Quicklogic Corp (QUIK) 2007 Q3 法說會逐字稿

Good day, everyone and welcome to the QuickLogic Corporation third-quarter 2007 earnings conference call. Today's call is being recorded and will be available for playback beginning one hour after the completion of the call. To access the replay, please dial 719-457-0820 with the pass code 5642724.

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. Please go ahead, sir.

Okay, thank you. Good afternoon, ladies and gentlemen. Thank you for joining us today. Carl will take you through our third-quarter 2007 financial results, and then I'll share my perspective on our business. Finally, Carl will detail our guidance for the fourth quarter of 2007 and then we'll take questions. Carl?

Thank you, Tom. Before we get started, I'd like to start with a 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; the effect of our customer-specific standard products or CSSPs and our ArcticLink Solutions platform and our expected results; 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. QuickLogic assumes no obligation to update any such forward-looking statements.

For your information, this conference call is open to all and is being webcast live. It can be accessed from the Investor Relations area of the QuickLogic website, located at www.quicklogic.com/investors.

Overall, for the third quarter of 2007 on a non-GAAP basis, our revenue of $9 million increased 7% sequentially and exceeded our guidance of $8.5 million, plus or minus $300,000. Our new product revenue of $1.6 million met our guidance for the quarter. In Q1 of this year, we introduced customer-specific standard products. CSSPs are complete solutions which we design and implement for our target customers.

We had our first CSSP revenue in Q3 as CSSPs were a significant factor in the $1 million sequential growth of new product revenue.

Please note that we have announced an ended life for QuickMIPS. As such QuickMIPS is now reported as end-of-life product family revenue. On earlier conference e calls, QuickMIPS revenue had been included in the new product family. For your information, [QuickLogic] contributed approximately $200,000 of revenue in Q3 and $500,000 of revenue in Q2.

Let's go down to talk about gross margin now. Our non-GAAP gross margin was 53% and it was higher than our guidance of 50%, plus or minus 2%. The sale of previously reserved inventory improved our gross margin by 4% of revenue in the third quarter and was higher than expected.

Our operating expenses were lower than guidance in Q3. R&D was favorable to our guidance. Actually the reorganization of one of our tier-one target customers, delayed the definition of one of our future ArcticLink solution platforms. As a result, our purchase of intellectual property for these platforms has moved to Q4. In addition, SG&A was favorable to (inaudible) guidance and competition expense was lower than expected in the quarter as were litigation expenses.

Our cash increased by $1 million sequentially, compared with our guidance that we could use up to $2.5 million of cash in Q3. Several items led to this improvement. First, our operating expenses were significantly lower than our guidance. Second, accounts payable was higher than expected due to the timing of purchases in the quarter. Third, our days of sales outstanding remained low at 26 days, so our collections were better than expected. And finally, ending inventory was lower than expected for the quarter.

A few other comments on the quarter follow. New products, as noted earlier, contributed $1.6 million of revenue in the third quarter, representing 18% of total revenue and increasing 165% sequentially. There is a key point worth making when we discuss our year-over-year revenue change. Option Wireless was our largest new product customer during 2006. It contributed $1.5 million of revenue in the third quarter that year. Option contributed approximately $300,000 of revenue in the third quarter of 2007. Excluding the effect of Option Wireless, new product revenue increased 129% compared to the third quarter of 2006. Including Option Wireless, new product revenue declined by 24% year over year.

Our total third-quarter revenue increase of $430,000 in 2007 compared with 2006 was primarily due to higher (inaudible) parts family and higher mature part family revenue.

So I'm just going to comment on operating expenses on a non-GAAP basis. Research and development expense of $2.25 million was flat sequentially, was favorable compared with our guidance. As noted earlier, we are obtaining additional tier-one customer feedback for purchasing intellectual property for use in future ArcticLink Solution platforms.

SG&A expense of $3.7 million declined by $450,000 sequentially, and it was favorable compared with our guidance. Compensation and litigation expenses were lower than expected in the quarter. The lower litigation expense was due to the dismissal of the stock-option litigation in August. We continue to carefully manage our SG&A expenses while driving the customer design activity needed to increase our new product revenue.

Other income expense contributed income of $120,000 in the third quarter, primarily due to earnings on our invested funds. Our non-GAAP net loss was $1 million or $0.04 per share in the third quarter, compared with the net loss of $1.7 million or $0.06 per share in Q2 of 2007.

Our Q3 non-GAAP net loss was $1.6 million favorable compared with our net loss of $2.6 million or $0.09 per share one year ago.

Higher revenue, improved product mix, and lower charges for inventory reserves contributed $1.5 million of higher gross profit in Q3 of 2007. Operating expenses were also $260,000 lower than one year ago. In addition, we had $150,000 of lower interest income compared to 2006.

Results for the third quarter of 2007 on a non-GAAP basis exclude two things- stock-based compensation of $452,000 and a small amount, $7,000, for the write down of long-lived assets.

Now let's summarize our GAAP results. The third quarter GAAP net loss was $1.5 million or $0.05 per share compared with a net loss of $2.1 million or $0.07 per share in the second quarter of 2007 and a net loss of $3 million or $0.10 per share in the third quarter of 2006.

On a GAAP basis, our third quarter gross margin was 52.2% of revenue. R&D expense was $2.3 million and SG&A expense was $4 million.

I want to note a few balance sheet and cash flow items. Our inventory did decline by $780,000 compared with our July 1st balance sheet. Our capital expenditures were $1.1 million during the quarter. Now our third quarter ending accounts receivable represents 26 days of sales outstanding and is better than our target DSO of 43 to 46 days. We currently have 102 days of inventory on hand and three days of inventory in the distributor channel.

In summary, demand for our CSSP solutions was high during the quarter. Revenue and gross margin exceeded guidance. In addition, operating expenses and our ending cash position were favorable compared to our guidance.

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

Okay, thank you, Carl. If all one looks at is the top-line revenue, we had a good quarter; growth of over 7%. New product revenue is fast becoming a very positive situation as we are now shipping in volume CSSPs based on both PolarPro and ArcticLink Solution platforms into tier-one customers from portable navigation products and smart phone PDAs. New product revenue was 2.7 times the prior quarter to 18% of total revenue in Q3.

The most encouraging part of the quarter is on the details of our revenue. For as you may know, just two short years ago pASIC I and II accounted for almost 50% of revenue. In Q3 '07, those product families were only a little over 4% of total revenue. I think you'll agree that we've come a long way in terms of new product revenue growth and momentum.

Now let's look a little closer at what's happening with new products. The real story here is based on the traction we are generating with our customer-specific standard products or CSSPs, which really offer our customers a different value proposition than the classic FPGA model. FPGAs, as you know, are really a do-it-yourself project; while CSSPs offer complete solutions.

Our production win with a tier-one portable-navigation-device customer highlights this point. We achieved production wins in multiple platforms based on offering complete solutions. That's silicon plus software, plus QuickLogic IP; all done in merely a matter of weeks. We even designed and implemented a custom ball grid array package that led to a simpler PC board, further reducing their component and manufacturing costs.

In support of broadening the reach of our CSSP strategy, we hosted a media day at the end of August and briefed the technical press and financial analysts on our strategy to be a solutions provider focused on the mobile, handheld, battery-powered prosumer market. The prominent prosumer products include smart phone PDAs, portable navigation devices and personal media players.

In the past, we've discussed the primary needs of these prosumer customers; namely time to market, time in market, [billed] materials costs, the ability to leverage R&D costs, product miniaturization and of course longer battery life. Our tier-one PND customer, by using our CSSPs, got shorter time to market, lower billed material costs and we supplied the R&D to give them a solution which included longer battery life.

But let's dig a little more into what we mean by longer time in market. Most of the top prosumer customers today are no longer designing products. They are designing platforms that they can spit variations off of to generate multiple products tailored for different geographies, markets and customers. So while the individual products may not have a longer time in market, the platforms they are derived from must have it.

And here is where CSSPs really offer benefits not previously available. It's all about hardware-based flexibility, which is enabled by the programmable fabric resident in each of our platforms used to make our CSSPS.

If a customer has a product with no hardware-based flexibility, he's just plain stuck when the marketing people tell him they need an extra SDI O port or an additional spy port, etc., etc. You get the picture. We call this future-proofing their platforms.

More of our target customers are designing platforms this way right now. They are relying on QuickLogic to use the inherent hardware-based flexibility of CSSPs to provide them with the extensibility needed to get more market life from their platforms. That's what we mean by time in market, longer time in market.

And speaking of our platforms, we launched the two remaining members of the PolarPro family of programmable platforms into the market and shipped these products to customers in Q3. The platforms are called QL1P600 and QL1P1000, and are the largest products from a programmable fabric density perspective we have ever done.

These two platforms were defined in conjunction with over 20 of our military and industrial customers. Incidentally, we had orders from several customers before we announced the official ship date which demonstrates the market need for high-density, low-power programmable platforms.

Our focused approach to customers and our new method of bringing CSSPs to market has caused several fundamental changes here at QuickLogic. Our new company logo communicates that we are a new QuickLogic. Our redesigned website more accurately reflects our CSSP solutions-oriented market approach, in distinct contrast to the old FPGA component business.

The website is organized by mobile market applications or technologies, making it an intuitive, consultative web resource for both OEMs and ODMs.

Being focused on a narrower, more closely defined set of customers, also changes the way we go to market. Therefore, we have spent the last three quarters aligning our sales channel with the requirements of selling CSSPs to our targeted customer base.

It's also important to note that CSSPs are not just sold at the design-engineering level like FPGAs, but also at the system architect or CTO level. We now consult with system architects on their platform designs to help them achieve their current and future feature sets; a much different, more consultative sales approach indeed.

Carl, back to you.

Thank you, Tom. Now let's turn to our non-GAAP guidance for the fourth quarter and some comments on our business.

As Tom mentioned, our customer-specific standard products are resulting in revenue with major customers in our target markets. And these customers clearly embrace our value proposition. We expect our focus on these accounts to result in significant revenue as a result of the good traction we are generating.

The new sales talent we have attracted to QuickLogic is clearly having a positive impact on our success. We expect these new hires to generate increased new product revenue in our target markets over the next several quarters.

We expect our new product revenue to be up significantly in the fourth quarter and believe we will achieve $3.5 million of new product revenue, plus or minus $300,000. That $3.5 million in new product revenue will increase nearly 120% sequentially. This growth is being driven primarily by CSSP production wins at top-tier customers in the PND and smart phone PDA markets.

We expect total Q4 revenue to be $10.5 million, plus or minus $300,000. We have strong demand for the fourth quarter, including strong growth in new product revenue, high demand for EOL products and strong demand for certain packages of mature products.

At the present time, we expect that some of the demand for our end-of-life products and mature product special packages will be satisfied in the first quarter of 2008 rather than the fourth quarter of 2007, as we prioritize the production of new products and respond to customer feedback on the timing of our end-of-life shipments.

Based on the mix of products we expect to ship in the fourth quarter, planned overhead costs and production variances; we are guiding that gross margin will be 42%, plus or minus 2%. Q4 gross margin is affected by pricing for high-volume opportunities and our strategic account and by high costs associated with existing inventory. Our current expectation is that gross margin will return to be at least 50% in the first quarter of 2008.

We expect the sequential increase in our R&D expenses of $700,000 to $900,000. As noted earlier, we're working with top-tier customers in our target market to define future generations of ArcticLink Solution platforms and plan to purchase associated intellectual property in the fourth quarter.

We expect fourth quarter SG&A expenses to be up $400,000 to $600,000 sequentially, due primarily to increased strategic hiring, forecasting compensation expenses. Interest income, interest expense and other debt includes interest income on our invested cash, foreign exchange gains and losses, and interest expense on borrowings. Due to expected levels of interest income and higher interest expense associated with new debt, we expect these accounts will contribute income of up to $80,000 in the fourth quarter.

We expect that our tax provision will be an insignificant expense in the fourth quarter. We may use $4 million of cash in Q4 based on expected increases in accounts receivable, planned wafer purchases and forecast capital expenditures.

Let me take a moment to mention a few other points. Stock-based compensation in our fourth quarter is expected to be about $550,000 and to be included in cost 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 opportunity. We believe that our new PolarPro architecture has reduced our cost per unit and our ArcticLink Solutions platform represents significant additional value for market-leading customers in their platform design.

We're also actively reducing our other cost of sales by price negotiations and by decreasing the time and cost needed to test and program our products. The 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 products will be 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, thanks Carl. This quarter I specifically would like to thank our ArcticLink team for the spectacular results they've achieved with the tier-one smart phone PDA customer. We've learned a tremendous amount about the USB 2.0 win CE 5.0 interface, which will serve us well in future opportunities.

The good news here is that this interface is very complex and will directly contribute to the stickiness of our solution. Well done, team.

On November 6th and 7th, we'll be presenting at the AeA Classic Conference at the Portola Plaza Hotel in Monterey. I hope you can join us. We're also presenting at the Thomas Weisel Power Conference at the Thomas Weisel offices in New York City on November 15th. In addition, we'll be presenting at the Needham Conference in January 2008 in New York City. Please see our website to confirm our presentation date.

And finally, our fiscal year and fourth-quarter earnings conference call is scheduled for Thursday, January 31st 2008 at 2:30 p.m. Pacific Standard time.

Okay, now let's open up the call for questions. Operator, please-?

Thank you, sir. (Operator Instructions.) And we'll take our first question from Edwin Mok with Needham and Company.

Hi, guys; congratulations on a good quarter and especially good numbers on the new products.

Thanks, Edwin.

You're welcome. So the first question I have is on new products-- just a little point of clarification there; you said the significant factor of the $1 million increase came from CSSP. Are you referring to ArcticLink or are you just talking about CSSP in general?

Primarily the ones that we shipped in the quarter were based on PolarPro, but we did have some shipments of CSSP based on ArcticLink.

So you did recognize some ArcticLink revenue in the third quarter then?

Correct.

What about the fourth quarter?

The fourth quarter is dominated by those same two CSSPs really.

I see, I see. So basically you expect your customer to ramp their product which will obviously get a-- you'll get a huge benefit from that.

Correct.

I see. In terms of the end of life; so you guys have EOL-- QuickMIPS and QuickPCI; is that correct?

Yes, the EOL; the QuickMIPS and also the 5 volt versions of our PCI products and that was a decision we made during the second half of this year and it's starting to result in revenue for us in the second half.

So the question is -- how should I look at that going forward? Should I expect all of them to end by the first quarter as you have said on your other call?

I think they'll tail off in the second quarter and then be insignificant in the third quarter, is my current expectation.

And do you expect an increase in revenue as a result of this EOL?

Not significantly, no. Most of our revenue growth is going be driven by the new products.

I see. So you expect the revenue to become flattish for the fourth quarter and possibly in the first quarter before it tails off then?

I guess I'd have to check that for the first quarter. But definitely, that's what we're seeing for the fourth quarter.

The forecast in the fourth quarter is going to be up--

--it's up but it's driven by new products.

Great. Thanks for clarifying that. Two more questions and then I'll go away. The first one is on your OpEx. So I understand the purchase of IP got pushed out to the fourth quarter. That's why your R&D increased. My question is how much is that going to be out of the $700,000 to $900,000? And the other question is on the SG&A-- since you mentioned that is new hiring, I expect those expenses to stay going forward. Is that correct?

So let me comment on that. If you look at our R&D expenses, we take a look at it really in two pieces. We have kind of a sustaining R&D level which is based on headcount and depreciation and the normal kinds of things. And you notice that we were flat on our R&D from Q2 to Q3. What tends to be lumpy for us in the R&D world is primarily pre-production and expenses associated with new products and the purchase of IP for new products. And that's what kind of tends to drive our lumpiness quarter to quarter.

And can you characterize how much of the $700,000 to $900,000 is pre-production versus IP, roughly?

No, but most of the increase is project related.

Oh, I see. Okay. Thanks. And the SG&A is expected to stay since you're hiring more headcount?

Fundamentally, yes.

Great, thanks for answering all my questions.

You bet.

We'll take our next question from Paul McWilliams with Indie Research.

Hi, guys; congratulations.

Thank you, Paul.

It looks like some good traction and it looks like it's increasing going forward. That's wonderful. Is the majority of the new CSSP biz in your ROW category?

No. Well, actually we had some significant shipments for the PND space into Asia this last quarter and going into Q4, that's going into Asia as well.

That's not ROW, though.

It is on the back page, Tom. We break out Japan in ROW.

Yes, because ROW is at a record from what I can see here. So I was just trying to track that and then put my pencil on it as I normally do.

Sure.

When might you break out prosumer as a category?

I think we'll probably do that no later than our Q1 results.

Okay. It appears to me that your EOL strategy, which I like, I think it's a smart way to play it; is going to level out what might be a change in your seasonal patterns next year. In other words, by pushing it into Q1 it might offset some of the seasonal weakness we would normally get in prosumer if you will. Is that a good way to look at that?

Well, we're still finalizing our numbers for Q1 so we're not going to comment on that. But generally, we see pretty good strength through the first quarter.

Okay. But do you think going forward if we looked at QuickLogic; and I'm not trying to get a number on this, what I'm trying to do is understand your new seasonal pattern as being a new CSSP company. Do you think you'll be more analogous to the consumer pattern than you were to the instrumentation, military pattern?

Probably.

Okay.

Although we haven't gone out of the instrumentation and military business as I commented. As I commented on it today, we just introduced two new parts primarily aimed at that.

Oh, I like it. You get a little bit from both sides and it might give you a really nice pattern, as it turns out.

Do you foresee any need at all in the foreseeable future at all, to raise cash either selling stock or debt or anything along those lines?

We have no current plans to do that.

Okay. Where was the 5 volt PCI classified for Q2? I was looking at your press release and I didn't notice it being listed.

We included the 5 volt-- when we did our Q2 press release it was included as prior to mature. In this press release, it was included as prior to [EOL] for all of the periods presented.

Got you. Okay. That's why-- the mature data didn't match mine.

Right.

Very good. I just didn't notice that note in there. Let me see here. I might have all my questions already in there. That does it. Thanks again.

Thanks, Paul.

And we'll take our next question from [Kevin Cassidy] with Thomas Weisel Partners.

Thank you for taking my question. On all the new products, can you say how many customers those were shipped to?

I haven't added that up Paul, but it's like anybody else, we have kind of an 80-20 rule where 20% of the customers kind of account for 80% of the volume. It's generally what happens with us.

I'm not sure. I can't give it to you off the top of my head. It's not just one guy, though.

Right.

And you'd said it was 20 military and industrial customers for the new products coming out next quarter.

Well, they helped define that.

I'm sorry.

20 guys helped us define what that product was, how big it was and how much memory was included with it, how much IO was there, which packages; those kinds of things.

Right. That's why I was just wondering-- in the third quarter, is it in the range of 20 customers or is it in the range of hundreds of customers.

I think in terms of notable customers it would be less than 100.

Yes, our real focus on the new products is to drive to tier-one, tier-two customers in specific markets. (Inaudible) portable navigation devices, smart phones, PDAs, data cards, portable industrial; so we've got kind of a laser-like focus. Have you looked at our target list? If we hit our objectives, less than 100 people are going to account for the predominance of our new product revenue.

That's great. And within those customers, I guess because of the features of your product, they have one platform and possibly eight different products that actually ship and one might have a USB but the other one would be PCI, is that the idea?

Yes. That's exactly what might happen. We've got people, as an example, that are using ArcticLink which has USB 2.0 that are using it in a product today where they don't have USB 2.0 but they know that their next generation is going to have USB 2.0 and so they're doing all of their application software around that part today. And in the next generation, they'll simply implement using USB 2.0.

Okay. Thank you for taking my questions.

Okay. Thank you.

(Operator Instructions.) And we'll take a follow up from Edwin Mok, Needham and Company.

Hi. One question is your instrumentation and task group really grew a lot this past quarter. Can you put some color on that?

Yes, sure. That's actually (inaudible) included in our PND sales, (technical difficulty).

I see; great. One question I have on the gross margin. You mention that you guys want to be a little more aggressive in pricing and that's part of the reason why gross margin is coming down next quarter. Is that going to be a longer-term trend? Do you guys believe that you want to be more aggressive in pricing but obviously you've gained a lot of revenue as a result of that; but how are you guys viewing that approach versus protecting your margin?

Well, as I mentioned earlier Edwin, we've got a list of really target accounts in these markets and if you look at the customers that we're going to with their strategy; it's much different than our historic customer base. So on kind of one-off basis, we may take a low margin yield to get penetration in one of target accounts. Now what we're able to do after we get in there is generally we get in to help them solve a short-term problem. Once we get in, we're able to then talk to them about the architecture of their future products and help them with their product proliferation strategy and with their platform strategy.

Tom, anything else?

Yes. And then that's about getting additional value for what it is we bring to the party. So solving problems for someone who's in a troubled [moment] is very different than helping them architect a platform that then can spin off on multiple generations of products, and therefore demand more value.

So it's really about us-- our initial concerns are about establishing ourselves with customers we've never done business with. Of the tier-one guys that we're selling CSSPs to today, never bought an FPGA from us. As a matter of fact, if you look at there's roughly 10 tier-one and about 40 tier-two and about 150 tier-three customers that we have targeted. Virtually all of those customers did not do business with us as an FPGA supplier.

Great, thanks a lot for answering my questions.

Okay.

(Operator Instructions.) We'll take a follow-up question from Kevin Cassidy with Thomas Weisel Partners.

Thanks. Can you give a little more detail on your inventory; what kind of product is that?

It's primarily-- it's heavily weighted in our new products. We believe that we've got opportunities for short-term high volume sales opportunities in those parts and we want to be ready to go to market quickly. So we have a predominance of that money tied up in new products.

And is it in die form?

Yes. We can get from die form to finished goods very quickly and generally all of our inventory is in die form. We keep a few weeks of finished goods or TU inventory tested unmarked inventory, for certain customers on a case-by-case basis.

But well over half the total inventory in dollars is really in die form. It's actually in die and wafer form. It's pro good die.

One other thing we're doing by the way Kevin, which is different than other guys; and that is that we're programming devices now at the wafer level for large-volume customers and so we're not having to handle and program those at the package level or the finished goods level, which significantly reduces our costs as well.

Great, okay; great. Thank you.

Thank you.

And that does conclude our question-and-answer session. At this time I'd like to turn the call back to you Mr. Hart, for any additional or closing remarks.

Okay. Well thank you for your interest in QuickLogic. We look forward to having you join us again at the end of January for our fiscal year and fourth-quarter earnings conference call and giving you an update on our progress on customer-specific standard products and the uptake on that from targeted tier-one, tier-two prosumer customers. Thank you and take care.

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