Quicklogic Corp (QUIK) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your QuickLogic second quarter 2010 earnings call.

(Operator Instructions.)

As a reminder, today's call is being recorded. At this time, I would now like to turn the conference over to your host, the Chairman and Chief Executive Officer, Mr. Tom Hart.

Sir, you may begin.

Thank you, Joe.

Good afternoon, ladies and gentlemen, and thank you for joining us today for QuickLogic's second quarter 2010 conference call. Joining me here today is our President, Andy Pease; and our CFO, Ralph Marimon. Ralph will take you through our second quarter results, and then I'll share my perspective on our business. Following this, Ralph will detail our guidance for the third quarter of 2010, 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 risks and uncertainties, including but not limited to stated expectations relating 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 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.

For the second quarter of 2010, total revenue was $6.5 million. This represents a sequential increase of 19% and was at the high end of our guidance range. New product revenue was $2.3 million. This represents a sequential increase of 11% and was within the lower half of our guidance range.

During Q2, there were capacity constraints with our packaging, test, and assembly subcontractor. If we had been able to obtain timely deliveries, we would have reported new product revenue at the midpoint of our guidance. The good news is that these delays didn't impact our customers, and the $200,000 we would have shipped in Q2 will be reported in Q3, in addition to the new product revenue growth forecast I'll share with you in a few minutes.

Our second quarter legacy product revenue was $4.2 million. This represents a sequential increase of 25% and was above the high end of our guidance. As we experienced in Q1, we saw an increase in demand for our legacy products for multiple customers during the quarter. Our non-GAAP gross profit margin for Q2 was 61%, due primarily to the higher mix of legacy product sales. This was above the midpoint of our guidance.

Non-GAAP operating expenses for Q2 totaled $3.5 million. This was better than our guidance of approximately $4.1 million and, when combined with the higher-than-expected gross profit margin and higher-than-expected total revenue, produced a non-GAAP operating profit of $508,000.

Non-GAAP operating expenses declined versus Q1, due to a decrease in engineering expenses which was partially offset by an increase in SG&A. The decline in engineering expenses was primarily due to a reduced level of third-party chip design costs. We expect these expenses to increase during the third quarter.

On a non-GAAP basis, tax and other expenses totaled approximately $90,000. This resulted in a non-GAAP net profit of $418,000 or $0.01 per share compared with a net loss of $484,000 or $0.01 per share in the first quarter of 2010.

Our ending cash position of $17.8 million reflects a decrease of approximately $473,000 from the Q1 ending balance. Cash usage benefited from higher-than-expected total revenue, gross margins, and lower-than-expected operating expenses. Our Q2 GAAP net loss was $215,000 or $0.01 per share. Our GAAP results include stock-based compensation charges of $633,000. 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 third quarter. But first, Tom will update you on the status of our strategic efforts.

Thank you, Ralph. It's been a year of tremendous progress for QuickLogic. I'm extremely pleased with the traction we've developed and the fact that we reported non-GAAP profitability. These are early milestones in what we believe will be our future of sustained revenue growth and profit improvement.

As Ralph noted, constraints in our assembly, package, and test subcontractor caused us to miss shipping roughly $200,000 of new products during Q2. Working closely with our customers, our subcontractor, and our channel partners, we were able to prioritize product shipments so that none of our customers were negatively affected by CSSP shortages.

In an effort to provide investors with the visibility necessary to measure the early progress of our CSSP strategy, we first shared with you our design funnel. This allowed us to demonstrate our progress towards winning CSSP designs that we believed would move into production. As production orders materialized, we shifted to sharing the number of unique designs, unique customers, and unique market sectors that we shipped to during the quarter, and what our expectations were for the coming quarter. This data was presented to help investors measure our progress during the early stages of production ramps.

During the second quarter, we shipped a total of 11 CSSP designs to 8 customers operating in 3 market sectors. If we had been able to fulfill all customer CSSP orders, we would have shipped a total of 15 CSSP designs to 11 customers in 3 market sectors. This compares favorably to our Q2 forecasts of 13, 9, and 3, respectively.

Based on our new product bookings during Q2, which by the way were significantly higher than our Q2 revenue, we believe we'll ship a total of 18 CSSP designs to 12 customers in 3 market sectors during Q3.

The Wireless Broadband Modem sector was again our largest market for CSSPs in Q2. We're scheduled to ship to 8 customers in this sector during Q3, including early production to a Tier 1 handset company whose objective is to become one of the top three market share leaders in wireless broadband modems.

Revenue from our Secure Authentication and Access Device sector fell off somewhat during Q2, as our primary customer worked with their customers in the banking and business sectors to further develop industry standards, regulatory requirements, and business models. We share our customer's optimism that these developments will work out well and that this market sector will turn into a strong market for our CSSP solutions.

Our third active market sector during Q2, Mobile Enterprise, showed steady progress during the quarter. This market sector has inherently longer design cycles than we normally see in consumer market sectors, yet the products tend to enjoy longer production cycles and yield higher gross margins. Design trends for CSSPs in the Mobile Enterprise sector continue to provide us with solid growth opportunities.

Now, consistent with what we've shared during the past conference calls, we continue to believe we will report production revenue for our VEE/DPO technology during the second half. I'm very pleased to announce we've received an order for 3,000 VEE/DPO CSSPs from a Tier 1 ecosystem partner that will be used to build form factor reference designs. Shipments of these CSSPs will begin in Q3. Our partner will send these reference designs to their broad base of customers and numerous design partners around the world.

The substantial scale of this project alone speaks to its strategic importance for both of us. To say this reference design will significantly broaden the industry exposure of VEE and DPO would be a gross understatement. Needless to say, we're extremely excited about this progress and the demand we believe it will help generate.

In addition, we are enthused about the new relationship we've developed with TAOS, which is short for Texas Advanced Optoelectronic Solutions. TAOS has taken an early lead in the rapidly emerging market for ambient light sensors with its very innovative technology. One of the early challenges we faced in selling our VEE/DPO technology was that, in order to leverage all the benefits of VEE/DPO, the end product had to include an ambient light sensor.

Design trends now suggest that ambient light sensors may end up as a classic checkbox item, reducing the marginal cost of adding VEE/DPO. We believe that partnering with a leader in this emerging market will broaden the market exposure of VEE/DPO.

Before turning back the call to Ralph -- I'm sorry. Before turning the call back over to Ralph, I'm going to take a few minutes to share with you what I see as changes in the design trends for mobile communications and computing devices.

We all know from headline stories how the new Apple iPad has impacted consumer behavior. Selling over 3 million high-end devices and establishing a new market segment in just 80 days is incredible market acceptance. The success of the iPad has significantly altered the strategies and behaviors of mobile computing and communications companies.

We've been able, in working a wide variety of designs in the smartbook -- sorry. We've been active in working a wide variety of designs in the smartbook, netbook, tablet, MID and smartphone markets. The short story here is that design engineering activities in these products has been high for at least the last 18 months. However, excluding smartphones, the product flow from design engineering to production has been pretty meager.

The problem was no one knew if there would be a broad consumer acceptance for these devices. And even if consumers embraced the product concepts, no one was sure what functions and features they would demand. The success of the iPad appears to have broken this marketing logjam. As a result, we anticipate the new generation of designs that are rapidly moving toward completion will go into production.

In addition, the iPad has had a real impact on smartphone designs. What we are seeing in smartphone designs are strong trends to run multiple applications simultaneously, support the latest version of Adobe Flash, and monitor multiple system sensors. Processor companies are working very diligently to optimize their processors for both price and power consumption.

We believe all of these trends will work to our favor. For processor designers, these are daunting challenges. Handling multiple simultaneous applications and Flash video takes more processor power. Having to monitor multiple system sensors means there are fewer opportunities to power down the processor to save energy.

Of course, consumers are unsympathetic to these challenges. They just want more features and longer battery life. Processor companies and system-level designers are adapting quickly to these challenges, and we believe this will lead to higher demand for CSSP solutions.

CSSP-based solutions provide both processor companies and end customer system-level designers with very agile and competitive ways to innovate. For example, our new WAV, which stands for Wake-up And Verify, proven system block provides system designers with the ability to monitor system sensors and use the main processor only when absolutely needed, thereby optimizing overall system power.

We can provide all of this, VEE/DPO, WAV, and a host of other proven system blocks, with a single, very low power and low cost CSSP. Our CSSP solutions provide our ecosystem partners and our targeted end customers with opportunities to expand market penetration, achieve longer battery life, and add features that improve the end user experience. Industry design trends are working to our advantage, and potential customers are increasingly embracing CSSPs as their preferred solution.

And with that, I'll turn the call back over to Ralph, so he can share our outlook for Q3.

Thanks, Tom.

We are estimating that for the third quarter of 2010 total revenue will be $7.2 million, plus or minus 10%. As Tom mentioned earlier, we are expecting that we will expand new product shipments in the third quarter to include a total of 18 designs, shipping to 12 customers in 3 market sectors. Given this expansion of customers and designs, we are forecasting new product revenue to increase to $2.9 million, plus or minus 10%.

At the midpoint, this represents 26% sequential growth for new product revenue. As in prior quarters, our actual results may vary significantly, due to schedule variations from our customers which are beyond our control. Schedule changes, particularly those that may impact new product revenue, could push or pull shipments between Q3 and Q4 and change our actual results significantly.

During the third quarter, we are expecting revenue from legacy products to increase to $4.3 million, plus or minus 10%. On a non-GAAP basis, we expect gross margin to be approximately 60%, plus or minus 300 basis points. The gross margin percentage is driven primarily by the anticipated mix of products shipped during the quarter.

We are currently forecasting operating expenses to increase to approximately $4.1 million, plus or minus $300,000. The increase in operating expenses is driven primarily by the continued investment in variable costs for chip development for our next-generation platform. Operating expenses will also increase due to the end of our cash conservation program.

As we have previously noted, in the third quarter of 2009, we instituted a cash conservation program that provided most employees with restricted stock units in return for foregoing 10% of their salary. This program resulted in cash savings over the last four quarters of approximately $650,000. With the increase in new product revenue and the recovery in revenue for our legacy products, we ended this program as of the beginning of the third quarter of 2010.

Given these changes, R&D expenses are forecasted to increase to approximately $2 million, while SG&A is forecasted to be approximately $2.1 million. Our other income and expense will be a charge up to $60,000 during the third quarter. Our stock-based compensation expense in the third quarter is expected to be approximately $560,000. We expect to use up to $500,000 in cash during the quarter. Cash usage during Q3 will be driven by investments in working capital to support sales growth and variable costs for external design services to support new chip development.

We are extremely pleased that we achieved a non-GAAP profit during the second quarter, and our forecast is for its continuation in Q3. We continue to believe our sustainable break-even point is in the range of $7 million to $8 million. Exactly where within this range will depend on the mix of new and legacy product sales, and new chip development activities taking place during the quarter.

And now I'll turn the call back over to Tom for his closing comments.

The Customer Specific Standard Products traction we're clearly demonstrating with revenue and margins -- for example, we've growth both since Q1 2009 -- add more credibility to our view that CSSPs are the future. We believe we are well-poised to grow our business as we move forward and demonstrate the clear value of Customer Specific Standard Products.

30 p.m. Pacific Time. We hope you'll join us.

And now, Joe, let's open up the call for questions.

Thank you, Mr. Hart.

(Operator Instructions.)

Our first question comes from Edwin Mok with Needham & Company.

Hi. Thanks for taking my question, and congrats for getting back to profitability.

So the first question I have is on these 18 designs that you guys are talking about. I was wondering if you can look a little bit beyond just the third quarter. Do you expect some of these designs to be more backend-loaded, meaning you expect more that -- more products to be shipped in the fourth quarter versus the third quarter? Or how do we kind of think about that?

Well, first of all, these are all designs that are in production, Edwin. So they'll all be shipping in the third quarter. The question is how much will be shipping, where are they in the ramp. Several of them are mature. Several of them are just beginning to ramp. Obviously, we've moved from -- let's see. We had an actual of 11 designs in Q2, and we're forecasting 15 designs in Q3; right?

18.

18.

Sorry. 18 in Q3. So we've obviously added new designs. And new designs means that guys are ramping. So these are not design wins. These are designs that are in production. So don't confuse this with what people talk about as design wins. This isn't just that we're on somebody's board or we're on their print or whatever. These are things where we've received production orders for them, production wins. And we define production wins, if you remember, as we've received purchase orders for and are shipping to a minimum of 1/12 of their estimated annual volume.

Does that address it for you?

Yes. That sounds -- yes. That is kind of what I'm looking for. I guess the other way I want to ask is how do you anticipate your -- that to ramp if you look beyond the third quarter. And obviously, like you said, it depends on the company. Some companies tend to have a much looser way of defining design win. And I understand you guys are a lot more stringent on that end.

But just curious if there are more projects in the pipeline that you expect to start in the fourth quarter. And any color you can provide there will be helpful.

The short answer is you bet. We've stopped talking about the funnel, because we've got revenue. And now we're talking about production, designs that were in the funnel that are generating revenue. And so, typically, we classically have not given guidance beyond the next quarter. And so we won't do that for designs in production, either, at this point, Edwin.

Okay. That's fair.

And then I have a question regarding the 3,000 units that you have shipped to your partner for -- I guess, for reference design. I was wondering if you have any idea which markets those are mostly going after. And any way of quantifying that would be helpful. Thank you.

You're asking which market segment, Edwin, that this is going into?

Yes, yes, exactly. Kind of at least at a high level, which market segments are we talking about?

This is actually --

Is it auto? Is it industrial?

This is actually a form factor. And for those of you who don't know what we mean by form factor, that is actually a device that could actually be reproduced into that marketplace. So it's a regular size. And in this case, it's a smartphone.

I see. Do you -- because that looks like that could be a potentially huge pipeline. How do you plan to work with -- in terms of with your partner, how do you kind of segment that with your partner? I mean, are you guys more focusing on the Tier 1 customer, and let your partner kind of service the other customers in the other markets, is how you kind of think about that?

So the way it works is when we engage with a ref -- with a partner -- and I think the Icera business is a great example of that, where when you're on their form factor board, they tend to make sales calls. They have their market segment, because they have their customers they're going after. And then they bring us along. And we expect the same thing to happen with the smartphones, as well.

Great. That --

So remember, we're a companion device. They're not a channel for us.

Right.

They're a partner.

Sure. I -- yes. I understand that. Yes.

They're not reselling our part.

See --

Yes. Of course. I understand that.

With this particular partner, we have already been talk -- we've been engaged, obviously, on an engineering level deeply with them over the past couple of years. And actually in anticipation of this form factor reference design, we've already met their sales and marketing people in the various geographies that are of interest to us.

And them.

And them. Yes.

Great. That was helpful. And then a question on the supply constraint issue. You mentioned that it's largely resolved and you expect you'll be able to ship in the third quarter. I was wondering did you resolve by qualifying a new supplier, or did that particular supplier just expand capacity that enables you to start shipping, basically.

Well, in this particular instance, Edward, we did actually resolve it with this particular supplier. Although as we increase our output, we are always looking at our options. But in this particular instance, this -- our supplier has actually been expanding capacity. And as they've expanded capacity and moving equipment around, one of the pieces of equipment went down.

And it turns out that in this capacity expansion, the actual output in the quarter decreased, as opposed to increasing. So it was a challenge for us throughout the quarter to get increasing sales through this particular contractor.

Great. That was good color.

And then finally just a question for Ralph. On the operating expense of $4.1 million, is that -- is there any kind of one-time R&D expense in that? And should we think about that as being the kind of normalized operating run rate for the business that you guys are running at right now?

No. There's no one-time expenses in there. You remember we moved to this variable model for quite a bit of our third-party or our chip design costs. So I'd say, if you were going to normalize it, it'd be somewhere in the range of $3.7 million to $4.1 million, $4.2 million, in that range. But there's no one-time charges in there.

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

Thanks, Edwin.

Okay. Thank you.

Our next question comes from Brian Coleman at Hawk Hill Asset Management.

Good afternoon, Brian.

I guess Brian's not there.

Mr. Coleman, your line's open.

Can you hear me?

Now, yes.

Now we can.

Okay. My first question for you. Your first data card designs went into production not quite -- maybe about a year ago. And I'm just wondering if you're getting any better visibility on what the kind of ongoing sales there might be.

Brian, this is Andy Pease. So our first data card production designs actually occurred in Q3 of 2009. And we expect that we'll be shipping into -- data cards well into 2012, if that was your question.

No, no. I'm wondering if you're getting better visibility quarter to quarter from your customers on what the order rates are.

No. As a matter of fact, this is a constant concern of ours. And I have regularly -- regular calls with the General Manager at Icera, where we constantly compare forecasts. Actually, the lead time that we get from our customers is roughly about 4 weeks, 4 to 6 weeks; when you know that, certainly, to make this product, it's anywhere from 12 to 13 weeks. So we are lucky to have a good channel partner. And our channel partner and us work well together to make sure that we can have product into the market that is outside our particular cycle times.

Okay.

It's very volatile, Brian.

Okay. When -- thinking out -- and this isn't a -- really looking for a forecast, but just kind of trying to understand how your revenue mix will change over time. When would you expect the smartphone/smartbook business to be bigger than the data card business? Is that 2011? Does it come on that quick?

I would expect that by the end of 2011 that business will be larger than the data card business. And I -- we do expect our data card business to kind of peak mid to latter 2011. But we also expect a good ramp for our -- the other business, let's say, the display-oriented business.

But you know what we -- is really hard to read here, Brian, is you guys have asked us repeatedly where is the revenue for VEE and DPO going to come from first, is it smartphones or smartbooks. And typically, I've hedged the bet and said my belief always was that it was smartbooks, because I thought they could move faster than smartphones.

But the challenge here is, is that smartbooks now are kind of taking a back seat to tablets. And everybody and his cousin has got a crash program going for tablets, in light of what iPad has done. So not clear at this point which is going to be the largest of the two. But I think the -- I would agree with Andy's overall assessment of the end of Q -- sorry -- end of 2011 is probably where the crossover will occur.

And I'm really talking about the aggregate of both smartphones, smartbooks, netbooks, tablets, cloudbooks, and even MIDs. We see opportunity in all those areas, Brian.

Okay. Where do you -- I know you're not breaking out SSOs for us anymore. But are those included in the smartphone? Is that how you think about them? Or is that an entirely new category? Is there some cannibalization of the two? How do you think about that?

Well, we -- the way we categorize our internal funnels, we do categorize it by, separately, smartphones, smartbooks, netbooks, tablets, and MIDs. All those are separate categories to us. And we have, obviously, a super-category that we roll them up to. But is there some cannibalization? I -- back to what Tom said, probably six months ago we were very big on smartbooks and probably to a lesser extent netbooks.

And we see virtually everybody that's doing those type of form factor designs are trying to come out with a tablet, to be what they call an early -- early or rapid follower to the iPad. The iPad really has changed the game for a lot of these ODMs and OEMs. Everybody feels like they've got to have an entrant into that market.

Okay. At the Uplinq conference, you announced an RGB Split PSB. What kind of applications -- form factors applications markets does a PSB like that --

A PSB like that would principally go into a pretty complex smartbook. And without -- excuse me. Smartphone. And without telling you too much about what they're planning, it is actually a multiple screen that's side-by-side. So it's actually to create a bigger viewing area and still keep the small form factor of a smartphone.

So imagine if you had a smartphone that hinged in the middle, or maybe it could even possibly have multiple hinges. You could open it up and, basically, see an image that would span across two displays.

So that's not something you developed on the fly, hoping somebody would need it. It sounds like something that was developed for a specific project.

Well, it was a problem that people came to us with, frankly. There was a ODM that was given a requirement by a fairly large OEM, and said that they wanted that type of form factor, and they were trying to solve the problem of taking an RGB signal and splitting it in one direction, in other words serializing the signal on one end and deserializing the signal on the other end. So we were able to do that for them.

Okay. Can you give us an update on the reference designs, how many you have, customers, which ones are complete, etc.

Don't have that information at the top of my head right now. The reference designs, I can tell you, have been relatively stable and steadily increasing, but not to the extent that the other designs -- the OEM designs have been increasing.

Okay. And then you've talked about some additional OpEx for chip development. And I'm wondering if you could give us some update on some of the new development platforms and work you're doing on new chips.

Yes. Marketing would shoot me if I told you that. So we don't like to talk about products until we're ready to announce them. And so I can't talk about that.

But I mean, look at the dimensions -- if you just think about what the market needs. We've come from doing -- with CSSPs, we've come from doing bridges to doing video processing in a way, if you will, with VEE and DPO, power management. And then just ask yourself where does that trend go. Well, it goes towards more complexity. It goes to being more -- taking on more of the functions, to help offload the processor.

Those are the kind of things that we're looking at. And I can't talk any more beyond that.

Okay. But these -- then we should think about them as new platforms, as opposed to just more PSBs on your current CSSPs.

Correct. We're doing both of those. We're doing more PSBs all the time. That's -- well, it's not a freebie, because it takes engineering talent. But I'm talking about -- when I talk about a new platform, we're talking about new silicon.

Right.

See, the real leverage for us with CSSPs is, if you think about it, is more PSBs off our existing platforms. And it's a lot easier to turn a PSB than it is to turn a new platform.

Right, sure.

Okay. And then my last question. If you could just maybe give us a little bit more detail around the SASA customer. And I think you said it was a little bit -- the business this quarter was a little -- was to the low end of guidance. And it sounds like that customer and its customers are kind of rethinking some things. And if you could just maybe give us a little bit of clarity on that.

Well, that particular customer has multiple designs. So one is really targeted to -- in one area, it's really a longer qualification cycle than we were aware of. And their customers, basically -- they have a couple of customers that they are using in this qualification cycle. And since it is Secure Access, the qualification cycle is rather complex.

They anticipate that they will be through that before we exit this year. So we definitely feel like we'll have a recovery in that business. The other piece of their business is really making sure that the specifications that their product has meets the specifications of this new market. And that's constantly being tweaked.

And once again, they feel like this business will recover before the end of the year.

Okay.

The latter one, by the way, is new -- a new area for this end customer.

A new end market for them?

Well, it's a new area. It turns out it's -- many of their existing customers use this type of product in a different way than the former customer -- than the former application.

We've talked in the past -- the first one was about -- was targeted at banking. The second one was targeted at business applications.

Right.

So really --

And that's all we can really say about it.

But when we say "business application," I think we can give you a little more clarity on that. So they could actually sell the business solution into that same banking customer, but they sell it into their MIS department, for instance.

Okay.

Where in the banking application, people like you and I as customers of the bank would use that solution for a Strong Authentication of our particular bank account with the bank. So that's what we mean by two different applications.

Okay. I see.

And I did have one other question for you on the -- actually, there's two here. They're tied together. The Tier 1 handset company; did you ship at all to that -- I think I know who that is, since I think I did the tear down report on it. But I'll let -- if you want to name customers, you can do it. I won't name them on your behalf. But did you ship at all to that customer in 2Q?

Yes, we did.

Yes.

Yes. How would you have gotten a part that you could tear apart if we didn't?

Well, the -- no. Well, I guess -- I guess, it was kind of mid to late June when I got the part. So I didn't know if you had --

No. They were included --

-- anything material in the quarter.

They were included in the numbers Tom gave you for Q2. Yes. We did ship production volume to them.

Okay. And then the 8 customers in 2Q going to 12 in 3Q, is that all in the data card space?

No.

No.

No. It's spread out across all three sectors. Data cards, smart -- well, sorry. Broadband Data Cards, Secure Access Data Cards, and Mobile Enterprise, in Q3.

Okay, all right, great. That's all I got. Thanks very much, guys.

Okay, Brian.

(Operator Instructions.)

Our next question comes from Bob West of NI Tech Research.

Hello, Bob.

Hi. Hi, Tom, Andy, Ralph.

Hi, Bob.

Hi, Bob.

Do you hear me?

Yes.

Okay. Good. Well, listen, nice results and encouraging guidance. So it's been a long steady climb back to break-even, but it's nice to see $0.01 a share.

Yes. It sure beats negative $0.01.

Bob West. Yes, it does, doesn't it?

I've got a question or two for -- maybe for Ralph on -- I noted the very low cash usage on the balance sheet. Are you seeing any of the QuickLogic option holders exercise options from last fall's equity offering?

Not yet.

Okay. And then a second question on margins. As you've now gotten back to break-even on -- in your business and balancing out, in the cost of goods area, you're absorbing, I assume, all of your fixed costs there. Are you seeing the 50% target on your new product sales that you have targeted to receive?

Well, I think what we've talked before about, Bob, is that as the mix swings to more heavily weighted towards new product, we would see a blended margin of about 50% in total. Obviously, the new products carry lower margin than legacy. But right now, I believe, in Q2 new products was about 35% of the total. And in Q3, it's about 40%.

And when we talk about the break-even point and the margin at 50%, we're talking about, really, reversing those numbers, with new products closer to 60% or 70% and legacy having a smaller share. So that's where -- and we think that that 50% margin is sustainable.

Is sustainable. So the actual products may be below 50%. But a blended result of 50% is sustainable.

Yes. That's possible. I mean, within the product line, within new products, we may be aggressive in selling one particular product to one customer, and not so aggressive with the other ones. So the margins may vary.

But in general, the blended rate should be 50% or above, once we get to the right mix.

And the other aspect of that is that the newer platforms that we're doing are targeted at having more value; and therefore, should generate more gross margin than the simpler functions that we've done in the past.

Okay. That's good insight.

Tom, in your prepared remarks, you noted the presence, both last quarter and this, of ambient light sensors that are now being installed in more and more smartphones. Can you give us some color on what's driving that change?

Well, I think it's the desire for a better viewing experience, is the primary driver. I mean, it's kind of like what's driving the trend towards higher pixel cameras. It's that people want better -- first of all, they want better pictures. But they also want better viewability. And basically, ALS -- sorry -- ambient light sensor, ALS -- gives them the ability to implement some pretty -- in the past, they've implemented some pretty crude algorithms to control backlight level.

And actually, you can see this on some of the feature phones, where it's pretty crude. You can -- actually, it's kind of annoying in some examples, where you'll see it shift from various backlight levels depending upon where the ALS is mounted and how you've got your hand positioned and all those other kind of things.

So I think, in general, it's just a trend towards improving quality. And the costs have come down. For pretty bread-and-butter kind of ALS sensors, you're talking something in the neighborhood of $0.50 now, down from well over $1.00 in the not-too-distant past.

Now, the other thing that's happening, by the way, is that they're building more sophisticated ALS sensors. And so they're looking to gain their ASP improvement there by adding more functionality. And we're, obviously, interested in that, as well. I mean, it's not just brightness. What if you begin to -- just as an example, begin to look at color temperature.

The color temperature in daylight is very different than under a fluorescent lamp or under a mercury vapor lamp. And if you could monitor then the incident light and change the way the information is displayed based on that, you could wind up with a better viewing experience.

So I mean, there's a lot of room to grow there. And all of that, by the way, is good news for us.

Yes. That's what I was going to ask -- or assume, that that is very good news for VEE, even as opposed to DPO, I would think, where they were prepared to emphasize VEE as opposed -- and forgive some on battery life.

Nobody wants to forgive any -- give up anything on battery life, I can tell you. And --

Okay.

And the ambient light sensor, of course, is really crucial to maximizing the DPO's performance.

Okay. Yes. The next question -- thank you for that. The next question, I'd like to follow up on Brian's questions on the Secure Access Strong Authentication market. As I recall, you had a second customer in that market and, perhaps, one or two designs. Have they been able to move that to production as yet? And then a follow-up to that.

Well, it's funny you'd ask about that. I -- we do have another customer there we can't talk about yet. But we do see that moving to production this year.

Okay. And a follow-up is a question -- with the activity of these first two customers, has that led to other customers or other interest in CSSPs in that marketplace? Anything you can talk about?

Well, it's led -- we see the next move as being beyond just Secure Access and Secure Authentication. And we haven't talked much about that in these calls, and it's really premature. But we think that both of those, Secure Access/Secure Authentication, is going to be required in this whole M-to-M, machine-to-machine, market, which is -- by some people's estimates, is going to explode and be bigger than cell phones.

At this point, it's -- I think it's opinion. But I think we can all believe that there's going to be a lot more IP addresses out there and all kinds of devices than any of us would have imagined just five years ago. And if you look at how you get there, it's going to be -- it's not going to be hardwired. It's going to be wireless.

And if you talk about wireless things, you need to talk about security. And so this goes hand-in-glove with what we're talking about. So we're not at a point yet where we can talk about specific designs that we have in the funnel, except -- beyond the one that we just talked about. But that's kind of where we're headed with this thing, is really towards getting ourselves set up to be a significant player in machine-to-machine.

Well, thank you. That's good insight.

Next question also follows up Brian on the Uplinq conference. And my question there was, was this conference focused both on the smartphone and the smartbook area? And did you have some customer engagements come out of your presence there?

The Uplinq conference was principally a developers' conference for Qualcomm. And they invited us to come along and show what we were doing. So most of the engagement that we had there was not so much end customers, but developers and how they could actually write applications and could take advantage of VEE and DPO.

So it was really more of a partner conference for them. The significant piece of the Uplinq conference -- by the way, there was 2200 registered attendees. It was really a well-attended conference. And for the first time -- I think Uplinq is a new name for Qualcomm. Because for the first time, they promoted other operating systems other than just the Qualcomm Brew operating system.

But to answer specifically your question, it was much more geared towards smartphones, and not necessarily smartbooks. It was definitely a smartphone conference, and the developers that evolve around that market segment.

Which, of course, is their historic strength.

Right, right.

Okay, okay. A kind of a little different question. In early June, ahead of this conference, QuickLogic announced the availability of VEE/DPO evaluation boards. Could you give us some color on how you're using these boards?

The evaluation boards, we use out in the field to demonstrate, in a -- basically, an encapsulated system, something that doesn't have an exposed PCB board, how VEE and DPO can be implemented with a customer.

So these new evaluation boards actually have two different displays on them. One is more of a netbook/smartbook form factor. And I think it's a seven-inch display or an eight-inch display. But it also has a four-inch display.

So basically, it's a much more rugged, much more nice looking development board for the customers to see -- or reference platform. Is that --

So Andy, are you using -- are you supplying this to some customers? Or are these things that you take in with your sales force?

We take them in with our sales force.

Okay. Did you have them at the conf --

And in some cases -- yes. In some cases, we give them -- leave them behind with customers to evaluate. We probably have had 20 of them built. I forget. I think it's about 20. But these are -- these actually have various connectors on them so a customer can hook right into them much more easily than the last boards that we had.

Okay. Well, and do you take them then to conferences like the Uplinq conference?

Absolutely, yes. We did have that at Uplinq. And like I said, the problem when you're taking around a raw PCB board is a lot of things can go wrong with that. And this is a much more ruggedized version. It carries very well. Plus, we could attach a tripod -- a mini tripod to it, so it's easy to set an angle for viewability --

Okay.

-- from a demonstration point of view.

Well, very good. Well, I think this is all the questions that I have. I -- again, nice results and good guidance, and look forward to the next quarter. Thank you.

Thank you.

Thank you, Bob.

I am showing no further questions on the phone. I'll now turn the conference back over to Mr. Hart.

Well, thank you for your continuing interest in QuickLogic and our Customer Specific Standard Product vision, as we're moving this forward. We look forward to you on our next conference call on October 2nd.

Thank you and take care. Bye.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program, and you may now disconnect. Everyone have a great day.