Quicklogic Corp (QUIK) 2009 Q3 法說會逐字稿

Good day, everyone and welcome to the QuickLogic Corporation third quarter earnings results conference call. This call is being recorded. With us today from the Company is the Chairman and Chief Executive Officer Tom Hart, Chief Financial Officer Ralph Marimon, and the President Andy Pease. At this time, I would like to turn the call over to Tom Hart. Please go ahead, sir.

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

Thank you, Tom. 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 activities. Market acceptance of our customer 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 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 of the QuickLogic website located at www.quicklogic.com.

For the third quarter of 2009, our total revenue was $3.3 million, which was an increase of 14% over the Q2 level. New product revenue increased by 67% sequentially to $1.4 million or 41% of total revenue.

The increase in new product revenue was driven by our data card customers who began initial production. Our legacy product revenue was $2 million, which was down slightly from the Q2 level of $2.1 million.

On a non-GAAP basis our gross margin declined to 41%, which was just below the low-end of our guidance of 45% plus or minus 3%. The decrease in gross margin from the second quarter was primarily due to an increase in inventory reserves related to an older CSSP solution platform.

Without this reserve, gross margin would have been approximately 48%, which would have put gross margin at the high-end of our forecasted range. As was the case in the second quarter, overall gross margin continues to be negatively impacted by the fact that the fixed portion of our cost of goods sold were under absorbed at the growing, but still low revenue levels.

Non-GAAP operating expenses for the second quarter totaled $3.2 million, which was below our guidance range. R&D expenses declined by approximately 32% to $1.2 million. This decrease was primarily due to a reduced level of third-party chip design costs. This savings is directly attributable to the operating model changes we implemented during the second quarter of 2008.

Due to the vast design resources available in the world today, we have been able to reduce and refocus our internal fixed design budget to leverage and manage these external resources as variable costs. This not only allows us to reduce aggregate costs over time, but also allows us to go quickly and easily to the best design resources in the world for what is now a wider variety of design requirements.

As we move forward, I expect this strategy will continue to enhance our ability to react quickly to customer needs, service a wider variety of opportunities, and keep total costs under control.

SG&A expenses declined to $2 million from $2.4 million in Q2. The primary reason for the decrease in SG&A was that several one-time adjustments were recognized that lowered administration spending during the quarter. Without those adjustments, SG&A expenses would have been approximately $2.2 million.

On a non-GAAP basis, total operating cost declined by 22% sequentially from $4.1 million in Q2 to $3.2 million in Q3.

Other income and expense, and income tax expense, totaled approximately $68,000 during the quarter.

Our non-GAAP net loss was $1.9 million or $0.06 per share. Our ending cash position of $13.9 million reflects a sequential decrease of $2.6 million from the second quarter of 2009, which was slightly above our guidance of $2.5 million. The cash usage was higher than anticipated due to the fact that 57% of the Q3 shipments occurred in September and therefore are not collectible during the quarter.

Given our bookings trends for new products, positive design funnel activity, and the success we've had with cash management, we continue to believe cash usage will be lower as we move forward.

Our GAAP results include stock-based compensation charges of $858,000 plus an asset impairment charge and fixed asset write-offs totaling $248,000. The stock-based compensation charge was higher than prior quarters due to the previously announced program of granting restrictive stock units in lieu of salary that began during the third quarter.

Our third quarter GAAP net loss was $3 million or $0.10 per share. Please see today's press release for a detailed reconciliation of our GAAP to non-GAAP results.

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

Okay, thank you, Ralph. Q3 marks another quarter of tangible progress in the execution of our customer specific standard product or CSSP business model. The new product revenue increased by 67% sequentially. This follows the 24% sequential increase we posted for Q2.

In total, new product revenue accounted for 41% of sales in Q3, up from 28% in Q2. New product bookings increased by 53% sequentially. We even saw a modest increase of 9% in legacy product bookings. In total, bookings increased by 27% sequentially.

In addition to these quantifiable measures, we also significantly enriched our design funnel, received production orders for two new production wins, and pushed several strategic design opportunities much closer to revenue. Clearly, our sales and marketing team, with the closely coupled support of our engineering team, is executing well.

R&D performed equally well by accomplishing the launch of our new VX2 and VX4 platforms on time, on budget, and working to specification on the first pass through wafer fabrication. These new platforms enable us to bring the value of our virtual enhancement engine and our display power optimizer to the handheld displays used in our target markets. As you may know, the V and DPO technologies are based on Apical limited technologies, which we licensed exclusively for mobile applications.

As Ralph presented, we also saw a strong validation of the new operating model we implemented during the second quarter of 2008. Leveraging this model has allowed us to respond to a broader array of opportunities, shortened our time to solution, lowered aggregate engineering costs, and provided us with the flexibility necessary to better manage operating costs.

In short, we are building measurable traction. In reality, the race however is just getting underway and as is the case with all good races, we expect excitement will build with each lap.

As you may recall from previous quarterly conference calls, our efforts are focused on the high-growth segments of the mobile market. Our first segment to revenue has been data cards, a segment that includes both wireless broadband USB cards, and strong authentication secure access memory cards.

Longer term, our largest revenue segments will include smartphones and multi-media phones, smartbooks, netbooks, mobile Internet devices, or MIDs, which are also known as pocketable computing devices, or PCDs. To optimize our leverage in addressing these markets, we've employed a three-pronged strategy.

The first prong was to develop direct relationships with the targeted customers. This ability was greatly enhanced when Andy Pease joined us after serving as the VP of Worldwide Sales for Broadcom. We further enhance this capability with the addition of Frank Ellis, who has held Senior Sales Management positions at large semiconductor suppliers that are active in our targeted customer base.

The second prong was to develop strong partnerships with leading applications and based band processor companies, as well as a select number of ODMs. This led us to the third prong, which was to jointly develop reference designs with these partners. These reference designs provide us with two very distinct benefits. The first of course is the ability to provide targeted customers with complete turnkey solutions. The second and more subtle benefit is that the large and well-connected sales and marketing teams of our partners are selling our parts by association. This significantly multiplies the selling effort for QuickLogic CSSP platforms.

The simple story here is the customers we engage require complete solutions that enable them to quickly respond to changing market demands. As we've learned from working closely with our partners, even though they include large and highly capable companies, our CSSP platforms allow them to bundle a complete solution quickly.

In addition, our CSSP platforms significantly extend the breadth of the markets our customers -- excuse me -- our partners can address and add flexibility to their designs, an increasingly important benefit we provide to our partners.

While each of these prongs is obviously an ongoing process, our progress in their implementation is accelerating and the evidence suggests the strategy is working.

As it stands today, we are actively engaged with tier one customers in all of our targeted market segments and have seen the first ramp of production revenue in the data card segment.

During the July conference call, I announced that we have received production orders from two tier one broadband data card manufacturers and the pre-production order from a third. During Q3, we shipped against both production orders and received our first production order from the third customer. This means we'll shipping production quantities of our CSSP platform to two of the five largest players in the wireless broadband data card market during Q4.

In addition to these three designs, we are working on two new designs with one of our existing customers and have new designs active with three additional companies in this market segment. To further these efforts and maintain design momentum, we've completed our second reference design with our broadband data card partner, ISERA.

With the continued ramp of production activity that we're focused -- forecasting for the broadband data card market, we've also received a scheduled production order from the strong authentication secure access memory card customer we discussed during our July conference call. This schedule calls for a shipment ramp starting in Q4, which is consistent with our July forecast. We're engaged with the same customer on two new designs and with a second customer in the segment on one design.

Now this is probably a good time to pause and discuss the poorly defined term design win. The short story here is a design win is simply a milestone in the process of getting to revenue, which is of course the goal. In the market segments we're addressing, it's not uncommon for customers to design a number of products that don't reach production for a variety of reasons. Therefore, to count design wins before the receipt of a production order is like counting chickens before the eggs hatch.

While it's good to know how many eggs you have that will potentially hatch, it's the chickens, or in this case the production orders that delivery revenue. This is why we carefully speak to investors in terms of production wins, pre production orders, and what we have in the active sales funnel, which may include what some other companies classify as design wins.

For the record, we define a production win as having the scheduled order in hand for at last one-twelfth of our estimated annual production volume for that opportunity. Accordingly, in the broadband data card market segment, we have three production wins, with three unique customers, and eight designs in process with six customers. Two of these designs are with existing production customers working on next generation products. We also have the two reference designs with ISERA that I referred to earlier.

In the strong authentication secure access memory card market, we have one production win with one customer and four designs in process with two customers, one of which is our current production customer.

The next focus segment, which we believe will generate significant revenue is the smartbook/netbook arena. This is a market that Intel opened with its Atom processor, but will soon be challenged by a variety of entrants offering what Qualcomm has termed as smartbooks, supporting various ARM core processor designs.

Strong contenders here will likely include Qualcomm, Marvel, NVIDIA, and Freescale. This extremely exciting market is ideal for QuickLogic. The combination of our display power optimizer, DPO, and our visual enhancement engine, V technologies, can provide up to two extra hours of battery life and radically enhance the viewing experience.

This is also a market where no one really knows what features and functions consumers will end up embracing. This means manufacturers in this market segment are keenly focused on designing flexible platforms that can be rapidly adapted as consumers vote for what they want with their wallets.

As you've undoubtedly read, there'll be several top line tradeoffs in the upcoming battle between netbooks based on X86 processors, and smartbooks based on the ARM core processors. Among these, the most often discussed include compatibility with Microsoft Windows, aggregate processing power, and how long a particular machine will run on a single battery charge. However when you look deep inside the machines as we do when working with our customers, there are a number of more subtle tradeoffs that are invisible to consumers.

The ARM core processor grew up in the smartphone market where it is virtually 100% market share. While it is clearly a robust processor and supported by a vast ecosystem due to its heritage, the implementations of the ARM core processors available today lack the connectivity needed to enable features required by netbooks and smartbooks.

These features include connectivity to a full sized keyboard, hard disk drives and solid-state drives, to name just a few. This has, and we believe will continue to create numerous design opportunities for our proven system blocks, which enable a wide selection of flexible connectivity CSSP platforms.

We currently have five active designs in process with four unique customers in the netbook, smartbook market segment. In addition to these, we have two reference designs in process. One would -- excuse me. One with a tier one semiconductor company and the other with a tier one subsystem OEM that is active in numerous tier one OEMs and ODMs. Based on what we can see at this juncture, we believe our first production ramp from this segment will start mid-2010.

Moving to the smartphone segment, we have six opportunities in the active funnel with six different OEM/ODMs. We are also working on three reference designs, two with a tier one semiconductor company and one with a tier one ODM. As you may know, the design cycle for these products is relatively long and we do not expect to see significant revenue until the second half of 2010.

However, the market volumes are large and rapidly growing, and we believe this segment represents the potential for truly explosive revenue growth for QuickLogic.

Sitting between the smartphone and the smartbook/netbook market segments is what was originally termed by Intel as a mobile Internet device market segment but has more recently be referred to as pocketable computing devices, or PCDs. This segment represents opportunities for QuickLogic that are very similar to those we're seeing in the smartbook/netbook market. In this segment, we have two designs in the funnel with two unique customers and one reference design with an ODM partner.

As you may have seen in our press releases, we recently announced that we're now sampling our ArcticLink II VX2 platform. With an embedded second generation visual enhancement engine, using V2.0, display power optimizer, an optional frame buffer, and lower-power programmable fabric, the ArcticLink II VX2 solution platform provides an ideal display path CSSP solution for netbooks, smartbooks, smartphones, multi-media phones, as well as for MIDs and PCDs.

As you can see, there are plenty of opportunities for CSSPs. OEMs and ODMs see that CSSPs offer a clear path to getting to market quicker with lower risk while offering hardware based flexibility to enable the differentiation desired.

Ralph, back to you.

Thanks, Tom. We are estimating that our total revenue for the fourth quarter will increase approximately 20% to $4 million plus or minus 10%. Because of increased visibility and the customer demand for our new products, we are breaking out our new product forecasts and estimate that new product revenue for the fourth quarter will be approximately $2 million plus or minus 10% or a 47% increase from the third quarter level.

As in past quarters, we are keeping a fairly wide range for our revenue estimate in our guidance. As we have discussed in earlier calls, our actual results can vary significantly due to schedule variations from our customers, which are beyond our control. Due to our lower revenue level, a scheduled change from a customer could push shipments into the following quarter and its potential push could change our actual results significantly.

On a non-GAAP basis, we expect gross margin to be approximately 45% plus or minus 3%. This gross margin percentage 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 at the currently forecasted revenue level.

Excluding the one-time adjustments that occurred in the third quarter, non-GAAP operating expenses will increase by approximately $300,000 to $3.7 million plus or minus $200,000 in Q4. The increase is primarily due to costs related to year-end activities and this being a fourteen-week quarter.

On a total year-to-year basis, operating expenses are forecasted to decline by 26% due to the reorganization instituted during the second quarter of 2008. Our other income and expense will be a charge up to $60,000 during the third -- during the fourth quarter and any tax provision will be negligible.

Our stock-based compensation expense in the fourth quarter will be approximately $700,000. This is primarily due to the previously mentioned restricted stock program that is offsetting reductions in cash compensation for employees and executives. We are expecting to use approximately $1.5 million in cash during the quarter, which is primarily due to the expected loss and the increase in working capital to support our new product revenue brand.

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

I'd like to take this opportunity to publicly thank our ArcticLink II team for bringing VX2 and VX4 to the stage where we are now sampling customers with these exciting platforms. A very complex design activity done on time, on budget, and sampling straight out of the fab on the first pass. I think these results provide a clear indicator of the quality of our team here at QuickLogic.

This is our first CSSP platform done with the new product development model we implemented last year. By moving context activities to outside partners. Well done, folks, and thank you.

I think the message to embrace here at the bottom line is that we are seeing tangible evidence that validates our CSSP business model and the effectiveness of our operating model. We are seeing design opportunities move into production, engaging current production customers with next generation designs, and have established ongoing design activity in all of our targeted market segments.

While accomplishing these strategic goals, we are also controlling our operating costs, yet doing so in a way that has actually expanded both the scope and scale of what we can offer and shorten the time it takes to present complete solutions.

In addition to these notable accomplishments, we've also cultivated meaningful partnerships with a number of industry leaders in our targeted market segments that have not only expanded both our reach and our influence with key customers. In short, things are going well and we believe they'll continue to improve as we move forward.

Our fourth quarter 2009 earnings conference call is scheduled for February 9, 2010 at 2:30 P.M. Pacific Standard Time.

And now, Jay, let's open up this call for questions please.

Thank you, sir. (Operator instructions) We'll take our first question from Edwin Mok with Needham & Company.

Hi, thanks for taking my question. Can I first ask a question just related to the financial statements? What kind of offerings (technical difficulty). Hello?

Edwin, you're cutting out on us. Try it again.

All right. Sorry about that. Can you guys hear me?

Yes.

Yes, sorry about that. So regarding your operating expense, it appears that it came into a pretty good operating expense. I was just wondering if there was additional cost cutting that you guys took during the quarter?

That certainly helped it, absolutely. So that was part of it. In general, our expense levels are down just by cost control. But the cash savings program we instituted certainly helped that.

I see. And do you anticipate assuming the new product continue to ramp, do you anticipate that OpEx might go back up in the -- beyond the fourth quarter into 2010 timeframe?

I think the biggest impact on op expense will be the third-party chip design activity that we do. And I think that the potential is there in the first half of the year for op expense to go up, but it depends on the timing of the chip designs that we do.

Great. That was helpful. And then just quickly on gross margin. It came in a little bit lighter than how you had decided, which I just (technical difficulty) any other reason why it was -- came in a little light?

No, the biggest factor on gross margin was the fact we took an inventory reserve on an older CSSP platform where the demand is much lower now. It's an older platform. Without that reserve, gross margin would have been about 48%.

I see, great. That was helpful. And then just lastly on this later financial statement, you basically have minimal tax so far and do you kind of anticipate to stay that way or do think you have -- you might have more write off given that you have quite a bit of loss?

I hope our taxes don't stay that low. That's a reference to the fact that I expect us to make money and therefore we'll be paying taxes. Ralph, do you want to answer the --?

But we -- Edwin, right now because of the loss position, we pay tax only in our international subs. But the -- and we have NOL going forward. So hopefully we'll make money, but it'll be a little while before we pay tax because of the NOLs.

Okay, great. And related to the product side, first one is looks like based on your guidance you effectively guiding that your new product revenue will be probably in line with your initial product. Mature product has come down quite a bit this year. Do you kind of expect that to stay at a level or is it more just because of kind of slow downs in (inaudible) market or do you expect a slight bounce in that area?

Well, we've seen a slight recovery. We don't expect to see a full recovery. As you probably remember, those products are basically in the industrial and military segment. Our largest customer as an example year in and year out has been Honeywell. And their products are primarily aimed at Avionics applications for commercial and general aviation. And of course, that market's pretty soft as you're well aware.

So I guess the shorter answer is we don't expect to see it recover to last year's levels. We think it's a pretty good bet that it'll be flat, but as we said before, we're really betting on the new product revenue. We've really got our energy focused on what's happening there.

Great. That was helpful. That's a good lead-in for the next set of questions. On the new (technical difficulty) you guys are gaining some momentum, especially on this data card market, but also looks like the secure business -- the secure memory card is also starting to ramp. Are those the few projects that you expect to start driving revenue in the 4Q?

And the follow-up question to that is given that some of this product is starting the ship in the fourth quarter, do you expect maybe if you look beyond the fourth quarter into the first half 2010 that you might not see much of seasonality? Because typical is you have a seasonal slowdown maybe in the first quarter, but given that you're shipping new product, maybe you won't see seasonality in the first quarter?

We don't think we're going to be involved or be impacted by traditional seasonality. These are new products. If you look at broadband data cards and you go look at what's happening in the market relative to broadband data cards, it's -- the growth there is unbelievable. In fact, if you followed any of the -- what the operators are saying, they're 3G networks are being overloaded by these cards and in fact, if you look at what AT&T did they recently opened up all their Wi-Fi networks to unload the 3G network from a data perspective. So I don't think any of us believe there's going to be a slowdown or anybody sees any slowdown in the relatively short term, relative to broadband data card usage.

I see. So assuming these things on your ramp looks like you're having some visibility in the first half that you might (technical difficulty) here?

I'm sorry. You kind of broke up in the middle of that.

Yes, sorry about that. So just in terms of sequential growth, looks like you're -- based on what you can see so far you have some COGS in that first -- even the first quarter or second quarter you may see the sequential growth on the new product area?

Edwin, you're trying to sucker me into giving you forward-going guidance and I'm not going to do it. We give guidance one quarter at a time.

Got you on that one, Tom. But (technical difficulty) ask the question as to how (technical difficulty). And now a question I have beyond that, right? I think your netbook opportunity looks like it's a good opportunity. Can I get the clarification? When you say there's a tier one OEM, you mean they are an ODM for the large manufacturer like whatever, Del, HP, and those guys. Is that correct?

And just a quick follow-up on that, is that design onto your Intel base or Qualcomm based platform? Or maybe a different way of asking it, does it really matter if it's Intel or on-base platform?

Let me address -- the answer to your question is both and both counts. We're working both with Intel and with ARM based processors in both smartbooks and netbooks. And we don't -- it -- one of the advantages of having programmable fabric onboard is that we can in fact connect to proprietary buses that these people have in a very efficient fashion and offer them the highest performance at the same time offering very low energy to transfer information.

So we don't care if it's an ARM based processor or if it's an Intel based processor. We're agnostic. And we're working with both OEMs and ODMs -- tier one OEM and tier one ODMs for smartbook and netbook products.

I see. So (technical difficulty) basically you can go ahead and (technical difficulty) space right now? Or --?

Correct.

Yes, and you expect those designs actually translate to a ramp sometime in 2010 basically. That's correct, right?

Correct.

Great. (Technical difficulty) quickly on -- if I can kind of circle back to the margins and I guess tie to your breakeven model. Right? It looks like these new products in terms of percentage margin wise maybe all closer to the 50% range? Are you still targeting the $8.5 million breakeven level -- revenue level? And what kind of target margin are you looking for at that level?

The answer is yes, around those ranges. We probably can do a little better than that on a breakeven, but we expect that gross margin will be 50% and above as we go forward. (Inaudible) the timing on the breakeven just depends on what revenue operating expense level as well as the mix of the products being sold. So we believe looking ahead that we can maintain a 50% margin.

Okay. That was helpful. Thank you.

Okay, next question please, Jay.

(Operator instructions) We'll take our next question from Brian Coleman with Hawk Hill Asset Management.

Thanks. Tom, can you clarify a little bit, dovetailing off of Edwin's question? Which market is more important to you? Is it the netbook market or the smartbook market? Is one more levered towards CSSPs? Or is there more design activity that you're experiencing with one or the other?

Well, let's look at the two camps. The X86 camp comes from the compute world and what they bring into that smartbook/netbook -- and let's just use one term. The term netbook was really used by Intel. Smartbook was coined by Qualcomm. Okay? But they're really aimed at the same kinds of applications as far as a customer is concerned.

If you look at what Intel's bringing to that market segment or that class of products, they're coming from the compute world. And so what we have to offer them is not connectivity to keyboards or hard drives, or any of those kinds of things. They've already got that. What we have to offer them is V and DPO. And what we're offering specifically there then is the ability to significantly reduce the backlight levels by like up to 80% or 85%, which -- and still give you the same visual quality viewing experience that you would have had without using V.

So, if you think about what we're adding to the X86 world, it's probably mostly aligned with V and DPO. If you look then at the smart -- at the ARM world, the ARM world really hasn't been used in PCs and therefore when you look at a netbook, they're missing a whole bunch of things that the PCs used to have. They can't connect to an 84-pin keyboard as an example. They're not used to connecting and didn't have connectivity to hard drives or solid-state drives.

So that's what we offer. The ARM world is more about connectivity. What we offer the X86 world is more about our visual enhancement engine and the display power optimizer. Is that clear for you?

Yes, that's good. Over time then, do you expect the ARM based processors to start to incorporate more of the IO connectivity that the X86 processors do, which again then makes the CSSP opportunity in smartbook over time become more of a V opportunity as well? Or do you think those connectivity applications will exist for quite a while for you?

Well, I think they'll exist for a while, but I share your view. I mean that's the nature of our business. You can't bet against integration. So eventually the ARM guys will in fact start to add those kinds of things that we've added in the short-term for them.

But I think then V represents a significant opportunity for them in the long-term. V looks better and better as the screen size goes up because the amount of power you need in the backlight in these screens goes up significantly. So if we can -- you're talking about several watts for a 10 or 12-inch netbook. And if we can cut that by 80%, we've significantly extended battery life.

Okay. And a question on your guidance. If I take the comment that Ralph, I think you used in your prepared remarks that 57% of CSSP sales in the third quarter were in September, that would translate into about $800,000 of revenue or $2.4 million on a quarterly basis. And your guidance for new product revenue for 4Q is $2 million. Now just if you could just square those two numbers, kind of the $2.4 million run rate with another design going into --

Well, I don't think I gave -- the 57% number was not CSSP. It was total revenue. So I didn't break out CSSP as a separate line item there. So we have a pretty detailed sales forecast that we can see going from the $1.4 million number to $2 million. But I don't think you can correlate the two based on that 57%.

Okay. Is there anything you can talk about with respect to linearity? With that such a backend weighted September, it would just seem that there should be some kind of follow through into 4Q off of that. Or are we just talking about an inherent lumpiness associated with some of these designs going into production?

I think what you saw is a little bit of an initial ramp that happened in September for some CSSP -- for some of the customers. So that's why it was a little bit higher. But also the legacy was higher in September as well. So I don't think we have as much of a linearity issue in Q4 that we saw in Q3.

Okay. All right.

(Operator instructions) And we'll go next to Edwin Mok with Needham and Company.

Just a quick follow-up. What was your August guidance again for 4Q and (technical difficulty) one outsource R&D expense that you mentioned, Ralph?

Hi Edwin. The first part I caught, which was what was the op expense guidance for Q4? And that guidance was $3.7 million plus or minus $200,000. I didn't catch the second part of your question.

Sorry. The second part is does that include of these R&D -- outsource R&D expense that you talked about?

It includes some, but at a reduced level.

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

Okay, thanks.

We'll go next to Brian Coleman with Hawk Hill Asset Management.

Yes, Tom I wanted to follow up on you reviewed the three-prong sales strategy and the one prong I remember you talking about in the past, namely getting to know your customer's customer. You didn't necessarily address and I'm just wondering if there's anything you can kind of update us on that, if there -- if you've got any success or how active that is?

Actually that turned out to be not as fruitful initially as we believed that it would be. Primarily because the -- even though they are customer of these handheld devices, typically the operators, their willingness to go drive specific solutions from specific vendors is problematic for them. And the reason for that is that as soon as they tell an ODM or an OEM to include something from QuickLogic, they feel that they get held up from a cost perspective or a BOM cost perspective in that kind of a scenario.

So they'll serve as cheerleaders for us, but they will -- they typically will not be directive of incorporating our silicon in the handsets as they originally indicated that they would be. Does that answer your question?

Yes, it does. Thanks.

Okay.

(Operator instructions) And there appears to be no further questions as this time. I'd like to turn the call back over to management for any additional closing remarks.

Okay. Well, we enjoyed having the opportunity to share with your folks what we're up to. I think -- I hope you can sense that we're pretty ebullient about what our forward going prospects are here and we'll look forward to chatting with you on our next conference call. Thank you.

That does conclude today's conference. We thank you for your participation.