Quicklogic Corp (QUIK) 2005 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Third Quarter 2005 QuickLogic Corporation Earnings Conference Call. My name is Nika, and I'll be your coordinator for today. (OPERATOR INSTRUCTIONS) I would now like to turn the call over to your host for today's conference, Mr. E. Thomas Hart, Chairman, President, and Chief Executive Officer. Please proceed, sir.

Thank you, Nika. Good afternoon, ladies and gentlemen. Carl Mills, our CFO, and I are here today and welcome you all to our Q3 2005 Earnings Conference Call. We appreciate you taking the time to join us and hear about QuickLogic's solid financial results, and our continuing progress in providing the world's lowest power programmable logic solutions to high volume customers.

In case you haven't seen our earnings press release yet, I'm again pleased to announce that we had a good quarter and, more importantly, we now have three quarters of profitability in a row. Carl will take you through our Q3 financials, and then I'll share my perspective on our business. Finally, Carl will detail our guidance for Q4 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 products, statements pertaining to our ability to convert new design opportunities into customer activity, market acceptance from our customers' products, 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 products, and full profitability -- and profitability for the full year. QuickLogic's results could differ materially from any such forward-looking statements. We refer you to the risk factors listed in our annual report on form 10-K, quarterly reports on form 10-Q, shelf registration on form S3, and prior press releases for a description of these and other risks that could cause actual results to differ materially from our forward-looking statements. QuickLogic assumes no obligation to update any such forward-looking statements. For your information, this conference call is open to all and is being webcast live. It can be accessed from the Investor Relations area of the QuickLogic website located at www.quicklogic.com.

First of all, we're very pleased to have been profitable in the quarter, and in each quarter of 2005. Q3 revenue was just below our guidance and came in down 1% sequentially. We were strongly profitable during the quarter with a record growth margin and expenses being favorable compared to our guidance.

Other highlights from the quarter include -- well, first of all, customer demand was sufficient to make revenue guidance for the quarter. We missed slightly owing to minor manufacturing issues that are not expected to repeat again. In spite of this, we still grew faster year-over-year in the overall programmable logic market.

Q3 was our 14th consecutive quarter of year-on-year revenue growth. Our military revenue increased 84% sequentially due to increased demand from four large customers. Revenue from our pASIC 1 and pASIC 2 product lines increased 19% sequentially to $6 million exceeding our guidance revenue for these products will be flat to up sequentially. Our gross margin was 66%, a record for QuickLogic. Our non-GAAP net income was $1.7 million, or $0.06 cents per diluted share comparable to our Q2 non-GAAP net income of $1.8 million or $0.06 cents per diluted share.

The difference between our third quarter GAAP and non-GAAP statement of operations is a $66,000 write-down of long-lived assets as a result of our annual long-lived asset impairment review. Our second quarter, that is the prior quarter non-GAAP net income excluded a $1.5 million write-down of our investment in Tower. We believe these non-GAAP measures are helpful in analyzing our results in comparing our performance against comparable companies.

Total cash was $25.4 million on September 30, an increase of $300,000, even though we repaid $2 million of revolving debt during the quarter. Our September debt-free cash of $23.4 million represents a $2.8 million increase over our June debt-free cash position.

Let me provide some additional details on our third quarter results. Revenue for the third quarter was $12.6 million compared with $11.9 million a year ago and $12.8 million last quarter. As I mentioned earlier, our military business grew 84% sequentially as four customers took delivery of relatively large orders during the quarter. As you are no doubt aware, large military orders tend to be lumpy.

Revenue from our pASIC 1 and pASIC 2 product lines increased sequentially as many customers took delivery of end of life purchases during the quarter. The pASIC 1 and pASIC 2 products contributed 48% of Q3 revenue compared with 40% of revenue in the second quarter. This higher revenue from our military and pASIC 1 and pASIC 2 customers helped to offset expected declines in revenue from a large Japanese customer and a large Asian customer. Demand from these two customers is typically lumpy for us. These factors, combined with the minor manufacturing challenges previously mentioned caused total revenue to decline 1% sequentially.

Our Q3 non-GAAP gross profit improved by $170,000 sequentially and then we had a record gross margin of 66%, which was higher than our guidance that gross margin would be between 58 and 63% of revenue. This was due to several factors that offset the slight decline in revenue. First, higher than expected military business improved our gross margins by an additional 1% compared to forecast. Second, we benefited from favorable yield and purchase price variances during the quarter, which contributed 1.8% of revenue. Third, our product mix was weighted toward higher margin products. Finally, while included in our forecast, the sale of previously reserved inventory reduced our cost of sales by 1.5% of sales in Q3. So, overall, our operations group did a great job during the quarter.

Research and development expenses were $2.4 million was within our guidance and were $50,000 higher on a non-GAAP basis than in the second quarter of 2005. This increase was due primarily to development activities associated with our next generation product that we will be announcing within the next month.

SG&A expenses increased by $100,000 sequentially to $4.1 million on a non-GAAP basis, which compares favorably to our guidance that SG&A expenses would be up between $300,000 and $600,000. In Q3, we spent less than forecast on legal and compliance activities, and our selling expense was lower than forecast.

Our non-GAAP operating income of $1.8 million was flat sequentially as $170,000 of higher gross margin was offset by higher expenses of $150,000. Our Q3 tax provision was $120,000 higher than our Q2 provision due primarily to our international operations. The higher tax provision contributed to our $98,000 sequential decline in our non-GAAP net income.

Let me just take a moment to compare our year-on-year results. Our revenue increased 6% to $12.6 million. Our gross profit increased by $2.4 million on this $700,000 increase in revenue due to several factors. Number one, a favorable product mix, which generated higher gross margin. Number two, we had $780,000 of higher charges against inventory and purchase commitments in the third quarter one year ago. And, three, production variances are favorable year-over-year. In total, our non-GAAP net income improved by $2.4 million year-on-year due to the gross margin improvement. Non-GAAP net income per diluted share of $0.06 compares to a net loss per share of $0.03 one year ago.

Our year-to-date net income is $4.3 million on a non-GAAP basis, and $2.8 million on a GAAP basis. As you may recall, the primary difference between the two net income figures is the Q2 write-down of our investment in Tower semiconductor by $1.5 million. Our ending cash of $25.4 million is better than our previous guidance that cash could be lower by as much as $1 million sequentially. Our $2.7 million positive operating cash flow and $600,000 of proceeds from our stock plans were higher than expected, and capital expenditures of $600,000 were lower than expected in the quarter. Our debt-free cash of $23.4 million at September 30 compares to $20.6 million at June 30. Our total interest-bearing debt on September 30 consisted of $2.2(ph) million of long-term debt.

Our accounts receivable increased to 52 days outstanding from 46 days at the end of Q2, and as above, our target DSO due to the timing of shipments late in the quarter. We had a $210,000 reduction in inventory during the quarter due largely to sales of pASIC 1 and pASIC 2 products. We currently have 176 days of inventory on-hand and 8 days of inventory in the distributor channel.

In summary, we are extremely pleased that we were able to achieve higher gross margin, favorable expense levels, and a strong balance sheet in the quarter.

Other key developments since our last earnings call include: We continue to experience strong design in activity for advanced ESP family, which include our new low-power Eclipse II, FPGA, Quick PCI2, and QuickMIPS products. We expect these products to provide significant long-term revenue growth. These products are also generating interest from new potential selling partners.

In the third quarter, we continue to work closely with new potential partners. We expect to announce new co-marketing relationships in the next few quarters, much as we did with Intel, Atheros Technologies, Renaissance, and Innova semiconducter earlier this year.

Also, both AG Edwards and Hudson Research initiated coverage on QuickLogic during the quarter. Now, let me turn the call back over to Tom.

Okay. Thanks, Carl. Well, another solid quarter under the bridge or over the dam, or whatever metaphor you choose to use. Three in a row, and I can tell you it sure feels good to the team here at QuickLogic.

Okay, now let me give you my view on our business, where we're going and how we believe we're going to get there.

Our patented propriety technology we call ViaLink is the fundamental building block that continues to provide distinct benefits to our customers and a defensible barrier for us. This technology which our founders invented and developed is the basis of our programmable logic and the key to enabling QuickLogic to design, build and offer the world's lowest power programmable logic solutions. No ifs, ands or buts. In fact, our vision is to be the market leader in providing the lowest power programmable logic solutions.

So what's new or what's changed now that will enable QuickLogic to emerge as a market leader in such a significant market as power-critical and power-sensitive applications? Well, first, let's get a good feel for the size of market we're operating in. The total available market for core silicon, which includes application-specific integrated circuits called ASICs, application-specific standard products, called ASSPs, and PLDs(programmable logic devices) is expected to exceed $110 billion in 2008. Of that 110 billion, power-sensitive and power-critical applications will exceed 66 billion, at least according to iSuppli, which is a well-known and regarded market research firm.

So, let's make sure you know what I'm saying here. I'm not saying our served available market will be over 66 billion. I'm saying that customers of core silicon are becoming increasingly aware of power because their new products demand it. So, the exact market size for programmable logic solutions is not known today, because it hasn't existed in the past. But we're betting it's going to be big, and I think it's a very safe bet.

Demand for low power products is a very good thing for us, but we have a solution and a long-term defensible position owing to both our viaLINK technology and our intense focus on low power solutions. So, let's make sure we're on the same page here. Low power is not a fad. It is an essential reality for our customers that build hand-held, battery-powered products. And in case you haven't noticed, there are more and more of these products coming onto the market. We believe we are perfectly positioned to be the market leader in providing the lowest power programmable logic solutions for these products.

So, you might ask at this point, what is our vision for embedded standard products? That new category of semiconductor devices we invented and pioneered and have talked so much about on these calls? Well, I'm glad you asked. As you can imagine in these high growth, professional consumer markets, time to market is of the essence. That's why more and more customers are looking to us for a complete solution. Or some portion of a solution, not just the capability to generate their own solution with an FPGA. For a field-programmable gate array is basically a do-it-yourself project that therefore takes much more time to get products to market.

So how does an ESP, an embedded standard product, help our customers get to market faster? It is a semiconductor device that contains customer-required known good functions and programmable logic on the same piece of silicon, on the same dye. This combination gives customer reduced risk and reduced time to market, and still allows for customization, enabling them to focus their engineering investments on differentiating their products from their competition.

Our product strategy is to offer our customers a spectrum of solutions. Starting with FPGAs for the do-it-yourselfers, all the way to complete out of the box solutions. By the way, when we use the term "out of the box," we mean that literally. The customer can use our solution directly as it comes from us. For example, if a customer is building a portable, battery-powered prosumer product using an Intel XScale embedded processor and needs to add WiFi and a micro hard disk drive, we have the complete solution, including the software drivers for Linux or WinCE. This is an out-of-the-box solution. And during Q3, we rolled out a family of solutions optimized for use with Intel's popular family of XScale processors. These solutions are aimed at high volume prosumer products requiring WiFi or micro hard disk drives, or both. We've also identified additional solutions for the professional consumer market that we plan to release in the coming quarters. A key element of our strategy is to be able to share these solutions across a broad base of customers.

So, how is it going with the new products, you might ask? During Q3, we saw a growing high level of design activity for Eclipse II and QuickPCI-2, as well as our QuickMIPS products. These products implementing our out-of-the-box solutions are being used by a number of tier one customers and prosumer products such as portable media players, hand-held GPS systems, and wireless data cards for laptop PCs, just to name a few. Our overall design pipeline grew in both the number of tier one accounts and their targeted revenue. We see our first solutions being applied by new customers in our targeted markets. This represents bigger revenue opportunities for us with Gold Standard customers as a direct result of our lowest power programmable logic solutions.

Let me illustrate with a real world example. A tier one company just released a portable media player to the market that offers 2.5 hours of video playback. We believe that if they had used our solution, the battery life for video playback could be extended to 10.8 hours. That's over four times the battery life, which is a huge factor in market acceptance for this new category of hand-held consumer electronic products. As mentioned in our last earnings call, we did in fact receive our first high volume production orders for our Eclipse II and QuickPCI products in Q3. The application -- the biggest application is for cellular data cards primarily focused on the European GSM marketing. It's happening, folks.

So, what else has changed for QuickLogic? Well, for the first time in our history -- by the way, we were founded in 1988 -- we are no longer staring down the proverbial gun barrels of Altara and Xilinx for each and every new design saga we work to win. They can't compete with our FPGAs because their power is too high. It's not just a little too high, but in many cases several orders of magnitude too high, and it's baked into their SRAM-based technology. So, they can't just throw more R&D dollars at their power problem. It's inherent in the fundamental way they achieve reprogrammability of their devices. It's not just leakage current. It's also about active current for all those transistors used as switches and all those transistors used to make the SRAMs that are used to control the switches.

So, QuickLogic provides the lowest power, high performance, programmable solutions for these demanding applications bar none. Our ViaLINK technology doesn't cause customers to trade off performance to achieve low power, as this is one of the major advantages of our well patented ViaLINK technology.

What about our traditional customers in the [inaudible], industrial and instrumentation markets? Well, these markets remain a vital part of our focus, because they've been our bread and butter design wins for a long time. We are a valued supplier to many blue chip customers today because they prize the instant on and design security aspects enabled by our ViaLINK technology, along with the lower power and high performance. So we aren't leaving them. In fact, during this quarter, we plan to announce a new family of FPGAs using our seventh generation of FPGA architecture, which will extend our leadership in lowest power programmable logic solutions that demand high performance.

Let me shift now to talk about what's going on with our end of life situation on the pASIC 1 and pASIC 2 products. As you saw, we had strong revenue in Q3 amounting to 48% of our total revenue, so the big question our investors ask and, hey, we ask it, too, “What's going to happen when p1 and p2 revenue goes away?” Well, this is the classic challenge immortalized by Geoffrey Moore in his book on Crossing the Chasm as the ‘nasty bit’, he calls it. It’s an old product line phasing out and a new one coming on. And what's the timing of the going and coming? That's the challenge.

The good news is that we're continuing to book p1 and p2 business. You remember, we gave our customers until the end of January 2005 to place their lifetime buys. Early on in our history, we made a deal with our customers that since we have sole source products, we won't discontinue a product without giving them a minimum of one year's notice. We gave our customers a lifetime buy based on the lack -- our lack of an assured supply from the foundry that makes these products.

We expect that revenue from p1 and p2 will be 25 to 30% of Q4 total revenue owing to two primary factors. Many customers took the liberty of their lifetime buy orders in Q3. Second, we believe that orders we book in Q4 will ship late this quarter for Q1, owing to foundry capacity issues. We expect revenue from new products, these are products fabbed by Tower semiconductor, to exceed 10% of total revenue in Q4. This is good news and in line with our previous guidance about the revenue turn-on of these new products.

As we've commented on in the past, Q3 is typically our weakest booking quarter owing to extended vacations and shutdowns in Europe. Good news here is that the total bookings in our last four weeks are running 65% ahead of the prior 12 weeks. Keep those orders coming.

On the manufacturing front, I'm sure you must have heard by now about the general tightening in the semiconductor industry of assembly capacity. This situation has been exacerbated by the fire in Taiwan at ASE, and the significant lengthening of lead time for substrates used in the molded packages. We're focused on this situation and working our way through it. We have long-standing relationships with the leadership of Amcor, the superlative and our primary assembly house, and we are confident they will do their level best to take care of our needs at this crucial time of turn-on for our new products.

Last, but clearly not least, I wanted to share with you how our relationship with Intel is going. In two words, very well. We have regular contact with the XScale marketing team, and are jointly pursuing tier one customer opportunities in prosumer electronics. We had a booth at the Intel Developer Forum in Taiwan last week and will participate in this week's Developer Forum event in Shanghai. This is a great marketing opportunity for the ODM customers based in that region.

So, please, let me recap. What are the market changes we see here at QuickLogic? First, an intense customer awareness about power. Hey, it's all about battery life. Two, customers are requiring the lowest power standard product solutions. This means much less competition for us. So we're not staring down those giant gun barrels of the competition for every design win. Three, customers want solutions to get their products to market more quickly with lower risk. We offer a range of solutions ideal for the do-it-yourselfers, as well as those wanting complete out-of-the-box solutions. We do it their way. Finally, re-programmability is no longer the holy grail. High performance and lowest power need to co-exist, and they do in our products, and ViaLINK is the key to that.

Okay, now let me turn the call back over to Carl.

Thank you, Tom. Let's turn to our Q4 guidance. We expect the transition from high pASIC 1 and pASIC 2 revenue will begin for us during the fourth quarter for the reasons Tom mentioned earlier. These products which contribute 48% of Q3 revenue are expected to contribute 25 to 30% of Q4 revenue. We also expect to transition to significant revenue from our new Eclipse II, QuickPCI II, and QuickMIPS products in the fourth quarter. This outlook is consistent with the message we have been delivering, that we expect our new products to contribute a significant portion of our revenue by the second half of 2005. As you may remember, we defined significant as greater than 10% of our overall revenue.

Our revenue guidance for total Q4 revenue is 10.7 million to $11.3 million, and the guided sequential design is primarily due to the decline of our pASIC 1 and pASIC 2 revenue, and because of some of the large military shipments in Q3 are not expected to repeat in Q4. As we have mentioned on our earlier calls, we have modeled that our P1 and P2 revenue will be zero in the third quarter of 2006. As Tom mentioned, we expect that revenue from the rest of our business will grow, and that our annual revenue will increase in 2006, compared to 2005. Based on higher forecasted overhead costs and production variances, and due to the expected mix of products with high margin military business in Q4 -- with less high margin military business in Q4, we are guiding that gross margins will be between 55 and 60% of revenue. We expect our Q4 research and development expenses could be higher by 100,000 to $300,000 sequentially due primarily to competition costs and pre-production expenses associated with new products under development.

We expect Q4 selling, general and administrative expenses could be higher by 400,000 to $700,000 sequentially due to competition costs, MarCom activity associated with our partnerships and new products, and compliance expenses. 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 third quarter, the combined effect of these charges resulted in income of $46,000. We expect that this will be an expense of less than $25,000 in Q4. We also expect that our Q4 tax provision will be $25,000 or less. And for the record, let me reaffirm that we expect to be profitable for the full year 2005. We may use up to $1 million of cash during the fourth quarter due primarily to lower cash flow from operations and higher capital expenditures.

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 have achieved standard yields for many of the .18(ph) micron products we sell today, and we believe that developing next generation products at Tower will continue to reduce our per-unit cost. We are also actively reducing our other costs of sales by price negotiations and by decreasing the time and cost needed to test and program our products.

Our target financial model remains the same. Our model based on a goal of $25 million in quarterly revenue as stated a percent of revenue to generate a growth profit of 60 to 62%, to have research and development expenses of 17 to 19%, to have SG&A expenses of 19 to 21%. This would result in income from operations of 20 to 26% of revenue. Back to you, Tom.

Okay, thanks, Carl. I would also like to take this opportunity to thank our dedicated employees at this time, whose talents, skills, intellect, and tireless efforts make our accelerating progress possible. Thank you, I appreciate it.

Now, for your scheduling purposes, our 2005 Q4 Earnings Conference Call is scheduled for Wednesday, February 1, at 2:30 p.m. Pacific Standard Time. If you have the opportunity, we plan to present at the AEA Financial Classic to be held at the Manchester Grand Hyatt in San Diego, November 6 to the 9th. We'd love to see you during our presentations on the 8th and 9th. Details of upcoming events can be found on our website at www.quicklogic.com. Okay, Nika, let's open the call for questions, please.

Okay, sir. (OPERATOR INSTRUCTIONS) Our first question comes from the line of Gary Mobley of AG Edwards. Please proceed.

Hi, guys. I was hoping -- I don't think you covered it, but what was the overall book-to-bill ratio for the quarter?

We didn't guide on it; we didn't give the data.

Less than one, though, right?

It was less than one.

Significantly? Okay.

What was the last part?

I was really just asking the question, how significant below one?

Well, I'll give you a little flavor on it. You know, we have the end of life going on for our p1, p2 family, and that was $6 million of revenue this quarter. We asked our customers to stop buying that in January this year, so there's the biggest gap in our book-to-bill especially with that product line.

Any -- beyond the fourth quarter, any estimate on the degree of decline or the linearity of the decline in pASIC 1 and 2 from the end of the fourth quarter into 3 of '06?

You know, it's hard to predict, but we don't know if it will be -- we don't think it will be higher in Q1 than it will be in Q4. It's hard to say what level it's going to come in at. Because as you know, for us it's a high -- it's back to a high turns model on P1 and P2. We basically have delivered most of the lifetime buy to our customers.

And a significant customer in the second quarter, your China customer, did they cut over to an A6, thus are you no longer receiving revenue?

We don't think they've cut over yet. But we think they are buying product in sufficient quantity that any order would be spread out for us. But we're not forecasting additional business with them, but that's significant.

Okay. Just a couple housekeeping questions. Carl, what was the contribution from the previous written off inventory in the third quarter, if any?

It was 1.5% of our revenue.

So, 1.5 percentage points?

What's that? Yes, 1500 basis points.

Okay. And DSOs, could you just do a quick recap?

Yes. DSO went from 46 to 52 days. And the reason is that a lot of our lifetime buy activity did ship in September, and that took the timing of our shipment into the last month of the quarter and resulted in AR.

All right, gotcha. I appreciate it, guys.

Thanks, Gary.

Your next question comes from the line of Daniel Ernst of Hudson Square Research. Please proceed.

Yes, good evening. Thanks for taking the call. A couple of questions. One, where are you in terms of ramping consumer revenues and all the activity that you've had with Intel. Did you have a sense of when you'll start to see a contribution from those efforts? And then secondly and perhaps related, looking at your contribution of the -- what you're calling the significant contribution of new technology products. What do you think the linearity in the quarter is going to be? In other words, if we try to look at it in terms of an exit rate of that business, when do you think that those products will be shipping? Thanks.

In terms of the consumer business, we expect that's probably going to be a big piece of our revenue I would say by Q1, Tom? Is that fair?

Yes.

Okay. We're doing a lot of business today, but I wouldn't necessarily call it a consumer device.

The biggest customer we've talked about, we can't typically name customers, but this guy has given us permission to do that, is Option Wireless. And Option is building GSM data cards primarily for the European market. We're designed into three different products there now, and they're ramping those very aggressively. We've also got a series of other hand-held devices that are being -- that should ramp in Q1 from Taiwan, and so we're still -- we believe we're good on 10% of revenue for Q -- sorry, for Q3 and Q4 together, and clearly for Q4 -- probably for Q3 and Q4. And then forward into the next year, we expect to see a significant ramp in it.

Okay. And then one follow-up question. On the Datacom/Telecom business that was off 19% quarter-over-quarter and computing off 53%, is that a trend or more of a seasonal, customer-specific element that we don't expect to see that continue, those declines in the business? Thanks.

Well, the computing decline is really due to the Chinese customer, so we don't expect that to continue. And Datacom/Telecom was just a smattering of customers, really, when we looked at it. We don't forecast that trend to continue, either.

Okay, thanks.

If you look at our total numbers though, you see the Datacom/Telecom is only what, 18% of our business?

Well, it's enough to move the needle, if it was moving up or down.

Right.

Thanks.

Thank you.

Your next question comes fro the line of Tim VanDusen of Southern Associates. Please proceed.

Yes. Can you tell us the new NAND flash drives, like the one in the iPOD Nano. Do they require the same interface as the microdrive?

No, they don't. It is a separate interface. It's on an IDE interface. IDE is unique to hard disk drives and so it's not the same thing.

Is this an area where you're likely to play in the future?

Probably not. By the way, the demise of micro hard disk drives has been grossly overstated. The NAND Flash guys would have you believe that they're going to drive the micro hard disk drive guys out of business, and I think that's sheer nonsense. The cost of -- especially at 20 gig and above, it will be a long, long time before you ever see NAND Flash able to compete effectively above 20 gigabytes. Below 20 gig or certainly with 4, you've already seen them compete for the Nano iPod, and you'll see them compete at 8, but it will be a long time before they're close to 20. So what's going to drive 20 and above is video, and that's where we're most excited about products on a forward-going basis.

Okay, thank you.

And your next question comes from Manoj Nadkarni of Chip Investor. Please proceed.

Hi. Good afternoon. Shall we talk about some of your other main products? Specifically, what is your outlook for pASIC 3 family in the next 6 to 12 months?

We see pASIC 3 revenues growing. We're seeing people now doing conversions out of p2 into p3, and the guys who started that and put in smaller lifetime buys now are beginning to order p3 in larger quantities. So we feel pretty good about what's going on there. That's not a declining revenue at all for us in the future.

Okay. And currently, approximately how much of your business is pASIC3?

We don't break that our separately. You can calculate it, though. We can give you p1 and p2 and you have Mature --

Right, right, okay. Can you give some details on where you are with respect to two other main families, QuickRAM and Quick PCI?

I will give you the color that we are seeing a high percentage of our design activity on our new Elipse II, QuickPCI II, and somewhat on the QuickMIPS device. That's really where our sales efforts are focused. We still have a good ongoing business from the QuickRAM and the QuickPCI, but we think that's going to be overcome by our new products.

Okay. So, then is it fair to say that you have some business now from your previous design, but you're not getting a lot more new designs in QuickRAM or QuickPCI?

We're still getting designs, but just not to the extent as our new products.

If PCI-2, that would just replace QuickPCI?

Well, not necessarily. I mean, nobody's going to go back and design out PCI in favor of PCI-2. What will happen is in their next designs, they'll design in PCI-2, rather than do another design with PCI. Do you see what I’m saying?

Yes.

So, people don't design out products anymore. They don't go back and do cost reductions on designs. What they do is move the bar forward. They make their engineering investments in new products rather than cost reducing old products. So that's why these products are so long lived. Just to give you color, we would never have given an End of Life p1 and p2, if we could have secured reliable or assured fab capacity. We have customers that were in fact still designing in p1 and p2 products. There were 5 volt(ph) products and people loved them. So this programmable logic space has a very long life, more like the analog business in many ways than certainly in the video graphics adapter business or that business where one production generation obsoletes the previous generation. That's not the case here. So, we'll see revenue out of p3 and QuickRAM and PCI for a long, long time to come.

Okay. And related to p1 and p2, are you still making new start from those, or has that stopped?

No. We're still making starts.

Okay. And your foundry partner from Texas, they are -- have they given you a deadline as to when they will stop making those?

No, they haven't.

I mean, you could still have these product if they agree to make those, and you're saying that you can get some sales out of those.

And we would keep doing it too, as long as we can get it from them. It's good business for us.

Yes. And then, finally, you made a comment earlier in the call that bookings were 65% ahead in the last four weeks compared to the last 12 weeks. Could you elaborate that? Are you talking about on a weekly basis outage, or are they gross?

It's on a weekly basis.

Yes, we measure -- we look at basically the first derivative of bookings, okay? So we look at all of our bookings on a weekly basis, so that you get a very sensitive indicator of what's happening in terms of the growth of new orders, and if you take and look at the last four weeks -- let me say it the other way. Twelve weeks of Q3 were very quiet, relatively speaking. The last four weeks -- in other words, week 13 of Q3 and the first three weeks of Q4 are 65% above what the run rate was for the prior 12 weeks. So it's -- but that's not unusual, by the way. We typically see -- when Europe comes back from vacation, we see towards the end of September bookings pick back up again. And that's exactly what we've seen.

And these are across all products, or are they mainly new products?

Across all products.

Okay. All right. Thank you.

(OPERATOR INSTRUCTIONS) Your next question comes from the line of Joi McCurdy of State of Wisconsin Investment. Please proceed.

Good afternoon, Tom.

Good afternoon.

Good afternoon. I was wondering -- you mentioned something about a manufacturing issue, and what was that all about and is that resolved?

Well, just really, we processed a lot of lots during the quarter. We had problems with really just two lots. One was a speed problem where the lot was lower than we expected. We started new material to replace that. We don't think that's going to be an issue at all. The other was a back-end lot that failed fine and gross leak, which is very unusual for us. It never happens, so it was really out of the blue and we think we're on our way to recovering from that as well. So, these are not repeating activities.

Thanks. On the military side, was that unexpected high demand that you saw was that turns business and is that something that you don't see happening again?

No, it wasn't turns business. It may look like it. Actually, some of the orders have been in here for a long time. Some of the orders required Department of Commerce licenses in order to export them to some countries and that was the primary reason for the delays. They all just kind of hit at the same time. We got releases for them and then we shipped them.

I see, thanks. One more quick question. I believe Actel has a new product out called Fusion, which is supposed to be a low cost system on a chip. Is that something that kind of competes with what you do?

Well, I really haven't seen the details on it, so I guess I really can't comment on it. I heard it was mixed signal, but I haven't really looked at enough detail, Joi, to be able to comment on it. I will though and obviously be prepared to talk about it next call.

Okay, thank you.

Your next question comes from the line of Brian Swift of Securities Research Associates. Please proceed.

Yes. I wonder if you could clarify something for me. In your recap you had talked about 10% of revenues in Q4 coming from new products, and then another point in time you thought that you'd be at significant revenue second half of next year. And I'm trying to figure out which products you were talking about for Q4 versus next year.

Sorry we confused you on that, Brian. We were talking about Q4 this year at 10% and, of course, we expect it to grow from there.

And in new products, you're talking about the --

Eclipse II, Quick PCI-2 and QuickMIPS.

Okay. And what were you talking about that would be up to that level on the second half of next year? Was your plan on introducing it in the next month, or --

Some investors thought we'd be over 10% for the full second half of 2005, and that's possible, but we think it's -- we definitely think that we'll be over 10% for the fourth quarter. So we really weren't talking about 2006; we were really talking about 2005.

Oh, okay. That's what confused me. All right. And what was that number in Q3?

We said we don't want to break that out until it gets to 10%, so we're kind of quiet on that at this point. But it was -- we said it was meaningful. It's up nicely from the prior quarter.

Right, right. And can you tell us more about what you're going to be introducing in November?

Well, I could, but the marketing guys would shoot me, so it's -- it will be early in the month and it will be very exciting.

Okay. All right. Thank you.

Thank you, Brian.

(OPERATOR INSTRUCTIONS) Your next question comes from the line of Paul McWilliams of Indie Research. Please proceed.

Hi, guys.

Hi, Paul.

Book-to-bill for products that are continuing -- in other words, not pASIC 1 and pASIC 2 -- was it positive for Q3?

I don't know. We typically -- to be honest with you, we typically don't pay a lot of attention to the book-to-bill anymore. This is a turns-oriented business and typically our book-to-bill is 1 or very close to 1. Obviously, it wasn't this last quarter because for the reasons Carl already gave around pASIC 1 and pASIC 2, but it's probably not that far off from 1. This is not a backlog business, Paul. This is a business where our turns are typically 65, 75% of our business in any given quarter.

Oh, I like the way you're set up, DI(ph) bank. That's one of the reasons I like having some money there. Eight days of distributor inventory is a nice thing.

We agree.

In the mill arrow (ph) area, how much of that is pASIC 1 and pASIC2, and if it's a lot, are you going to be able to replace some of that business with other parts?

We didn't break that out, p1 and p2, but it was p1, p2, p3, QuickGram(ph), I believe, and a little bit of a clips business to serve those military customers this quarter. So it was a good piece of it, but I didn't break it out.

I was just wondering, is that p1 and p2 stuff anything that you'll be able to get other parts into?

We believe so. They are designs that -- the big advantage of p1 and p2, and the reason people stayed with them, they're fairly small amounts of logic. The biggest device there was only 9K, but they were 5 volt parts, and so some of the older military stuff are -- were 5-volt systems. All the new military systems though have got multiple voltages, so that's not an issue for the military anymore.

Very good. Consumer design wins. I know you can't elaborate in great deal on these, but can you tell me, how many do you have, just in total?

Well, we typically don't quote the total. We talk about the vector, whether it's increasing, flat, decreasing, rather than quote a total number. But one thing, everybody measures them differently, and therefore if I told you 20, or if I told you 5, what would it mean to you? I mean, the point is that we've got a funnel that is significant, we believe, to generate significant revenue. We believe -- we've said and you can see that 48% of our revenue this last quarter is going away, and yet we believe that 2006 is going to be larger than 2005. So that says that we're going to make all that up out of our existing business and our new products. So, we've got a very hefty -- I know this isn't satisfactory to most folks. They want a number they can hang their hat on. But the problem is that the best thing for you to look at is what's going on with our funnel, is it growing, is it getting smaller, and what's the quality of the customers? I can tell you that there are more tier one customers now than there were a quarter ago. That's true about two quarters ago. So, the vectors are headed in the right direction, it's just hard to quantify the exact numbers for you. The only way you can really quantify it is with revenue and we expect that we're going to be able to show you that.

You know, a couple of things on that. One is we're starting to see follow on designs from customers, where we're getting into second and third designs, which is nice. The other thing is, as Tom talked about during his portion of the call, we've got some designs complete now that we're very excited about. We think they're going to be able to repeat those designs for many customers, and that will help our design funnel even further.

Oh, absolutely. Good answer, and you got two other questions in there at the same time, so thank you. One last one here, it's kind of housekeeping and excuse me, because I'm new to Quick Logic. Not new to programmable logic, but certainly to Quick. What is your typical seasonality for Q1?

Our low quarter tends to be Q4.

Right. And Q4 tends to be low, because Q3 bookings are normally crummy. So, if you look back over the last three years, you'll see Q4 has typically been down from Q3, and Q1 is back up again over Q3, typically.

Excellent. One last housekeeper here is -- can you give me some idea of the rate of dilution for fully diluted shares next year, and I know that's dependent upon stock price, so let's just assume similar prices to your average price for Q3.

We have a fairly good activity in our ESPP and those buys tend to be in the second and the fourth quarters, and that tends to add -- that has historically been adding 400,000 or 500,000 in shares each time we do a buy, so that's kind of significant for us in terms of our shares out. And then I think our -- but I think our underlying spread on shares outstanding versus diluted, I don't expect it's going to change very much.

Okay, very good. Thank you, guys.

Thanks, Paul.

Your next question comes from the line of Robert Katz of Sunvest International. Please proceed.

Hi Tom and Carl. I thought I'd just sneak a question in here. A question about the new products. Do you think today you have more visibility or more backlog generated with new products than with your existing products? Would your new business be less turns? And, also, would that change how you deal with sort of the supply chain for some of these larger quarters that might ship over to multiple quarters as opposed to one quarter?

Well, that's a very good question. You know, the demand -- this is -- I wouldn't say it's a brave new world, but it is certainly a new world for us here at QuickLogic, the consumer business. These guys ramp faster and stronger than typical industrial customers do. The volumes are much higher and the downside will be more dramatic as well. In fact, we've observed that with our customer out of -- which was although it was a government program it had a lot of the same characteristics out of China, if you remember. It went from zero overnight to very significant revenue then back not to zero, but -- do you remember in 2003 they were 14% of our revenue, in 2004 they were 3%, so that's a pretty big swing.

I think the -- I don't think we're going to necessarily have better visibility in terms of backlog. I think we'll have better visibility in terms of potential, or in terms of run rates, but that may not be covered with hard orders. So if you've ever dealt with -- I guess you haven't, you're not in this business -- but if you've ever dealt with the large ODMs or contract manufacturers, they typically tend to give you guidance about what's going on in the future, but they don't give you order coverage much beyond whatever your lead times are. And so we're getting a little better visibility now, just as an example, with Option than we had before, which is very positive. But you don't build on that stuff until you get the orders.

When you ultimately have multiple customers ordering similar parts?

Yes.

Would the contract manufacturer be programming the parts? Would you be programming the parts?

No, we program the parts.

You'd still be programming the parts.

Yes, we're much more efficient at programming parts. I can tell you, you know, just as an example. I'll wager you don't know a semi-conductor company that has returns of a tenth percent of revenue; that's where we are. And that changed very dramatically when we went away from having other people program our parts to when we program them. So, the RNA rate is almost negligible.

Okay. So you wouldn't rely on distribution to program parts.

Would not, no. We're much better at that. We do it offshore, we do it with automatic handlers. We scrub the bejeezus out of the programming time. When there's something wrong, we stop the programmers and find out what it is rather than keep going, you know. So we're -- our yields are in the high 90s, and when distributors were doing it for us, they were in the high 80s to low 90s, big difference.

When you talk about the new parts that you're going after in mass market, can you give us a range of the ASPs and also kind of the units. Sort of put a range on the number of units typically in the program that would use your type of part?

Well, we're talking in general about ASPs. There are probably three different windows there, dependent upon what the value is that we've got in the product. And the range is sub $5, $8 range and $10 range. And these are typically opportunities that we are looking at are 150,000 to 500,000 kinds of units at those kinds of ASPs.

Excellent. So these programs can ramp pretty quickly and can fill up the lost business pretty quickly with just a few of these orders. I guess that's the idea.

I think -- I think -- I was just kind of smiling to myself, because that's what we believe will happen as well. But, you know, you can't beat orders out of these guys. So, it's the ‘nasty bit’. That's where we are. It's the ‘nasty bit’. You don't know how hard this is going to turn on and how quickly. The good news is though that we've got lots of DI. As you've seen, we've built our DI banks of these products out of Tower, and we think we're in a good position. The assembly situation has been problematic, but we think we can manage our way through that as well, so we're pretty optimistic about what's going on here, Robert.

Okay, okay. Excellent. Thank you very much, guys.

Thank you.

This concludes today's question-and-answer segment. I'd like to hand the call over to Mr. Hart for closing remarks.

Okay. Well, thank you kindly for taking the time to hear about what we're up to here. We're very encouraged about the turn-on of our .18(ph) products and look forward to seeing you folks at AEA. If you're not there, we'll look forward to you on the next call. Thank you, and have a good quarter. Bye-bye.

Once again, ladies and gentlemen, we thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.