Quicklogic Corp (QUIK) 2006 Q1 法說會逐字稿

Thank you for your patients, ladies and gentlemen. Your 1st Quarter 2006 QuickLogic Corporation Earnings Call will begin shortly. Please stand by.

Welcome to the QuickLogic 1st Quarter Fiscal 2006 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 pass code 49149571.

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

Good afternoon, ladies and gentlemen. Carl Mills, our CFO, and I are here today, and welcome you to our Q1 Fiscal 2006 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 for high-volume applications.

Carl will take you through our Q1 2006 financials, and then I’ll share my perspective on our business. Finally then, Carl will detail our guidance for Q2, and then we’ll take questions. Carl?

Thank you, Tom. Before I get started, I'd like to read a short Safe Harbor Statement, although they never seem short.

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 of our customers' products, and our ability to replace pASIC1 and pASIC2 [amp hill], which we expect to decline due to the previously announced end-of-life of these products.

We refer you to the risk factors listed in our Annual Report on Form 10K, quarterly reports on Form 10Q, and prior press releases, for a description of these and other risks that could cause actual results to differ materially from our forward-looking statements.

QuickLogic assumes no obligation to update any such forward-looking statements. For your information, this conference call is open to all, and is being webcast live. It can be accessed from the Investor Relations area of the QuickLogic website, located at www.QuickLogic.com/Investors.

Overall, Q1 was a solid quarter for us. Our revenue of $9.3 million was at the high end of our guidance. Non-GAAP gross margin was 60% of revenue – exceeding our guidance of 55-58%.

Our non-GAAP net loss was better than expected, as a result of the high revenue and gross margin, as well as other incumbent expense net received during the quarter.

Cash increased by $1.9 million during the quarter. Revenue from our new products – Eclipse II, QuickPCI II, QuickMIPS and our new PolarPro – contributed 12% of revenue, and was in line with the guidance of 11-16% given on our last call.

As expected, several potentially high-volume customers took pre-production quantities of these products during the quarter.

Because of continued higher-than-expected customer demand, revenue from pASIC1 and pASICII products contributed 24% of Q1 revenue, compared with our guidance that these products would contribute 17-22% of revenue.

Our sequential revenue declined of $1 million is primarily due to a $1.3 million reduction in pASIC1 and pASIC2 revenue.

We often talk about our business in terms of new products, and our pASIC1 and pASIC2 business. We were pleased to see that new orders for our other products – particularly pASIC3 increased in Q1. Several customers are now converting their production from pASIC2 designs to designs using our pASIC3 devices.

During Q1, we adopted a statement of financial accounting standard 123R – share-base payment. This quarter, our non-GAAP results exclude stock-based compensation. We believe non-GAAP results are helpful in analyzing our results, and comparing our performance against historic performance and other companies.

Highlights from the quarter on a non-GAAP basis include – as I mentioned earlier – non-GAAP gross margin of 16.2% -- exceeded our Q1 guidance. We had a sequentially favorable mix of high gross margin revenue in Q1, and our operations group did a great job of bringing overhead spending in under forecast. The sale of previously reserved inventory benefited our cost-of-sales by 3.5% of revenue in the 1st quarter, compared with 2.1% of revenue last quarter.

Our non-GAAP operating expenses came in better than our 1st-quarter guidance. For instance, SG&A expense was flat, sequentially, compared with our guidance that expenses would increase $100,000-200,000. We managed the cost of our Annual Report on proxy to be lower than expected, and our marketing and selling expenses were also lower than expected.

Other income and expense contributed income of $218,000 in Q1 – primarily due to earnings on invested funds. Our non-GAAP net loss was $776,000, or $0.03 per share, in Q1 – which was favorable compared with our guidance for the quarter. Compared with the 4th quarter of 2005, our revenue declined by $1 million while our gross profit declined by $400,000 and our non-GAAP net income declined by $300,000.

Our 1st-quarter GAAP net loss was $1.2 million – or $0.04 per share. Compared with a net loss of $456,000 or $0.02 per share in Q4. Of course, our Q4 results did not include stock-based compensation expense, while Q1 included $452,000 of stock-based compensation – with $49,000 charged to cost-of-sales, $146,000 to R&D, and the balance to SG&A. On a GAAP basis, our Q1 gross margin was 59.7% of revenue. R&D expenses were 2.4 million, and SG&A expense was $4.6 million.

Our revenue declined $3.2 million year-over-year to $9.3 million. Revenue from our pASIC1 and pASIC2 products, which are completing an end-of-life program, declined by $4.2 million compared to one year ago. Our new products – which contributed 12% of Q1 revenue, grew $900,000 year-over-year. Our Q1 non-GAAP gross profit declined by $2 million on the 3.2 million year-over-year revenue decrease. Our gross margin as a percentage of revenue was consistent year-over-year – primarily because R&D expense was $200,000 lower than one year ago. We had a $140,000 reduction in non-GAAP operating expenses, compared with Q1 of 2005.

We also benefited from $200,000 of higher "other income and expense," net. And a lower income tax provision. In total, our non-GAAP net income declined by $1.6 million, to a net loss of $776,000 – or $0.03 per share on a $2 million reduction in gross profit.

Due to the Q1 stock-based compensation noted earlier, our GAAP net income declined by $2.1 million year-over-year.

Total cash was $30.2 million at March 31st. It’s great to see that number begin with a 3. It increased $1.9 million during the quarter. This is significantly better than our guidance, due to a smaller net loss and improved contributions from working capital – particularly accounts receivable.

In addition, we received $1.1 million from the exercise of stock options and borrowed $900,000 from our equipment line-of-credit during the quarter.

Our March debt-free cash was $26.2 million, representing an $800,000 increase over our December debt-free cash position.

Capital expenditures were $700,000 in the 1st quarter. We also entered into a non-cash, $800,000 capital lease to acquire design software and related maintenance during the quarter.

From a balance sheet perspective, our accounts receivable declined significantly during the quarter due to high shipments made in Q4 that we collected in Q1. Our March accounts receivable represented 40 days of sales outstanding compared with 49 days at the end of December, and is lower than our target DSO of 43-46 days of sales outstanding. We had $220,000 reduction in inventory during the quarter. We currently have 187 non-GAAP days of inventory on hand, and 9 days of inventory in the distributor channel.

In summary, we are pleased we were able to generate pleased we were able to generate revenue at the high end of our guidance, achieve over 60% gross margin, manage favorable expense levels and improve our balance sheet in a quarter with reduced revenue level.

Other key developments since our last earnings conference call include… We continue to experience strong designing activity for our new products – which include our Eclipse3, QuickPCI2, QuickMIPS and PolarPro devices. On our last call, we said that we expected to see early production orders from several customers in Q1, but expected volume orders in Q2 and late Q2 or thereafter. We were very pleased to see that several potentially high-volume customers did place early-production orders in Q1. These products are also generating significant interest from potential selling partners, and during the 1st quarter, we issued press releases which announced co-marketing relationships. With Hitachi, with Seagate and with the Intel Land Group.

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

Thank you, Carl. Well, as you just heard – as anticipated – we had a solid 1st quarter. And now we're working our way through the nasty bit, as Jeffrey Moore, the well-known author of "Crossing the Chasm" refers to that time in the life of a company when a product line is being phased out, and a new one is turning on.

I know we've been discussing this for well over a year now, but for the benefit of newcomers to our story, let me reiterate that revenue from our pASIC1 and pASIC2 products – revenue that was 44% of our 2005 revenue – is going away. Despite this, we are excited about our future. And let me tell you why.

It’s all about growing our revenue from the new products we've invested in – bringing to market over the last several years. Namely, Eclipse II, QuickPCI2, QuickMIPS – and the newest family, PolarPro.

In this past quarter, we achieved full-production status for the first member of the PolarPro family of devices. As you may remember, Polar Pro was voted by the readers of EDN Magazine to be one of the hottest products introduced in 2005. The primary innovations of this product family are aimed at continuing our growing legacy of having the lowest-powered FPGAs in the industry. Which really began with our Eclipse II family.

Just for your info, Eclipse II is the lowest-power FPGA in the industry. And PolarPro draws half the current that Eclipse II uses.

We also received the first production orders for PolarPro during Q1. An ideal application I can discuss is the use of PolarPro in a portable, medical-monitoring device. Our customer builds a line of battery-powered products that are used to monitor various human systems in real-time. PolarPro enables our customer to offer products with significantly longer battery life.

We also plan to sample a second member of the Polar Pro family this quarter. This device offers 3 times the logic capacity of our first device. We are very pleased to already have received our first order for this device.

With our introduction of the PolarPro family, we have further raised the bar for low-power FPGAs. At last months' Embedded Systems Conference here in San José, we demonstrated a power demo board that has sockets on it for 2 QuickLogic PolarPro devices – one 100,000 gate device, and the second, the 300,000 gate device.

An Actel pASIC 3 FPGA, an Altera MAX2 CPLD, Alantis Mock XO CPLD, a Xylinx Cool-Runner II, and a Xylinx Spartan 3E.

The intent is to have all the competition on one board, with similar-sized devices doing the same job, and each powered by equally-charged capacitors. We could then simultaneously turn on all the devices and observe on individual counters just how long each will run on the same amount of charge or energy, if you prefer. Guess what? It’s not even close.

PolarPro wins hands-down. Running over twice as long as the low-power CPLD leader, our next-closest competitor. PolarPro lasts over 16 times longer than the poorest performer.

To date, we've been unable to obtain either Actel's or Lattice's device. But rest assured, we’ll share the results with you when we have those devices to plug in to their reserve sockets. Actually, our plan is to put the power demo board on our website for all to see.

Okay. Does anybody want to wager with me on whether we’ll continue to be the lowest-power programmable logic devices when the smoke clears? Drop me an e-mail, if you're up for it.

Needless to say, this power demo board has proven to be a great tool for debunking the marketing hype surrounding low-power PLDs. It was a hit at the Embedded Systems show. And last week – in China and Japan, as well – where we did a formal introduction of PolarPro for the technical editors in Beijing and Tokyo.

While we're talking about Beijing, let me tell you in particular about the Beijing press briefing. Because it drew applause from the technical press corps, which is a rare thing to have happen.

We have a customer – a large, well-established design partner in China, that presented a demo at our press conference of their platform – streaming SVGA-quality video to a 42-inch plasma display – with both video and audio data coming off a micro hard disk drive. Our Quick IDE capability embedded in our Eclipse II product, served as the disk drive controller in this Intel PXA270-based system.

In this application, our product was in the data path serving to offload the processor, and thereby extend battery life. Superlative results, by the way, here – in both energy management and performance.

So basically, we enable SOC levels of energy management and performance with a standard product.

Okay. Shifting gears, now. This might be a good time to talk about the press releases. We did this quarter with both Hitachi and Seagate. Our Hitachi press release announced the introduction of our companion device, which interoperates with one of their microdrives. With one of their 1-inch microdrives. To deliver a complete storage solution for Intel-based portable consumer electronics. I quote… "Low CPU utilization, low power consumption and small footprints are all critical parameters for our customers – integrating micro-drive technology into their portable electronics." Said Marsha [Vencala] – Vice President Corporate Strategy and Product Planning, Hitachi Global Storage Technologies.

Hitachi’s work with QuickLogic will go a long way in helping product designers achieve these parameters and deliver compelling handheld consumer electronic devices into the marketplace.

The Seagate release says in part – and I quote… "Most embedded processors do not have a direct or native interface to IDE-based small-form factor hard disk drives. QuickLogic not only provides an excellent companion device, but extensive testing has demonstrated that their solution helps us to achieve maximum performance, while minimizing system power and optimizing CPU utilization. Critical to the user experience in portable consumer products," said Todd [Beuloh] – Business Development Manager at Seagate Technology.

I urge you to take a look at the excellent whitepaper Seagate just published on their website, which contrasts our device with a CPLD solution. There's no comparison, really. We offer up to 50 times the battery life and up to 50 times the throughput.

Both of these announcements were geared around our companion-solution strategy for the Intel X-Scale embedded processor family, which they call the PXA2XX family. We have now also developed similar solutions for the analogue device’s BlackFin family of digital signal processors.

We also announced with Intel, support for Ethernet. The majority of low-powered, embedded processors – such as Intel’s PXAs – do not integrate a PCI-controller, required by most land devices developed for PC platforms. By integrating the PCI controller in our companion device, QuickLogic provides connectivity to these land devices.

This now provides designers of embedded systems access to cost-effective technologies, which were typically only available on the PC platform.

Now, just a brief update on our option-wireless production status. If you remember, in this application, where we serve as a bridge between the mini PCI bus used in the PCM-CIA slot of a laptop, and a QualComm chip set. The chip set is used to bring 1.8 megabits per second of data wirelessly over the cellular 3G network. Think about this, folks. That’s over T1 or E1 data rates to your laptop. And T-Mobile Europe is offering this level of service for only €10 per month.

Do any of you remember what a T1 line used to cost here in the US? I would submit we live in exciting, incredible times. So what do you think? Would you pay $12 a month for reliable T1 data rates to your laptop? Well, based on your reaction, do you think this option product will sell? We do. And we're very pleased with the volume of QuickPCI2 devices shipped to them in the last 3 quarters.

So as you can see, we are building quite a bit of customer momentum for our new products, in portable, battery-powered applications. While maintaining our commitment to the military and industrial markets. So that there's no doubt in anyone’s mind, the 600,000 gate and million-gate devices of the PolarPro family are targeted directly toward the industrial and military markets. We're very confident in our future.

We still have to navigate through the nasty bit, ’til revenue from our new products can completely replace the revenue that’s going away, but in our minds, it’s not a question of "if," but only a question of "when."

Carl – back to you.

Thank you, Tom. Now let’s turn to non-GAAP guidance for our second quarter. And some comments on our business.

As Tom mentioned, and as we expected on our last call – during the 1st quarter, we received initial production orders for our new products from several customers. We expect to receive higher-volume orders from several of these customers by the end of Q2. Based on the timing of their orders, we would expect to ship against this orders in Q2 or Q3.

We also expect an increase in revenue from existing customers this quarter, and expect new products to contribute 16-20% of Q2 revenue.

Based on the expected decline of T1 and P2 bookings, as a result of the end-of-life program, we are guiding revenue from these products will decline sequentially to contribute 12-16% of Q2 revenue. Overall, we are providing revenue guidance for $9.7 million to $10.3 million in Q2, as we expect that growth from our new product and other product revenue will more than offset the expected decline in pASIC1 and pASIC2 revenue.

As we have mentioned on earlier calls, although we could have revenue from pASIC1 and pASIC2 in the 2nd half of the year, we have modeled that revenue from these products will be zero – beginning in the 3rd quarter of 2006.

We are moving through the transition from high pASIC1 and pASIC2 revenue to high new-product revenue. We are very encouraged by new product design activity, although customers for these products have taken a longer time to come to market than we expected on our January call.

While we still expect our company revenue to grow in 2006 compared with 2005, demand needs to accelerate to grow our revenue in 2006.

Based on the mix of products we expect to ship in Q2, higher forecast overhead costs and production variances, and lower sales of reserved inventory, we are guiding that Q2 gross margin will be between 53 and 58% of revenue.

We expect our Q2 research and development expenses to increase by $300-500,000 sequentially, due primarily to the purchase of IP blocks for use in future products.

We expect that Q2 selling, general and administrative expenses should be within $150,000 of Q1 expense levels.

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 $218,000 in the 1st 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 $100,000 in Q2.

We expect that our tax provisions will be an insignificant expense in the 2nd quarter. We may use $2-3 million of cash in Q2 – based on expected increases in accounts receivable, funds to be paid under a contract currently under negotiation, and forecasted capital expenditures.

Let me take a moment to mention a few other points. Stock-based compensation or FAS123R charges in our 2nd quarter are expected to be about $450,000, and to be included in cost-of-revenue, R&D and SG&A expenses.

We expect to report non-GAAP results in Q2 that exclude these charges. 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 parts we sell today, and we believe that our PolarPro architecture with twice the logic density will continue to reduce our [pre-entered] costs.

We are also actively reducing our other costs of sales by price negotiations and by decreasing the time and costs needed to test and program our products. While capacity of some of our suppliers is tightening up, we expect to manage our way through constraints that arise.

Our target financial model – based on a goal of $25 million in quarterly revenue – and stated as a percent of revenue – is to generate a gross profit of 60-62%, to have research and development expenses of 17-19%, and to have SG&A expenses of 19-21%. This would result in income from operations of 20-26% of revenue. 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 this call over to Tom for his closing remarks.

Thank you, Carl. Again, this quarter, I'd like to take this opportunity to thank our dedicated employees, whose talent, skills, intellect and tireless efforts make our accelerating progress possible. Our teams around the world are performing at unprecedented levels.

The recent PolarPro on-time production release clearly demonstrates the extraordinary level of commitment. I appreciate all of your efforts – and especially the results. Thank you.

Now, for your scheduling purposes, we're presenting at the ADA Financial Conference in Monterey on Monday, May 8th – and the CE Unterberg Emerging Growth Conference in New York City on July 11th and 12th. Our Q2 Earnings Conference Call is scheduled for Wednesday, July 26th, at 2.30 PDT. Details of upcoming events can be found on our website at www.QuickLogic.com.

Now, let’s open up the call for questions. Operator, please?

Yes, sir. Ladies and gentlemen, if you would like to ask a question, please press *1 on your telephone. If you would like to withdraw your question or your question has been answered, please press *2. Press *1 now to begin. And thank you for your patience, as we assemble the list.

Thank you, sir. Your first question comes from the line of Mr. Charlie Glavin of Needham & Company. Please proceed, sir.

Carl, it sounds in terms of some of the orders, you were saying that you were expecting or had in order indications as far as the orders being placed in Q2 – but may be shipped in Q2 or Q3. Within your modeling and your forecasting, are you assuming that it’s going to come in late in the quarter? Not going to say are you sandbagging, but are you taking a conservative approach that more than likely these will be shipped in 3rd quarter – not in 2nd quarter?

Well, we definitely expect our new-product revenue to be up sequentially. And the question is, how much is it going to be up? And we do think we will get our first volume orders from several of these customers, and that some of them will ship this quarter and many of them will ship next quarter.

And if I heard you right, Carl, the pASIC1 and pASIC2 would be 12-16% of revenue?

That’s right.

Is that actual demand? Or is a fair amount of that end-of-life? If I'm not mistaken, Cyprus could still take orders after 2nd quarter. They just won’t guarantee the bookings. Correct?

Well, Cyprus is our supplier. So we can still today place orders for wafers with Cyprus. We do think that they will, at some point in the future, convert their line to other equipment and that we’ll no longer have the availability to make starts. We think that will happen no later than Q3, and it could happen this quarter. We're just not sure.

And you gave the guidance in terms of the pASIC1 and pASIC2. Could you give a little bit more detail in terms of either the embedded or the advanced? If you wanted to, talk about even the newer products – s far as rough ranges of how those increase. As you certainly had a shift last quarter in terms of the end-markets. I'm just trying to get an idea of where we might be seeing the core growth as opposed to assume that all of it’s coming from the new products.

Well, the core growth is… We have a very strong traditional instrumentation and test business. And several of those customers have converted their pASIC2 designs to pASIC3. So I think the revenue from those customers will grow in Q2 over Q1. And that’s terrific, for us.

In terms of the new products, we're just in a faster quarter with $1.1 million in new-product revenue. At the mid-point of our guidance, that would be 1.6 to 2 million next quarter. And we think a portion of that growth is from the customers we've been shipping to and production volumes, today. And a portion of that growth comes from these new customers hitting production volumes.

As we look at it, kind of our newer opportunities tend to be more in the portable handheld space. And I think we’ll start to see some meaningful revenue probably late this quarter or early next quarter in terms of the [prosumer] opportunities.

Carl, what I'm asking – one of the reasons why I'm asking is the instrumentation and testing was down fairly significantly quarter-over-quarter. Do you expect that to bounce back within the pASIC3? Or are these also migrating to other products?

I'm trying to get a gauge of whether or not that snaps back and how much of this are we going to see an increase in – say – military guys using some of the products – for gaming and other industrials coming back with the newer products, as well?

Let’s just talk about the vectors of our business a little bit. The vectors for pASIC1 and pASIC2 – that’s really heavily instrumentation and text. A little bit of datacom and telecom for us. With that sequential decline, that’s going to detract from revenue in those segments.

Coming on stronger, in terms of the newer opportunities, are these portable handheld electronic devices, primarily. And we're starting to see those – as Tom mentioned – we've got some medical opportunities which would be instrumentation and text. But most of the volume, I think we're going to [inaudible] kind of opportunities.

And then Carl, in terms of this R&D – the IP blocks that you're hiring. Given the design activity and the interest on it, should we view that spike up in Q2 as being more of a one-time to acquire initial blocks? Or is this being asked of customers in terms of an ongoing basis, as far as acquiring blocks and libraries, and to keep the R&D trends off of that higher base in Q2?

Yes. You should think of that as more of a 1-time event, as we kick off the next-generation of our products. We're buying some IP blocks. It’ll take us a while to build those into the products and come to market with those. But we have to take the expense as seen as we buy the IP, in this case.

Let me pass it on to somebody else and I’ll come back with follow-ups, then.

Sir, your next question comes from the line of Mr. John Lau of Jefferies & Company. Please proceed, Mr. Lau.

I was wondering if you could go over the PolarPro again and the schedule timeline. You had mentioned that the first device is now shipping and that the second device is coming. I was wondering if you could give us a little bit more color with regard to the design activity for both of those devices. Thank you.

Okay. Well, the first device is 100,000-gate device. That’s in production, now. It went into production this quarter. That device is – I think we've talked about this, before. We didn’t really expect to see significant revenue out of the PolarPro family this year. What we expected was that Eclipse II, QuickPCI II and QuickMIPS were going to be the new products that generated the bulk of the revenue to make up for pASIC1 and 2 going away.

The advantages of PolarPro, specifically – we haven’t talked about it on these calls, I don’t think. But there's a very-low-power mode that the part can be put into, which is really brand new for the industry. Specifically, what it is, is there are registers in the parts, so that when you shut the part down or put it into standby, it remembers what it was doing. And then when you wake the part back up again, it very quickly comes back online.

The beauty of that, of course, then is it’s much easier to put the part into shutdown and save significant power. In the shutdown mode, you're talking about something less than 10microamps of current drain. So it’s really – on that basis – it’s about 3 orders of magnitude lower than what anybody else can do. Most people – when the part is on a bus and the bus is wiggling, their parts draw about 10 milliamps of current. Our part in the same situation is drawing 10 microamps. So you can see, it’s significantly lower.

So those are the kinds of applications that can really take advantage of that.

You know, for many people, Eclipse II or QuickPCI II, is plenty low-enough power. And they've been designing those in for a long time, now. And so that’s what we think the bulk of this year’s new product revenue will come out of.

The second device that now is out of the fab – and as I said today, we’ll be sampling this quarter – is a 300,000-gate device. It has all the same characteristics of the other. Just more capacity. More logic capacity and more memory.

Then I don’t believe that we've released to the world yet what our schedule is for the other devices. But I can tell you that those are scheduled out over the coming months. The coming quarters, actually.

And Tom, if we can go over in terms of the new devices. You had mentioned that the orders… you were starting to get orders over here. Do you believe that the spectrum of design activity that you have over there and the orders that you're getting are clearly focused on that prosumer area that you were talking to us about? Or is it pretty broad based, also?

Well, we've been pretty tightly focused on significant opportunities. And these devices are finding homes. You know lots of people use FPGAs. So there are lots of people who want low-power FPGAs. So they're using those. But our real focus has been on volume, prosumer opportunities.

Handheld, battery-powered kinds of devices like GPS systems, like portable media players, like smart phones. That space, really, is the one we've been focused on.

Those designs are now beginning. We've seen pre-production orders on those kinds of products in this last quarter. We've also seen some opportunities come up because of the low-power nature of the product, in mini-notebooks. We're seeing some opportunities in handheld POS systems and others. So it is… I speak broad based across implementation and text-data-telecom. But the biggest chunk by far is the consumer or prosumer chunk.

Great. Thank you very much.

Sir, your next question comes from the line of Mr. Eric Glover of Canaccord Adams. Please proceed, Mr. Glover.

You were talking about increased design and activity for the new products. I'm just wondering if you could sort of help me quantify that, in terms of how many design ends you've won. Perhaps a ballpark number.

I'd love to be able to quantify for you exactly what our funnel looks like, Eric. But the problem with doing that is, at least according to our counsel, that we're opening up a real can of worms by doing that. So we typically in the past have really talked more generally about momentum. What does the momentum look like? Are we seeing more opportunities or fewer opportunities? Are they for bigger or less dollars – potential dollars – than we've seen in the past?

We've typically characterized our design funnel, that way. That is the only way that I can, in fact, characterize it for you, today.

We're seeing strong design activity. If you just look around the marketplace and look at how many people are introducing these kinds of devices or… And by the way, it hasn’t really even hit yet… Portable media players are really at the front end of this. What I think you're going to see is a huge groundswell of products from lots of different people with lots of different feature sets.

So I can tell you that this part does something that nobody else does. And the only other way… the other PLD guys are not competitors in these spaces. The real competitors are ASIX. And you know for yourself that people would rather use standard products than ASIX. If they can get the price points to where they want. And that’s why – by the way – PolarPro has got twice the logic-density at the same prices.

So we're very comfortable that the design pipeline is growing. We measure it religiously. I don’t know what else to tell you, unfortunately.

That’s good enough. Now it looks like your gross margin… I'm just curious about why such a wide range in the gross margin, and the Q2 guidance of 53-58%, given a relatively tight revenue-guidance range.

That’s kind of consistent with what we did last quarter. So… [inaudible] [crossing]

I think this is fundamental conservatism.

All right. That’s it for me. Thanks.

Gentlemen, your next question comes from the line of Mr. Gary Mobley of AG Edwards. Please proceed, Mr. Mobley.

For some of your IDE and PCI bridging opportunities out there… Could you talk about what some of the key design windows that may arise – that may help you out when going with customers supposed to get Hitachi and Intel.

I'm not sure quite what you mean by that.

Oh, as an example. It might be the transition to an 802911N and how that may impact potentially your bridging, therefore, the Intel and beta processor.

Yes. Actually, what’s happening… Let’s separate WiFi from IDE or the micro hard drives for a minute. Let’s talk first about WiFi.

What people are beginning to do in WiFi, which our good friends at [Vetheros] have done, is they've gone to SDIO interfaces for those devices aimed at embedded applications. And most of the processors have an STIO port. And so they're able to connect up directly or natively. And so they don’t need us in those kinds of applications.

But they do need us. Most guys don’t want just one SDIO port for their products. They want 2. They want 1 perhaps to connect WiFi to, and they need another to connect memory to, or some other device, as an example.

The IDE situation is a little different. IDE is going to be here for a long time. Notwithstanding the fact that as a matter of fact, we're participating today and tomorrow in the CEATA plug fest. CEATA is the consumer electronics ATA, which is aimed really at simplifying fewer pins and lower power for these micro hard drives. We're very tightly coupled to both Seagate and Hitachi in that space. So I think we're going to wind up having solutions when they wind up having disk drives for CEATA. But I think IDE will be here for a long, long time. And we have very good solutions for IDE – for both hard drives and CDs and DVDs. Does that answer your question?

Sure. That’s fine. And potentially, until they adopt PCI Express for its interface, and that particular protocol has fewer PIN requirements, then maybe you might be able to support it. Has that diminished the opportunity there? Has Intel and the market in general adopted PCI Express?

I think PCI Express will be adopted and embedded processing way down the road, Gary. It’s an issue of most of these handheld devices, first of all, don’t need that kind of bandwidth. And secondly, they can’t handle the power dissipation. So I think PCI Express is going to be a real hit in the server world. And we're beginning to see a turn-on, now. And it’s essentially going to be in the laptop world. But I don’t think you're going to see it in portable handheld kinds of devices. And the reason, quite frankly, is USB 2.0 is plenty fast enough.

I want to shift gears for a second and discuss your migration path to 130 nanometer. Does your current [inaudible] tower incorporate 130 nanometer? And does it require any additional funding from you to tower – to help that migration?

Actually, our original agreement covers both 180 and 130. And no, it doesn’t require additional capital. Obviously, if you're going to build devices in 130, you're going to pay more for masks than you're going to pay in 180. But I’ll have to tell you that there's no real driver today that would drive us to a 130.

Let me share something else with you that may or may not be obvious to you. An all-copper system… and these are numbers that I got from TSMC… The contrast in what a copper system – metal system – costs versus an aluminum metal system… is about $450 a wafer. That’s on an 8-inch wafer. So there's a very significant cost premium to have to go do that. And the reason, by the way, the other guys do that… The "other guys," meaning SRAM-based FPGA guys… is because they've got so many transistors that they've got to make their die sizes smaller.

I think we've talked about this before, but we haven't talked about it recently. Our logic density is 4 times as efficient as the SRAM-based guys. That says we could be 2 generations behind them and have the same die sizes, because you get about a 2X reduction in the die size for every generation. So we could be 2 generations behind them, and be the same die size and be paying a helluva lot less per wafer than they are. So we're not driven into being a 130 or 90-nanometer because we've got to get there, because our die sizes are so blown out.

So we're in a very different kind of position.

Gentlemen, your next question comes from the line of Mr. Lawrence Borgman of Jesup & Lamont. Please proceed, Mr. Borgman.

Just to clarify, on the decline in the pASIC1 and 2, it was around 3.5 million in the 4th quarter. It went to 2.5 million n the 1st quarter. And you're guiding toward a number that’s around 1.6 or so in the 2nd quarter. Is that the right numbers?

That’s fair. The 1.6 would be closer to the high end of our range.

So that would suggest then that we probably have passed the low point in revenues, in this product area for the year, then. At least the effect of the pASIC1 and 2.

You mean overall revenue?

Overall revenue. Right.

God, I sure hope so!

Okay. The other part of that is, how much does pASIC3 absorb of that? Of those customers that are leaving 1 and 2?

That’s a very good question. I think it remains to be seen in total. But I can tell you that we've seen a bigger spike than a lot of folks here thought we would see in P3 revenue, in Q1. It remains to be seen whether that’s sustainable, or not. But it looks very good. These are… When you look at what were the orders that we're getting there, they're… Let me back up for a minute.

We program about 80% of the devices that we ship for people. And that programming code – we can tell how old the design is by what the number is – that code. So we look every month or every quarter at how our bookings relate to how old the designs are.

So we can see the pASIC3 designs – the revenue – the spike in revenue is coming from new designs. New CS numbers. And that’s very positive.

So I think we don’t know, exactly – to be honest with you. But I think it’s going to be bigger than we originally believed that it be.

We've talked about this all along. We talked about the fact that pASIC3 was easy for people migrate designs from P2 to P3. There's only a voltage difference – operating voltage difference. And we made the transition for their intellectual property very easy with our software. But we weren’t clear about how many people were actually going to do it. P3, by the way, has the same PIN-out as P2 did.

I think we're seeing more of that than we originally expected. Which is really good news. But I can’t quantify it for you.

Okay. If you were running at 3 million a quarter or 4 million a quarter with P1 and P2, and you were running at 2 million a quarter, say, with P3… What’s it going to be 3 quarters from now? How is that distribution going to split? I don’t know, to be honest with you.

Also, the gross margins were really higher than expected. I wondered – did you have much higher military orders than you might've expected? Did that account for any of it?

Really, what happened, Larry, is we benefited quite a bit in the sale of reserved inventory. It came in at 3.5% of revenue. In addition, we had forecast to purchase some non-capital tools in the 1st quarter. Our production team reassessed the timing of that and decided they didn't need to buy them in Q1. And both of those things are primary contributors to our sequential improvement in gross margin. And then in addition, it was a more-favorable mix.

Military did go from 10-14% of revenues. So it was up nicely. But it wasn’t a big factor in that mix.

And finally – do you have any numbers for book-to-bill and backlog?

First of all, we're not big believers in book-to-bill. This is a turns business. So book-to-bill or derived from backlog is of marginal value, in terms of what’s going on in our business. So we typically haven’t done that. And we haven’t given our backlog, either. Backlog in the semiconductor business is kind of a hope and a prayer. For as you know, most customers backlog – all that really means is they got in line. They're not really committed to buy what they've placed orders for. So we've trained our customers poorly, as an industry.

Typically, Larry, we're at like a 65-75% turns rate. And that’s one of the reasons that backlog and book-to-bill don’t make a big difference to us. We really are dependent on current quarter bookings to make our revenue numbers.

Okay. Well, congratulations on your progress.

Gentlemen, your next question comes from the line of Mr. Dan Scoville of [Tokinik] Research. Please proceed, Mr. Scoville.

Thank you. Again, good progress, you guys. A couple of questions if I can on the gross margin side. Can you achieve your target gross margins without Polar Pro?

We've said that Polar Pro is an important part of getting to that 60-62 points of gross margin at 25 million. Just think about it, Dan. In the same sized die, you can fit twice as much programmable logic. And that allows us to deliver value to our customers and better margins for us. So it is an important part of our play.

I guess part of my question begs – I mean – PolarPro’s not really meaningful revenue until next year. But can you sort of get and hold something in that range of gross margins before then? Given the decline in pASIC1 and 2? But obviously, the ramp of the advance of the new products?

We're being very careful not to give guidance out past the current quarter. Because it’s done nothing but hurt us in the past. So we’ll have to not comment on that, Dan. Sorry.

Nice try, though.

I'm going to keep trying, here! Because of historical essence, here – let me go ahead and ask it, anyway. Do you think that you can have year-to-year revenues flat, still?

No. We think we're driving to drive it up slightly. So that’s our goal and that’s what we're driving for.

In the 2nd half of this year… Obviously whether it begins at the end of the 2nd quarter or in the 3rd quarter with a ramp of some of your new products. You clearly have not been able to announce the customers and the applications. But have these applications been introduced into the market yet?

Let’s see. I guess in some cases, they have. And in some cases, they haven’t. I don’t know if you've ever dealt with the ODMs in Taiwan. But we have NDA agreements with all these guys. That precludes you talking about anything relative to your involvement with them. And so, the fact that one of them did a demo with us at a technical press conference in Beijing blew me away that they would do that. Because we have an NDA signed with them that precludes our ability to even mention that we're working with them.

It’s okay. You can whisper it to me in Chinese.

Yes. Actually, if you could read it in the Chinese Technical Press, I’ll bet it’s in there.

I've got my kid taking Chinese classes. Send it on over.

There are devices. Obviously, people buy product from us before they go into production. And they introduce things before – in many cases, before – they're in full production. So it’s in various stages. We're not talking about one device or one customers. We're talking about multiple customers and multiple devices.

Think of the kind of applications we've talked about. Portable media players. Mini notebooks. Smart phones. Portable GPS. Those are the kinds of items that we're focused on.

Right. Yes. Obviously the game here is, I'm sort of driving a little deeper. This is the 2nd quarter now where it’s kind of at the edge of the subsequent quarter, when a ramp might occur. So I was just wondering if there's any sort of granularity or detail that you can provide that would – I guess – enhance confidence that the stuff is coming, and it’s fairly big. Clearly, you've talked a lot to that degree, but I was just looking for any more detail that you could provide.

Let me just be really clear about what we said on our last call. We said that we expected activity from a lot of customers last quarter. But that we didn’t expect big volume from those customers. This was early production or pre-production volumes.

That did, in fact, happen for us. So – while we would love to be further ahead in terms of volume opportunities, what happened in Q1 is basically what we talked about on our last call. And we said that we thought those customers would start to order in Q2. That’s still the story.

So compared to what we said on our last call and what we're saying on this call, we're pretty consistent. Would we like it to be faster sooner? Absolutely! But we're not disappointed with the progress we made last quarter.

Okay. Good. Thank you very much. Good luck, you guys.

Gentlemen, you have a follow-up question from Mr. Charlie Glavin of Needham & Company. Please proceed, sir.

Just to make sure that I heard you right, Carl. Can you describe what the new products were as a percentage of revenue?

Yes.

Was that 12%?

Correct.

And that was Eclipse II, QuickPCI, QuickMIPS and PolarPro. Correct?

Yes. We really didn’t have PolarPro for revenue in Q1. We just released it to production. So really, it was the 1st 3 devices.

So it’s really everything except the eclipse. But is there anything within the software that’s material, right now? Or is it essentially all bundled within the product groups?

No. The software’s not a significant piece of revenue for us.

Okay.

It’s really device-driven. But as you know, what we're taking with our devices is that we're wrapping with them intellectual property and software drivers to target applications such as IDE-bridging opportunities or companion devices. To load the Intel [inaudible] processor and WiFi bridging devices to go into wireless opportunities.

And again, I apologize, Carl. But you gave guidance on the pASIC1 and pASIC2 for next quarter. Last quarter, you gave a rough idea for the new products. What are you expecting, in terms of a percentage of revenue from the new products?

16-20.

16-20. Okay. Thanks. It’s been a long week – I'm sure – for you all.

We're looking forward to talking about those results about 3 months from now.

Gentlemen, we have time for one more question, and it comes from the line of Mr. Paul McWilliams of Indie Research. Please proceed, Mr. McWilliams.

I think that Dan covered this, but I want to make sure I understood absolutely correctly. The last 2 quarters, you had said – or maybe not after Q3. Maybe it was just after tele[inaudible] but you had said that you expect 2006 revenue to exceed 2005 revenue.

Correct.

We've got a record quarter coming, I see.

We've got a couple record quarters coming.

Excellent. Now in the new…

In order to do that.

Exactly. I've been doing that math. The breakout of products. Where does Option fit? Is that in computing?

Instrumentation and test.

Oh. Option is instrumentation and test?

Yes. You could argue. You know that it should be computing. You could argue it could be communications. You could argue it could be consumer.

But we don’t have consumer, yet.

No, we don’t. Nothing in consumer, yet.

[inaudible]

Oh. It is in telecom?

Yes. Yes.

Where would an MP3 player or a handset with a hard drive or a GPS… Where would that land?

Or are we going to have a new breakout?

We're going to have a new breakout.

Yes.

I'm looking forward to that.

Yes. We are, too.

Oh – one housekeeping question. Did you take any reserves in Q1?

We did take some reserves on some pASIC1 and pASIC2 stuff.

How did that compare to the reserves that were shipped?

It was about 100 – a little bit less than 100,000 lower.

Okay. Thank you very much. Look forward to next quarter.

You bet. So are we.

Thank you, ladies and gentlemen. There are no further questions at this time. I would now like to turn the call over to Mr. E. Thomas Hart for closing remarks. Please proceed, sir.

Okay. Well thank you for your interest and for hanging in there with us. This is – the nasty bit is a tough time to go through. Transitions like this are tough for investors and for those of us that are closer to it.

I did want to remind you that we’ll be at ADA on Monday the 8th of May, and we’ll be at CE Unterberg in New York on the 11th and 12th of July. And we’ll look forward to seeing you – if not there, we’ll look forward to seeing you either out here at our space or at the next call, which is July 26th 16 2.30 PDT. Thank you.

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect.