Quicklogic Corp (QUIK) 2005 Q4 法說會逐字稿

Welcome to the QuickLogic Corporation fourth quarter and year-end 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 47480056. At this time, for opening remarks and introductions, I would like to turn the call over to Mr. E. Thomas Hart, QuickLogic's chairman, president, and CEO. Sir, please go ahead.

Good afternoon, ladies and gentlemen. Carl Mills, our CFO, Christine Moses, our Investor Relations guru, and I are here today and welcome you all to our Q4 and fiscal 2005 earnings conference call. We appreciate you taking the time to join us and hear about QuickLogic's financial results and our continuing progress in providing the world's lowest-power programmable logic solutions.

In case you haven't seen our earnings press release yet, I am pleased to announce very solid profitability for 2005. Non-GAAP net income was $3.9 million, or $0.14 per diluted share, an improvement of almost $8 million, or $0.29 per share over the prior year's loss. GAAP net income was $2.4 million or $0.08 per diluted share, more than $11 million, or $0.43 per share better than 2004.

Although our fourth quarter revenue was below our expectations, we're proud of our 2005 profitability and overall progress. Carl will take you through our fiscal 2005 and Q4 financials, then I'll share my perspective on our business, and, finally, Carl will detail our guidance for Q1, 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, and our ability to replace pASIC 1 and pASIC 2 revenue, which we expect to continue to decline due to the previously announced end-of-life of these products. QuickLogic's results could differ materially from any such forward-looking statements. We refer you to the risk factors located in our Annual Report on Form 10-K, quarterly reports on Form 10-Q, and prior press releases for a description of these and other risks that could cause actual results to differ materially from our forward-looking statements. QuickLogic assumes no obligation to update any such forward-looking statements. For your information, this conference call is open to all and is being webcast live. It can be accessed from the Investor Relations area of the QuickLogic website located at www.quicklogic.com.

Now let's take a look at our fiscal 2005 and fourth quarter results. As Tom noted, our 2005 annual results were a very strong improvement over 2004. First of all, we are proud to be solidly profitable for 2005 for the first time since 2000. 2005 revenue was $48.3 million, an increase of 8% over 2004. Growth in 2005 came mainly from two categories of products. First, our new products consisting of our Eclipse II, QuickPCI-2, and QuickMIPS devices contributed $2 million of growth. Second, our pASIC 1 and pASIC 2 products grew $3.1 million in 2005 over 2004 levels. In terms of market segments, revenue from our military customers grew $3.5 million year-over-year, and our instrumentation and test business grew by $2.7 million. Much of our 2005 new product revenue came from Datacom wireless data cards for the PC market.

Regionally, our 2005 revenue increased by $5 million in North America and $1.5 million in Europe. Our revenue was down $2.1 million in Japan and $800,000 in Asia Pacific. Our 2005 non-GAAP gross profit increased by $6.4 million over 2004 to $30.1 million. 2005 gross margin of 62.4% was an annual record for us and increased substantially over our 2004 results, which were 53.2% of revenue. This improvement is due to higher revenue or favorable product mix and lower production variances.

Our non-GAAP operating expenses declined $1.2 million in 2005 compared with 2004 --by $1.2 million -- excuse me -- due to a $2.2 million reduction in our research and development expenses as a result of lower project expenses associated with new products and also due to lower depreciation expense. This was offset by a $1 million increase in our SG&A expenses due to higher sales rep commissions on higher sales, marketing, and administrative expenses.

Other income and expense net contributed $350,000 of income in 2005 compared with a net expense of $40,000 in 2004 due to higher cash balances and higher returns on our invested cash in 2005. Our 2005 tax provision of $170,000 is primarily due to taxes on our international operations.

In summary, our non-GAAP net income of $3.9 million, or of $0.14 per diluted share compares with a net loss of $3.9 million or $0.15 per share in 2004. This $7.8 million improvement is primarily due to higher revenue, higher gross margin as a percent of revenue, and lower operating expenses noted above.

Our GAAP net income was $2.4 million, or $0.08 per diluted share compared with a net loss of $8.8 million, or $0.35 per share in 2004. This $11.2 million improvement in net income is primarily due to the $7.8 million improvement in non-GAAP net income that I previously mentioned and due to a $3.2 million impairment charge that we incurred in 2004 and did not incur in 2005.

By the way, the $1.5 million write-down of our investment in Tower was the primary difference between our GAAP net income of $2.4 million and our non-GAAP net income of $3.9 million in 2005.

Good news for us is that our ending cash balance of $28.3 million grew $3.4 million during the year for the following reasons -- operations contributed $5.7 million of cash; we received $3.3 million from the issuance of shares under our stock option and stock purchase plans. On the other hand, we used $1.8 million for capital expenditures; we repaid $2 million of revolving debt, and we reduced our long-term debt by $1.9 million during the year.

During the fourth quarter of 2005 we did record a $1.5 million capital lease to acquire EDA software and maintenance services. This was a non-cash transaction. Our total long-term debt was $3 million at December 31, 2005. As a result, our December 2005 debt-free cash of $25.3 million represents a $5.7 million increase during the year.

In terms of other balance sheet items, at December 31, 2005, our days of sales outstanding was 48. We had 166 days of inventory on hand and seven days of inventory in the channel. I'd really like now to turn and look at our fourth quarter results.

Perhaps the best news on our call today is that our new products contributed significant revenue in the fourth quarter. In the past, we had defined significant revenue as greater than 10% of overall revenue. We have now crossed the threshold, as these devices accounted for 12% of our Q4 revenue, or $1.2 million.

Other items of note from our fourth quarter results include our Q4 revenue of $10.3 million, just slightly below the guidance we gave on our last conference call. Last quarter the guidance that our new products would contribute 10% of Q4 revenue. At the high end of our overall revenue guidance, this would have been $1.1 million. New products actually contributed $1.2 million in Q4, which was 12% of total revenue.

Our pASIC 1 and pASIC 2 products contributed $3.5 million of Q4 revenue, which was higher than expected due to higher distributor resales during the quarter. One customer purchasing primarily pASIC 1 and pASIC 2 product under our end-of-life program contributed 24% of fourth quarter revenue. Revenue from our other products was lower than expected in Q4 due to lower-than-expected booking activity. Bookings for these products picked up in December and, so far, in the first quarter.

Gross margin of 58.4% of revenue for the fourth quarter was inline with our guidance of 55% to 60%. Gross margin as a percent of revenue declined by 7.4% sequentially due to lower standard margin and because our overhead costs and production variances were spread over a smaller revenue base. Revenue from our military customers was 11% of revenue in Q4 compared with 32% of revenue in Q3, accounting for much of the standard margin change.

Our Q3 revenue included several large orders from military programs whose ordering patterns do tend to be lumpy.

Q4 research and development expense of $2.4 million was flat sequentially, compared with our guidance that R&D would increase $200,000 to $300,000 sequentially. Q4's selling, general, and administrative expense of 4.4 million increased to $200,000 sequentially and was favorable compared with our guidance that SG&A would increase by $400,000 to $700,000 sequentially. Competition expenses, sales rep commissions, and other selling and marketing expenses were lower than expected in the quarter.

Other income and expense net contributed $240,000 of income in Q4 due primarily to higher interest income in the quarter. We reduced our tax provision by $66,000 in Q4 due to the loss we had in the period, timing differences that occurred in Q4, and tax planning strategies.

Now I would like to turn the call back over to Tom.

Okay, thank you, Carl. Well, the great news is that new products contributed 12% of our revenue. We grew our cash by almost $3 million to $28.3 million, and we had a very successful launch of our PolarPro product family in Q4.

For the year we are GAAP profitable with $2.4 million, or $0.08 per diluted share and on a non-GAAP basis, $3.9 million or $0.14 per diluted share. Year-over-year we grew our total revenue a little over 8% with advanced ESP revenue up 24%. So my take on Q4 -- a good quarter, however, clearly, not our best. We lost money. Although we expected this, it's never a good thing to lose money. No surprise, however -- we've been talking about P-1 and P-2 winding down, and that is, in fact, what's happening.

For your information, virtually all of our new product revenue is fabbed in Tower Semiconductor and is really starting to come one, which, of course, is what has to happen to make up for the planned decline in P-1 and P-2.

Now, we've talked in the past about the kinds of products and applications that Eclipse II, QuickPCI-2, and QuickMIPS are being designed into, so I won't belabor that point today. Just let me remind you that our customers' average development cycle is nine months. We really started cranking with Intel as a companion device for their Xscale embedded processors in Q2 last year. This is when we did the joint Webinar with them and, with their assistance, we are gaining exposure to Xscale companion device opportunities. Many of these designs for Prosumer products like personal media players and handheld global positioning systems are having the finishing touches put on them right now and are getting ready for production. We expect orders toward the end of this quarter and into Q2.

Our new product growth in Q4 to 12% of total revenue is a result of our penetration into high-volume applications and other accounts that are clearly benefiting from our lowest-power technology, a very good sign of what we believe is to come. And if you've tracked our inventory position, you know we're set up with plenty of die for volume production whenever the bell is rung.

We have also talked in the past about the benefits our solutions offer our customers. Today I'd like to share the leverage or benefits we get from those solutions by using them for many customers. So let's take a real-world example. We have a Prosumer customer that was designing a media distribution center based on an Intel PXA-270 processor. They required a hard disk drive and a WiFi module, neither of which could interface directly to the processor. They are also using the Linux operating system. In Q4 we completed this design in an Eclipse II device and fully expect to see production volume in late Q1 or early Q2 of this year. We have subsequently taken this design, and with adaptations are now using it for 10 different customer designs.

Further, we've migrated this solution from Linux to WinCE and have 12 additional customers in various stages of design. So as a direct result of that first design, we now have a roadmap for complete solutions using both WinCE and Linus operating systems. Solutions providing IDE for hard-disk drives, IDE for DVDs, IDE for CDs, and a mix of any of the two. We also provide PCI for Atheros WiFi, PCI for Ethernet, USB and CardBus. We can also put two solutions in one chip, which adds real value and reduces board space. Of course, board space is always at a premium in these handheld products.

So one way to think about our future opportunity is we have flexible silicon platforms on which we can enable custom solutions with very low risk, competitive prices, and super quick time to market. All of these benefits are enabled by our proprietary patented technology, which we call ViaLINK, yielding the industry's lowest power programmable logic solutions.

At the beginning of this quarter, we announced our SDIO reference design, which provides a complete bridging controlling solution between the Intel PXA-27X embedded microprocessor and SDO peripherals and/or SD memories. Our mobile application board plugs into the PXA design environment and enables customers to implement SDIO solutions in hardware. This is just one more arrow for our quiver of customer-designed solutions.

And, oh, by the way, SDIO is on the path to what will become the replacement for the IDE interface to hard-disk drives for Prosumer applications. We are working now with several of the hard-disk drive manufacturers to ensure we have a complete solution for the new standard, which is called CE-ATA, as in consumer electronics ATA. Drives using the CE-ATA interface are expected to be available late Q2 of this year, and we'll be ready.

During Q4, we also announced PolarPro, the industry's ultimate in lowest-power FPGAs, setting the low-power, high-performance bar for FPGAs. In fact, out of the many thousands of products introduced in 2005, "EDN Magazine" selected PolarPro of one of "EDN's" hot 100 products for 2005. This is just one more note of recognition for this truly revolutionary product family. Our first device began sampling in Q4 with full production being scheduled for early Q2. we have active designs underway right now and fully expect meaningful revenue from PolarPro in late Q3 to Q4 of this year.

I'm sure you can tell how excited we all here at QuickLogic. The main reason is, I think, after, lo, these many years of staring down the barrels of the big guns in the FPGA industry, we've found our special purpose -- being the market leader in providing the lowest power programmable logic solutions and, as you know, low power is not a passing fancy for the electronics industry. It's a big deal and getting bigger. With ViaLINK as our foundation, we expect to be the market leader in lowest-power programmable logic solutions.

I have commented on this before, but I think it is crucial for investors to understand that we believe ViaLINK provides a continuing advantage over SRAM-based FPGA technology. So no amount of R&D dollars will solve the inherent power disadvantages of the SRAM-based technologies. We are very excited about our future prospects, please stay tuned.

On a final note, some of you may have noted that Don Beadle retired this last month after serving on our board of directors since 1997. We'll miss Don very much -- his contributions, his guidance, his wit, his no-nonsense manner. And now he can devote more time to his golf game, which will certainly benefit from the increased attention. Hit them long and straight, Don, and many thanks for all you've done for QuickLogic. Carl, back to you.

Thank you, Tom. Now let's turn to guidance for our first quarter and some comments on our business. During the fourth quarter, we completed key solutions for some new product lead customers, and we believe the availability of these solutions will accelerate our customers' time to market. We expect a significant amount of customer order activity for new products in Q1, which is great news. On the other hand, we expect most of this activity will be for early production orders, and volume product orders for new customers will occur late in Q1 or in Q2.

While we are poised to support these customers with volume shipments in Q1, we currently expect these customers to contribute significantly larger revenue in the second quarter. As a result, we expect our new products to contribute 11% to 16% of total Q1 revenue. Almost all of our P-1 and P-2 customers took delivery of their lifetime buy orders for these products in 2005. Customer demand for these products is expected to decline sequentially in Q1. Our pASIC 1 and pASIC 2 products are expected to contribute 17% to 22% of Q1 revenue compared with 34% of our fourth quarter revenue. We are providing guidance for $8.7 million to $9.3 million of total revenue in Q1 due primarily to the expected sequential decline in our pASIC 1 and pASIC 2 revenue.

As we have mentioned on earlier calls, we have modeled the pASIC 1 and pASIC 2 product revenue will be zero in the third quarter of 2006. We are moving through the transition from high pASIC 1 and pASIC 2 revenue to high new-product revenue. While we are extremely pleased by our new-product design activity and encouraged, customers for these products are taking a longer time to come to market than we expected on our October call. For instance, we now expect Prosumer customers to contribute meaningful revenue in the second quarter better than the first quarter of 2006. While we still expect our business to grow in 2006 compared to 2005, demand is lower than we had planned in the short term, and we will need to make up this difference in order to grow our revenue in 2006.

Based on higher forecast overhead costs and production variances as a percent of revenue regarding the Q1 gross margin will be between 53% and 58% of revenue. We expect our Q1 research and development expenses to be within $100,000, our fourth quarter amount. We expect the Q1 selling, general, and administrative expenses to be higher by $200,000 to $300,000 sequentially due primarily to annual costs associated with our 10-K, 404 activities, and proxy.

Interest income, interest expense, and other net includes interest income on invested cash, foreign exchange gains and losses, and interest expense on borrowings. The income from these accounts was $240,000 in the fourth quarter. Due to expected levels of interest income and due to higher interest expense associated with new debt, we expect these accounts will contribute income of up to $50,000 in Q1.

We expect that our tax provision will be less than $40,000 in the first quarter. We may use up to $2 million of cash in the first quarter due primarily to cash flow from operations and capital expenditures.

Let me take a moment to mention a few other points. Going forward, we will record stock-based compensation in accordance with FAS 123-R. You will find elements of these charges in our gross margin and R&D and SG&A operating expenses. In Q1 we expect total compensation charge under FAS 123-R to be about $500,000. We expect to report non-GAAP results in Q1 that exclude these charges and are in line with our guidance.

Our manufacturing strategy is to reduce the cost of producing our products so that we can pursue higher-volume sales opportunities. We have achieved target yields for all of the 0.18 micron products we sell today, and we believe our PolarPro architecture will continue to reduce our per-unit costs. We are also actively reducing our other costs of revenue, our price negotiations, and by decreasing the time and cost needed to test and program our products.

Our target financial model based on a goal of $25 million in quarterly revenue as stated as a percent of revenue is to generate a gross profit of 60% to 62%; to have research and development expenses of 17% to 19%; and to have SG&A expenses of 19% to 21%. This results in net income from operations of 20% to 26% of revenue. We believe that lower costs associated with our PolarPro architecture and the development of new products will be significant factors in achieving the gross margin objectives in this model.

Now I'd like to turn the call over to Tom for his closing comments.

Okay, thank you, Carl. I'd also like to take this opportunity to thank our dedicated employees, whose talent, skills, intellect, and tireless efforts make our accelerating progress possible. Our teams in Toronto, Canada, Bangalore, India, and here in Sunnyvale are performing at unprecedented levels. I appreciate your efforts and results. Thank you, folks.

Now for your scheduling purposes, our Q1 earnings conference call is scheduled for Wednesday, April 26, at 2:30 pm Pacific Standard Time. Our annual meeting of stockholders is scheduled for the day before, April 25th, at 10 a.m. and will be held here in our offices in Sunnyvale. If you have the opportunity, we plan to invest at the SRA Annual Winter Technology Conference in San Francisco on February 15th. And in case you haven't noticed, we now have five analysts writing on QuickLogic. Details of upcoming events can be found on our website at www.quicklogic.com, and now let's open up the call for questions. Jen, please?

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John Lau with Jefferies & Company.

It looks like you have a significant ramp with regards to your new product launch at the end of Q1 now and going into Q2. Tom, can you tell me with regards to your wafer supply and staging to support that ramp and how that's looking in terms of there's any constraints at the back end? Thank you.

Okay, thank you, John. Let's start with wafers first. As you may or may not remember, we bought a partnership interest in Fab 2, which is the newest fab at Tower Semiconductor. We bought this back in -- I believe it was about 2000 -- and, of course, the primary advantage to us there is the guaranteed capacity -- percent of the overall fab capacity and pricing that was favorable to the industry. If you've looked at our inventories, you see that we've grown our inventories, and that's been in anticipation of Eclipse II, QuickPCI, and MIPS turning on. So we've got a lot of die and inventory here as well as short capacity out of the fab, should we need that.

With regard to the rest of the manufacturing processes, as you're probably well aware, assembly is tightening significantly on a worldwide basis. We believe we've been able to meet our commitments to customers in the past, and believe we'll be able to do that on a forward-going basis. But, as you know -- or -- as I think you folks do know, that's certainly an area of concern.

Test is not an area of concern. We've got our own testers installed in these locations, and we also have our own programming equipment installed. So capacity in certain packages is a challenge, or could be a challenge, it hasn't been to date.

And, Tom, finally, in terms of your PolarPro launch, how are those qualifications going with the customers as they prepare for that ramp in the second half of the year?

Okay, well, nobody is really in a qualification mode yet, because all they've seen, to date, is engineering examples. We haven't been through our full qual yet. As I indicated in the call today, that's expected to happen in early Q2, actually late this quarter, early Q2, we'll have all of our results back. We've qualified other products out of that fab, Eclipse II and QuickPCI-2, and QuickMIPS 2, products that have been qualified from that fab on that process, and so we don't believe that there will be any challenges there. We've already seen a lot of the reliability testing, and nothing looks out of order at this point, so I don't anticipate a problem on that at all.

I think the ramp to revenue for PolarPro will be quicker than Eclipse II because we've got customers today who are waiting for it, and the reason they're waiting is because they get more logic for the same price, and we get better margin. So it's in our best interest for them to move as well.

But those samples are at the customers, and they're taking a look at them right now, Tom?

Yes, they are. They're designing with them right now.

And, you know, the PolarPro devices also offer a significant power advantage over even Eclipse II. That's another reason that PolarPro is attractive to many of our customers.

Gary Mobley, A.G. Edwards.

I just wanted to follow-up on some of the Tower questions. Now, you guys have, roughly -- what -- $4 million in purchase commitments with Tower for '06, and I'm just wondering if that's a use-it-or-lose-it arrangement and what would you expect non-cash cost of goods sold be in '06, given the early credits that you've already paid for for Tower?

Well, a couple of things, Gary. One is we've got a very good relationship with Tower. While contractually we have limited ability to change our wafer demand up or down, they have been very flexible in both directions for us. So we don't anticipate that being a problem, going forward. We do report that as a cash commitment, because under the contract, if push came to shove, we are bound to take a certain percentage of what we've got on order over the next year.

The wafer credits are kind of an interesting phenomenon. What they do for us is they -- we basically have prepaid for a portion of the wafers. If we buy $100 worth of wafers, we wind up writing a check to Tower for $85 and using $15 of the credits. The full $100 goes to our cost of sales. So the wafer credit does not save us in terms of cost of sales, it really saves in terms of our cash flow.

So basically just take some sort of cost of goods margin assumption on products produced at Tower, and that's basically the non-cash contribution from the credit?

Well, actually, the non-cash contribution from the credit is balance sheet only. It just reduces the amount of cash we have to outlay to tower.

Okay -- different topic. How diversified was the ramp in advance at standard products during the quarter? In other words, how many customers contributed to the ramp?

One customer was pretty significant in the quarter, but the ramp by the customer was not the complete ramp. The business with the rest of our customers for the new products grew as well.

Sure. Now, you guys have been fairly vocal and open about option wireless coming on as a user of some the ESP products. Could you talk about how they ramped, so far?

Well, the challenge there is, to be very honest with you, my sales guys would beat the crap out of me for naming customers, and so if you paid attention to the call today, you didn't hear the name of any customers today. We talked about it as Datacom wireless or cellular PC cards. But you know, in fact, who that is. We are currently in multiple designs with them that are turning on, and we're being designed into new products as well. So we feel very good about that relationship.

Charlie Glavin, Needham & Company.

Thanks. Tom, in terms of the time from design to revenue, you talked about the first media center, and that has now generated 10 additional designs. Is that still on the same nine-month period, where, given that it's built up on reference to nine, could we actually see revenue coming off of that in the second half of this year?

Well, I think we'll see we're planning on revenue coming from these other designs off that base design with other customers. But this nine months almost seems to be kind of an immutable thing with customers. What we've really done is we've focused on making sure that we're never the long pole in the tent for their time to get to market, but, you know, you typically can't really accelerate them beyond what they're doing. You certainly can screw them up, and we focus on not doing that, but it's pretty hard to accelerate our customers' design cycles.

Now, by starting with a more complete solution, which is what we're offering them, we are reducing their time to market, and so we can expect -- we do expect to see certainly second and third designs out of the same guy in less time than nine months, and we've already witnessed that with our customer in Europe. Our first design took almost 10 months before we saw anything, and then the second and third designs turned on very quickly.

So I guess there doesn't seem to be a magic wand here that we can wave significantly to contract the amount of time for that. It's almost like there's a latency there of nine months, and once you get the thing started, then additional designs come much quicker than that.

You mentioned your sales guys will hate it, but Atheros, in terms of the WiFi -- but take a look at the CE-ATA and some of the other designs -- two questions off of that -- one, is Atheros the only WiFi customer either with designs or that you expect in 2006? And the second one, in regards to some of the design wins in the CE-ATA, some of the guidance was in it, but can you give a little bit more detail on terms of the type of disk drive -- perpendicular, or are we talking more standard, say, 1.8, 2.5, or are you also talking 1-inch drives?

Okay, let me try to separate that out into -- you've asked a compound question there. Let's start with the disk drives. First of all, the real excitement, I think, on a forward-going basis, are around CE-ATA are for the smaller drives. And what that's about, really -- and by that I mean the 1.2 and the 1-inch drives, and what that's about, really, is getting away from the IDE, which is fundamentally a parallel interface. So I think IDE, as a minimum, takes about 20 pins, and SDIO, I think, you can do with something less than eight. So, for one thing, when you get a small drive, it's advantageous to move to a CE-ATA, and I think that's what you're going to see on a forward-going basis, is that will become the predominant interface for these micro hard drives.

I don't think there's much advantage in bigger drives, certainly not for laptops or desktops of moving to CE-ATA. IDE has been around for a long time; is well understood, and people know how to manage that in the PC environment. I think the handheld environment for hard-disk drives is where you're going to see CE-ATA, and that's what we're working with these folks on. There's no one that I'm aware of, of the four major guys that are doing this, that are in production yet. They're sampling, but I'm not aware that any of them are in production yet.

Are you involved in any perpendicular drives?

Let's back up for a minute. When you say "involved in the drive," we're not involved in the drive the way someone who is involved in the read/write electronics would be. Whether it's perpendicular or whether it's horizontal really doesn't matter when it comes out CE-ATA. So I'm not aware, to be honest with you, if we're involved with anybody who is doing perpendicular CE-ATA drives. I don't know the answer to that. I'll find out, though.

Thanks, Tom. In regards to the WiFi, beyond Atheros, can we expect additional guys off of the WiFi side not the CE-ATA, although they could be one and the same.

Yes, actually, I think the WiFi guys are going not to CE-ATA, they're going to SDIO, and that's really a subset of CE-ATA. Currently, the vendor that we are doing the most with, that our customers are doing the most with, is Atheros. We view them as being very, very strong in the RF-CMOS business, and really enjoy working with those guys, and they're doing very well.

Can we expect anybody else to kick in in '06?

Not that I'm aware of at this point in time, to be honest with you. If you look at who the other guys are that are really in that -- Broadcom, Marvel -- both those guys have really not focused on embedded. They've both focused on the PC world, or the laptop world. I'm not aware that either one of them has dumped any significant energy into embedded devices.

Okay, last question, Tom, in regards to -- or to Carl -- fourth quarter dropped particularly in the military and aerospace. Can you give a little more color off of that. Actel certainly has indicated that they saw some choppiness within the aerospace, but it started to at least stabilize. Could you give a little more color -- is that similar to what Actel said or is it separate?

It's a little bit different for us. We bid on designs, for instance, for the Joint Strategic Fighter with a couple of our customers, and they just had a window where they need product, and that window was the third quarter. And so those don't tend to be regular purchases quarter in quarter out. They tend to be purchases that happen once or twice a year, and that's what really we benefited from in Q3, and we returned to kind of a more normal level of military activity in Q4.

Actually, believe it or not, we also -- never mind. Ceramic packages are a real dog, and as you are probably well aware, the industry has pretty much gone to plastic packages, and whenever you have to build anything in ceramic, it's almost like you're asking for problems, because people seem to have forgotten how to do things in ceramic packages. So we've had some challenges there in Q4, which we believe can be resolved in Q1.

Eric Glover, Canaccord Adams.

It sounds pretty optimistic about your ramp in the second quarter. I'm just wondering if you could give us sort of a ballpark range for the number of customers that you expect to be moving into production in that quarter?

We haven't given that kind of guidance. We obviously have a war board, where we have all these guys plotted out there, and we look at -- every month we forecast -- actually, we update the war board if any new information occurs, and every month we reforecast each of those guys, but we haven't given that kind of detail and probably won't, to be honest with you.

Okay, and then, for the first quarter, you're talking about some lower demand in the short term. I'm just wondering if you can give us some more specific color about why some of these designs possibly have been pushed out?

Well, I think some of them have just taken longer than we expected and that the customers have expected. Most of these customers that we're doing business with today are new to us, especially in the Prosumer space. We've not dealt with them before. So they are -- in some cases, they're doing parallel design or attempting to do -- solve the problem a different way just to have a backstop since they don't know us. But once, as we've demonstrated already, once the guys develop confidence, like our customer in Europe, boy, they turned on a lot quicker than any of us ever expected.

So I think part of it is just the startup of dealing with unknowns. They don't know us as a supplier. As a matter of fact, if it weren't -- I'm not sure this is completely true, but I can tell you that a lot of the tier 1 accounts that we've been into, if Intel hadn't been there as a big brother, we'd have had real difficulty getting in there. So obviously having them standing there beside you, recommending you as a solution goes a long, long way. There's a lot of leverage associated with that, and we're working very hard on capitalizing on that.

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Brian Swift, Security Research Associates.

Yes, could you give us some differentiation in terms of the type of applications that you may be now growing into with Eclipse II and PolarPro that maybe the characteristics of those products that may not otherwise have been available -- kind of give us some idea of what kind of market expansion may be coming about because of your product migration?

Of course, what we're really focused on are portable electronic devices, essentially battery-operated, handheld devices. We really bring two things to the party. One is we have absolutely the lowest-power FPGA technology out there, and we can provide that FPGA technology with very high performance. So as we talk about, in our investor conferences, if you took a look at, say, for instance, the life drive from Palm. It has about a two-and-a-half-hours battery life. We believe that if you took that apart and redesigned it with PolarPro, the battery life would expand to over 10 hours. We do that through a combination of, one, having more power components but also by offloading the microprocessor so that the microprocessor is on much less a portion of the time, releasing power consumption.

I just love it when my CFO gets technical with you, Brian.

So, really, in essence, what we see is a big move toward mobile, high-performance application driven primarily by video.

So I guess the short answer is you can do the electrical connectivity with an SRAM-based FPGA, but you kill the battery life, and that's the big difference -- very high bandwidth and very low power. Does that answer your question?

Yes, but I'm going to expand on it at some later time.

Okay. Next question, please?

Paul McWilliams, [NAN-D] Research.

I've got a couple of housekeeping ones here, just real quick. On the $3.3 million that you generated from option sales, what was the average exercise price on those options or number of shares involved?

I haven't check that out, but I'll be happy to get that for you.

Thank you. One thing struck me just a little funny here, again, in housekeeping, was that the fully diluted share count for Q4 was less than the fully diluted share county for year-end 2005. I would have thought it would have been more with the higher stock price average in Q4. Can you help me on that?

We had a lot of exercise activity during the quarter. I think that was the fundamental difference.

Okay, I can see how that math would work. Q2 -- do you expect to show year-over-year growth over 2005?

I haven't even looked at it that way, to be honest with you. So I can't answer off the top of my head. We haven't given guidance for Q2. We've only given guidance for Q1 to start with.

Oh, I know. Well, you've told us that the year, you expect an increase in 2006 over 2005, and based on guidance, we're going to start a few million in the hole there. So I was just trying to get a vision of a ramp and, honestly, I was trying to cheat a little guidance out of you.

I know you were. You're very clever, Paul.

Gotta ask. The last question, for you, Tom, here, is how many Prosumer design wins would you say that you've got, so far? Just a rough order of magnitude number?

Well, we haven't really quoted those kinds of numbers, and let me tell you why -- for several reasons, actually. One is that what is a design win?

Exactly.

How do you define a design win? We have a pretty strict criteria on what we call design win, and that is that as part of the funnel process, we look at and estimate what the estimated annual unit volume is going to be times the average selling price to come up with what is this opportunity going to be worth annually at full production? And so our ground rules for a design win, then, is we've received orders for at least one-twelfth, no less than one-twelfth of the estimated annual usage. Now, a lot of people count design wins a lot differently than that. That's a pretty stringent way to count design wins. Some people talk about them when they've got a board back that's got a footprint for your part -- that's a design win. When the engineer tells you you're on the spec, that's a design win. So it's all over the map.

A lot of our investors, by the way, have shared with me over the years that they really need to see what the funnel looks like in some more detail, and on the other side, our legal counselor is saying, "Hey, you start doing that, you open yourself up to a whole set of risks that just are not worth it. And let your talking be the revenue that comes from those designs rather than talking about the number of design wins per quarter or per fortnight or per whatever measure.

So unfortunately, that's kind of the box that we're in. I did share with you today that we've got -- just an example -- off of the IDE and the PCI, we've got -- I gave you 22 different customers that we've got designs going with today. That's just a smattering just from those designs. So it's larger than that, but we haven't given guidance on the number.

Let me turn my attention back to that diluted share question. Since we had a loss in the fourth quarter, the basic shares are equal to the diluted shares. We didn't add any shares for outstanding options in the fourth quarter, and we did in the third quarter. That's the fundamental difference.

Is there anything more that you can help us with, Tom? What I think every investor in Quick is trying to get their arms around right now is the handoff between the legacy and the new stuff.

So are we. I'm not being flip about this. We dump a lot of energy into this, and this isn't something that's come out of left field. We've been talking about this for over a year. So this consumes a lot of cycles here as to what is going to be the -- you know -- how do we make it through this "nasty bit," as Geoffrey Moore calls it. And we believe we're in good shape on the year. We have never said we're going to be in good shape quarter over quarter.

As there are no further questions in the queue, I will now turn the presentation back to Mr. Hart for closing remarks.

Well, thank you very kindly for your time and your attention and your interest in QuickLogic. I'm sorry that we're not able to fully open the kimono. Part of that, of course, is FD, and so I would urge you to talk to the folks who control that if you want to get it change, but I'm not sure it would do you a lot of good, quite frankly, because you'd get so much different information from different companies that you couldn't compare it, anyway. GAAP is tough enough to compare it these days and getting tougher on a forward-going basis. But I can tell you that we're undisputed leader in the lowest-power FPGAs in the market, bar none. If you buy the fact that low power handheld devices are going to be important on a forward-going basis, we think there's a great opportunity for us that is sustainable. We look forward to seeing you at next quarter's call. Take care and thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes your presentation, and you may now disconnect. Have a good day.