Quicklogic Corp (QUIK) 2009 Q2 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the QuickLogic Corporation second quarter 2009 conference call. This call is being recorded. At this time, for opening remarks and introductions I would like to turn the call over to Mr. E. Thomas Hart, Chairman and CEO for QuickLogic. Sir, please go ahead.

Thank you. Good afternoon, ladies and gentlemen. Thank you for joining us today for QuickLogic's second quarter conference call. Joining me here today is our President Andy Pease and our CFO Ralph Marimon. Ralph will take you through our second quarter 2009 financial results and then I'll share my perspective on our business. Finally, Ralph will detail our guidance for the third quarter and then we'll take questions. Ralph?

Thank you, Tom. Before we get started, I'll take a moment to read a Safe Harbor statement. During this call, we will make statements that are forward-looking. These forward-looking statements involve risk and uncertainties including but not limited to stated expectations related to revenue growth from our new products, statements pertaining to our design activity and our ability to convert new design opportunities into customer activity. Market acceptance of our customers' products, 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 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 of the QuickLogic website located at www.quicklogic.com.

On July 1st, we issued a press release with our updated revenue outlook of $2.8 million to $3 million for the second quarter. Total revenue for the quarter came in at $2.9 million. In the second quarter, new product revenue increased by 24% sequentially to $816,000 or 28% of total revenue. Offsetting this increase however, was a 46% decline in our legacy product revenue, which came in at $2.1 million.

The US and Western European market sectors served by legacy FPGA products were among those hardest hit during the recession. These markets include general and commercial aviation, instrumentation, test equipment, industrial, and aerospace.

I will talk in more detail about our financial guidance later in the call, but we will note know that it will include our expectations of the significant -- of a significant sequential increase in new product revenue. However, based on our current backlog for legacy FPGA products, we are planning at this time that legacy revenue could decline sequentially, limiting our total sequential revenue increase to about 7% at the midpoint.

On a on a non-GAAP basis our gross margin declined to 48%. This decrease was predominantly driven by the fact that the fixed portion of our cost of goods sold was spread across a significantly lower revenue base and therefore was under absorbed. Contributing to a lesser degree was the mix of new versus legacy products and modest inventory reserves taken during the quarter.

Non-GAAP operating expenses for the second quarter totaled $4.1 million, which was within our guidance range. R&D expenses increased 14% sequentially to $1.7 million. This increase was due to planned investment in chip development.

SG&A expenses were essentially flat with the Q1 level at $2.4 million. In total, operating expenses increased 4% sequentially on a non-GAAP basis. Other income and expense, and income tax expense, netted to a positive $37,000 and included interest expense of $23,000, which was offset by foreign exchange gains, interest income, and a tax credit, which totaled $60,000.

Our non-GAAP net loss was $2.7 million or $0.09 per share. Our ending cash position of $16.5 million reflects a sequential decrease of $1.7 million from the first quarter of 2009 and was primarily due to the low revenue level and resulting net loss that was incurred in the quarter.

Our GAAP results include stock based compensation charges of $567,000. This was higher than previous quarters due to the annual employee stock option refresh that occurred during the second quarter. Our second quarter GAAP net loss was $3.2 million or $0.11 per share. Please see today's press release for a detailed reconciliation of our GAAP to non-GAAP results.

Before handing the call back to Tom, I'd like to review an important cash conservation action that QuickLogic has undertaken recently. In light of the fact we're expecting legacy FPGA product revenue to be depressed again in Q3, we have implemented an across-the-board salary reduction plan for the second half of 2009. As a result, all executives and most of our employees will take a 10% reduction in cash based compensation. And in its place, receive restricted stock units that vest in two traunches over a four-month period. The only exception at the executive level will be our CEO Tom Hart, who is taking a 20% cut in cash based compensation.

I'll rejoin you in a few minutes to discuss our guidance for the third quarter, but first Tom will update you on the status of our strategic efforts.

Okay, thank you, Ralph. While our total Q2 revenue was disappointing, we again made notable progress towards realizing our strategic goals. I don't want to take much time today discussing the status of our legacy FPGA business, but I don't want you to think that it's being ignored either.

The short story here is the vast majority of our legacy FPGA business goes into products serving market sectors that were among those hit hardest during the recession and will likely be the slowest to recover. Due to this and the fact that our customers know we are holding ample inventory in [tie] bank for their near-term needs, we're receiving minimal visibility and backlog commitment.

As a result of the situation we face with our legacy business, we're forecasting only to the extent customers are sharing visibility. Fortunately though, our legacy business is only one part of the equation, a part that we believe will be of lessening importance going forward as we continue to grow our strategic customer-specific standard product or CSSP business.

During Q2, we received further validation of our CSSP business model from both semiconductor companies that have chosen to use us in their reference designs, and our targeted customers. You will read in a press release on Thursday about the new CSSP win we have with Icera. Icera is a privately held fabless semiconductor company based in the UK that has developed a very unique software defined baseband processor targeting the high-volume broadband data card market.

By working with QuickLogic, Icera has developed reference designs for the next generation high-speed wireless data modems that include an SD SDHC memory card slot. Working together, we've already won several strategic designs and we have received production orders from two tier one customers. In addition, we've shipped pre-production orders to a third tier one customer. We expect to win more designs in the data card market by the end of this year.

In addition to formalizing our working relationship and reference designs with Icera, we have ongoing development efforts with a number of other semiconductor companies that we believe will lead to reference designs based around their processors. This is a really big deal for us since it means sales teams from much larger companies will be presenting new reference designs to their customers. We expect these reference designs to include QuickLogic CSSPs.

Now, the benefits we bring to the party for semiconductor companies that supply processors to the various handheld battery powered markets are exactly the same benefits we provide our targeted customers. In both cases, we offer competitively priced solutions that allow them to broaden the markets they can serve and dramatically accelerate how quickly they can adapt their products to changing market trends. By using our low power platforms that combine hard wired functional blocks with programmable fabric, which by the way is leveraged with our library of proven system blocks, we can deliver custom tailored CSSP solutions with a unique combination of price, performance, low power, and time to market.

Based on the progress we've made during the year, it is clear to us that our targeted markets are beginning to embrace our compelling value proposition and the flexibility it offers.

Let's shift now to updating the status of the design wins and orders we covered in our April conference call.

Last quarter I announced a design win and initial production order for an innovative USB secure access memory stick. This project is alive and well, but production was delayed due to challenges the customer encountered during their qualification process. These challenges, which are now resolved, delayed the ramp of our production volume.

Shipments that were originally scheduled to begin in Q2 will now ramp during late Q3. Our customer for this project will initially market this device in Western Europe where secure portable data is already a substantial issue. They intend to follow this with marketing campaigns in North America and Asia.

During Q1, we secured design wins with three of the top five data card manufacturers. In two cases, we received pre-production orders and in the third an initial production order. During Q2, we secured the initial production order from the second of these three customers.

All of these wireless data card designs incorporate our SPIDA proven system block. SPIDA stands for smart programmable integrated data aggregator, which is designed to manage data flow, to maximize speed, while minimizing the power and energy required for each byte transferred. As you might guess, SPIDA is viewed by our customers as a key element in their designs.

Now, one of the inherent challenges in the data card market is the long qualification cycle imposed by network operators. These cycles typically run 16 to 18 weeks but in the case of one of the largest operators in the world, the cycle can stretch to 24 weeks. Due to this, shipment schedules that are currently set to ramp in late Q3 could be shifted into early Q4. We took this into consideration when formulating our Q3 guidance.

In addition to these designs with established data card customers, we have ongoing design efforts with three tier one communication companies that intend to enter the data card market. During Q2, we secured a prototype order with one of these customers, but it's too early yet to term this as a formal design win.

At our last conference call in April, I briefly shared with you our ArcticLink II VX4 new product launch, incorporating VEE 2.0, our next generation visual enhancement engine. And the positive response we've seen from the technical press and potential customers.

VX4 brings with it a number of innovative new features and enhanced capabilities. Among the more notable features is a built-in frame buffer that allows the application processor to work in a more power efficient burst mode. This feature reduces the duty cycle and power consumption of the processor. The frame buffer is sufficient -- sorry, is significant since it allows VEE to optimize power consumption for both the display backlight and the application's processor, which are two of the most power hungry components in smart phones, netbooks, and a variety of other battery-powered devices.

A major VEE accomplishment realized during the second quarter was the completion of a VEE powered netbook by a tier one PC manufacturer. This customer's response to their VEE technology evaluation has been positive.

When introducing VEE 2.0 last quarter, I neglected to mention the status of VEE 1.0, which led a few investors to inquire as to whether it was still alive. VEE 1.0 is very much alive and it is currently in evaluation or implementation with tier one customers addressing the smartphone, smartbook, netbook, and mid markets.

I have previously commented that I expected to see significant VEE revenue in the last half of this year. While I still believe this is a possibility, owing to longer than anticipated evaluation cycles, and customers that have extended new product introduction schedules, it is not a sure thing. However, VEE remains a very exciting opportunity for QuickLogic.

In 2007, we developed a customized opportunity tracking system that has helped us manage many of the complex aspects associated with the introduction of our new CSSP business model. This tool has helped us understand our targeted customers, how they value new design concepts, and what drives them to implement our CSSPs in their designs. Through this experience, we've become more efficient in every facet of our business. We're more efficient in design, introduction, and at driving the best opportunities through the sales funnel.

In the beginning, the primary benefit we derived from the sales funnel was learning about what targeted customers like about our CSSP concept. And what it takes to move from customer interest to design implementation. We believe these lessons and the rate at which we are now generating new design wins confirms our CSSP business model as a valid concept and presents the attractive value proposition we envisioned it would two years ago.

Launching a new product concept like CSSP is a huge challenge, not only to implement in the market, but also to communicate to investors. Therefore, we decided to share detailed sales funnel data, beginning with our Q2 2008 quarterly conference call. We believe that by sharing this data, investors could better understand the viability of our CSSP strategy.

Now, with a good understanding on what it takes to move from concept to interest and finally through to design implementation and production orders, we're able to leverage the strength of our sales process to fine tune our resource allocation and focus on the opportunities most likely to produce revenue.

Due to the fact we are now in a position to talk directly about results rather than the more volatile collection of opportunities in our funnel, presenting these results will be the focus of our investor presentations and conference calls going forward.

So, to provide you with a baseline, we have SSOs with tier one customers in evaluation, implementation, and verification stages using CSSPs in the following market sectors. Broadband USB data cards, smartphones, netbooks and smartbooks, mobile Internet devices, or MIDs, USB based secure access and storage devices, and finally handheld POS terminals.

My closing message to you is that over the last year, we have shown there's no shortage of opportunities for CSSPs in our target markets and applications. Further, we believe that the opportunities are of sufficient magnitude to enable future revenue and profit growth that will please our investors. Ralph, back to you.

Thanks, Tom. As I mentioned earlier in the call, and as Tom discussed regarding new production orders, we expect new product revenues to increase significantly in the third quarter. With the expected decline in FP -- in legacy FPGA products however, we are forecasting total third quarter revenue to increase approximately 7% at the midpoint to $3.1 million plus or minus 10%.

As discussed earlier, we have several new designs that are scheduled to hit production later in the quarter. However, as we experienced in the second quarter, schedule variations from our customers, which are beyond our control, could push some of these shipments into the fourth quarter. Because of these factors, we are not breaking out our forecast for new and legacy business, beyond stating that we expect new product revenue to increase significantly on a sequential basis.

On a non-GAAP basis, we expect gross margin to be slightly below the second quarter level at 45%, plus or minus 3%. As was the case last quarter, this low growth margin is driven by the mix of new and legacy products and by the fact that our fixed costs associated with our cost of goods sold are being under absorbed by the low forecast in revenue.

By comparison, if we were to report revenues of $6 million in Q3 and use the mix of new and legacy products that I use to calculate the 45% margin forecast, gross margins would be approximately 52%.

Operating expenses will be lower than the second quarter or about $3.9 million plus or minus $300,000. The actual amount would vary depending on timing of our investments and new product design, which would be partially offset by the previously mentioned cash conservation activities.

Our other income and expense will be a charge up to $60,000 during the third quarter and any tax provision will be negligible.

Our stock based compensation expense in the third quarter will be approximately $700,000. This anticipated increase is due mostly to the aforementioned restricted stock program that is offsetting reductions in cash compensation for employees and executives. Stock based compensation expense will decline in Q4 when the recently issued restricted stock is fully vested.

With regard to cash usage in the third quarter, while we believe that the first quarter of this year was the low point for new product revenue, we believe that the third quarter will be the high point for cash usage. Due to the low revenue level in Q2, and the resulting low-level accounts receivable at the beginning of the third quarter, we are expecting to use up to $2.5 million in cash during the quarter.

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

Okay, thanks, Ralph. In May we were very pleased to welcome Mr. Frank Ellis, who joined us as Vice President of Worldwide Sales, replacing Andy Pease, who we promoted to become our President.

Frank is a senior semiconductor sales executive, well versed in sales and sales management with extensive experience in the markets we are pursing. Frank's leadership skills when coupled with his customer knowledge bring an additional resource to our customer facing activities. Welcome aboard, Frank.

Our third quarter 2009 earnings conference call is scheduled for October 27, 2009 at 2:30 P.M. Pacific Daylight Time. Now let's open up the call for questions. Rebecca, please?

(Operator instructions) And your first question will come from Edwin Mok with Needham and Company.

Hey, thanks for taking my questions. So, first question's on new products. Looks like you guys are looking for new products to grow in the coming quarter and there might be some revenue timing issues. Right? But if you look at like from first half to second half, will you characterize that [as significant growth layer] over 100% type of growth in first half to second half in terms of revenue?

We haven't forecasted out beyond -- we forecast one quarter at a time. We give guidance one quarter at a time. And where I can tell you that we expect the second half to be significantly larger than the first half.

Okay. And then maybe a different way to ask that. Also, given that new product, there's potentially some risks for (inaudible) because of the timing on revenue. And given that your product is more tied towards more consumer type products like handheld and netbook, is there any risk that if you have missed a window the customer will just come basically to just go with another design and as such might not materialize into revenue for this year and becomes more like a next year opportunity?

I don't think so. The things we're betting on revenue on in this quarter are already secured as design wins. So, I don't think they're going to get -- I don't think we're talking about missing a window. My only concern there might be if one of the network operators pushed them out even further. But it looks like we expect that that's behind us. But that's the guidance we're getting from our partners. So, I don't think we've missed a window here.

Great. And then maybe I'll ask one more thing. You mentioned about the VEE design into a netbook at a tier one PC OEM. Is it possible for you to kind of talk about that option? Because these netbooks volume can be quite high. Right? And is that something that you expect to ramp this year? Or is it more like late this year and more like next year? Can you kind of maybe put some color on that?

Yes, let me let Andy address that.

Yes, when these netbooks -- the netbook that Tom was talking about was actually a technology evaluation. So, what this PC OEM did was take apart an existing netbook and put a daughter card on it to evaluate the VEE technology. And that's what we're talking about. The way they do this, which is by the way the way a lot of PC manufacturers do it, is they like to do a technology evaluation and if the technology proves itself out, then they spin that technology into the various operating groups that make devices that hit the market.

I see. So, I imagined it as actually more for a PC ODM in Asia. Is that who you're targeting?

No, this particular -- the technology evaluation was done by a tier one PC OEM.

Oh, I see. So, the OEM does it evaluation and then they kind of transfer the technology to the ODM to actually design the physical netbooks. Right? Is that correct?

Yes.

As you might expect, this marketplace is being embraced by both OEMs and ODMs.

I see, yes. Okay. Now I think I want to jump just quickly on the mature product end. Looks like a decline -- a little bit part of it because of the end markets. Right? Tom, have you gotten a look at maybe kind of a normalized end market range since it has been kind of decline -- basically came down quite a bit from nearly a historical level. Right? Have you looked at kind of a normalized range going forward? Do you think you're already at kind of close to bottom in the third quarter? And do you expect to bounce back? Any kind of color around that would be helpful. Thank you.

Gee, it's tough to say. We're -- the major customers in that -- that fit into that are guys that we are close to. Not so much anymore from a sales perspective, because we're not doing new designs with them. But certainly our customer service people are close to them. And stay in pretty close contact with them to see what's happening. And it's just about -- as we've talked before, it's just about the fact that there aren't a lot of G4s or G5s being sold these days. And that's where -- that's certainly a significant sector of what's our business from before. But it's not just there. It's really across-the-board.

So, it's down significantly from where it was before. We didn't expect that big a fall off, quite frankly. But we're not betting on it recovering. We're betting on CSSPs on a forward-going basis.

Great. And then one last question just on historically I think you guys talk about break-even model at around $8 million to -- maybe $8 million to $9 million for revenue run rate. Right? Given that there's an increase kind of mix on the new product, looks like new product for potentially more than half your business going forward. Do you think that can have an impact on that model given new product? Do you expect to have a slightly lower gross margin than like the 60% that you historically got for the (inaudible)? Can you update us on that break-even model? Thank you.

Yes, I don't think it changes our break-even model too much because the model was always based on a high percentage of CSSP revenue. So, I think our break-even remains in the $8 million range, plus or minus. I don't think it changes it that much.

Great. That's all I have. Thank you.

Your next question will come from Brian Coleman with Hawk Hill Asset Management.

Good afternoon, Brian.

Hey, Tom. How are you? First question. Can you tell me how many SSOs you now have in production? Or I guess more appropriately, how many SSOs does your third quarter guidance assume will be in production?

Off the top of my head I can't tell you that. I shared with you -- we -- the data card space there's three. Four.

Three.

Three in data card. And secure memory is one. One early in the quarter, we expect two for later in the quarter. I don't think there'll be any smartbook or netbook in the quarter. We expect the POS terminal to be possibly two. Should be one for sure. Let's see. What else? I think that's it.

Okay. And so, that was -- you probably had -- if I understand the flow of design share, you had three data card designs in production during 2Q and then these other ones kind of fold in during 3Q?

No, we had one in production in Q2.

We've got a (inaudible) quarter that got delay to Q3.

Okay.

Yes, we got a production quarter. We got our first production quarter in the data card market at the very end of Q2. And that is going to ship in Q3. And then two other data card production or -- we actually have one secured and we're pre-production in the third. And we hope that the pre-production should go into production by the end of the quarter as well.

Okay. So, it's just really one design then that contributed most of the growth in your new product revenue in 2Q.

Right.

Okay, good. Okay. Can you talk I guess qualitatively about how maybe the delay in handing over the 700 megahertz spectrum may have affected the designs -- the pace of design progress in your SSO funnel?

It's not clear that there's a direct correlation that I can see quite frankly. I mean the customers that we're -- our customers' customer I don't think is being stalled by that at all. These guys are doing HSPA data cards. And I don't believe that's impacted at all by 700 megahertz is it?

No, I was thinking more along the lines of any feed designs or those types of opportunities you might have. I read increasingly about media flow accessory type products. And that would -- I would think that would be a target for you. I'm just curious if there's been any reprioritization at -- if there had been any reprioritization at your customers just given that that handover happened a quarter or four months later than expected.

We were impacted by that aspect of. I missed what you were referring to there. I was focused on data cards. We were impacted negatively by that. But long-term I don't think that would be an impact for us -- will have a negative impact for us.

There was a contributing factor to the delay that we have seen with our -- some of our SSOs. I guess the bad news is some of these opportunities we've been working on have been delayed. The good news is that we have not lost them.

Okay. Another question. When you talk about the (inaudible) evaluation for a netbook, how long, just kind of ballpark, would you estimate that it would -- for a technology evaluation, a successful technology evaluation to translate into a design and then a production order? Is that potentially 2010 or 2011 of revenue?

I would expect that these technology evaluations take upwards of a year to 18 months. And I would expect that for the netbook market that we hope to start seeing revenue in that mid to late 2010. If it comes earlier than that, that'd be great. But as you know, the netbook market is really taking off now.

Okay. And then, last question. As you get these designs that begin to roll into production, I assume you -- the order patterns could be quite lumpy as inventories are stocked and you get these initial production runs. I'm curious if you've got an ability to kind of monitor how much production (inaudible) inventory versus how much of it is actually sold through the end market? And if you've got a way of being able to provide guidance going out that accounts for some of your current production ending up in inventory?

There's probably three or four mouths to feed in there. You've got the ODM, you've got the OEM, you've got the network operator for starters. And so it makes it pretty murky. I think we have a good handle on inventories at ODMs and at OEMs. What we don't have a very good handle on is inventories in the channel or actually at the network operator.

So, that's the big -- kind of the big question mark for us. The coordination I think we get these days now between us, ODMs, and OEMs is pretty good. So, that is a lot of visibility there, which there never used to be, if you remember several years ago that was kind of a black hole and they kind of played a game with that. That pretty much over now because they don't take any -- ODMs take no inventory risk. OEMs won't commit forward either, so everybody's running really skinny on inventory in that channel.

But the unknown is the ultimate sell through. And I don't know how to monitor that yet, quite frankly.

Okay.

I was going to add one thing that works very well in our favor, because we're a model of CSSPs is remember that when we come out of the fab, we basically have a configurable part. So, it's not like we're making a custom part in fab and we're building up inventory. So, that works very well to our favor in terms of not having large amounts of inventory -- custom inventory staged for customers.

Yes, that takes care of our inventory.

Right, but not -- certainly not the channels inventory.

Right.

Right, I understand. Okay. All right, thanks very much.

Okay, thank you, Brian.

(Operator instructions)

Okay. Well, if there's no other questions, thank you for your interest in QuickLogic. We look forward to sharing with you our CSSP growth in the future. And we'll see you on -- or hope to see you next on October 27th at 2:30. Thank you.

Ladies and gentlemen, that does conclude today's presentation. We do thank everyone for your participation.