Quicklogic Corp (QUIK) 2008 Q2 法說會逐字稿

Welcome to QuickLogic Corporation's Second 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 7654670.

At this time, for opening remarks and introductions, I would like to turn the call over to Mr. E. Thomas Hart; Chairman, President and CEO for QuickLogic. Sir, please go ahead.

Good afternoon, ladies and gentlemen. Thanks for joining us today for the QuickLogic Second Quarter 2008 Earnings Conference Call. Carl Mills, our CFO, will take you through our 2008 second quarter financial results; and then I'll share my perspective on our business. Finally, Carl will detail our guidance for the third quarter of 2008 and then we'll take questions.

Carl?

Thank you, Tom. Before we get started, I'd like to read a short Safe Harbor statement.

During this call, we will make statements that are forward-looking. These forward-looking statements involve risks and uncertainties, including but not limited to, stated expectations relating to revenue growth from our new products; statements pertaining to our design funnel activity and 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, on our expected results; and our financial expectations for revenue, gross margin, operating expenses, 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 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 on the QuickLogic website, located at www.quicklogic.com.

As many of you know from our last conference call, in the second quarter we took significant steps to realign our resources with expected revenue levels. For instance, we are focusing our in-house research and development expenses on our core capabilities, those capabilities that cause customers to choose our products over competing solutions.

These core capabilities include our ViaLink technology, silicone-device architecture, software, system architecture and the development of both proven system blocks and packages. We have moved other product-development activities such as design implementation, to an outsourced on-demand model. We believe this model lowers our cost per design, enables cost savings between designs and allows us to scale to multiple designs at the same time.

Since our last call, we've implemented a further expense reduction and announced this to investors in our June 3rd press release. As noted, a 17% reduction in headcount. The purpose of the reduction was for several reasons; one, lower our fixed costs to enable a lower break-even revenue level and optimal profitability scaling with revenue growth; two, provide greater headroom for discretionary costs to provide the agility to enable new product revenue growth; third, to conserve our strong cash position by reducing operating expenses, enabling us to work through this period of reduced new product revenue visibility.

Q4 '08 non-GAAP operating expenses may be reduced by 25% to fit with the first quarter of 2008. And finally, we want to enable a quicker return to overall profitability.

We did have significant charges associated with our realignment activities. And we will discuss both our non-GAAP results and the charges associated with our Company realignment. We'll start with our second quarter non-GAAP results and then present information on the other charges included in our GAAP results for the quarter.

Our second quarter non-GAAP results were favorable compared with our guidance. Our revenue of $8.7 million was at the high end of our guidance. Our new product revenue of $2.6 million was also at the high end of our guidance and reflects strong CSSP sales to a PND manufacturer in Asia-Pacific. This accounted for 21% of total revenue in the quarter.

While our Q2 revenue was at the high end of guidance, overall revenue declined by $2.3 million sequentially due to a $2.5 million decline in end of life product revenue. End of life products contributed $1.6 million of revenue in the quarter.

Our non-GAAP gross margin of 55.7% was on guidance for the quarter and it compares with 52.9% in Q1. The sale of previously reserved inventory improved our gross margin by 1.7% of revenue in the second quarter.

Our operating expenses were favorable compared to our guidance for three principle reasons. We reduced our compensation expenses significantly during the quarter due to staff reductions, lower incentives and the use of restricted stock units. Our R&D project spending was lower than expected. Projects planned to start in Q2 are now planned to begin in Q3.

Across the Company, we did a great job of reducing expenses in areas such as equipment and supplies, outside services and travel and entertainment. Our ending cash of $19 million compares with $19.3 million at the end of the first quarter and was favorable compared with our guidance. Our expenses were significantly lower than expected in the quarter and accounts receivable with 25 days of sales outstanding is lower than we expected. We also decreased inventory more than expected in the quarter.

A few other comments on the quarter follow. New products, as noted earlier, contributed $2.6 million of revenue in the quarter, representing 29% of total revenue. Let me take a minute to expand on our non-GAAP operating expenses.

Research and development expense of $2.4 million declined $250,000 sequentially and was favorable compared with our guidance. As mentioned earlier, both compensation and project expenses were lower than expected in the quarter.

SG&A expense of $3.3 million declined $540,000 sequentially and was favorable compared with our guidance, due primarily to lower than expected compensation and outside services expenses in the quarter. Other income expense was a net expense of $42,000 in the quarter, primarily due to lower earnings on our invested funds. And our non-GAAP net loss was $927,000 or $0.03 per share, compared with a net loss of $712,000 or $0.02 per share in the first quarter of 2008.

Now let's take just a moment to discuss charges included in our GAAP results for the quarter that are not reflected in our non-GAAP results. Our second quarter results included $2.9 million of non-recurring non-cash charges affecting gross margin, operating expenses, and net income before income taxes.

Let's talk about gross margin first. Non-recurring impairment charges of $1.5 million lowered our gross margin by 17.7% of revenue. These charges are a result of the limited new product revenue visibility we discussed earlier and reflected write-down of Tower pre-paid wafer credits and assets associated with a chip that is not a focus of our CSSP strategy.

Our GAAP operating expenses included three non-recurring items totaling $935,000; $168,000 of charges for the long-lived asset impairment associated with unutilized PDA software licenses due to our new outsource development model; $452,000 of restructuring charges associated with our reduction in staff and $15,000 for the write off of equipment.

Our GAAP net income before tax includes $417,000 for the write down of our equity investment in Tower Semiconductor, owing to the decline of their share price. Our [carrying] value for this investment is now $0.86 per share.

In addition, our GAAP results included stock-based compensation charges of $917,000 in cost of revenue, research and development and selling, general and administrative expenses.

So let's summarize our GAAP results. Our GAAP net loss for the quarter was $4.7 million or $0.16 per share. On a GAAP basis, our second quarter gross margin was 36.8% of revenue and operating expenses totaled $7.5 million.

And let's now discuss just a few balance sheet and cash flow items for the quarter. Our net inventory declined $1.6 million during the quarter and our capital expenditures were only $110,000 in the quarter.

Our second quarter ending accounts receivable represents 25 days of sales outstanding and is better than our target DSO of 43 to 46 days. Excluding non-recurring charges, we currently have 68 days of inventory on hand and one day of inventory in the distributor channel.

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

Okay, thank you, Carl. The transformation from an FPGA business model to a CSSP business model entailed many changes. As we noted in our press release last quarter, to support these changes we've completed the realignment of our sales, marketing, operations, engineering and field support organizations to drive our highly focused and innovative CSSP model.

The realignment reduced our fixed cost of operation, created a financial model that scales better with growth and improves our ability to react more quickly to a wider variety of opportunities than we could with our previous FPGA business model.

The FPGA business is very horizontal, with thousands of customers as opposed to the CSSP business which is vertically focused on application solutions and consists of a much smaller set of generally larger customers.

During this conference call, we're going quantify the results of these efforts to a much greater degree than we have in the past.

With the reduction of certain fixed development costs, we're now seeking the best and most-economical solutions for our customers. These solutions are increasingly available at a lower cost in emerging markets and are often located near our customers. We believe partnering with specially-skilled design groups that are in close proximity to our targeted customers, will benefit us in many ways.

The financial impact of our CSSP realignment has also significantly reduced our revenue break-even point, taking it from $12.5 million per quarter at the start of this year, to $8.5 million when the full impact is realized by Q4 of this year.

Customer design activity continued to build in Q2 and we are now in a position where we can share some quantifiable data. As I noted a minute ago, the CSSP sales process is very different from the FPGA sales process. Owing to the differences, we redesigned our sales funnel tracking and forecasting systems. We began that redesign over a year ago and have been busy refining it. We now have confidence in our sales funnel tracking system and enough historical perspective to share it with you today.

In our sales funnel tracking system, we have a total of five distinct stages through which we track what we call single sales objectives or SSOs. SSOs identify a definite customer project or CSSPs at clear value and enable the solution. In our sales funnels, SSOs move from qualification to evaluation, verification, design win and production win. The following then is a brief overview of our qualified CSSP-based SSOs at the end of Q2.

Our SSOs have increased by over 140% from the beginning of 2008, or said another way; we now have 2.4 times the SSOs that we had when we started this year. Nearly two thirds of the SSOs are with Tier I and Tier II accounts; each account representing at least 500,000 units and estimated annual shipment volume.

36% of our SSOs originate in North America, with 27% each for Europe and Asia-Pacific, and 10% in Japan. 57% of the SSOs are for smart phones, portable navigation devices, portable media players, and data cards; and the remaining 43% for portable consumer, portable industrial, military and other.

75% of our SSOs are for solutions that we can implement using existing PolarPro and ArcticLink platforms, which is most encouraging and fits our sell-what-we-have-today mindset. Finally, 23% are for products scheduled for production in the next year. And 2% would require special design effort to support if they move forward.

Our visual enhancement engine or VEE, which we introduced in the US and Europe in March of this year, has really gained the attention of many of our targeted strategic customers; including some of our customers' customers, which of course would be the wireless network operators like AT&T, Verizon, Sprint, Photophone, etc.

In May, we completed the worldwide launch of VEE with press briefings in Korea, Taiwan, China and Japan. We received excellent press coverage in all four markets with numerous articles published in each market.

The customer response to our VEE launch has been very strong. We currently have 21 SSOs desiring VEE in various stages of the sales funnel. 10 of those SSOs by the way are with Tier I smart phone OEMs.

When we introduced VEE into the wireless network operator community, we received a most gratifying enthusiastic response. As a result, we've engaged with one of the top three wireless network operators in the US, based on their interest in VEE, for future generations of smart phones.

VEE really does an incredible job of improving the video viewing experience, especially in small-screen LCDs like the ones found on smart phones. VEE also does an outstanding job of managing the backlight to these displays which is the major drain on battery life and it does all this in bright sunlight as well.

In the first week of July, we announced the availability of the new platform, that critical proven system block. PolarPro II is our new platform and it was designed to enable more complex solutions and a smaller footprint for mobile devices; basically more functionality and less board space, which will of course yield lower overall system costs.

The critical proven system block, which implements a high-speed UART, was specifically developed for a China smart phone OEM. Now high-speed UART is required to support the latest high-speed enhanced data rate mode of Bluetooth- a very important capability for phones targeting business to high-end users.

Now moving to our current production and design-win status; today we have CSSP wins on a total of 14 SSOs with nine different customers, located all over the globe. These customers' products include a portable thermal printer and barcode scanner, enterprise PDAs, wireless hard disc drives, portable navigation devices, portable media players, casino gaming devices, military PDAs and UMPC-mid devices.

A little over one year ago, we solved a significant problem for a very large Tier I customer by designing one of our platforms to provide a CSSP- a custom solution uniquely for them, using our standard product platform. Their rapid production ramp challenged the ability of our production systems to react quickly. We performed flawlessly, shipping millions of units in just three quarters for use in four different models of their product.

Our production performance demonstrated that CSSPs were real and in fact, so were we; real in the sense that we could rise to meet the challenge of high volume on-time production.

One of the many natural applications for a CSSP is to fix a customer's design problem, especially when they're already in volume production. A CSSP can be a great solution for a customer who is in this trouble mode. Sometimes these fixes are sticky and sometimes they are superseded by a customer's major design change in relatively short order.

In the case that I just mentioned, we knew going into the deal that the use of our solution in two of the high-volume models would be temporary and that the customer had already committed to an application's processor change that would eliminate the need for our solution.

However, by proving ourselves and our CSSP strategy, we developed a very good relationship with this strategic customer who has embraced the value of CSSPs. As a result, we gained several more SSOs for designs with longer production lifetimes; some in production today and the others headed that way.

However, the production starts for these new designs and SSOs with other customers are not certain to go into production this quarter. But coupled with the loss of two high volume designs, this reality has impacted our revenue outlook for Q3.

Given our limited visibility, we've decided to depend only on what we can clearly see today for shipment in Q3. Therefore, we must guide Q3 new product revenue to be $1.4 million plus or minus $200,000; clearly, not what any of us wanted to hear. However, there is good news. Based on the real momentum of our overall design activity and the strength of our sales funnel, we believe that Q3 will be the low point for our new product revenue.

Carl, back to you.

Thank you, Tom. Let's continue by providing some non-GAAP guidance for the third quarter of 2008 and some comments on our business.

Total revenue and new product revenue at the high end of guidance last quarter, even though end of life product revenue was lower than expected. We are pleased with the growth of our sales funnel and we are starting to engage with wireless network operators.

Customers and operators are seeing the value of our CSSPS. As Tom already shared, our new product revenue guidance for Q3 is $1.4 million, plus or minus $200,000. Primarily as a result of expected sequential declines in new product and end of life product revenue, we are guiding that total revenue will be $6 million, plus or minus $300,000 in the third quarter.

Based on the mix of products we expect to ship, and planned production variances, we are guiding that gross margin will be 55%, plus or minus 2% in the quarter.

We also expect our recent realignment will lower third quarter operating expenses compared with the second quarter. We expect a sequential decrease in our R&D expenses of $200,000 to $400,000, reflecting lower compensation and depreciation expense.

We also expect third quarter SG&A expenses to decline by $200,000 to $400,000, due to lower payroll and reduced outside service expenses.

Due to expected levels of interest income and interest expense associated with debt, we expect interest income and other net will be an expense of up to $30,000 in the third quarter and that our tax provision will be insignificant in the quarter.

We expect stock-based compensation expense to by $500,000 in Q3. We may use up to $2 million of cash in the quarter based on expected increases in accounts receivable and expected revenue levels.

Let me take a moment to mention a few other points. The end of our end of life product revenue is in sight. Regarding, total revenue will be down in Q3 and our guidance includes an expected decline in the EOL product revenue. We do not expect EOL product revenue beyond the third quarter.

We have responded to our short-term revenue outlook by realigning our Company to provide agility, lower our cash consumption, lower our break even, and provide profit scalability with revenue growth. We currently expect that fourth quarter operating expenses will be 25% lower than the first quarter of 2008 and at a break even revenue level of $8.5 million as a result of this realignment.

Our target and financial model at $25 million in quarterly revenue is to generate gross margin of 50%, plus or minus 2%; to have R&D expense of 12%, plus or minus 1%; and to have SG&A expense of 18%, within 1%. Achieving this model would generate operating income of 20%, plus or minus 4%.

On a personal note, some of you may have noticed an 8-K we filed when we announced my decision to pursue another career opportunity. I have thoroughly enjoyed my six years with QuickLogic and believe the Company has a very bright future. I want to thank our investors and employees for being great to work with through these years, and look forward to continuing as CFO during this transition period.

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

Thanks, Carl. Once again this quarter, I'd particularly like to thank all of our employees for their collective efforts aimed directly at the challenges of making the transformation from an FPGA component supplier, to becoming a powerhouse CSSP solutions provider for mobile battery-powered handheld prosumer products. Great job, team; great job; we've still got a long way to go, but well done to date; thank you.

And Carl, please accept my heartfelt thanks for your many contributions to our progress. We wish you fair winds and following seas as you move on to the next chapter in your career. We'll miss you. Thank you.

Our third quarter earnings conference call is scheduled for Thursday, October 23, 2008 at two-thirty PM Pacific Daylight Time.

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

Thank you, Mr. Hart. (OPERATOR INSTRUCTIONS). And we'll take our first question from Edwin Mok, Needham and Company.

Hi. Thanks for taking my question and good luck to you, Carl. Let me first start off by asking-- regarding the SSO that you laid out Tom, I was-- there was a [low] number and I might have missed it. But you mentioned that SSO grew 140% from the beginning of 2008. Can I ask how many--number of SSOs we have right now?

We haven't shared that number with the outside world at this point.

I see. And okay then you mentioned that you thought of those SSOs or Tier I or Tier II makers that each of them is over 500,000 units or more. Can I ask how many customers that that group is comprised of?

Yes. I think I said it was nine.

It was nine. Okay, good. Great, I missed that. Sorry about that. And then regarding your guidance on new product; you mentioned that there is a loss of two new designs. Can you put a little bit of color on that? Is it just that the customer decided to move to a different design or is it some other reason, or you guys are moving to a new version? What is the color behind that?

Okay, sorry; I thought I-- I guess I didn't do a very good job of explaining that. We knew going into those designs that the customer had already made a decision to change the processor-- the application's processor that they were going to use. And what we really did is we intercepted basically, and offered a solution prior to them making that change because that new app's processor wasn't done yet. So we knew that was going to happen. Actually, it's happened later than we expected. It was originally forecasted to be switched over in February and now it looks like it will take place in the third quarter. So we really didn't lose that design, what we really did was filled it until that new processor came along.

I see. I see. So basically you were supporting your customer on that one then. That sounds good. And one question I have is on your mature product; it actually grew a little bit sequentially. Can you tell me which product that was driving that growth or was that just kind of a seasonal thing? How should I visualize that?

We had great growth from one particular customer buying our pASIC III products, Edwin. And that contributed to our growth in the mature business.

So I gather that that is just a one-quarter event rather than a long-term trend then? Is that a fair way to look at that?

I think Edwin that we think about our mature business as relatively stable. So we look for all of our upside in our new products.

Great. And finally on the-- Tom, you talked about having 21 designs in the works and given that you guys introduced last quarter; do you expect to see any of those designs going into production within this year?

Yes. We're expecting at least one design to be in production in the fourth quarter.

That's great. So that's quite fast actually given the turnaround, right-- given that you just released--?

That's very fast. It was actually released-- formally released in March and we had some specific customers that we were talking to under NDA, right at the beginning of the year. So it will almost be a year between first customer contact, and of course any kind of production quantities.

Right, and then the application you mentioned that allows them to place more [inaudible]. Should I visualize that as that a lot of these new designs might turn into good revenue round in the back half of next year?

Yes, I think of the 21 clearly the Tier I OEMs are the slowest to move. And those are probably-- you're looking at second half of '09 for any significant revenue out of those. "09 and '10 we believe will be very strong for VEE revenue.

Great. That's all I have. Thanks very much.

Okay. Thank you, Edwin.

And our next set of questions comes from Brian Coleman of Hawk Hill Asset Management.

Great, thanks. Tom, can you break down your SSOs by the five stages of how you qualify them in those buckets? Can you tell us what percentage of them are in the qualification stage versus design, versus production?

I can't do that off the top of my head and I didn't prepare that for this discussion. I can tell you that at this point, the bulk of them are still in stages two, three and four; which is qualification, evaluation and verification. Bulk meaning probably at this point 75%, with maybe about 15% in design win and 10% in production win.

Okay. Is there a way--

But don't hold me to that exact--

No, no, no; that's roughly what I was looking for. Is there a way; do you have the historical track records yet to be able to know how many in the first three stages qualification, evaluation and verification; what percent of that 75% roughly that's in that bucket, make it through to production and what percent fall out and never make it to production?

Not yet; we don't really have the confidence. We don't have enough data yet to really have the confidence in being able to quote that. Actually as I told you; I think I shared with you, out of the whole funnel at this point, let's see-- how many do we have that are resulting in production? We've got I think 14 SSOs are in production or design win today with nine different customers. So you can see this is-- we introduced CSSPs five quarters ago. So this is relatively new for us.

We had a very good handle on FPGA motion through the funnel. We're not as-- we don't have as much history on CSSPs yet.

Right. Okay. When you made this transition from FPGA to CSSP, you kind of restructured the organization and you've got a lower break even. But what's gone on in your sales force; I mean if selling CSSP solutions is different from FPGA products; have you had to turnover your sales force and how seasoned are those guys now and what's the new sales strategy look like?

Well, as you may not know, we hired a new VP of sales in November of 2006. Andy Pease came to us from-- he was the worldwide VP of sales at Broadcom and he came to us at about the time when we were committing to do CSSPs. We restructured the sales force at that time in the direction that we were going to move in and really tried to bring along our existing guys. And let me talk about what's fundamentally different.

Selling FPGAs is really-- the decisions get made really at the engineer's desk. FPGAs are used typically towards the end of the design process of a product to fix the bits and pieces that don't quite get glued together correctly; the SSPs that don't interface correctly. And typically FPGAs, specifically CPLDs really get used for that kind of activity. So you're really dealing with a pretty straightforward, what I called cubicle-to-cubicle level selling, where you're really at the engineer's desk selling your products.

CSSPs are really-- the way to really benefit from them is to sell them early in the design stage when the architecture isn't set yet and you can really maximize your contribution to the overall architecture of the product. So by that very nature, you're selling instead to CTOs, you're selling to VPs of engineering, you're selling to marketing folks to get them to convince their hardware people that having hardware-based flexibility is important, both for time to market and time in market.

So it's a very different sell. It's a much more complex sell. There are many more people in the loop to make decisions. The customers themselves are much larger. You start talking about calling on Nokia or a Samsung or a Motorola-- that's very different than calling on the average FPGA customer.

So over the course of-- since Andy has been here, we've turned over virtually the whole sales force. We've turned-- basically the gentlemen that we've hired are senior sales guys in their territories. We believe that they're up to speed now, fully up to speed. And you can see by the SSOs that they're generating are 2.4 times the SSOs in the first half of this year, compared with everything that happened last year; that we've really got some momentum going.

The other thing is that we now have also allocated into the field business development people who really do the more long-ranging kinds of development activity where we focus our sales guys primarily on things that are going to happen hopefully in less than a year.

The last element really that we changed is that as an FPGA component supplier, we had field application engineers whose job it really was to help the engineering community in these companies put their logic or their designs into our silicon. That's a very different sell and a very different activity than being involved at the architectural level with our customers' architecture with their products.

And so that necessitated a change then, a move away from using field applications engineers to a new title we designated a customer solutions architect where they're really focused on architecture. So where they really make their money is going in and doing whiteboard talks with the CTO or with the customer's architects to look at where we can maximize our ability to contribute in their system.

That's probably more than you wanted to know--

No, that's actually really helpful. I guess on that same topic, I'm really surprised to kind of come to understand that a lot of the handset design and features and functions are being driven by carriers and not actually the handset OEMs. And I'm curious, I mean if you could just use the 21 VEE engagements that you talked about; how many of those were initiated at the carrier level versus at the handset level? And if you could just kind of maybe qualitatively discuss where your sales guys are spending more time-- talking to carriers or handset OEMs?

Okay, well all of those 21 that were initiated at the OEM or ODM level; we've just started what we call the pull strategy where we're engaging with the carrier or with the operators to get them to pull through features or request specifically VEE is what we approach them with, because they all complain about their video quality.

So all of the existing opportunities we have, the SSOs, have been driven by our guys calling on the Motorolas and the Nokias and the Samsungs and Sony Ericssons -- those people. So we have just initiated during this last quarter in fact, our first wireless network operator and we're really surprised at how quickly they latched on to this and very gratified by it.

So we expect to see VEE in handsets [inaudible] drive in less than a year. Now, let's back up for a minute. I think you're going to begin to see the operators much more involved in the future about what the feature set is that's in the devices that they're buying from the OEMs and ODMs. In the past it was kind of- here it is. Take it or leave it. And now they're beginning to be a lot more fussy about what the features are because the features enable services so that they can then generate more average revenue per user out of and of course that's what they're concerned about.

Okay. You talked about of the two Tier I design wins that are going away; I guess lost isn't really the right word, the one I believe was you enabled an application's processor to work with an alternative flash supplier. I think that's the one you expounded on a little bit in the prior question. What was the second- your second role that you lost?

It was the same but it was for two different products.

Oh, okay.

It was basically boot for managed NAND. You must have got that from the previous call because I don't think I mentioned it this call. But that's exactly what it was; it was to enable this customer who had been using SLC memory to be able to use MLC memory which gave them the option then of five or six suppliers instead of just one. And then it enabled them also to get rid of the NORflash device, which reduced their [bottom] cost as well. So that was a big win for them.

Okay. And then I've just got two more quick ones. Are you seeing any of the OEMS or the carriers as you show them the VEE solution; are they seeing anything else that's comparable, is there anything else in silicon or anything else done in software that has the attributes that VEE has?

Well, that's a very good question. There is a lot of noise in the market. There is a lot of-- there are probably maybe four or five competing solutions. I won't go into all the technical aspects at this point, but really all of these surround the issues of power, specifically the backlight which can be half of the power consumption of a smart phone in some cases or in many cases actually for the slightly bigger displays. It's about image quality. And to me quality is not just a function of how good an LCD display they buy, because these smaller displays are by their very nature, what are called low-dynamic range displays.

So if your TV, if you've got a good Sony, or [RAVI] or one of those; they claim or the Samsung plasmas- they claim the dynamic range on those things is up around 10,000 plus. On a handheld device, you're going to be lucky to see 200 to one dynamic range. So obviously if you've got video that was prepared to be displayed at 10,000 and now you're going to display it at 200; you're going to lose a hell of a lot of what's going on in that video.

Apical is the only company and therefore VEE, which is what we call the algorithm that we licensed from them. And of course we've enhanced it as well for our architecture. VEE is the only one that addresses really that issue of dynamic range compression, as well as at the same time working on reflecting ambient light. So if you've looked at a lot of displays as you take them out into the sunlight, you can't see anything, especially if you're talking about video. VEE fixes that problem very nicely.

So the way to prove this is we've developed an evaluation board which we give to these OEMS and ODMs, smart phone OEMs and ODMs and they in fact then integrate those into their devices to be able to compare directly. Today we've got only about five or six of them out there, but we've got about 20 more guys who want these evaluation boards and we're scrambling like mad to get those done right now.

So seeing is believing; nobody believes data sheets; nobody believe PowerPoint presentations. The way you prove it is to show it because seeing is believing in all of these video things. And VEE is by far and away at this point, head and shoulders above anything else in the marketplace.

Okay. And then my last question is just on the revenue mix shift as we go forward; the end of life revenues are estimated to be what in the third quarter?

We didn't disclose that separately, but between mature and EOL it would be the difference between our $6 million and our $1.4 million guidance for the new products.

Okay. And then the end of life goes to zero in the fourth quarter. So should we assume then that fourth quarter-- the revenues drops or do you expect that new products and mature can compensate for the end of life by the quarter or should we be thinking 2009?

Well, we think we've got some good things in our pipeline that are going to hit in Q4 so we're not commenting on Q4 but we think we've got the opportunity for new products to come back strong.

Okay, that's good. Thanks a lot, guys.

Okay. Thank you.

(OPERATOR INSTRUCTIONS). And it looks like we have a follow up from Edwin Mok.

Hi, Carl. I got a question on your break even model. You mentioned that it's $8.5 million, top-line for break even. And you lay out that your average should be around 25% lower than the first quarter of 2008; is that correct?

Yes.

So what is the implied gross margin you are making-- that implies a 60% gross margin with that model, right?

We can talk about it a little bit, but I think that what we've got is I think the 25% is a minimum you're going to see in terms of an operating expense savings. So it's going to be a combination of gross margin and probably lower than-- savings of higher than 25% in Q4.

I see. And in terms of your target model, what is your target gross margin range; maybe that's a better way to ask that?

The target is 50%, plus or minus 2.

Okay 50%, plus or minus 2; that's because of new product that is focusing that kind of margin, right; which is what you guys mentioned last quarter, right?

And that's the $25 million model, Edwin.

I see; I see; great. And I mentioned that target gross margin does not include any kind of inventory-related expense or benefit, right?

That's right.

Okay, great. And last thing is-- I missed it-- did you provide stock-comp guidance for the coming quarter?

$500,000.

$500,000; okay great. Sorry about that; thanks.

No problem; good to talk to you.

And it appears there are no further questions. Mr. Hart, at this time I'd like to turn it back to you for any closing remarks.

Okay, well thank you for your interest and continued interest in QuickLogic. And we look forward to chatting with you in October for our Q3 call. Bye-bye.