2 biggest assembly subcontractors in the world, semiconductor assembly subcontractors. AFC had a fire in [Koashung], which took out a lot of capacity. And so then a lot of people wound up going to Amcore. Now Amcore is full and the people that make substraights for these kinds of packages are full, and so things are going through a pretty high stress thing now.

The high velocity model still works, but you've just got to be a hell of a lot more diligent about driving it with our contractors. So I guess the bottom line is that when we see we have 75% turns, our guys forecast business to make up those turns. But those aren't guarantees; those are forecasts. So when you have that kind of a high velocity model, there is a lot of unknowns. So the answer to that then is just keep a lot of irons in the fire, so that -- and that's exactly what we've done.

I apologize if you already answered a question like this, or said it in the comments. I may not have picked it up; I came on a little late. But on the new consumer applications, are you seeing a lot of them that are in the volumes of hundreds of thousands? Have you actually seen any that are half a million units potentially annually or above?

Yes.

Okay.

Intel isn't screwing around with 10,000 parts a year.

Okay. I'll let other people in. Thanks a lot.

Okay.

That concludes our question and answer session. I'd like to turn it back over to Mr. Hart.

Thank you very kindly. We appreciate your time and your interest in QuickLogic. We look forward to seeing you either at the [Annenberg Philbin] or perhaps at the Silicon Valley Bank. Thank you and we'll look forward to another great quarter. Bye-bye.

Thank you. This concludes the presentation.