Quicklogic Corp (QUIK) 2006 Q4 法說會逐字稿

Good day, everyone. And welcome to the QuickLogic Corporation 4th Quarter and Year-End 2006 Earnings Conference Call. Today's call is being recorded, and will be available for playback beginning at 8 pm Eastern Time. To access the replay, please dial 719.457.0820, with the passcode 1249985. 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 for QuickLogic. Sir, please go ahead.

Good afternoon, ladies and gentlemen. Carl Mills, our CFO and I are here today, and welcome you all to our Q4 and Fiscal 2006 Earning Conference Call. Thank you for joining us to hear about our progress, as we make the transition from being an FPGA Compound supplier to a world-class, low-power solutions provider.

As you no doubt already have seen in the filing of both our Q2 and Q3 2006 10Qs, our internal review of our employee stock option practices has been completed and approved by our audit committee, lawyers and auditors. The bottom line results -- we've found and corrected technical errors. No fraud or purposeful intent to mislead investors or regulatory agencies was discovered. And with the changes we've made to our stock option granting process, we certainly don't expect any future errors.

If you recall, I closed our Q3 2006 Revenue conference call by predicting that today's call would be a normal earnings conference call -- and that, it is. Our SEC filings are current, and the cloud of a potential NASDAQ delisting of our stock has been officially lifted. So now, let's get on with it.

Today, Carl will take you through our FY2006 and Q4 financial results. And then I'll share my perspective on our business. Finally, Carl will detail our guidance for Q1 2007, 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 levels, revenue growth from our new products, our ability to convert new design opportunities into customer activity, market acceptance of our customers' products, the influence of partnerships on our business, net income and liquidity.

QuickLogic's future results could differ materially from such forward-looking statements. 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.

Today, we are pleased to provide full financial information to our shareholders. Let's take a look at our fiscal 2006 results.

2006 revenue was $34.9 million -- down $13.3 million, compared with $48.3 million of revenue in 2005. Our 2006 revenue, when compared to 2005, was significantly affected by the end-of-life for our pASIC 1 and pASIC 2 products. 2006 revenue from pASIC 1 and 2 products totaled $5.8 million -- a decline of $15.3 million from 2005.

Our new products -- Eclipse II, QuickPCI II, QuickMIPS and PolarPro, contributed $7.1 million of revenue in 2006, growing $5 million or 241% over 2005 levels. 2006 revenue from our pASIC 3 products increased $2.3 million or 26% over 2005 -- due to the migration of pASIC 2 designs to pASIC 3 devices and due to higher demand from existing pASIC 3 customers.

Our Eclipse revenue declined by $2.6 million in 2006 compared with 2005 -- due almost entirely to lower demand from one large test manufacturer in Japan. In addition, our EFP business was $3.3 million lower in 2006, due primarily to $2.1 million of lower Quick-grown revenue due to a Chinese customer product end-of-life, and lower demand from aerospace customers, and due to $1.4 million of lower V3 product revenues, due to the lifecycle of our customers' products.

Our new products had a material impact on 2 market segments in 2006. Namely, datacom/telecom and graphics and imaging. Option Wireless contributed approximately 14% of total revenue in 2006. Sales to this customer increased $3.8 million year-over-year, and fueled 16% annual growth in our datacom/telecom business. Our new products were also the primary driver of a 26%, or $700,000 growth in our graphics and imaging business.

Let's go through other key elements of our profit-and-loss. The numbers that follow are non-GAAP, unless otherwise noted.

Our 2006 gross profit of $17.4 million compares with $30.1 million in 2005. This decline in gross profit is due to the following elements. $9.8 million is due to lower revenue of $13.3 million. $1.4 million higher costs were due to product mix and other costs. $2.3 million was due to higher inventory reserves in 2006, compared with 2005. And I'll break down the significant components of this 2006 reserve, later. These factors were partially offset by $650,000 of royalty revenue in 2006.

Our gross margin for the year was 49.8%. Adjusted for the impact of inventory reserves, our gross margin would've been 58%. For your information, the sale of previously reserved inventory lowered our 2006 cost-of-revenue by 2.3% of sales.

Let's move to operating expenses. 2006 R&D expense of $8.9 million declined by $650,000 compared with 2005 -- due primarily to low incentives earned on Company results under our incentive compensation plan, and lower consulting fees.

Our 2006 SG&A expense of $17.2 million increased by $300,000 compared with 2005, as one-time expenses associated with our internal stock option review and legal matters, and higher temporary employee expenses more than offset our reduction in incentive compensation and independent representative commissions.

Our non-GAAP operating loss was $8.7 million for the year -- due to the gross margin and operating expenses noted earlier. We had net interest and other income of $1 million, and a tax expense of $71,000 in 2006. As a result, our non-GAAP net loss was $7.7 million, or $0.27 per share. This non-GAAP loss compares with a profit of $3.9 million in 2005. The change of $11.6 million is due to the $12.7 million of lower gross profit described previously, which was partially offset by $300,000 of lower operating expenses, $700,000 of higher net interest and other income, and $100,000 of lower income tax expense.

Our GAAP 2006 results were -- gross margin of 49.2%, research and development expense of $9.3 million, SG&G of $18.1 million, and an operating loss of $10.2 million.

A net loss of $9.2 million or $0.32 per share. This net loss compares with net income of $2.4 million in 2005. The change from year-over-year is due to the non-GAAP factors we discussed earlier, $1.4 million of 2006 charges for stock-based compensation under SFAS 123R, and $34,000 for the write-down of long-lived assets in 2006, compared with $66,000 in 2005. In addition, our 2005 results include a $1.5 million write-down of our investment in Tower Semiconductor.

Our 2006 stock-based compensation expense includes charges of $183,000 to cost-of-revenue -- $368,000 to research and development -- and $894,000 to SG&A.

As Tom noted and as noted in our press releases and in our 10Q for the 2nd and 3rd quarters of 2006, we concluded our internal stock-option review. We concluded that a total of $964,000 was associated with errors related to our stock-option granting practices and related accounting. Since this amount was not material to any prior year, we did not restate previously reported amounts. We charged this $964,000 as an adjustment to our balance sheet, by increasing additional [inaudible] and making a [lopsided] entry to accumulated deficit. Please see either 10Q for a further description of the internal review.

We finished 2006 with $24.6 million of cash. A decline of $3.7 million from December of 2005. Our operations used $4.1 million of cash during 2006. Our net loss adjusted for non-cash items -- such as stock compensation and depreciation -- was $1.2 million. We used $4.1 million for inventory, to secure lower wafer prices -- in anticipation of large-volume orders.

Our reduction of accounts receivable contributed $2.7 million during 2006, and changes in other working capital accounts reduced cash by $1.5 million -- which included a $1 million payment to secure 2 years of back-end manufacturing capacity.

We made $2.3 million of capital expenditures during 2006 -- primarily from back-end manufacturing hardware and design software. Financing activities contributed $2.6 million of cash. We received $2.6 million from stock-option exercises and participation in our ESBP. We borrowed long-term debt of $2.5 million, and made scheduled repayments against long-term debt of $2.4 million during the year.

The primary factors in our 2006 cash flow include $4.1 million used to acquire inventory, and a $1 million payment to secure back-end manufacturing capacity. Without these items, our cash would've increased by $1.4 million during the year.

At December, our debt-free cash was $20.7 million. In terms of other balance sheet items, as of December, our Days of Sales Outstanding was 33. We had 188 days of inventory on hand, and 4 days of inventory in the channel -- all on a GAAP basis.

Let's turn our attention quickly to our 4th quarter results. Q4 was a difficult quarter from a bookings perspective, as bookings were lower than we expected. Our total revenue of $7.7 million which included in $7.1 of product revenue and $650,000 of royalty revenue, was within our guidance of $7.6 to 8 million. New products contributed $1.4 million of revenue, or 18% -- which was lower than our guidance of $1.6-1.9 million, due to lower-than-expected demand.

Option Wireless accounted for 12% of Q4 revenue -- which was lower than we expected in our guidance, due to the lifecycle of the option application and to our inventory position.

Our pASIC 1 and pASIC 2 products contributed $1.4 million or 18% of revenue in Q4, compared with our guidance of up to $1 million. Q1 and Q2 demand was higher than we expected during the quarter, and we benefited from a distributor inventory reduction during Q4. Also during Q4, we recognized $650,000 of royalty revenue from Aeroflex. In Q4, Aeroflex reported to us for the first time, to sell our products using our ViaLink technology. Please note that the recognition of this revenue is dependent on sales repeated by Aeroflex. They have not provided us with guidance on their revenue outlook. Going forward, internally, we expect quarterly royalty revenue from Aeroflex to be approximately $100,000.

Other items of note from our 4th quarter results -- again, on a non-GAAP basis unless noted otherwise, include -- a gross margin of 43.9%. Includes the impact of inventory reserves and royalty revenue. We took a $1.2 million charge against the encryption inventory in Q4. This reserve reflects a lower current demand outlook and our prosumer customer mix.

Without the charge for inventory reserves, our gross margin would've been 58.9% in Q4. Without the inventory reserve charge and without royalty revenue, our gross margin would've been 55.2% in Q4.

As an aside, and since we did not discuss our financials on our Q3 call, I want to mention the way charges against inventory of $1.2 million in Q3 due primarily to the effect of our QLP, QL1P300 [inaudible] device is expected to have on our large-density Eclipse II business. And due to reserving pASIC 1 and pASIC inventory -- which was excess to [our backlog] at that time.

Our Q4 operating expenses generally benefited from lower competition costs due to lower headcount and lower incentive expense associated with the Company's underperformance to plan.

Q4 research and development expense of $2.1 million was down $300,000 sequentially, due to lower compensation and project costs. Q4 SG&A expenses of $4.6 million increased $850,000 sequentially. During Q3, we had a $200,000 credit to legal expense. When we got to Q4, we incurred a $300,000 one-time legal expense. These announced cost of $500,000 sequential increase in SG&A.

In addition, we incurred $300,000 of higher charges for the internal stock option review in Q4 as compared to Q3. Our Q4 operating loss was $3.3 million, as a result of reduced revenue, inventory charges of $1.2 million, and the one-time SG&A expenses described earlier. Interest and other income net contributed $306,000 in Q4, and a non-GAAP net loss of $3 million, or $0.11 per share.

Our GAAP results for Q4 were gross margin of 43.3%, an operating loss of $3.6 million, and a net loss of $3.3 million or $0.12 per share.

Our Q4 GAAP results include $300,000 of stock-based compensation charges, of which $45,000 was charged to cost-of-revenue, $47,000 to research and development, and $208,000 to SG&A.

We consumed $5.2 million of cash in Q4, compared with our guidance that we reduced more than $3 million of cash in the quarter. Wafer deliveries occurred earlier in the quarter than planned, and as a result, we spent more than expected for inventory purchases. In addition, our product revenue was lower-than-expected in Q4.

Now I'd like to turn the call over to Tom.

Wow! [laughter] What a mind-numbing array of numbers, there, Carl. Good job! Thank you.

Clearly, the team here at QuickLogic is not satisfied with our 2006 revenue and earnings results. Our original view in Q4 2005 was that our customers for new products -- Eclipse II, QuickPCI II, QuickMIPS and PolarPro, would purchase sufficient product to make up for the planned decrease in revenue from pASIC 1 and 2 end-of-life. Our expectations proved to be optimistic -- which we acknowledged in our Q2 revenue conference call, when we said 2006 revenue would not exceed 2005 revenue.

pASIC 1 and 2 product revenue decreased in 2006 by more than $15 million, compared with 2005. As we expected, pASIC 3 revenues increased year-over-year by just over 26%, as some customers replaced p2 in their designs with a PIN-for-PIN compatible P3. We do expect modest growth of pASIC 3 revenue in 2007.

Total revenue excluding new product revenue, declined year-over-year by just over $18 million. As I said before, owing to $15 million of p1 and p2 end-of-life, and the fact that 2 major customers in China and Japan completed their programs.

In this very tough year, the good news is that new product revenue -- namely, Eclipse II, QuickPCI II, QuickMIPS and PolarPro, increased by over $5 million year-over-year, as we shipped these products to over 100 customers, worldwide. Many of these shipments were for preproduction quantities, which we believe will turn into more significant revenue this year. New product design activity remains encouraging, as our focus on offering solutions instead of components gains traction with customers and partners. More on this in just a minute.

Let's take a closer look at what this whole solutions business really means. We believe this is our future, and the way we become the market leader in providing the lowest-powered programmable logic solutions.

By many measures, QuickLogic FPGAs are superior to the market leaders SRAM-based FPGAs. The most obvious measure is our low static and operating power. Our low-power characteristics are actually baked into the technology we invented, which we use to make our FPGAs. However, the programmable logic market reality is that the vast majority of customers prefer FPGAs that are reprogrammable. Ours are not. Our patented ViaLink technology, once programmed, is permanent.

We implement our 100% solutions in our programmable logic. Our 100% solution customers don't even come in contact with programmable logic. They're buying a complete solution.

For example, a Tier 1 Taiwan ODM, who would not consider using an FPGA in their battery-powered handheld product, is using our 100% solution. Why is that? Our 100% custom solution provides them with short time-to-market, low power, and is cost-effective.

At the Consumer Electronics Show in Las Vegas 3 wks ago, we had a suite where we featured end-product demos, and reference designs that use our latest solutions. These solutions are ideal for portable, convergent consumer-electronic products requiring wireless connectivity, mass storage, and digital TV.

Examples include SmartPhones, portable media players, portable navigation devices, PDAs and gaming systems. All our solutions are optimized for battery life, and enhance user experience, and offer a small-form factor. Please see our website and our press release dated January 8th for the complete details of what we demoed there at CES.

At CES, we also had an editor event for the technical and business press. As it turned out, these editors had just been to the FPGA market leaders' press event the day before, where they heard the market leader proclaim that half their revenue currently comes from solutions. Wow! How could we possibly expect to compete with this giant with our offerings? Very good question.

Well, there are solutions and then there are solutions. An FPGA is not a solution, from the buyers' perspective. It's a capability. An FPGA is a blank slate of programmable logic cells that the user can put his design or intellectual property into. So it's not a solution.

And even when soft IP is offered to perform specific system functions, FPGAs still require that the customer deals with the programmable logic. So it's clear that the SRAM-based FPGA solutions are -- at best -- partial solutions, requiring significant logic design, verification, testing, et cetera. Or -- said another way -- "Some assembly is required."

Our solutions are 100% complete. No assembly required. Our solutions appear to the customer as either an application-specific standard product -- an ASSP -- or, if the customer desires a turnkey design, a unique custom solution specifically for them.

So let's take a concrete example. We offer a solution called, "Quick IDE," enabling our customers to connect an IDE-based hard disk drive to an embedded processor. Just straightaway. Our solution includes everything required. Silicon, software drivers, system design environment, et cetera. A no-muss-no-fuss solution. They're basically buying an ASSP.

Or a customer may want to connect his processor to an IDE hard disk drive and also have some custom logic they need. For example, in order to buy a cheaper display. So we'll do the custom logic for them. They are basically buying a 100% custom solution.

As you might expect, solution-selling requires a new customer approach. Our solutions -- either standard or custom -- offer very low-power. That makes them ideal for handheld, battery-powered products. So we focused our sales and marketing team on portable consumer, prosumer and industrial suppliers.

The FPGA market, in contrast, is very horizontal, with lots of customers. Our new markets are very vertical -- which enables us to target fewer customers. And, of course, we are targeting and partnering with embedded processor-suppliers like Marvell and ADI, to be a companion solution with their embedded processors.

As you know, Marvell announced the acquisition of the X-Scale embedded processor business from Intel in June of last year. They completed the sale in December. We're in close contact with Marvell management of this business group, and are developing a tight working relationship with them for customers that need additional functionality not currently available in existing or announced Marvell embedded processors.

While there may have been a few customers that were nervous about the sale to Marvell, I can tell you that Marvell's management is attacking the market. They are getting the wafer starts to expand their business, and the R&D dollars to do the technology shrinks required to be cost-competitive. I predict they will be a potent competitor, just as Marvell is in other businesses they've entered -- like the hard disk drive market they now dominate. We have seen significant increase in partnership activities with Marvell in Q4.

In November, we hired a new worldwide sales Vice President. His name is Andy Pease. He's a world-class semiconductor sales professional. A real leader. Most recently, Senior VP of worldwide sales at Broadcom. He understands solution selling, and is shaping our field team to excel. Andy knows that selling is a process -- not an art. And we are implementing focused, disciplined sales strategies to clearly adapt our value propositions to specific customer needs.

Instead of our sales team calling on thousands of FPGA customers, we are focused on 100 OEMs and ODMs that will value our solutions and buy them in large quantities.

Great news last week. HTC -- a Tier 1 ODM from Taiwan -- introduced an ultra-mobile PC with T-Mobile in Europe. This is the new product design win we talked about in previous calls, and expected to go into production in Q4. We originally thought this was a very smart phone. And I guess you could call it that. But they call it a "mobile office PC." Check out their website, and then go buy one.

In closing, we believe we're on the right path and have the right team to achieve our vision of becoming the market-leading provider of the lowest-power programmable logic solutions. While my personal credibility, to put it mildly, has no doubt been strained by our past performance, strong customer acceptance of our low-powered solutions gives us encouragement to press on with all our energy and vigor. We believe this will be our breakout year. Carl?

Thanks, Tom. Now let's turn to our guidance for the first quarter, and some comments on our business. As we mentioned earlier, Option Wireless represented 12% or $900,000 of Q4 revenue. Due to the stage of their product in this lifecycle, and due to their inventory position, we currently are not expecting additional revenue from this application until the 2nd quarter of 2007. However, we expect revenue from other new product customers to roughly double, sequentially. Accordingly, our Q1 new product revenue guidance is for $800,000 to $1.1 million.

As a result, our total revenue guidance is a disappointing $6-6.5 million for Q1 -- reflecting an expected drop in revenue from Option Wireless, pASIC 1 and pASIC 2 customers and royalties.

In addition to Andy Pease, our new VP of Worldwide Sales, we brought significant marketing and sales talent into the Company beginning in late Q3. This new talent is allowing us to focus our sales team on target accounts, and we expect to see the results of these efforts reflected in our pipeline by the midpoint of the year. Because of these activities, our current pipeline, and the solutions that Tom described, we believe we have a significant opportunity for sequential quarterly revenue growth during 2007, and that Q1 will be our low revenue point for the year.

Based on our revenue level and expected product mix, we are guiding that Q1 gross margin will be 48 to 53% of revenue. We expect our Q1 non-GAAP research and development expenses to be up $200,000 to 400,000 sequentially -- reflecting higher compensation costs and higher new product development expenses.

We expect our SG&A expenses to be flat-to-down $200,000 sequentially -- as lower legal costs and expenses associated with the stock-option review are offset by higher expenses for field-sales personnel, incentive expenses and seasonal expenses associated with our annual report and internal control testing.

As a management team, we are focused on increasing demand for our new products, while making only necessary investments in R&D and SG&A. We currently expect to achieve lower operating expenses in Q2, with roughly the same headcount.

Interest income, interest expense and other net is expected to be income of up to $150,000 in Q1. We expect Q1 stock-based compensation charges of about $400,000 in Q1. We may use up to $4 million of cash in the 1st quarter, due primarily to our low revenue level, accounts payable related to wafer purchases and planned capital expenditures.

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

Thank you, Carl.

Well, I want you to know that we're fully committed to driving our 100% solutions into the portable consumer and prosumer market. We are totally engaged and energized, and our Company-wide morale is very good, as we believe we can see our way through this most difficult product transition and achieve market leadership. Leadership that is driven by supplying 100% solutions -- not FPGAs.

Details of upcoming events can be found on our website, at www.QuickLogic.com. Now let's open up the call for questions. Janie, please?

Thank you, sir. If you would like to ask a question, please press the * key, followed by the digit, "1," on your touchtone telephone. If you are using a speakerphone, please make sure your mute function is disengaged, to ensure that our equipment can hear your signal.

Again, that is *1 on your touchtone telephone to ask a question at this time. And we'll pause for just a moment to assemble our roster.

And we'll take our first question from Edwin Mok with Needham & Company.

Hi, guys.

Hi, Edwin.

Hi. I've got a quick question on revenue. You talk about this Option Mobile PC that HTC announced. Did you recognize any revenue on the 4th quarter? Or is that more of a 1st-quarter or 2nd-quarter when it starts to ramp? [inaudible]?

We had some initial production revenue from that application in the 4th quarter. We've seen some activity in the 1st quarter, as well. They're just rolling that out. We think it's going to gather momentum through the 1st half.

I see. Okay. That's great. Another question is actually not on your new product, but on the ESP product. It actually declined a little bit on the 4th quarter. Going forward in the 1st quarter, do you think that that will stabilize? Or do you think you see a continued decline on that product line?

We think it's going to be roughly the same in Q1. We expect a little bit of an uptick in Q2.

I see. Do you guys want to give any kind of guidance of how much mix of the new product is, relative to the revenue for the full year of 2007?

No. We're going to stick to quarterly guidance.

You're going to stick to quarterly guidance. Okay. Great.

I guess one more question. You guys obviously are losing money. Right? Any idea of... You talk about [inaudible] things stabilizing [inaudible] for the 2nd quarter. Any idea what will be a break-even point for you guys? At what revenue level do you think you can break even?

Well, we've traditionally talked about our breakeven being in the 12-12.5 million range. With the real focus on spending, we dropped that to no more than $11 million -- probably less than that. So that's -- we think -- substantial progress for the Company.

I see. Great. Thanks. Fine.

And once again, that is *1 to signal with a question, at this time. And we'll go next to Gary Mobley with AG Edwards.

Hi, guys.

Hi, Gary.

Tom, to the extent that you're willing to share, I was hoping that you would walk us through the lumpiness in the Aeroflex royalty contribution to you guys.

Tom's looking at me, Gary. [inaudible] [laughter]

I'm assuming all the royalty revenue in the quarter -- the 650,000 -- was recognized from deferred revenue. And I'm just wondering why the one-time spike in the quarter, and why the big dip back down to the 100,000 per quarter level.

Well, we're just really dependent on what Aeroflex reports to us from a royalty revenue perspective. We were fortunate in that Q4 they reported revenue to us for the first time. There's a little bit of a catch-up component to that, and we think that going forward, it's going to settle out in that 100,000 level. Right around there.

We of course had a great relationship with those guys, but they are in no way giving us guidance going forward on what they expect their business to be like. So that $100,000 number is kind of an internal projection.

So the amount they paid you guys in the 4th quarter was included -- a fair chunk of catch-up. So it wasn't all product shipped by them in the September quarter.

Correct.

Okay. What was the personnel count at the end of the quarter?

Roughly 150.

And what was the delta there?

It was just a handful of people.

And Tom -- maybe one other philosophical and perhaps too deep of a question for the conference call, but I'll ask it, anyway. You mentioned this transition to offering of solutions. And I'm just wondering why you guys can bare the risk better -- the non-recurring engineering risk better -- than some of your customers that you're working with. And how you're able to make the economic model work better than your customers.

Well, because what we're doing is designing standard products, and not one-off products. So we're sharing the NRE, basically, across multiple customers. These are standard products. Not ASICs. There are some smaller [inaudible] perhaps of customization, but as an example, IDE -- we supply that to multiple customers, and therefore, should spread that engineering cost across those customers.

Okay. So for whatever minor tweak you might have to do to get a customer, your goal is to try to leverage that with potential future customers. Is that correct?

Well, the custom aspect, you probably wouldn't leverage, because that's [inaudible] guide. But the standard product aspect of it, you would.

Gotcha. Okay. All right. Thanks, guys.

Thank you.

And once again, that is *1 on your touchtone telephone, if you'd like to ask a question. And we'll pause for just a moment.

And there appear to be no further questions at this time. I'll turn the call back to you, Mr. Hart, for any additional or closing remarks.

Okay. Well, thank you for your time. We look forward to chatting with you in our next conference call, the date of which escapes me, here. The 26th of April -- for the Q1 conference call. Thank you kindly. Bye-bye.

And that does conclude today's conference. Thank you for your participation. You may disconnect at this time.