Quicklogic Corp (QUIK) 2007 Q2 法說會逐字稿

Good day, everyone, and welcome to the QuickLogic Corporation second quarter 2007 earning conference call. Today's call is being recorded and will be available for playback beginning at 8:30 p.m. Eastern time. (Operator Instructions.)

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

Good afternoon, ladies and gentlemen. Thanks for joining us today. Carl will take you through our second quarter 2007 financial results, and then I'll share my perspective on our business. Finally, Carl will detail our guidance for the third quarter of 2007, 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 related 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, the effects of our customer-specific standard products and our ArcticLink solutions platform, and our financial expectations for revenue, gross margin, profitability, and cash.

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 10-K, quarterly reports on Form 10-Q, and prior press releases for descriptions of these and other risks that could cause actual results to differ materially from our 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, for the second quarter of 2007, and on a non-GAAP basis, our revenue of $8.4 million was 35% sequentially higher and exceeded the guidance of $7 million to $8 million. We had significant overall revenue growth, including new products, mature products, and end-of-life products. We were pleased to show significant growth over our Q1 revenue level of $6.2 million, consistent with the guidance that Q1 would be our low point of quarterly revenue for 2007.

Our non-GAAP gross margin of 53.3% was at the midpoint of our guidance, which was 50% to 57%. The sale of previously reserved inventory benefited our cost of sales by 2% revenue in the second quarter and was more beneficial than our first quarter results, due primarily to the sale of previously reserved pASIC I and pASIC II products. Our spending was favorable compared with guidance at the quarter end. Our cash position at July 1 of $19.8 million represented a decline of only $1.3 million, compared to guidance that cash would decline up to $2.5 million. This was due to better collections and lower capital expenditures.

New products contributed $1.1 million of revenue in the second quarter, representing 14% of total revenue and increasing 34% sequentially. This was within our guidance. It's a key point worth making when we discuss our year-over-year revenue change, Option Wireless was our largest new product customer during 2006 and contributed $1.7 million of revenue in the second quarter of 2006. As we expected, Option did not contribute significant revenue in the second quarter of 2007. Excluding the effect of Option Wireless, new product revenue increased 100% compared with the second quarter of 2006. Including Option Wireless, new product revenue declined by 50% compared with the second quarter of 2006.

Our total Company revenue for the second quarter declined $840,000 compared to 2006, primarily due to the reduced sales to Option Wireless.

Let me take a moment to comment on operating expenses, again on a non-GAAP basis. Research and development expense of $2.3 million was flat sequentially and was favorable compared with our guidance of a $200,000 to $400,000 increase. Preproduction project expenses were lower than expected during the quarter. SG&A expense of $4.1 million declined by $200,000 and was favorable compared with our guidance that SG&A would be within the $150,000 of Q1 levels. We continue to carefully manage our SG&A expenses while driving the customer design activity aimed to increase our new product revenues.

Other income expense contributed income of $245,000 in the second quarter, primarily due to earnings on our invested funds and a gain on the sale of test equipment. Our non-GAAP net loss was $1.7 million or $0.06 per share in the second quarter, compared with a net loss of $5.5 million or $0.19 per share in Q1 of 2007. Our Q2 non-GAAP net loss was $400,000 higher compared with a net loss of $1.3 million, or $0.05 per share, in the second quarter of 2006. The change in our net loss was caused by a decline in gross profit of $600,000, due primarily to lower revenue, partially offset by a $210,000 reduction in operating expenses. Results for the second quarter of 2007 on a non-GAAP basis excludes stock-based compensation of $428,000.

Now let's summarize our GAAP results. Our second quarter GAAP net loss was $2.1 million, or $0.07 per share, compared with a net loss of $5.9 million, or $0.20 per share, in the first quarter of 2007, again compared with a net loss of $1.7 million, or $0.06 per share, in the second quarter of 2006. On a GAAP basis, our second quarter gross margin was 52.7% of revenue, R&D expense was $2.3 million, and SG&A expense was $4.4 million.

I'd like to take a moment to discuss a few balance sheet and cash flow items. At July 1, debt-free cash position was $16.7 million. Our reported inventory declined by $850,000 compared with our April 1 balance sheet, primarily due to $760,000 of inventory write-downs during the quarter. Our capital expenditures were $210,000 in the second quarter. Our (inaudible) accounts receivable represents 29 days of sales outstanding and is lower than our target DSL of 43 to 46 days. We currently have 129 days of inventory on hand and three days of inventory via distributed channel.

In summary, demand for our solutions was higher than expected during the quarter. Revenue exceeded guidance. Gross profit was at the midpoint of our guidance. In addition, operating expenses and our ending cash position were favorable compared with our guidance. Now I'd like to turn the call over to Tom.

Okay. Thank you, Carl. New product revenue increased 35% sequentially, while mature products were up 27% sequentially, to just under 60% of total revenue. End-of-life products, which include pI, pASIC I, pASIC II and V3 products, represented 27% of revenue. A good quarter, you might add? Yes, but really just a start in what we think will be the ultimate validation of our customer-specific standard products, or as we call them, CSSPs. You might ask, "What is the ultimate validation of CSSPs?" Well, we all know that. It's revenue and gross margin dollars.

An industry trend that is worth discussing briefly here is that our customers are no longer designing products. Yes, you heard me right. They are no longer designing products. They either outsource product design to ODMs, or they're designing platforms--platforms from which they intend to derive many products. The trick here, then, is to be sure the new platforms they design can be readily adapted to meet changing product features over an extended period of time. The trend is clear and is brought on by the rapid new product introductions demanded by the marketplace in response to intense competition.

Today we are winning designs in portable media players with market-leading suppliers. These customers are using Arctic Solutions, ArcticLink Solutions platforms to future-proof their current designs. For example, one customer is using ArcticLink to enable two SDI O ports today with the intent of using the high-speed USB 2.0 OnTheGo as well in their next generation products.

We're winning designs in portable navigation devices today with market-leading suppliers and are progressing to multiple designs at specific customers. Our CSSPs typically enable boot for managed NAND in these systems, which eliminates the need for NORflash, as well as several other components in the design. These customers value our IP, our small package geometries, our CSSPs' ability to reduce their bill of materials cost and complexity and the resulting board, space, and power savings.

We're also winning designs in smart phones with leading suppliers. By the way, the term "smart phone" now encompasses a spectrum of devices, namely, cellular connectivity combined with many other functions--like PDA, Web and e-mail access, digital camera, and on and on. We've been introducing the ArcticLink Solutions platform to these customers for about six months now under nondisclosure agreements. These suppliers value the high-speed USB 2.0 OnTheGo and FI available in our ArcticLink CSSPs, which enable system designers to quickly transfer data as a host or device without heavy processor utilization. These customers also use ArcticLink for boot for managed NAND, allowing system designers to replace several components in their system while extending battery life.

We are the new QuickLogic, a truly innovative company offering complete solutions and world-class support for the challenges our target customers experience in making portable, battery-powered, handheld prosumer products. We are no longer primarily an FPGA company or a programmable logic supplier. We utilize our CSSPs to offer truly complete solutions tailored for specific customers in our target markets. Carl, back to you.

Thank you, Tom. Now let's turn to our non-GAAP guidance for the third quarter and comments on our business. As Tom mentioned, our new customer-specific standard products are resonating with major customers, and they clearly see our value proposition. We expect our focus on these accounts to result in significant revenue. We believe we're generating good traction. The new sales and marketing talent that we have attracted to QuickLogic is clearly having a positive impact on our success. We expect these new hires to generate new product revenue in our target markets over the next several quarters. We expect our new product revenue to be up sequentially again in the third quarter and believe we will achieve $1.8 million of new product revenue, plus or minus $200,000. At $1.8 million, new product revenue will increase nearly 60% sequentially. This growth is being driven by new production range in our target markets.

We expect total Q3 revenue to be $8.5 million, plus or minus $300,000. We do expect growth in our new product revenue to be offset by a decline in end-of-life product revenue. Based on the mix of products we expect to ship in the third quarter and planned overhead costs and production variances, we are guiding our gross margin will be 50% in Q3, plus or minus 2%. We expect a sequential increase in our research and development expenses of $600,000 to $800,000 while we are working with top customers in our target markets to define our next-generation (inaudible) ArcticLink solutions platform. We plan to start these development programs in the third quarter. These programs will include the purchase of another intellectual property.

We expect third quarter selling, general and administrative expenses to be within $150,000 of our second quarter results. Interest income, interest expense and other net includes interest income and invested cash, foreign exchange gains and losses, and interest expense on borrowing. Second quarter results also included a $95,000 gain from the shareholders' fixed assets. Due to the expected levels of interest income and higher interest expense associated with new debt, we expect these accounts will contribute income of up to $100,000 in the third quarter. We expect our tax provision will be insignificant in the third quarter. We may use up to $200,000 of cash based on expected increases in accounts receivable and forecasted capital expenditures.

Let me take a moment to mention a few other points. Stock-based compensation for FAS 123R charges in our third quarter are expected to be about $450,000 and to be included in costs of revenue, R&D, and SG&A expenses. Our manufacturing strategy is to continue to reduce the cost of producing our products so that we can pursue higher volume sales opportunities. We believe that our new PolarPro architecture will continue to reduce our cost per unit and that our ArcticLink Solutions platform represents significant additional value to market-leading customers in their platform designs.

We're also actively reducing our other costs of sales by price negotiations and by decreasing the time and cost needed to test and program our products. Our target financial model, 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% to 62% of revenue, to have research and development expenses of 17% to 19%, and to have SG&A expenses of 19% to 21%. This would result in income from operations of 20% to 26% of revenue. We believe that lower costs associated with our new PolarPro architecture and ArcticLink Solutions platform and the development of new products are significant factors in achieving the gross margin objectives in this non-GAAP model.

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

Okay. Thank you, Carl. This quarter I specifically would like to thank our ArcticLink team for the spectacular results they've achieved. On time, on budget, and now in full production, and just in time for significant customers, early design wins, already moving into production. Well done to the team. Thank you.

On July 30, we'll be presenting at the SRA Tech Conference at the Omni Hotel in downtown San Francisco. I hope you can join us there. We're also doing an editor-analyst day luncheon and presentation at the Four Seasons Hotel in East Palo Alto on Tuesday, August 28. We'll be sharing our vision for the new QuickLogic, including a high-level overview of our CSSP road map. And finally, our third quarter earnings conference call is scheduled, is currently scheduled for Wednesday, October 24, at 2:30 p.m. Pacific Time.

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

(Operator Instructions.) We'll go first today to Edwin Mok with Needham and Company.

Hi, guys. Congratulations for a good quarter.

Thank you, Edwin.

I want to start off by asking you some questions about your revenue. It seems to me that the revenue comes from Europe and also the American revenue has gone up quite a bit sequentially in the last quarter. Can you make some, put some color to that, why that's the case, or which customer is really driving that growth?

Of course, we looked at that for the call, and what we found is that both in Europe and in the military/aerospace, that really the revenue is broadly based across several customers. There's no one or two customers that are dominating the growth. That's good, broad-based growth for us across, in terms of the military market across our older products, and Europe across our mature products.

Is the nature of that more related to the pASIC III? I'm just curious, because I know that the pASIC III is on, so a lot of it is sold to the military space.

I'd have to check that, but it could be pASIC III or QuickRAM.

I see. Good. Thanks for the comment. In terms of your end-of-life product, just for some clarification, did you guys actually recognize any revenue on the pASIC I and pASIC II this quarter?

Yes, it was about flat this quarter compared with Q1, and we did, and the real change or us is that we had some significant end-of-life for V3 this quarter.

So, then, in fact, the question, in terms of when these things are, the full pASIC I, II, as well as the V3, when do you think those products will maybe stop generating revenue?

Our current expectation is it will generate some revenue through the end of the year.

And for V3 as well?

Spotty, that would be more spotty, but yes.

I see, so it's both, both products. Great, thanks. In terms of your new product, did you guys start generating any revenue under ArcticLink?

You know, we just released the Arctic to production about 10 days ago, and so it's a little early for production shipments yet, but we're getting close with some customers and taking early production volume.

We do already have orders for the product. We're waiting for first article approval from customers.

So it sounds like you guys (inaudible) in the second half you'll generate some revenue from that, and then the orders will be much more substantial?

You bet.

That's a good way to look at that, right? That's great, great color. In terms of R&D, your guidance is for R&D for next quarter is quite aggressive, and you mentioned there's some new program including a purchase of IP. Is it possibly that to give more color on that, either in terms of any new product that you guys are talking with (inaudible) ArcticLink, and/or what type of IP are you looking for?

Yes, we really aren't prepared to do that until we do the product announcement, Edwin. But you can pretty much guess that it's going to be follow-on oriented products for ArcticLink. And I guess the one key point is that we believe that this product has the opportunity to add even more value than the first ArcticLink product.

Right. So based on that comment, it sounds like you guys are talking new applications besides where you guys are at right now?

We're target on the, on battery-powered, handheld applications. But look at what's happening in that space. They're adding--just take a look at video and imaging. Look what they're adding there, and the changes that are taking place there. So there's a lot of room to grow and never leave that space of battery-powered, handheld prosumer devices, which is where we have a real advantage based on flexibility, of course, but also low power.

Okay. I guess I'll, the point all and what I was trying to get to is, you guys have announced the managed NAND solution. You guys also have announced some story solution. Sounds like you guys are looking to work on, and not other solutions that you might announce when you're down the road. Is that the correct way to look at that?

That's correct.

Great. Thanks for clarifying that. I'll pop onto anybody else and then I'll come back.

Thanks, Edwin.

(Operator Instructions.) We'll go next to Paul McWilliams with Indie Research.

Hi, guys. Congratulations. Wonderful quarter.

Thank you, Paul.

Thanks a lot.

Yes, the traction looks good. It looks to me, and tell me if I'm wrong, as though the military came through with some nice up side, as well as everything else going good, and then by next quarter, some of that up side, maybe the end-of-life stuff, slips away a little bit but is replaced, and then maybe more than replaced with the new business?

Well, I think Carl commented on it specifically. We expect the new business to grow significantly. I think the number he gave you was $1.8 million up from $1.1 million.

Yes.

Which is over 60%, but we're also losing others as well. So we won't see a quarter that's up 60%.

Oh, no, no, no. It looks as though it's going to compensate some of the end-of-life stuff that might be going away next quarter, is where I was going.

Right. Correct.

Okay. Moving over here to Option, what segment were they in?

Data cards.

Pardon me?

Datacom and telecom.

Okay.

Data cards is what, oh, the segment--yes, sorry--datacom/telecom.

Okay. And a smart phone. Would that be telecom?

No, we put that, we're putting that in consumer on a forward-going basis.

Okay. If you had a consumer segment for this particular quarter, would we have a meaningful number in it at all?

It would be a small number this quarter.

Okay, so we'll just look forward to that. Gross profit guidance, I think you pretty well outlined that you've got some aggressive plans, and you're still modeling long-term to the 60% to 62% at $25 million. What's happening next quarter that's dragging it down so much?

Well, we've made some significant inventory purchases on our new products, and those purchases, if we were to buy those (inaudible) at a lower cost, that's number one.

Got you.

And we think that that was a great move, and then that's opening up some opportunities for us. But we do have to work through that inventory.

Okay. Will there be an advantage in economy of scale once these get up to higher volumes?

Clearly, clearly. Both from a--the biggest economy of scale for us really comes in, in terms of test and in programming, and we're implementing that right now.

Wonderful, wonderful. Well, again, thank you very much for a great quarter, and pass it along to the sales and marketing team. Great job.

Thanks, Paul.

(Operator Instructions.) We'll pause a moment to see if we have any additional questions this afternoon. And we do--Edward Mok with Needham and Company.

Hi, you-all. I've got a question on taxes. Assuming that, as you guys continue to grow, I think that some point in time you guys will start turning a profit, right? How should I visualize that in terms of taxes? Am I supposed to look at you guys will have some taxes, or you guys really expect to have no taxes for a period of time?

Well, we expect to have just like 2% of U.S. income for a long period of time.

So (inaudible) nominal. And then the other thing--obviously, (inaudible), looks like, you know, while your R&D guidance is a little higher next quarter, is that, should I look at that as more of a one-time new program cost?

Yes, those are, yes, that's right. Those are third-party costs, and those aren't recurring costs.

Great. So it looks like actually, you actually have improved your OpEx target compared to how you guys guided last quarter. Is that, and you saw the--at what revenue level do you guys think you'll reach profitability or breakeven point?

We've typically talked about that being 11 to 12.

$11 million to $12 million, and you guys really are sticking to that guidance, then?

That's right.

Even though you're, you guys have lower OpEx this quarter and it looks like you guys actually, looks like some of those improvements, especially on the SG&A side, sounds like it's more permanent than just a one-time improvement in this particular quarter, is that correct?

Believe me, Ed, when we're sure working it.

Sounds great. Thanks for clarifying that.

Okay. Thank you.

And at this time there are no further questions in our queue. We'll offer one last opportunity. (Operator Instructions.) We'll pause just a minute to see if we do have any additional questions today. Well, Mr. Hart, at this time, no one else is signaling for a question, so I'll turn it back to you for any closing remarks you may have, sir.

Okay. Well, thank you for your time. We appreciate the fact that you're interested in what we're up to at QuickLogic here. We're very excited about the new QuickLogic and our customer-specific standard products, and we look forward to sharing more of that with you in October. Thank you.

Ladies and gentlemen, this does conclude our conference. We appreciate your participation. You may disconnect at this time.