Quicklogic Corp (QUIK) 2008 Q3 法說會逐字稿

Good day, everyone, and welcome to the QuickLogic Corporation Third 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 4545787. At this time for opening remarks and introductions, I'd like to turn the conference over to Mr. E. Thomas Hart, Chairman, President, and CEO for QuickLogic. Please go ahead, sir.

Thank you, Jaime. Good afternoon, ladies and gentlemen. Thank you for joining us today for the QuickLogic Third Quarter 2008 Earnings Conference Call. Joining Carl and me today is our new VP of Finance, and incoming CFO, Ralph Marimon. Carl's wrapping up on the Q3 2008 SEC reporting requirements and after the 10-Q is filed, Ralph will assume the duties of our Chief Financial Officer. Welcome aboard, Ralph.

At this point, let me extend our thanks and gratitude to Carl Mills, our departing CFO. Carl's served admirably as our CFO for over six years, and being the true professional he is, he's made this transition go very smoothly, even beyond expectations. Thank you, Carl, for all of your efforts on our behalf. And our best wishes to you on your new adventures.

Carl will take you through our 2008 quarter -- third quarter financial results and then I'll share my perspective on our business. Finally, Carl will detail our guidance for the fourth 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 effects 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.

We had a very solid third quarter compared with our non-GAAP guidance, especially in terms of total revenue, gross margin, operating expenses, and cash flow. Our favorable operating expenses and cash position reflect the value of our recent operational realignment. Our revenue of $6.2 million was near the high end of our guidance and included new product revenue of $1.4 million, which was at the midpoint of guidance for the quarter.

Our non-GAAP gross margin of 56.7% of revenue is at the high end of guidance for the quarter and appears with 55.7% in Q2. The sale of previously reserved inventory improved our gross margin by 0.9% of revenue in the third quarter. Our operating expenses were lower than guidance and reflect the benefits of the operational realignment that we completed in Q2.

The realignment of our R&D activities for instance, include a significant reduction in fixed costs while maintaining our core competencies such as the definition of chip architecture. Physical chip design will be outsourced allowing us to save money between design and enabling multiple designs at once should the need arise.

R&D spending for Q3 was $1.3 million, down $1.1 million or 48% sequentially. Our guidance was $2 million to $2.2 million. We had no IP charges or outsource chip design expense in Q3. We do expect to see an increase in the expense -- in these expenses in Q4.

SG&A expenses of $2.4 million declined by $900,000 sequentially and were also favorable compared to our guidance of $2.9 million to $3.1 million. The savings were due to a more rapid than expected benefit from our new operating model. Total non-GAAP operating expenses were $3.7 million and decreased by $2.1 million or 36% sequentially.

Other income and expense was a net expense of $105,000 end of the third quarter primarily due to low earnings on our invested funds -- we invested in treasuries -- and foreign exchange losses. We had a tax benefit of $58,000 in the quarter due to the favorable resolution of an international tax audit and expected refunds associated with R&D credits that became effective this year.

Our non-GAAP net loss was $196,000 or $0.01 per share, compared with a net loss of $929,000 or $0.03 per share in the second quarter of 2008. This improvement reflects the benefits of our operational realignment. Our ending cash position of $18.8 million compares with $19 million at the end of the second quarter and was stable (inaudible) with our guidance. Our expenses were significantly lower than expected in the quarter in our accounts receivable, with 33 days of sales outstanding is lower than we expected. We also decreased inventory more than expected in the quarter.

I just want to make a few other comments on the quarter. Most importantly, new products as we noted earlier contributed $1.4 million of revenue and were in line with our guidance. We mentioned on our last call that our largest new product customer was converting two out of four designs to a new processor and that we expected a sequential decline in revenue from these applications.

As expected, revenue from this single customer declined by $1.1 million sequentially as did our total new product revenue. Revenue from end of life products declined by $1.4 million sequentially. Combined, this led to a $2.5 million sequential decline in revenue.

The P&D market leader that's purchasing our new products represented 13% of total revenue in the quarter. Furthermore a long-term customer, instrumentation and test market, contributed 28% of our revenue in Q3.

I just want to take a moment to discuss our GAAP results for the quarter. Our GAAP results included stock based compensation charges of $389,000 in cost of revenue, R&D, and SG&A, as well as $30,000 for the write off of fixed assets. Our third quarter GAAP net loss was $615,000 or $0.02 per share. On a GAAP basis, our third quarter gross margin was 55.4% of revenue and operating expenses totaled $4 million.

Now let's turn our attention to the balance sheet and some cash flow items for the quarter. Our net inventory declined by $500,000 during the quarter. Our capital expenditures were $180,000 for the quarter. We currently have 80 days of inventory on hand. And you may have noted on our balance sheet that our Q3 results included a decline in inventory held by distributors. Let's spend a few minutes talking about this and begin with a discussion of our revenue recognition policies.

We recognize revenue on shipment of program product, including CSSPs. Since the price is negotiated prior to shipment, and the distributors have no stock rotation or price protection privileges on programmed products. This is referred to as a sell in revenue model. We historically have allowed stock rotation and price protection on our unprogrammed products and have recognized revenues on a sell through basis for these devices. Since programmed products dominate our strategy and our volume, in Q3 we started changing our distributor agreements to reflect a sell in revenue model for all of our business, including unprogrammed products.

As of the end of Q3, most of our distributors no longer have price protection or stock rotation privileges and this contributed to a decline in inventory at distributors, which is on our balance sheet as deferred revenue less cost of revenue. We expect to complete this transition to 100% sell in by early Q1 2009. The movement to a selling model was not significant to our revenue results for the third quarter.

I'd like to take a moment also to discuss our investment in Tower. Three months ago, we wrote down the value of our Tower ordinary shares to $0.86 per share. In accordance with our internal policies, if the value of Tower shares remains below $0.86 at the end of Q4, we will incur a write down in the fourth quarter. Tower recently closed at $0.33 per share. If at December any value is at this level, we would incur a non-cash of $700,000 in Q4.

And finally, you may have noted an 8-K we filed where we mention that we amended our agreement with Silicon Valley Bank. We did that in August. The amended agreement is a great credit facility for us. It's a $6 million revolving line of credit that runs through June 2010. During the quarter, we repaid long-term debt including debt with Silicon Valley Bank in the amount of $2.8 million, and we borrowed $2 million against the revolving line of credit. So, on a net basis, we repaid $800,000 of debt in the quarter. Please note that our debt free or net cash increased by $700,000 to $15.9 million in Q3. Now I'd like to turn the call back over to Tom.

Thank you, Carl. We've talked in the past about the transformation that our customer specific standard product, CSSP model, brings to QuickLogic and you've now seen some of the financial impact this model's had on expenses for Q3. Now the fun part. We get to talk about how the offense is doing.

Well, the proof will be the posting of significant new product revenue, which we believe is on the way. I will share with you how we're measuring the progress that supports our belief. While most companies are guiding down in Q4, customers in our carefully targeted markets are recognizing the inherent benefits we can provide with CSSPs and embracing them as design solutions. Carl will detail Q4 guidance later in the call, but I will tell you that it's up slightly both in total and for new product revenue.

Before we examine the metrics of our sales funnel, let's address the elephant in the room that demands to be acknowledged. How is the current global economic situation impacting QuickLogic? Well, there's no doubt -- absolutely no doubt -- that lower-end user demands in almost every sector have rippled through the supply chain leading some semiconductor suppliers to forecast significant declines in revenue. There's also no doubt that this global economic turmoil has slowed the rate at which some of our opportunities move through the funnel to revenue. But we've seen few opportunities cancelled; we do see uncertainty in production start dates. We do believe Q3 will prove to have been, by the way, our new product revenue low point in spite of this.

Last quarter I introduced to our custom implementation of salesforce.com, a Web 2.0 system we use to track our progress and focus our resources. Leveraging this system has helped us address a broader spectrum of opportunities, manage them with greater predictability, and lower our fixed operating costs. We track future revenue opportunities with what we call single sales objectives, also known as SSOs.

SSOs identify a customer's specific project where a CSSP can add clear value and implement a desired solution. Within our tracking system, we have five distinct stages that SSOs must progress through in moving from qualification to revenue. We also track the potential annual value of the SSOs.

The number of our total worldwide SSOs increased 34% in Q3. Even more impressive is the fact that the value of the SSOs increased by 56% sequentially. We view this as a clear indication of our CSSP momentum continuing to build.

Now let's talk about metrics that are most important to investors. 63% of total SSOs are in our target markets of smartphones, portable navigation devices, portable media players, and broadband data cards. As a result of our focused sales efforts in these target markets, these SSOs represent 79% of our total SSO potential revenue. From a geographic perspective, 60% of the total SSOs are from Asia Pacific and Japan. While European SSOs represent 22% of the total SSOs, they account for 43% of the total potential revenue.

What this says is that European SSOs have significantly higher total revenue potential per design. And finally, just over 60% of the total SSOs are with tier one and tier two customers, which are our focus accounts. They also account for 80% of the total potential annual revenue.

Now, our visual enhancement engine, or VEE as we call it, design activity, continues to build from our formal launch in March. In just over seven months, 77 editors have written 316 articles featuring VEE. We now have over 40 SSOs involving VEE in various stages of the sales funnel. This is nearly double the 21 that we had at the end of Q2. VEE has also gained the attention of several of the largest cellular operators in the world.

We've done many demonstrations using side-by-side displays, one with and the other without VEE for easy direct comparison purposes. In critical direct sunlight conditions, our customers tell us that VEE provides an image that is far superior to other competitive display enhancement products. Even when using nearly 90% less backlight power than the display without VEE, our solution provides a superior image.

We believe that as video becomes a bigger deal on smartphones, so will VEE. We now have VEE demos running on multiple mobile platforms including smartphones and PDAs and they look just great. To further our VEE and CSSP marketing efforts, we will have booths and meeting rooms at the upcoming Mobile Asia Congress in Macao in November, at the Consumer Electronics Show in Las Vegas in January, and the Mobile World Congress in Barcelona in February. Please stop by and see the VEE demo for yourself, for as we all know, seeing is believing.

Carl, back to you.

Thank you, Tom. Let's continue by providing our non-GAAP guidance for the fourth quarter of 2008 and some comments on our business. Total revenue is at the high end of guidance last quarter. We are pleased with the growth of our sales model and we continue to engage with wireless network operators. Customers and operators are seeing the value of our CSSPs. We entered Q4 with a strong new product backlog position, and as a result we expect new product revenue to increase 13% sequentially to $1.6 million plus or minus $200,000.

The rest of our business is expected to be essentially flat sequentially and as a result we expect that total revenue will be up to $6.3 million plus or minus $300,000. Based on the mix of products, we expect to ship in the fourth quarter and planned production variances, we expect the gross margin will be 55% plus or minus 2%. We do expect an increase in our operating expenses in the fourth quarter as we continue to drive opportunities and new product development. This will include costs for IP and outsourcing physical design, expenses that were not material in Q3. We expect a sequential increase in our R&D expenses of $600,000 to $800,000. We also expect fourth quarter SG&A expenses to increase by $200,000 to $400,000.

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 $60,000 in the fourth quarter. We do not think that our tax provision will be a significant item in the fourth quarter. And let me conclude by saying that our stock based compensation could be up to $500,000 in Q4. We may use up to $2 million of cash in the quarter based on expected increases in operating expenses, increases in accounts receivable, and expected revenue levels.

Let me mention just a few other points. End of life products only contributed $200,000 of revenue in Q3 and the end of this business really has arrived. While we expect some end of life product revenue going forward, it will be lumpy and will probably contribute less than 10% of quarterly revenue.

The operational realignment we undertook provides agility, lowers our cash consumption, lowers our break-even, and provides profit scalability with revenue growth. We are already seeing its benefits both in lower operating costs and improved new business development. As we guided last quarter, we continue to expect our model will provide us with break-even results at $8.5 million in revenue.

On a personal note, I'd like to welcome Ralph to the Company and wish him well. Ralph has already hit the ground running. I expect you will really enjoy QuickLogic. Now I'd like to turn the call over to Tom for his closing comments.

We've undergone some extraordinary changes here at QuickLogic during the last year. And through the dedication of the QuickLogic team, we've become a better company for it. During the last quarter, we've accomplished more with less. This is a testimony to good people, even more than it is to good systems and opportunities. Today we're a start up company that has the benefit of a 20-year foundation, an extraordinary core of talented and dedicated team members. Thank you one and all.

Ralph Marimon will be joining me at the American Electronics Association Classic Financial Conference in San Diego on November 4th and 5th. We'll do a live webcast from the conference, the details of which can be found on our website. Please join us.

We'll also be presenting at the Needham Growth Conference in New York City on January 6th and 7th at the New York Palace Hotel. And then later that same week, we'll have a booth at a meeting room at -- and a meeting room at CES in Las Vegas. Please do come by and see our VEE demos.

Our fourth quarter and fiscal year earnings call schedule -- conference call is scheduled for February 3, 2009 at 2:30 PM Pacific Standard Time. Jaime, now let's open up the call for questions please.

Thank you. (OPERATOR INSTRUCTIONS) We'll take our first question from Edwin Mok with Needham and Company.

Hi guys. Congratulations for a good quarter. Actually good results. First, let me ask you just some housekeeping questions. Regarding the financial with $700,000 charge related to the Towers and the investment, I was just wondering, Carl, are you -- are we going to report that as a non-GAAP or is that going to be part of the, I guess --?

That'd be part of -- if that happens in Q4, that'll be part of our non-GAAP results. I mean, I'm talking about GAAP results, not part of my non-GAAP results.

I see. Okay, great. So, it will be part of GAAP and it would be kind of a one-time charge related to that.

Exactly. And it's a non-cash charge.

A non-cash charge. Right, exactly. So, then that's the reason why you do [non-GAAP]. Okay, great. And then on the OpEx line, kind of based on your commentary, it sounds like third quarter was a little bit unusually low because you have very little outsourcing expense there. I was wondering how do you count -- look at that if you just average out over a longer-term, how much R&D outsource expense do you guys expect for the quarter?

We haven't provided the guidance on that going forward, Edwin. I guess the thing I would say is that as we outsource our R&D, one thing we expect is much lower cost per design. So, whereas we had a fixed cost in Canada for R&D through the second quarter, really we've -- that fixed cost has largely gone down and the variable costs per design were much lower than the fixed cost was per design.

So, in that effect should be, even after variable costs, then that effect should be lower R&D costs for the same amount of product or if we elect to do more designs of course, R&D would be more expensive. But it is a variable model as opposed to a fixed model.

Yeah, that's -- I had -- that's fair. So, maybe I should ask you -- ask this differently. So, is it fair to say that your second -- those third quarter numbers is basically your base fixed R&D costs? Whereas you will expect some outsourcing costs along the way for example in the fourth quarter where you are guiding high R&D expenses. Is that correct?

That's reasonable. And it's not only just the outsource cost, Edwin, but we may purchase IP that we expense in the quarter too. So, this is really the combination of those two things and plus then prototypes would hit the project expense kind of category.

I see. So, yeah, (inaudible) is a function of when you are going to do the activity and that's the result [incurred].

Yes. But your interpretation of last quarter being close to the baseline is good.

Good. So, on your last quarter, if I kind of look at your OpEx, your OpEx is around $3.7 million and the non-GAAP OpEx is around $3.7 million. And if I kind of look back at your guidance of break-even of $8.5 million, it's (inaudible) implying on GAAP OpExs closer to high 4. Maybe it's kind of how you're guiding for the fourth quarter. Is that how I should visualize that in a longer-term type of model?

That -- those longer-term models, Edwin, I really have to leave up to you. We just provide guidance one quarter out. Sorry about that.

I see.

But I think if given the $8.5 million break-even, given our margin objectives from our model, I think you'll be able to get where you need to be.

Great. Then maybe you can help remind me what is your margin assumption for your break-even model?

Margin assumption is 50 points plus or minus 2 points. Or plus or minus 3 points.

Long-term model is.

Long-term model, right. Yeah.

Your long-term model -- did you say 50? I'm sorry, I (inaudible).

Yes, 50 points plus or minus 3.

50 plus or minus 3. Okay, great. Now, moving on to the product side, last quarter you guys talked about the VEE and you have -- I think you mentioned that you had 10 out of the 21-design engagement. Actually it was Q1 handset OEM. I was wondering if you can put some color around the progress there? And also, since you've given the 40 -- over 40 SSO this quarter, I was wondering how much of that is tier one customer (inaudible)?

Yeah, first of all, the progress, as you know tier one guys, the big guys, move -- they measure the speed of light in weeks. And so they move at their own pace. I can't give you the names, but I can tell you that typically if you've done -- if anybody's ever done any business with these guys, they know that just being certified as a vendor can wind up taking you a year. So, our first revenue will not come from tier one guys.

What we're trying to show is that VEE is being embraced by tier one guys, even though it won't impact revenue. So, what it really points to is the value that they perceive. And by the way, the value is really along two axes. One is a -- of course the critical one of -- for some of them is sunlight, if you've ever looked at any of these LCD displays in sunlight, it's virtually impossible to be able to see what it is. The second is really one about power. How long an operating life do you get on the -- between recharges? And VEE addresses both of those very aggressively.

So, the additional 40, I don't know that we picked up any new in tier one customers during Q3 to be honest. I think it was tier two guys for the additional 19 SSOs. But I don't have that number off the top of my head, but that's my sense.

And you know, Edwin, of course we are designing -- well, maybe you want to check, Carl, our design cycle.

Well, it -- the design cycle's all over the map, but as you know with smartphone guys, they've got FCC approval, and that's relatively straight forward. The longer-term -- and all these things are serial -- the longer-term approval cycles come from the people they supply those phones to, the operators. And each of the operators -- if they're supplying the same phone to multiple operators, each of them have a little different wrinkle on what they want. And so you come back in for kind of a minor redesign before you go to production. And that alone can wind up being a six to nine month kind of deal.

So, you're looking at, for tier one ODMs, if you've never done -- sorry, OEMs. If you've never done business with them before, you're probably two years away from revenue on these tier one guys. So, obviously that's one of the reasons that we're driving so hard on tier two as well because there the turn around time is much shorter. A time to revenue is shorter.

And the other reason of course, is they're more aggressive about embracing new technology that might give them competitive advantage in the market. With the big guys, you've got to convince them that what they've already done internally, this homebrew solution that they may have done internally, isn't as good as VEE. And that's what NIH is like in not invented here syndrome in companies. It's some of the intense bureaucracy is such that it really kind of stifles innovation and so you've got to sell through that. And that just takes a long time.

I see. So, it's fair to say during your fourth quarter guidance is (inaudible) optics as being design of your new products, right? And then with VEE will come our 2009 opportunity?

Correct.

That's fair, right? Okay, great. Just -- actually just a little bit of a question over seasonality. Obviously on the fourth quarter I would imagine you will see a little bit of seasonality especially for a product that sells to consumer side. I was wondering how is that new product revenue that you expect in the fourth quarter, $1.6 million. I was wondering how much do you think it was subject to seasonality versus other (inaudible) less so?

I'm sorry. How much is subject to what, Edwin?

Seasonality. Like the (inaudible) seasonality and (inaudible). This way you can quantify would be very helpful.

Well, I don't think much of that $1.6 million is really driven by seasonality quite frankly. We -- as Carl mentioned, we -- we're going in -- coming into this quarter with a fair amount of that on the books already. And that's why we feel pretty confident, as opposed to a lot of the other semiconductor guys, which have kind of thrown up their arms about what's going to happen in Q4. We've got it on the books and we feel that it's in applications that probably are not as seasonal. So, I don't think we're going to be faced this year with Q4 seasonality like we will be maybe two years from now when we have a larger portion of our business coming from cell phone guys, for example.

I see. Okay, great. I have two more kind of logistic questions. First, regarding your revenue recognition in terms of a sell in model, it's fair to say though, yeah you guys are doing sell in, but you have very little of your business comes from distributor, right. Or sell in to your customer. Is that a fair way to look at that?

No, actually we use distributors for logistics. So, we're not relying on them to hold inventory anymore. They've got less than a day of inventory. We're not relying on them for design wins. We use them primarily for the logistics and to carry the paper, quite frankly. Dealing in China, as an example, we want somebody else to worry about the receivables there. We'll pay a distributor some reasonable sum to manage that whole process.

What was our -- in Q4 -- or Q3? Do you remember what our -- what percentage of our revenue went through distribution? I'll bet it was over half.

I'd have to check. I think it was probably close to half.

Yeah.

And I think on that case it goes to distribution, Edwin, that significant portion, probably 60%, 65% is programmed by us. And so, you're looking at 35% or 40% that's blank and that's half of our business. So, it's less than 20% of our total business that is affected by the need to sell in rather than sell through.

Great. Okay. And then one last question. For the third quarter, I'm curious. Really your mature product has been quite stable. I'm curious if there's any kind of particular product that's a little more than the other ones in that group? And did you guys recognize any royalty revenue in that quarter?

Well, we didn't recognize any unusual royalty revenue in the quarter, just kind of steady as she goes there. And we've been really pleased with the strength of our pASIC 3 business, it's been good.

Which is what we expected, by the way.

Yes, right.

And we told -- which is what we forecasted right along.

Great. That's all I have. Thanks.

Thank you, Edwin. See you at AeA.

(OPERATOR INSTRUCTIONS) And there appear to be no further questions at this time. And I'd like to turn the conference back to you, Mr. Hart, for any additional and closing remarks.

Okay. Well, thank you kindly for your interest in QuickLogic. I hope you have an opportunity here in the short-term to take a look at our VEE demos, because they really are exciting. The -- you can't -- I can't believe the major operators, the cellular operators, that the excitement you see when you show them a VEE operating on phones in bright sunlight. It -- seeing is believing.

So, we'll look forward to hopefully seeing you at one of the conferences or exhibitions. And if not, we'll be back February 3rd for our year-end conference call. Thank you kindly.

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