Quicklogic Corp (QUIK) 2006 Q3 法說會逐字稿

Welcome to the QuickLogic Corporation third quarter fiscal 2006 conference call. Today's call is being recorded and will be available for playback beginning two hours after the completion of the call. To access the replay, please dial 719-457-0820 with the passcode 2103410. 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 of QuickLogic. Sir, please go ahead.

Okay, thank you. Good afternoon, ladies and gentlemen. Carl Mills, our CFO, and I are here today and welcome you all to our Q3 fiscal 2006 conference call. We appreciate you taking the time to join us and hear about QuickLogic's revenue results and our continuing progress in providing the world's lowest power programmable logic solutions for high volume applications.

In today's press release we reminded investors that we have an ongoing internal review of our stock option practices and related accounting. As many of you know, our audit committee proactively asked management to initiate the review since so many companies are finding issues with their option practices. We continue to be focused on completing this review and filing our financial reports.

As with any company going to a review, the process includes an internal assessment, review by our audit committee, auditors, advisors, communication with regulatory agencies, and filing financial statements. We continue to work our way diligently and with top priority through this process.

We want to provide full financial information to our investors as quickly as possible. In the meantime, our officers and employees are not commenting on this review.

Carl will now take you through our Q3 2006 revenue, and then I'll share my perspective on our business. Finally, Carl will detail our revenue guidance for Q4, and then we'll take questions. Carl?

Thank you, Tom. Before we 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 of our customers' products, competition, the impact of regional conflicts on our suppliers and customers, the effect of the options review on our financial statements, and the delays in the filing of our financial statements with the SEC. QuickLogic's future results could differ materially from such forward-looking statements. We refer you to the risk factors in our annual report on Form 10-K, quarterly report 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/Investors.

Let's break down revenue for the quarter. New product revenue in the third quarter of 2006, which includes our Eclipse II, Quick PCI II, PolarPro and QuickMIPS products grew 2% sequentially in line with our guidance that new product revenue would be flat to up, low single digits sequentially.

New products contributed 27% of revenue in Q3 compared with 25% of revenue in Q2. Revenue from our pASIC1 and pASIC2 devices was slightly better than guidance, contributing $1 million, or 11% of revenue in the quarter compared with our guidance of $600,000 to $800,000 of revenue for these products.

Revenue from our other products was $5.3 million in the third quarter and was slightly lower than expected due to low order rates in September. Our order rate has since improved from the September levels.

Third quarter total revenue of $8.6 million was within our guidance that revenue would be between $8.3 million and $9 million. Our operations team did a great job of delivering product for the quarter, and we did not have the delivery issues in Q3 that we experienced in Q2. Also of note, we had two significant customers in the third quarter -- a domestic OEM that purchased primarily pASIC3 devices accounted for 15% of revenue, and a European customer that purchased Eclipse II products through our contract manufacturer accounted for 18% of revenue.

Let's take a moment to compare our results to the same quarter a year ago. Revenue from our new products increased by $1.8 million, or nearly 400% compared with Q3 of 2005. This growth was offset by a decline of $5 million in our pASIC1 and pASIC2 revenue due to the end of life of these products. Revenue from our other products was $900,000 lower year-over-year. Our other product results one year ago included revenue from three significant military programs, and we did not receive revenue from these programs in Q3 2006.

The growth in our new product revenue compared with Q3 of 2005 was more than offset by the pASIC1 and pASIC2 and other product revenue declines. As a result, total revenue of $8.6 million compares with $12.6 million one year ago.

Our ending cash position was strong in Q3. Total cash of $29.8 million is $300,000 lower sequentially and debt-free cash of $25.4 million compares with $26.7 million in Q2.

In summary, while we are disappointed with the contributions of our other products during the quarter, we met our new product revenue guidance and have a strong cash position. Now I'd like to turn the call over to Tom.

Okay, thank you, Carl. So a question I know many investors are asking themselves right now is where's the beef? Or, more directly, where's the revenue? Let me briefly refresh you on what we're doing here at QuickLogic and why we believe we can be successful in becoming the clear market leader and providing the lowest power programmable logic solutions.

Fundamentally, the underlying technology we use to make our programmable logic devices is very different than what is used by the SRAM-based and FLASH-based FPGA suppliers. Simply said, we have a fundamental low-power advantage based on our technology; an advantage our customers find to be true in face-to-face runoffs against our competition. But enough about our patented technology we call ViaLink.

Let's look at our design wins and get a better feel for what's happening with the spectrum of solutions that we provide to customers. In general, customer interest in our lowest-power, high-performance solutions remains high. It's also important to note that we generally do not lose designs to other programmable logic suppliers because they're not even close compared to our low power consumption.

Having said that, it is fair to say that not all of the designs in our pipeline have gone to volume production to the extent we believed they would and forecasted to you. We live and learn. On our last revenue call we talked about three customers specifically for our new products that told us we would be on the shelves in their products before Christmas. The three products are a high-end GPS system, a very smart phone, and an ultra mobile personal computer.

Today we are in a very different place from a quarter ago. The GPS system will be much lower volume than forecasted owing to the ODM losing a major customer as a result of an acquisition. The smart phone ODM is about one to two months behind where they planned to be, and now expect to begin production late this quarter. While the UMPC customer has the design complete, they are working to obtain appropriate funding to move forward.

Now, although not much consolation under the circumstance, it is important to note that we're not losing these designs to competition, but we are certainly seeing delays in forecasting revenues and reduced volume expectations of others.

There is good news here regarding additional new business with these same customers. For example, the smart phone ODM sees significant value in our current solution and is asking us to engage in several new design projects. We are clearly learning from these experiences, although I must admit it's been painful at times. We are changing our selling process and focusing our resources on opportunities that can contribute significant revenue for QuickLogic. We are transitioning from selling products to selling solutions.

Our focus is on high-volume prosumer applications, which includes smart phones, personal media players, portable navigation devices, portable industrial devices, wireless data cards, and the like.

Now, some investors and customers have expressed concern over the sale of Intel Xscale family to Marvell. My sense is the short-term impact to our business will be negligible, and the long-term impact is really a function of how well Marvell does in assuring those customers of their plans for the Monahans family, which is the next generation of Xscale embedded processors. We are clearly betting on Marvell being successful, and if you look at their track record, I think you will agree, they are a pretty good bet.

But just as Intel didn't win every socket for handheld, battery-powered prosumer products neither will Marvell. We are aggressively working to establish relationships with additional prominent embedded processor suppliers such as analog devices. In fact, we are currently engaged in two reference designs based on blackfin processors for portable media players scheduled to be completed this quarter and demo'd at CES in early January.

Becoming a companion device for embedded processors is proving to be a good strategy for us. Our solutions add significant value and are not merely glue logic. We offer complete solutions; namely, our flexible programmable logic plus software crafted to offer better battery life with increased functionality and portable, handheld, battery-powered systems.

The really good news for us is that, for the first time in our history, reprogrammability is not the over-arching consideration, because customers that buy solutions don't care of you create the solution out of a reprogrammable FPGA, a one-time programmable FPGA, or peanut butter, and they don't care which technology node we're using to make their solution. They care about a solution that, one, meets their needs; two, is the lowest power; three, comes in a very small package; and, four, is good value or, said another way, meets their price point. And our answer for all these requirements is a resounding "Yes!"

Just a note in passing to give you an appreciation of our overall bullishness on our future, you will see our new product die inventory grow in Q4 and Q1 as we take delivery of wafers ordered to position ourselves for significant volume opportunities.

Okay, shifting gears now -- we recently hired a seasoned semiconductor sales executive to join us in early November as our new Vice President of Worldwide Sales. He replaces Jeff Sexton, who left in late Q3 for a sales management position requiring less domestic and international travel. I won't share the name of our new hire yet only because I don't want to mess with the cosmic karma around new hires here in the Valley. This is the same reason I don't order new hires' business cards until I see the whites of their eyes. Superstitious? Who, me?

I can tell you, this gentleman most recently had worldwide sales responsibility at a well-known semiconductor powerhouse significantly larger than Altera or Zylinx, and his key account knowledge coupled with his overall broad background and experience in semiconductor sales leadership will serve us very well as we transition to providing programmable logic solutions.

My final point to share is that we introduced into production two new PolarPro devices during the quarter. The 200,000 and 300,000 gate devices. That brings the total to four PolarPro devices in production today. We also announced the availability of our CETA solution for implementing micro hard disk drives based on this new standard in embedded processor-based products.

Okay, Carl, back to you.

Thanks, again, Tom. Now let's turn to our revenue guidance for the fourth quarter and some comments on our business. As Tom mentioned, Q4 demand for our new products from the three customers we talked about last quarter is not as high as we had originally expected. In addition, demand from our largest new product customer is expected to decline in Q4 compared with Q3 due to the stage of our customer's product in its lifecycle. As a result of these factors, our guidance for new product revenue in Q4 is between $1.6 million and $1.9 million.

In terms of our pASIC1/pASIC2 business, we have a solid backlog position, and we expect to ship $800,000 to $1 million of product in Q4. Please note the fab supplying these wafers to us is taking the equipment used to manufacture our products out of service, and we will not make additional wafer starts.

We have a small inventory position and may have additional opportunistic revenue from this pipeline. The quote activity has slowed. We are now not forecasting significant revenue beyond Q4.

As we mentioned earlier, demand for our other products was softer than expected in Q3 and bookings did not rebound until the second week of October. As a result, we are cautious in our Q4 outlook for this portion of our business. In general, we've seen a nice uptick in our pASIC3 revenue. Year-to-date revenue is up nearly 30% compared with the same period of 2005 primarily as a result of the transition from pASIC2. As we have said in the past, we expect solid but not spectacular revenue contributions from this portion of our business, going forward. As a result of these factors, we are providing guidance for total revenue of $7.6 million to $8 million in Q4. As Tom mentioned earlier, we expect to build our die bank for new products in Q4. Due to our revenue outlook and this die build, we expect to use more than $3 million of cash during the quarter.

I would like to mention there is a tremendous vitality and purpose at QuickLogic. Our employees and our management are passionately pursuing market leadership in providing the lowest power programmable logic solutions to create a company of lasting value. We are attracting significant new talent to the company, and we strongly believe the efforts and focus of our team will create a substantial company over the next few years. We appreciate the patience of our investors as we realize this vision.

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

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 progress possible. I can share with you that our spirits and morale are high as our teams around the world are performing at superlative levels.

During this last quarter, we've hired three seasoned marketing professionals from Zylinx, Intel, and Altera, to beef up our marketing muscle. Welcome aboard to [Jing], Howard, and [Elash].

Now, for your scheduling purposes, we are presenting at AEA Classic on November 7 and 8 in Monterrey, and at the Needham Conference in New York scheduled for January 9th through the 12th, 2007. Our Q4 and 2006 earnings -- not only revenue -- conference call is scheduled for Wednesday, January 31st at 2:30 p.m. Pacific time. Details of upcoming events can be found on our website at www.quicklogic.com.

Now let's open up the call for questions, Ann, please.

Yes, sir, thank you. [OPERATOR INSTRUCTIONS] Charlie Glavin, Needham.

Tom or Carl, I guess one of questions would be in regards to not only the die bank build within the fourth quarter but is it not my understanding that you have some weight for obligations within Tower. Can you give the general idea about how your inventory has gone both in Q2 and Q3, given that revenue in both quarters were below expectations, and is this die bank in Q4 -- how much of that is due to that obligation? How much of it is incremental or discretion on your part?

We don't have, really, Charlie, a firm commitment to Tower quarter to quarter. They've been very flexible in our wafer start levels. We did get an opportunity to purchase wafers that we think is a terrific price, and we took advantage of the opportunity with the full support of the management in the company. So we think it's positioning ourselves well from both the volume and a pricing perspective, going forward. So it's not a take-or-pay kind of a deal that's causing us to build this inventory, it's a belief in our future that's really driving us to build this inventory, okay?

We did build inventory on a gross basis in the third quarter; roughly, about $1 million. We did take some charges against inventory in that quarter for two things primarily -- one is, we took charges against some of our pASIC1 and pASIC2 business as that winds down and, secondly, as we have the large FPGA that's really going to be taken over by the parts we introduced this quarter. They are the 2003 200,000 and 300,000 gate devices, and as a result of those charges, our net inventory was down quarter over quarter.

Carl, to the point about the pASIC1/pASIC 2, it was our understanding that was going to be running in the 200,000 -- well, less than half a million run rate in the third quarter; that there was some delay just in terms of final testing -- well, some logistic issues on it.

It looks like, if I understood your guidance, that it's actually going to spike up. I would assume that's not from Cypress starting new wafers but dipping down into previously end-of-life type of wafers that you had already pre-aligned with that. And, if so, why would you take an inventory charge if you are able to sell off that older product?

Well, we certainly didn't take a charge against the inventory that we have orders for. We didn't take the charge against additional new bookings that we are forecasting. We took a charge kind of beyond that. You know, we realized that we did make some risk starts toward the end of our process that Cypress Net contributed to our writedown this quarter.

Okay, and, Tom, there was the other question in terms of where's the beef? If we even take a look at the three customers that were supposed to come up, it doesn't look like you'll recoup all of that. It sounds like you may have a lot of very interesting product at CES that your end customers will be able to show, but in terms of the seasonality, is it safe to say that, from a revenue standpoint, you're really going to be looking more into the spring and spring refreshes before you start to see significant orders start to really pick up even though the design wins may be incrementally positive between now and January.

Well, the smart phone people, as an example, that's not a seasonal -- that's not driven by seasonality, and they were expected to do an announcement in October, and it now looks like the announcement -- they've taken pre-production quantities of, like, 10,000 pieces at this point, and I expect that they're going to do their announcement now in November. It could be even at Electronica and, therefore, we expect volume production out of them late this quarter or early next quarter as their customers -- the carriers -- begin to buy product. So I don't think that's a seasonal issue.

Tom, but if you could, without breaching anything, can you give a little bit more of a description on what this smart phone is, given that we've heard Texas Instruments, Qualcom -- feedback from a recent trip to Asia that the high-end phones have not been selling, and that there's been a significant shift away from the high phones, including the smart phones, to the lower-end phones. Can you give us at least some indication why this anticipated November delay may not also get pushed back further, given the weakness that many of the base band guys are seeing on the higher-end phones?

Well, I think you're seeing something different than what we're talking about. Certainly, there's a tremendous surge in very low-end phones that people did not anticipate, specifically, China is an example. The very low-cost phones are surging at a much greater rate than anybody ever believed they would. But I just saw the Q3 results, and Q3 showed that the industry is well on track to build 1 billion cell phones this year. Out of that billion, the last number I saw was smart phones were going to make up 75 to 100 million of that in 2006. So I'm not aware that -- if you've got data that says smart phones are going into the tank, you've got new information compared to what I have.

Yeah, Tom, I'll take more offline, but from some of the folks we saw within Asia, including Mainland China, they thought Qualcom may have another two to three months overhang and Texas Instruments said -- they agreed with you. The units are going to be 950 plus, but they had to lower their expectations by 200, 300 basis points of sequential growth just due to the mix shift alone. With that sort of overhang, what I'm worried about is what sort of confidence do you have that the ODM is even going to be able to sell it; that it's not going to get pushed into Q1, given the overhang of these other phones out there?

Well, that's part of the challenge dealing with these ODMs, Charlie. As you point out, when it comes to confidence level about what their schedules are, you know, we don't have a lot of confidence in what these guys are doing at this point. We don't know these guys that well. So when they tell us something is going to go in October, that it's set for a huge announcement with their customer in Europe, and then it doesn't happen, you know, there isn't a hell of a lot we can do about it.

I'll pass it on, Tom. At least it's good to see you have a Missouri approach to it.

I think we all do, Charlie.

Farag Agarwal, Jeffries & Company.

I was just wondering what is the profile of the customers for your new products you are working on. I just wanted to get a feel of whether these guys are tier 1 or tier 2 customers, and what is their outlook regarding [indiscernible] end customers?

Well, I think it depends on the product that they're selling. These are tier 1 and some tier 2 ODMs for the battery-powered handheld devices. Most are Taiwan-based, a couple are tier 2 in China. But the designs are typically being done either in Taiwan or in Europe. Very few designs are actually being done in China. These devices are -- smart phones is a large portion of the business we see on a forward-going basis. I guess the second major category would really fall into portable media players -- not MP3 players but video players. It's generally believed that the whole DVD player market is going away and will be replaced by devices typically that have micro hard disk drives and can play either off the air from DVBH or some of the other TV standards -- digital TV standards around the world and, therefore, offer a Tivo-like capability with hard disk drives. So that whole portable media player -- or portable video player -- is also a significant opportunity that we see.

We've already talked numerous times in the past about the data cards. These are people who are offering 3G cellular connect to get higher levels of data. HSDPA at 1.8 megabits per second is the current high-volume standard. We have a customer there, the largest manufacturer of those cards in the world -- the market share, at this point, north of 30%. That's option wireless, and their business looks like it's been quite robust.

And then, finally, the people who are building industrial handheld kinds of devices, and you see them all over from the guy that checks you in at Avis to the UPS sales guy or the Fed Ex sales guy, those kinds of devices are in abundance, and we're aggressively involved with several of the major manufacturers of those kinds of devices.

So that's kind of the newer customers for us. Our traditional customers, of course, and the ones we're not leaving, have been the military guys, and those people buy our FPGAs and love them. They love them because they're instant-on, because the bulletproof IP content protection is virtually possible to reverse-engineer what's going on inside those devices. And, finally, the bigger devices, lower power, of course, is an issue for them as well. But the bigger devices now -- the million -- the 600,000 and the million gate device that we'll be introducing early next year, they are, of course, eagerly awaiting.

So if you looked at the profile of customers from the past, it's been 70% of our business has come out of instrumentation test, industrial and military and with virtually nothing out of consumer. And on a forward-going basis, you'll see -- we believe you'll see a significant portion of our revenue come out of consumer or prosumer -- high-end consumer -- handheld battery-powered kinds of products. Does that do it for you?

This is great. The other question I had, a kind of follow-up was -- what kind of competition are you seeing from the bigger [PRT] guys and from CPLD?

Okay, let's take the -- first, in general, there's really not competition from SRAM-based FPGAs primarily because their power dissipation -- they measure power typically in miliwatts or watts, and we measure power in microwatts. So we're typically three orders of magnitude lower power than they are, so they're no competition at all.

The CPLD guys, they're really mostly used for glue logic and configuration and typically, there, you're talking about $0.40 and $0.80 parts, 64 macrocell, 128 macrocell kinds of CPLDs. There's no doubt they're low power, but they're also very low performance and low functionality as a result of it -- no memory, is an example, and if you're going to do anything at higher speeds across clock domains, you need memory to build FIFOs. So those aren't the primary competitors for what we're doing.

The primary competitor actually is an ASSP, if one exists to do the job, and in many cases they don't exist. And, secondly, an ASIC, if a guy thinks he's going to build a jillion of exactly the same thing. So our competition has moved from being the classic SRAM-based FPGA to being a very different type of competitor on a forward-going basis.

Lawrence Borgman, Jesup & Lamont.

Did you suggest that you would have the option review done by the time of the end of the next quarter? Is that what I heard you say?

I think I did more than suggest. What I said was -- let me just read it to you again -- I said, "Our Q4 and 2006 earnings -- not only revenue -- conference call is scheduled for Wednesday, January 31st."

Okay. Also in discussing the outlook, you mentioned your European customer was going to be down this quarter. Is that the same as the option wireless? As I recall, that customer had some inventory correction in a previous quarter. Is he -- is that correction over, or is he going to be increasing --

Yeah, I don't think it's an inventory correction. It is the customer, and I don't think it is an inventory correction. I think what it really is, is this is a 1.8 megabit HSDPA data card, and if you've been following that space, they've announced, and other people have announced, 3.6 megabits and 7.2 megabit cards. The challenge is, of course, that none of the carriers have been able to service to that level, and so while it's a great thing to beat your chest about and brag about having a 7.2 megabit card, nobody in the world can supply data at that rate over the 3G network yet.

So I think the transition is going to be slower than what they'd originally thought, and so their forecast for their requirements in Q4 of this year is down slightly from Q3. We also -- we accelerated some shipments at their request in Q3. So I think the prognosis is that eventually 1.8 will go away, or will certainly be reduced just like Ethernet did. You know, we had 10-megabit cards forever, and we had 10/100, and now we've got 10/100/1000 now. I think you'll see the same kind of thing happen in this space.

Okay. Can you point to any revenue shipments this quarter for PolarPro?

You know, Larry, we're working with a couple of accounts on PolarPro. It's not clear whether they're going to ship this quarter or early next, but we don't think it's going to have a significant play in our revenue for the quarter, because they'll be initial quantities.

Okay, a final question -- I was wondering if any of the other companies have approached you about a possible merger?

I wouldn't comment on that even if they had.

Gary Mobley, AG Edwards.

I was hoping that maybe you could provide us some insight into what your breakeven point would have been for the quarter?

You know, I'd love to comment on that, Gary, but we're just kind of avoiding the financial questions until we get through the review and put our numbers out. Nothing is final until we get through that process, and so I can't really give you that insight. Sorry about that.

Okay, well, let's back out the options -- or the expenses as with the options review. You know, approximately, what would your breakeven point be? Is it still roughly around 12 million?

The last update we gave to the investment community was in that range. We haven't done a lot to change our operating expenses since that time. We look forward to giving some updates in terms of breakeven on our next call. We're going through our planning process this quarter, and we'll give you an update January 31st.

Okay. Can you guys run any leaner than you are right now?

We probably always have the opportunity for marginally leaner, but we think we've been -- we've done pretty historical layoffs in this company. We think we're pretty lean and mean. We do think we've got a big opportunity ahead of us, and that that opportunity may take some additional investment in terms of preselling resources to realize the potential in the timeframe we want, and that's also going to be part of our planning process.

Having said that that way, Gary, what the fundamental belief here is is that we're not going to save our way into profitability.

[OPERATOR INSTRUCTIONS] [Brian Laddin], Bonanza.

For the last couple of quarters, we've been hearing about three new product wins that we're going to ramp. Are there any other new product wins we can talk about?

Well, there are, but one of the lessons learned from talking about those three is that when they don't materialize, or when they change significantly, you wind up in hot water, and so we're pretty reluctant to -- as we've commented before, these aren't the only things we're working on. We've got many designs in the pipeline, and the only reason we even offered these three was because several investors beat me into talking about what are we going to be able to do -- when am I going to be able to go down to Frye's and see something on the shelf that's got your product in it? And so I knuckled under to that request.

We're resisting talking about specific customers -- first of all, we can't talk about specific customers. We can talk about applications, but we can't typically talk about specific customers. And we've already shared with you the kinds of applications that we're working on.

Are you guys pursuing OEMs as well as ODMs? I know traditionally the ODM channel has been easier to get design wins, but, clearly, it's much less reliable than the OEM channel.

We are absolutely pursuing both, and we're in contact with tier 1 OEM manufacturers for smart phones along with ODMs.

[inaudible].

Yeah.

Do you think that -- I know one of your competitors, in particular, came out with a product that, I guess, is going up against PolarPro. Has that lengthened sales cycles for you at all? I know their silicon is not out, but will that drag out sales cycles?

Well, it certainly hasn't, to date. It's tough to -- if you're doing products today, you know, I don't want to be a smart aleck here, but if you're doing products today, it's tough to do them with data sheets or with marketing literature compared with having product, if you've got product. So when they get it out here, whenever it comes out, then we'll take a look at it. It's got some pretty wild claims -- I shouldn't say it that way -- it's got -- if it's as good as they claim it is, it will probably be competition. I'm not sure it's going to be as good as they claim it is. It's hard to fool Mother Nature, you know. The physics of what we're doing is very different from the physics of what they're doing, and so it will be very interesting to see if they can live up to what their data sheets say they want to live up to.

Have you guys gotten any traction on the Seagate reference designs?

At several customers we have, yes, as a matter of fact. What's been interesting there is we had expected CEATA to take off stronger than it has, and that looks like it's not moving as fast as either Seagate of Hitachi believed that it was going to, which is kind of curious.

Do you need CEATA to work before you're getting design wins there?

Not at all. We've got design wins using IDE.

Okay, and, Tom, do you feel like you're getting -- are you getting good visibility into your sales pipeline right now? Because it feels like you guys were caught by surprise by some of the sales ramps getting pushed out.

Well, you can always ask for better visibility. You know, the real challenge here, Brian, is that when a guy tells you that something is going to happen and then, at the last minute, tells you that he lost his customer and puts product on hold that he'd ordered, you know, there isn't a hell of lot you're going to be able to do about that.

When a guy tells you that he's going to do an introduction in October, and then -- and or sales guys are in there every week, we're not making up these dates -- and as their plans change -- so, yeah, it's never as good as we want it to. It's never as good as if it were under our absolute control. You know, to be honest with you, I don't really know what the answer is. I think getting to know these customers better and being able to get the real skinny from them so they're not hedging their bets because they don't know us, either. They don't know how capable we are or how reliable we are. When we say we're going to do something by a specific date, and so therefore how far have they hedged that, I don't know, to be honest with you.

The other good point is that -- and Tom mentioned it -- at these customers, you know, we're demonstrating the value we bring to these systems, and they're using us in future designs. So the fact that we go through this process, and even if they delay their time to production, it's still a win for the company, long term, because we're able to develop our business with that customer.

This is an example, Brian, the smart phone ODM guy has got 10 other designs that he's currently working on, and they want us involved in those designs. So the frustrating part is obviously where is the revenue today, why isn't it here, and we're as frustrated about this as you guys are -- probably moreso.

Is the phone ODM someone that has a decent amount of experience in that space, or is it a new entrant to the handset market?

No, this is a tier 1 ODM.

Doug Campbell, Spirit Capital.

I'm new to this company, but from the discussion, so far, it sounds like your current target markets essentially are high-end consumer products, and so in that case, what price points or reduction in price points would it take for you to effectively address a broader marketplace in a consumer market?

Well, Doug, we entered this market with our Eclipse II family, and we absolutely have the lowest-power FPGAs in the market with that family. That opened up a lot of doors for us. So the smart phone company that Tom has been talking about, you know, what we've done since Eclipse II is we've introduced PolarPro. PolarPro, also low power FPGA just like Eclipse II has twice the logic density. So on the same size die you can put twice as much programmable logic. So for the smart phone company Tom was talking about, our cost reduction path is going to be to migrate them from Eclipse II to PolarPro, and they're very pleased with that path, and they're bought in.

So we are able to deliver better price points to these customers. In addition, we have a terrific operations group who has really streamlined the cost to program our parts and test our parts. We've seen a dramatic reduction in our backend costs as a result. And then, finally, Tower is delivering world-class yield for us, so we think the pricing we're getting from Tower and the yields we're getting from Tower, combined with the other things we talked about, really are allowing us to deliver the price points to win these accounts.

My secondary general question is it sounds as though you may have begun to address through marketing and sales the OEM market later than the ODM market. Is that correct? Because certainly in both categories the larger companies have very, very strong capabilities in terms of identifying products that will work for them and their customer base. But it sounds as though the OEM marketing perhaps is somewhat behind your stages with the ODMs.

Part of that, in my opinion, to the products that we typically sell to OEMs were going to be more the industrial instrumentation and test kinds of products. They generally have a longer time to market than the prosumer devices we're working on. So what we're looking forward to toward the end of this year and next quarter is we're going to start to see some of those industrial applications come to production.

But if you're talking about the prosumer OEMs, so let's take Motorola as an example. That product is a full custom product for them -- the RAZR, as an example. I think they've sold north of 50 million of those at this point. You're not going to find any programmable logic in that product. They go to a full ASIC.

Now, they buy products from tier 1 ODMs to satisfy, as an example, Cingular's requirements for specific phones that have specific features that aren't going to be sufficient volume for them to warrant doing it themselves. You know, like maybe a half a million to a million devices. So even though you say -- you know, you approach an ODM, the tier 1 ODMs are selling now and actually some of them are beginning to sell directly to the carriers. If you've noticed, of late, you're beginning to see ads now, as an example, with Cingular, private labeling, high-end smart phones that are done for them directly by HTC, as an example.

Are we successful at this point in penetrating Nokia or Motorola? The answer is no. Are we working on it? The answer is yes.

At this time we have no further questions. Mr. Hart, I would like to turn the conference back over to you for any additional or closing remarks.

Okay, well, none of us are pleased with where we are from a revenue perspective, but I can tell you that we believe in what we're doing. The team is energized, and we believe we're organized to go make this happen, and we hope you'll stick with us. Thank you, and we look forward to an earnings call next time and not a revenue call. Good day.

And that concludes today's presentation. We thank you for your participation, and you may disconnect at this time.