Quicklogic Corp (QUIK) 2008 Q1 法說會逐字稿

Good day, and welcome to the QuickLogic Corporation first quarter 2008 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 passcode of 4474570.

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.

Good afternoon, ladies and gentlemen. Thank you for joining us today for the QuickLogic first quarter 2008 earnings conference call. Carl Mills, our CFO, will take you through our 2008 first quarter financial results, and then I will share my perspective on our business. Carl will detail our guidance for the second quarter of 2008. I'll wrap up with some additional thoughts, 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 related to revenue growth from our new products, statements pertaining to our facilities to convert new design opportunities into customer activity, market acceptance of our customers' products, the effects of our customer-specific standard products, or CSSPs, on our expected results, and our financial expectations for revenue, gross margins, profitability, and cash.

QuickLogic's future results could differ materially from the results described in these 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 a description of these and other risk factors.

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

Let us talk about our results for the first quarter. Our revenue of $11 million increased 3% sequentially and was within our guidance. Our new product revenue of $2.6 million was at the high end of our guidance, and reflects strong CSSP sales to our PMP manufacture in Asia Pacific, who accounted for 17% of total revenue in the quarter.

As we mentioned on earlier calls, we introduced the concept of CSSPs in the first quarter of 2007. CSSPs are complete solutions that we design and implement that target customers on our solutions platforms, also resonating with our customers in our target market.

Our non-GAAP gross margin of 52.9% was lower than we expected in Q1. Excess inventory charges, primarily due to a softer revenue outlook for our Eclipse II devices in Europe, amounted to 8.7% of revenue in this quarter. The share of previously reserved inventory improved our gross margin by 2.1% of revenue in the first quarter, which was higher than expected. Without these two inventory effects, our gross margin would have been 59.5%. On a comparable basis, that is without the effect of the reserved inventory, Q1's gross margin is 13.4% higher than the fourth quarter of 2007, primarily due to improved costs from parts sold into the T&D space and an improved product mix.

Our operating expenses, both R&D and SG&A, were lower than the guidance than we gave for Q1. Our ending cap of $19.3 million compares with $20.9 million at the end of 2007 and is favorable compared with our guidance. Our accounts receivable was 31 days of sales outstanding, is lower than we expected, and our operating expenses were significantly lower than expected.

A few other comments on the quarter follows -- new products, as noted earlier, contributed $2.6 million of revenue in the first quarter, representing 24% of total revenue. Our total revenue increased $4.8 million year over year, a 77% increased. New products contributed $2 million of this growth, and this growth was driven by the sales of CSSPs to mobile device manufacturers.

Let me take a moment to comment on operating expenses, again on a non-GAAP basis. Research and development expense of $2.7 million increased $200,00 sequentially, and was favorable with our guidance. We expect that expenses which were planned for Q1 will take place in the second quarter of 2008.

SG&A expense of $3.9 million declined slightly on a sequential basis and was favorable compared to our guidance. We spent significantly less than expected for recruiting, stock activities, legal expenses, and archetype services in the quarter, and our compensation expenses were lower than expected in the quarter, due to lower hiring.

Other income and expense contributed net income of $30,000 in the first quarter, primarily due to earning on our invested funds.

Our non-GAAP net loss was $712,000, or $0.02 per share in the first quarter, compared with a net loss of $1.1 million, or $0.04 per share, in the fourth quarter of 2007. Our Q1 GAAP net loss was $4.8 million favorable compared to our net loss of $5.5 million, or $0.19 a share, one year ago. Higher gross profits guided this change, increasing $4.9 million year over year due to a 77% increase in revenue and a reduction in inventory charges. Results for the first quarter of 2008 on a non-GAAP basis excludes stock-based compensation of $665,000.

Now let's turn to our first quarter GAAP results.

Our GAAP net loss was $1.4 million, or $0.05 per share compared with a net loss of $1.7 million, or $0.06 per share, in the first quarter of 2007, and a net loss of $5.9 million, or $0.20 per share, in the first quarter of 2007.

On a GAAP basis, our first quarter gross margin was 62.3% of revenue. R&D expense was $2.8 million, and SG&A expense was $4.3 million.

Now let's take a moment to talk about a few balance sheet and cash flow items for the quarter ended March 30.

Our net inventory decreased $1.2 million during the quarter. Our capital expenditures were $250,000 in the quarter. Our first quarter ending AR is notable in that there are 31 days of DSO, and is better than our target DSO of 43 to 46 days. We currently have 79 days of inventory on hand, and one day of inventory in the distributor channel.

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

Thank you, Carl.

Today, I've got several topics that I want to share, both as a result of what we're doing here at QuickLogic, and the response to questions investors have been asking of us.

First on our list today is our progress toward our transition from being and FPGA component supplier to a mobile, prosumer solutions provider. Second, I'll share the early returns on our new visual enhancement engine technology launch, which we officially announced to the world on March 10, and our roadmap for future products. However, since it's never a good idea to share too much detail with our competition that undoubtedly listen to our conference calls, my comments will be more philosophical than what they are explicit. We do share detailed roadmaps with our target customers under Nondisclosure Agreements. Following this, I will also share comments and thoughts on our customers' design activities. Finally, I will share our view of the market conditions, again with an eye towards forecasting our future -- more specifically, revenue from new products.

Okay. So let's get on with it.

Transition is an interesting word that may be interpreted in many ways. So let's start off by defining it. I use "transition" in the context of knowing the process of change from one form, state, style, or place to another. Those of us that have been in the semiconductor industry for many years are very familiar with change. However, for many people, the rapid change we live with in the semiconductor industry can be unsettling, uncomfortable, yes, even painful. For others, change is dynamic, exciting and the door leading to opportunity.

So which category do you think the real semiconductor people live in? Well, it's the latter of course, because if you're not going 100 miles an hour with your hair on fire, all the time, you're falling behind in this most competitive complex business. You will either love it or you'll leave it, very simple.

On a personal note, I'm not shy at all to say that I'm as excited about the opportunities facing QuickLogic today as I've ever been on my 40-year career in the semiconductor industry. Here are QuickLogic, we made a purposeful decision approximately 18 months ago to use our patented proprietary technology we call ViaLink to offer a new collection of solutions to a new set of customers. These are big changes.

We call these solutions customer-specific standard products, or CSSPs. Our solutions are directly aimed at the challenges faced today and the also rapidly changing handheld professional consumer product sector, or as it's called in the industry, the prosumer sector. Our customers are the OEMs and ODMs that design, manufacture and market prosumer products like smartphones, portable video players, personal navigation devices, portable digital assistants, mobile internet devices, data cards and the like. Our solutions basically serve as a companion device to the processors that provide the basic brainpower of these products.

Our decision to move into this rapidly evolving, high volume market sector was not made easily, for we knew that it would be a major transition for our company -- a company founded by three gentlemen who built the foundations for the programmable logic business back in the mid-70s and subsequently invented the ViaLink technology we still use and value today.

However, as we evaluated the needs of prosumer customers and the inherent qualities of ViaLink technology that have been leveraged by military, aerospace and medical customers needing high reliability and low power consumption, the fit was obvious. However, to make it work, we knew we had to leverage the technology in different and unique ways, as well as to significantly change both our business processes and our business model.

I'm proud to say that we have made great strides towards accomplishing these initial goals, but as I implied earlier, change in this industry is a constant thing. In other words, we'll always have more to learn than more work to do.

As our British friends say, there are knock-on effects to this kind of major transition. I don't want to belabor you with all the details, but I can share that every department and function here at QuickLogic has been challenged to rethink what has to change for us to go after this very different market with a very different value proposition that we chose to call CSSPs. Here at QuickLogic, we're fans of the author Geoffrey Moore and his insights into how new products fit into markets, which he put in his book, Crossing the Chasm. In his follow-on book, Dealing with Darwin, Moore addressed the needs for companies to constantly innovate if they are to sustain their competitive advantage.

We view these books, by the way, as primers on driving successful businesses in highly competitive markets, like semiconductors for the prosumer electronics market. Please allow me to quote directly from Dealing with Darwin -- "Given the mounting pressures of global competition, it is a rare business plan indeed that will not have to rewrite itself from the ground up. And the sooner you start, the sooner you will be able to extract yourself from those commitments that make you vulnerable. Establish those commitments that will strengthen your new position."

We believe our CSSP strategy, which is as much process as it is a collection of technology, leverages the inherent strengths of QuickLogic and addresses in unique and valuable ways the needs of our targeted markets. Our transition has also led us to realize how important it is to be in touch with our customer's customer -- namely the cellular network operators. One of that the changes that has become very visible in the handset business during the last year or so is the amount of input the wireless service providers have in the design of new handset platforms. Due to the fact that we are addressing the stated needs of these providers by facilitating a vast attractive market, the ability to maintain the freshness of existing designs by adding new features on short notice, and of course creating an enjoyable video experience with our exciting new VEE technology, it only makes sense to drive demand at the source.

Today, we have a well-ordered plan that we believe will bring us into collaborative designer process being leveraged by our customers' customers. Because we believe having connections with the network operators is of great importance to our business, this last Tuesday we voted Mike Farese, the current CEO of BitWave Semiconductor, on to our board of directors. Mike is an experienced veteran of the telecoms space; his previous most direct experience was as the Senior Vice President of Engineering at Palm, where he drove their very successful Treo line of smartphones. There, the network operators were his prime customers, where close collaboration proved to be crucial. We fully expect to be able to use Mike's extensive industry experience and industry contacts.

Now, we thought we understood tighter market pressures from our experience in the FPGA world. But the prosumer electronic manufacturers really elevate those demands to a new level. This heightened awareness has caused us to reexamine the functions and processes we have heretofore done internally at QuickLogic and resulted in our tuning the company to optimize our efficiency, our response time, our ability to scale, and at the same time, broaden the scope of solutions we are able to support. This tuning process also enables us to shift previous fixed cost to variable costs. For example, most of our platform designs these days require analog functions on our chips. However, rather than bearing the expense of developing an analog design department, we have developed a network of analog IP providers that can address a much wider variety of design challenges that we put in-house. Not only does this increase the scope of the markets we can address, it optimizes our agility and minimizes fixed, if not the absolute, cost.

Now to our product roadmap. Last month we announced the release of our new visual enhancement engine, or VEE, technology. VEE an important evolutionary shift in our CSSP strategy in that it broadens our scope from being just in the connectivity business and brings us directly into the critical signal path. VEE is based on the pioneering from our partner Apical Limited in the UK, where they develop the most unique algorithm which we have implemented in our CSSPs. Introduced to the press in early March of this year, we have already received an incredible amount of coverage. Over 60 articles in the technical and trade press, in a little over 7 weeks. This was just in North America and Europe. We have shared VEE with our key Asia Pacific customers; the official press launch there won't begin until early May.

VEE makes an astounding difference in the user's experience when watching video on a handheld device. Before I describe it more detail, let me share just one sentence that was written by a veteran technical author for a well-respected industry publication. And I quote -- "Every now and again, I get to see something that makes me say 'Wow! That is really, really cool!' VEE is a highly complex algorithm that's been implemented in our CSSP technology in a way that optimizes performance and power consumption. VEE addresses the video stream on a pixel by pixel basis, making real time adjustments to dynamic range, contrast and color. The result is that the display can be enjoyed in bright sunlight, and then when under normal viewing, looks better with 50% or less backlight power than a non-VEE driven display with full backlight. Since backlighting is one of the most significant power drains on a cellphone, we do think his power requirement is a huge deal. I urge you to visit our website to view the VEE video clip and check out the spectacular results for yourself. Seeing is believing.

VEE is being very well received by our target customers, and the design activity is rapidly gaining momentum. As we've only been discussing this with customers for a couple of months, I can't yet report production wins, but they are coming. Many people, including us, believe full motion video will drive the handheld prosumer product world. And once you've experienced VEE, the rest of the handheld world is about as exciting as black and white TV was after color TV technology was introduced.

It's my firm belief that VEE will be coming to a small screen near you by the end of this year, and that it will likely take until next year before there is a significant volume ramp.

In terms of our other new product platforms, namely PolarPro and ArcticLink, design activity continues to build momentum. We did a press release in March on the use of ArcticLink based solution used to enable smart data transfer in a Wi-Fi and a remote hard disk drive. Data transferred on the ArcticLink USB 2.0 port directly into the hard disk drive had a whopping 200 megabits/sec rate, which by the way I would wager is faster than your laptop hard disk drive. These high speed data transfer rates save energy, which increases battery life, which clearly is a priority in battery-powered products. In early April, ArcticLink was also awarded the prestigious Portable Design Magazine Editor's Choice Award, selected by their editor-in-chief after reviewing thousands of product submissions. This award underscores the importance of how integrated our proven system blocks, with our malleable fabric, can solve real world problems for designers of handheld battery powered products. They need solutions, not components, which is exactly what our customer-specific standard products bring to our customers.

During the quarter we also announced PolarPro II, our new look programmable solution platform. PolarPro II is ideally suited for mobile applications; from entirely optimized I/O structure to rapid entry and exit from a very low power mode for effective system power management, and a small 5mm x 5mm package to reduce circuitboard spinnage. PolarPro II will also be available in known good die form for the truly space-challenged applications.

Shifting down to market conditions and what's happening with our customers and their customers, with an eye, of course, towards the subsequent impact of our revenue. To say market conditions are mixed would be an understatement. Even our cellular handset semiconductor market leader, Texas Instruments, cited on Monday in their earnings call, their concerns about their very limited revenue visibility. I don't want to belabor the obvious here, but beyond the fact that we certainly get less visibility than TI, being a new supplier and some other subtle challenges that may not be obvious -- not to date myself but I've been through more of these semiconductor industry cycles than I can count. While each is different in some way, there are also some very common threads. The current cycle is mostly centered in the consumer electronics bas, while networking, video and several other sectors are chugging along pretty well for now. Consumer spending is a bit soft, and many observers think it will soften more before it begins growing again.

We are of course seeing evidence of this within our own customer base. What's interesting here, however, is that our customers tend to keep up the pace of new design work so that they are ready with new products when the consumer spending picks back up. However, in the meantime they tend to delay new product introductions. This is not to say that there's no new products being released; just that the flow is reduced and the scheduling for any one specific product becomes even less predictable than when the market is operating under more normal conditions.

In the industry, those who forecast group all this under the subtitle of visibility, and I'll go back to what TI said earlier in the week -- Visibility is low at this juncture.

I'm working very hard here to avoid making excuses for very real lack of crystal clear new product revenue visibility. At the same time, I want you to understand the reality we face when trying to provide an accurate picture of the future. One, again, which will certainly be major.

I've been in this industry since the mid-60s. I've been through many of these "slowdowns". But I don't think you ever get used to them. They're not a cause for panic and for companies in transition like QuickLogic, they can even provide opportunity. We're in a strong position and continue to gain confidence every day from the very positive customer feedback on CSSPs in general, and the visual enhancement engine in particular.

With our strong balance sheet, by the way, we believe we're more than capable of weathering the storms that may blow across our bow.

Okay, Carl. Back to you.

Thank you, Tom.

I'd like to give you our non-GAAP guidance for the second quarter of 2008. And I have some comments on our business. As Tom mentioned, our CSSPs have resulted in revenue with major customers in our target markets, and these customers are embracing our W-pronged position. We expect our focus on these accounts to result in significant long-term revenue that results [with our business on track and regenerating]. The sales count we have attracted to QuickLogic is clearly having a positive impact on expanding our sales funnel.

In terms of our second quarter outlook, I'd like to talk about the three categories of our business. Most importantly our product revenue is expected to be nearly flat sequentially, and our guidance for new product revenue is $2.5 million plus or minus $200,000. We expect mature products to remain strong in Q2. However, due almost entirely to an expected sequential decline in end of life product revenue, our guidance is that total revenue will be down sequentially to $8.5 million, plus or minus $200,000.

We expect a sequential improvement in gross margin. Based on the mix of parts, we expect a shift in the second quarter in planned cost reductions, we're guiding that gross margin will be 55% plus or minus 2%. We expect sequential increase in our R&D expenses of $300,000 to $400,000. As noted earlier, we have worked the top-tier customers in our target markets to define future generations of ArcticLink solutions and platforms. We are purchasing associated intellectual property in the second quarter.

We expect second quarter SG&A expenses to be up by as much as $200,000 sequentially as we incur some stock accruing and outside share expenses. Due to expected levels of interest income, and intrinsic spend associated with that, we expect interest income and other net contributing income of up to $30,000 in the second quarter. And we expect that our tax position will be significant in the quarter.

We may use $2.5 million of cash or more in Q2, based on expected increases in accounts receivable, and expected revenue levels.

I'm going to take a moment to mention a few other points. The end of our end of life product revenue is in sight. We're guiding revenue will move down in Q2 and our guidance reflects an expected decline in overall product revenue. The overall product revenue may decline again in Q3, and new product revenue growth expected in the second half of 2008 may not fully offset expected revenue declines in other parts of our business.

We are driving new product revenue growth very high internally. Our ability to grow total revenue between Q2 and Q4 will depend on the success of our new product revenue ramp. Where the guidance is clearly not what we want, and the impact this has on our business and our stockholders, is problematic at best.

We are driving new product designing activity very hard; we are also taking steps to ensure the continued financial health of the company. First, as Tom mentioned, we are moving some product development functions to an outsourced on-demand where there is a fixed cost an in-house model. While we are changing our core competencies, we are outsourcing where it makes sense. This outsourced model will reduce our fixed spending level, reduce our development expense per project, allow us to save money between projects, and enable us to develop more development programs in parallel if and when it is appropriate.

We do not expect the outsourced model, which will be fully in place for Q3, to impact our product and production schedule. We want to supplement our VEE solution offering with additional platforms, and we expect to incur some outsourced costs about equal to our fixed cost savings during the second half of 2008. We have streamlined expenses in other parts of the organization, which is refrlected in our guidance.

We are reducing expenses and we are contributing cash wherever possible. One way we are contributing cash is through the use of restricted stock units or RSUs. Our executives will receive any incentive pay earned in 2008 and a portion of their regular compensation in RSUs rather than cash. We are also utilizing RSUs in other parts of the organization. Total cash savings, though the use of RSUs is expected to be significant. We expect stock-based compensation to increase to $1.2 million, due largely to the granting of RSUs.

Our strategy is to continue to reduce the cost of producing our solutions. We're being more aggressive on pricing so we can pursue higher volumes sales opportunities. Our PolarPro II architecture and the new docketing and manufacturing processes make us more cost competitive, and our ArcticLink solution platform represents significant additional value to market leading customers in their platform design.

We are also actively reducing other costs of sales, our price negotiation and our decreasing the time and costs that are attached on the program of products.

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

One of the key factors in managing major transformations is to properly align strategies operations and incentives with goals. We believe our goal to become an important supplier in the prosumer space is both realistic and capable of supporting our longer term goals for QuickLogic.

But we've learned many lessons so far in pursuit of this goal, and will undoubtedly continue to learn lessons as we move forward. We have received nothing but confirmation from our targeted market that our CSSP strategy presents an attractive value proposition that has already been embraced by some of the top prosumer suppliers in the world.

Our originally stated model was to produce an operating margin around 23% once we were shipping revenues of $25 million per quarter. This model was based on the thought we could realize a gross profit margin of about 61% and run with an operating expense budget of around 38%. Although 61% targeted nominal gross profit margin appeared realistic, we believe now trying to achieve it would slow our progress towards the first plateau of our revenue model, $25 million in quarterly sales.

This is a conclusion we have not arrived at lightly. However, after talking with our current and prospective customers, and analyzing semiconductor companies that serve the markets we are targeting, we are going to lower this target for the time being. This is not to suggest we won't move our thinking up as we grow and gain efficiencies, but for now we are shifting our focus to operating income and operating efficiencies that will allow us to optimize our ability to scale those operating profits.

After all, top line profits are nice for gross margin, but it's the operating profits that really matter and represent the all-important earnings per fully diluted share. After giving careful thought and study we have arrived at an operating model that we think will not only help us realize our initial revenue goal more quickly, but also provide us with a significantly better ability to scale -- grow profits more quickly than we grow revenue.

Now one of the most logical metrics for majoring in a scaling potential of a business that I have seen is to simply divide the gross profit dollars that are generated by the operating expenses that it takes to generate the profit. This tells us how many gross profit dollars are generated for operating dollar that's invested. In my view, this is one of the most important ROI metrics there is for a company to achieve.

In our old model, the operating efficiency model at its midpoint yielded about $1.60 in pro forma gross profit per every pro forma operating expense dollar invested. In our new model this ratio has been pushed up to about $1.67. This aligns our operating model much more favorably with the superlative companies that produce dependable results such as Analog Devices, Altera and Xonix.

Obviously, since we're reducing our gross margin expectations to achieve this model, we are also reducing our operating expense ratios, and taking a page from linear technology manuals, we are almost moving more towards a variable cost operating model, particularly in R&D.

As I noted earlier, one of the lessons that we've learned from our targeted customers is that they not only like our CSSP strategy, they want us to include design capabilities that are offered different than we are staffed to provide internally. Complicating this is the fact that if we were to attempt to support the majority of these designs internally, we would significantly elevate our fixed costs and still not be able to respond in a variety of peak demands that we believe we'll continue to encounter.

One of the great examples that may catch some industry outsiders by surprise id that we've already included some analog functions in our existing chips. As you know, physical layer functions such as USB have been a part of our library. However, unless you're a design engineer, you might not realize that a USB driver requires both digital and analog functionality. Our goal is not to become a broad-based analog supplier; we most certainly want to optimize our differentiation and position ourselves so that we can readily include other analog functions in our CSSP solutions.

That is just one example of why it makes more sense for us to move to an IP-lite operating model. Hardly a week goes by when we don't field and inquiry from potential customers for core function blocks that we could more economically and more quickly support with outside engineering talent. Over the next couple of quarters, you'll see this trend, internal fixed R&D costs, and push them out the IP network that we've developed and thereby make them variable cost.

Another step that we have recently taken to create the opportunity for better incentive alignment is to move a portion of our compensation from cash to restricted stock unit grants, which is a form of stock-based compensation. This, again, takes a page from the linear tech operating model, and gives our employees the opportunity to hold on to shares they receive via RSUs or sell them into the market for the same net result they would receive if we continue to pay them in cash. We believe this change better aligns our compensation plan with what we want to incentivize. As this plan is implemented, we will provide you with clear data so that you can measure the effects in your financial models.

Now things I just want to just address in describing our strategy realignment -- our new operating model is designed to produce a nominal 20% pro forma operating profit margin at $25 million in quarterly sales. It's scaled favorably as sales continue to grow, and improves higher gross profits for each operating profit dollar we invest. To this end, then, our new financial model will be able to produce a nominal 50% gross margins, with R&D at a nominal 12% and SG&A at a nominal 18%. This results in a nominal 20% operating profit at $25 million in revenue per quarter.

Carl has already given our guidance for Q2, please let me comment on it now, just briefly. In my earlier remarks, I have tried to set the stage for our guidance. As we have heard from virtually everyone in the handheld markets, visibility is very low right now. Complicating this for QuickLogic is our growth is dependent on new products, and our new customers' new product release schedules. That's three "new"s in there, folks, if you're counting.

Our design win momentum has continued to increase in Q1. Predicting when these products will hit the market is more even more vexing than usual. Due to the fact that we would rather underpromise and overdeliver, we're taking what we think is a conservative view of Q2 revenue guidance.

Finally, once again this quarter, I particularly would like to thank all of our employees for their collective efforts aimed squarely at the challenges of moving QuickLogic from being a well-respected, albeit petite, FPGA component supplier to becoming a powerhouse CSSP solutions provider for battery powered handheld consumer products.

Great job, team. Great job. But we've still got a long way to go -- but well done for what's happened to date. Thank you kindly.

Our second quarter earnings conference call is scheduled for Wednesday, July 23, 2008 at 2:30 Pacific Daylight Time.

Okay operator, now let's open up the call for questions please.

Thank you, Mr. Hart. (OPERATOR INSTRUCTIONS)

Our first question will come from Edwin Mok with Needham & Company.

Hi, Tom. Hi, Carl. How are you guys doing?

Hi, Ed.

So why don't I start with a few financial questions and we'll move on to product.

Sure.

So in your March quarter, actually you are excluding those one-time impacts on your gross profits, you're actually pretty close to operating at break-even right? So would this change in your long-term model going forward? Do you think that you would have pushed out that break even point, the $11 million point in the March quarter or do you think you have actually pulled it. I got confused because of all the numbers.

Our break even point is still going to be in that $11 million to $12 million range depending on the margins we generate though products. That's pretty consistent I'd say.

That's great. So basically, with this change there's no real big impact there. So that outsourcing model, based on how you described it, it sounds like your stock would really see the benefit in 2009 and beyond, right? Because 2008 is a investment year for you to actually execute this change, basically, is that correct?

We've had so much interest in the VEE that we want to get a couple of platforms out this year, and that will cause our spending to be relatively flat. Yes, we expect any savings would be between projects, which would be Q1 2009 at the earliest, I would say.

I see, great. That was helpful.

Regarding your guidance for the June quarter, you mentioned that the end of life revenue, you expect to decline. Based on your guidance, it's going to decline quite a bit. My question on that is -- is that decline coming from all the product line and the end of life, or is that one or two of those that those that's going to come through the phaseout, number one? And number two is, what is your projection for zero end of life revenue. Which quarter do you think that will take in?

Well, first of all let me say that since the last time we've had a call, we've really changed our outlook for EOL revenue. We had one customer that couldn't fund a substantial forecast that we had, and that has been part of the reason for the change in the short term.

We do accept that the end of life revenue will slow down significantly again in the first quarter, and be nonexistent in the fourth quarter at this time.

Okay, great. In the past quarter, I noticed that your datacom and telecom revenue went up a lot. Is that most of the EOL or is that something else I should watch out for? Maybe something to do with the new product?

There was a lot of EOL activity in datacom and telecom last quarter related to PCI Prodcuts.

I see, I see. Great. That was helpful.

Regarding the target model that you paid out, Tom, for the 50% gross margin, which is lower than what you were looking for before, is that partially due to the fact that some of your mature products both targeting the consumer end market which effectively typically has a lower gross margin as a whole, and you guys are willing to go with that because that way you can drive the volume and therefore drive the top line -- is that a fair assessment?

I think the nature of consumer electronic space is one that if you look at all of the guys that sell into that space, they don't classically, all the guys who sell visibly in that space -- they don't classically generate mid-60s kinds of gross margins.

But secondly, the other thing that's going on there of course is that very large volume customers typically don't pay 60 to 70 points of gross margin either. So you look at the Broadcoms of the world or the Marvels, they're not operating at 60 points of gross margin. And the reason for that is they'll supply 20 million or 30 million kinds of units to people rather than 20,000 or 50,000 like the classic FPGA guys.

Own cost is critical to our customers, Edwin, and so it's going to be an elastic market for us. So we're doing a great job of reducing our product costs. We're going to be also more aggressive in our (inaudible) so we can get a bigger share of the market.

Great. Sorry, I have three more and then I'll go away. This one is actually just a housekeeping.

You mentioned that you saw some product that was previously written off -- how much (inaudible) did you get on the gross margin again? I missed that number, I'm sorry about that.

It was 2.1% of revenue.

2.1%, great. And then Tom, some question on the product. On the VEE technology that you guys have announced -- can you describe what is a typical application? I understand that it's the screen, but how do I actually use it? How do I use that technology, and where would that chip be in whatever the handheld product that is being used for that?

Let's take iPhone as an example. If iPhone had used this -- I'm not saying we're in the iPhone -- if iPhone used this, not only would you get a better visual user experience when viewing video, but you'd get a significant improvement in battery life. So we have got a demo here that calculates, it does the numbers from iPhone and calculates the effect of reducing the backlight, still maintaining a good user experience and we can take that nominal 7 hours of battery life to well over 11 hours using VEE to back down on the backlighting.

I see. Tom, I understand the benefit. But in terms of usage, how do I actually design this in? Is it a chip that is attached to your screen or how do I actually implement it?

Oh, sorry.

Sorry about that.

What it really does is it goes between, it goes between the RGB output of the applications processor and the display. So it's very easy to implement.

So it's fair to say that this is something that can be added on to, even if the design is already completed?

You got it.

It can be something that you can add, it's not like it has to come from scratch design and you have to redesign the whole thing to get this to work then, is that a fair assessment?

Correct.

Okay. That was very helpful.

One last thing, regarding PolarPro II. Am I understanding correctly that this product's biggest advantage is that it's a smaller size than PolarPro? Or is there another advantage that I'm missing here?

You are missing here. It is smaller but the biggest advantage is that the I/O structure is tuned for mobile applications. The other thing is that its very low mode enables you to go to about I think it's about 5 microamps in the very low power mode, and it will come out of that mode in about 10 microseconds. So you can use this, then, to control a microprocessor as an example to respond to keystrokes or those kinds of input where keeping a microprocessor away or even putting it in a sleep mode requires a lot more than 5 microamps.

So it's about power management, it's about better I/O, you don't need level shifters then to go, as an example, to interface out to a hard disk drive, which you would for a conventional device. That is in tune for mobile applications.

But the sounds like the difference within this and PolarPro is like it's a different application rather than a replacement or an enhancement from PolarPro? Is that a fair way to put it?

Certainly there are overlapping use cases, there's no doubt. But PolarPro II was definitely designed specifically for mobile applications. PolarPro I was designed to be a cost reduction of Eclipse II, and we were really coming out of the FPGA era in those days. PolarPro II was designed from the ground up to be aimed at, specifically aimed at, mobile applications.

I see, so basically with this product, it's fair to say that because it's designed for mobile application there may be some things that you couldn't do with PolarPro? You can now go up to those applications as well?

Or go after them better, yes.

Thanks for answering my questions. That was very helpful.

(OPERATOR INSTRUCTIONS)

And it appears that we have no questions at this time, Mr. Hart. I would like to turn the call back over to you, sir for any further comments or closing remarks.

Okay, well thank you for your interest and for your attention to what we're up to. Obviously for us, our customer-specific standard products is where we're heard, and VEE of course is just the first really exciting improvement system block that takes us out of just the kind of activity, or even the smart kind of activity, smart data management world, and moves us into a whole new world of video, which we believe will be a significant driver of handheld devices.

So we're looking forward to it, and I hope you are as well. Thank you for your attention. We'll see you in July at the next conference call.

Thank you. Ladies and gentlemen, that does conclude today's teleconference. We would like to thank everyone for their participation in today's call. Have a great rest of your day.