Quicklogic Corp (QUIK) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the QuickLogic Corporation Third 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, chairman and CEO, Mr. Thomas Hart. Sir, you may begin.

Good afternoon, ladies and gentlemen, and thank you for joining us today for QuickLogic's third quarter 2010 earnings conference call. Joining me here today is our President, Andy Pease, and our CFO, Ralph Marimon. Ralph will take you through our third quarter results, and then I'll share my perspective on our business. Following this, Ralph will detail our guidance for the fourth quarter of 2010, and then we'll take your 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 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 third quarter of 2010, total revenue was $7.3 million. This represents a sequential increase of 13% and was within our guidance range. New product revenue grew to $2.8 million, representing a 20% sequential increase. Legacy product revenue totaled $4.6 million, which was a 9% sequential increase. Both product lines were within our guidance range.

Our non-GAAP gross profit margin for Q3 was 64.5% and was above our guidance due to the mix of product shift. Non-GAAP operating expenses for Q3 totaled $3.8 million, which was at the low end of our guidance. These lower expenses, combined with higher than planned gross margin, produced a non-GAAP operating profit of $921,000. Non-GAAP operating expenses increased compared to Q2 primarily due to an increase in third-party engineering expenses and a modest increase in SG&A.

On a non-GAAP basis, tax and other expenses totaled approximately $4,000. This resulted in a non-GAAP net profit of $917,000, or $0.02 per diluted share compared with a net profit of $418,000, or $0.01 per diluted share in the second quarter of 2010.

Our ending cash position of $19.2 million reflects an increase of approximately $1.3 million from the Q2 ending balance. This increase was driven by our higher than expected gross margin, lower than expected operating expenses, and the exercise of warrants from our November 2009 registered direct offering. One investor from our November offering exercised warrants which provided cash to the Company of approximately $556,000.

Our Q3 GAAP net profit was $550,000, or $0.01 per diluted share. Our GAAP results include stock-based compensation charges of $568,000, which was partially offset by a one-time tax benefit of $209,000 related to our investment in TowerJazz shares. Because of our GAAP profit, shares outstanding are now calculated on a fully diluted basis. Weighted average fully diluted shares outstanding at the end of Q3 totaled 38.7 million shares. 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. Tom?

Yes, thanks, Ralph.

Well, by every measure, it's been a year of tremendous progress here at QuickLogic. Q3 2010 total revenue was up 13% sequentially and 120% year-over-year. With this growth, we've returned to GAAP profitability, positive cash flow, and exited the quarter with $19.2 million in cash.

In addition to these tangible accomplishments, we've made significant strategic progress with our customer-specific standard products, or CSSPs, that we believe will fuel our growth and profitability during the coming year. I'll cover this progress in a few minutes, but first, let's take time to evaluate how near-term industry events are impacting QuickLogic.

As you have undoubtedly heard from many semiconductor companies that have already reported calendar Q3 results, short-term visibility has been reduced and, in many cases, there's some degree of inventory rebalancing expected to occur during Q4. Because we've been able to maintain short and dependable lead-times for our legacy products throughout 2010, we are not anticipating any material impact from inventory rebalancing. Even though Q4 is normally a seasonally soft quarter for the industry sectors we serve with our legacy products, we expect sales for these products to be flat to Q3.

We're also forecasting flat new product revenue in Q4. This forecast is being driven by new designs moving into production and partially offset inventory rebalancing within these supply channels supporting our ongoing business. We expect to resume new product revenue growth in Q1 2011.

The broadband wireless data card market remains our largest market sector for our new product sales. We've seen a number of developments within the data card market during the last three months that I'd now like to comment on. Some of our largest data card customers have advised us they are now only getting two- to three-week order coverage from their customers, namely the wireless service providers. In addition to reducing our visibility, this also makes us more susceptible to schedule changes that may push or pull shipments between quarters.

Due to reduced demand visibility and shorter component lead-times, there is a concerted effort by the channel to lower aggregate inventory levels. Now, while the broadband wireless data card market appears as though it will be a little bumpy in the near-term, we were very happy with the strategic progress we made during the quarter and optimistic about how it positions us for the longer term. With our ecosystem partner, Icera, we have won a number of high-profile designs that support enhanced connectivity and performance. These designs provide users with download speeds ranging from 7.2 to 21 megabits per second, including an [SCIO] interface, and in some cases facilitate very high-speed USB side loading. This covers the leading edge of the current speed ranges offered by wireless service providers worldwide, placing us in a high-value position. In addition to our ongoing data card engagements, we won a new design that uses a baseband chip supplied by Icera's primary competitor. Our CSSP was chosen for its flexibility and connectivity features and its security functions that are core to the product's value proposition. This move up the value chain is an extremely important part of our CSSP strategy. There are two emerging trends in the broadband wireless data card market that are providing us with opportunities to move up the value chain. The first trend is the move to higher data rates, 7.2 to 21 megabits per second, and the emergence of 4G. Since it will take some time for 4G coverage to roll out, data cards supporting 4G must also support 3G standards. Multi-radio data cards provide several strategic applications with high relative value for CSSPs.

Now, the second trend is a growing demand for security in wireless mobile devices. This includes in part data protection, secure access and strong authentication -- secure access and strong authentication. Strong authentication requires multiple security factors and goes well beyond simple password protection. Today, we ship CSSPs that implement solutions for secure access and strong authentication. We believe the fast time-to-market benefit of the CSSP model is well suited to addressing the rapidly-changing dynamics of this highly fragmented market.

As presented in previous conference calls, we've won multiple designs and gain significant experience through our close partnership with a leader in the business and banking markets for secure access and strong authentication, communication and storage devices. We leveraged this experience in the architecture and design of our newest CSSP platform family, ArcticLink II CX. Launched in October, this new family supports a wide variety of industry standard and customer-specific multi-factor security designs. It also provides our customers with a significantly higher level of design flexibility that's useful in a multitude of applications beyond security.

ArcticLink II CX is the first CSSP platform family that integrates an embedded 32-bit risk microprocessor and feature -- and it features interfaces that facilitate very low-power chip-to-chip communications. This platform family enables content and data protection, as well as extremely fast USB side loading. ArcticLink II CX opens new markets for QuickLogic. Its feature set, including the microprocessor and programmable fabric, significantly broadens the flexibility and the value we can deliver to our customers.

This family positions QuickLogic at the leading edge of the emerging market for mobile devices -- mobile device coprocessors or, as they're now being called, offload engines. External coprocessors are not new to the computing markets. However, mobile system architects have recently determined they are an attractive way to address the many new demands consumers are placing on mobile devices.

Linley Gwennap, the principal analyst at the Linley Group, summed up his view of this emerging offload processor trend as follows - "The number of CPUs in a mobile device continues to grow. Host CPUs in high-end SmartPhones and tablets control multiple radios, memories, and I/O devices, but must still have enough processing power remaining to handle HD-quality video, 3D gaming, and other performance-hungry applications. These requirements drive mobile processor vendors to include several CPU cores within their designs. QuickLogic's ArcticLink II CX family provides a customizable solution that enables OEMs to re-architect their systems to address these needs." Now, needless to say, we agree with Linley, and based on the initial comments we've received from our customers, they do, too.

We'll circle back to the computing and communications market in a minute, but first let's touch briefly on the security and mobile enterprise markets. Our partner in the secure access and strong authentication market has experienced ongoing issues with server implementations that have continued to hamper the rollout of their mobile products that contain our CSSPs. However, good progress was made during the quarter, and we expect to see the rollout built traction during Q4. This is a very exciting market, where QuickLogic offers a strong value proposition that we believe will lead to a similar position in the emerging machine-to-machine market.

Preliminary estimates on what is becoming called "The Internet of things," Internet 3.0, is that we can see 16 billion -- with a B -- connected things by 2020. It's already started, as I can now use my SmartPhone to lock and unlock my car and even pinpoint it on a map if I forgotten where I parked it, all over the Internet. Always-on, always-connected applications demand low power, and that's one of our proven strengths.

Now, while design cycles in mobile enterprise applications tend to be longer than we see in other strategic markets, production volume increases have tended to be more linear, and we believe product lifecycles will be longer. We're very pleased to announce that we'll ship over $1 million in CSSPs this year to our leading customer in the mobile enterprise market segment. And we're enjoying continued design activity with this customer and a growing number of other customers.

Consistent with our prior forecasts, we believe we'll ship our first production revenue for our Visual Enhancement Engine, or VEE, and Display Power Optimizer, or DPO, during Q4. While the Android operating system currently supports SmartPhones, the increased screen size and resolution of tablets requires an optimized release. This has delayed the Q4 introduction of many ARM-based tablets while the OEMs and ODMs await this release from Google. We expect additional VEE DPO designs to ramp during the first half of 2011.

The old saying, "Timing is everything," most certainly applies here. After roughly two years of persistence, the appreciation for VEE-DPO is growing rapidly. As you may recall, I announced last quarter that one of our tier one ecosystem partners entered an order for 3,000 VEE-enabled CSSPs. Shipments to support this order were initiated in Q3, and the customer has since increased the total order quantity to 4,000 units. This [SmartPhone] reference design is being sold to application developers.

During Q3, we received another 4,000-piece order for a second [smart form] factor reference design. This design is being targeted for OEMs and ODMs and should generate significant leverage for QuickLogic across multiple customers. In addition to these two smart form factor reference designs, we're engaged in multiple designs with multiple partners across tablet and smartbook form factors. We expect VEE/DPO-enabled CSSPs to be included in these reference designs in the coming quarters.

There is no doubt that 2010 has been a tremendous progress year for us here at QuickLogic. As we look at Q4, we expect to exit the year shipping CSSPs to 11 unique customers to support 19 unique designs in four of our strategic market sectors, which are broadband wireless data cards, secure access and strong authentication data cards, mobile enterprise, and tablets. We continue to see solid evidence that our targeted partners and customers are embracing the benefits of our CSSP strategy, and we are positioning our new platforms to increase the CSSP value proposition. I believe the convergence of these two trends positions us very well to deliver long-term growth and profitability.

Back to you, Ralph.

Thanks, Tom.

As Tom has discussed, due to limited visibility in what we believe will be a brief period of inventory rebalancing in the supply channels where our new products are sold, we are estimating that, for the fourth quarter of 2010, total revenue will be flat with the Q3 level of $7.3 million, plus or minus 10%. New product revenue is forecast at $2.8 million, while the forecast for legacy products is $4.6 million. We expect to resume sequential new product revenue growth in Q1 2011.

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 Q4 and Q1 and change our actual results significantly.

On a non-GAAP basis, we expect gross margin to be approximately 64%, plus or minus 3%, in the fourth quarter. The gross margin percentage is driven primarily by the anticipated mix of products shipped during the quarter. We are currently forecasting non-GAAP Q4 operating expenses to increase to approximately $4.1 million, plus or minus $300,000. While we are forecasting flat SG&A expenses, we are anticipating an increase in R&D expenses driven by development work on two new CSSP platform families and new hires that are forecast for our R&D department.

Given these changes, non-GAAP R&D expenses are forecasted to increase to approximately $2 million, while non-GAAP SG&A expenses are forecast to be approximately $2.1 million during the fourth quarter. Our other income and expense will be a charge up to $60,000 during the fourth quarter. Our stock-based compensation expense during the fourth quarter is expected to be approximately $525,000. At the midpoints of our guidance, non-GAAP net income is expected to be approximately $0.01 per diluted share, and, on a GAAP basis, we expect to be approximately break-even. We expect the quarter to be cash-neutral.

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

Thanks, Ralph.

Well, we are excited and pleased that our targeted customers are embracing our CSSP strategy for their new and differentiated products. Customers view CSSPs as a way to add flexibility to their designs, broaden market penetration, and accelerate their time to market. Now, with VEE [TBO] rapidly building traction and broad customer interest in our newest ArcticLink II CX family, there is clear evidence that customers see QuickLogic as a valuable partner providing innovative solutions. With CX, we believe we're in the right place at the right time and think we have a one of the most powerful and flexible solutions available in the rapidly-emerging need for offload engine capability.

Our vision is to enable mobile market leaders to produce exciting new products, resulting in strong profitable growth for QuickLogic. We hope you will join us in this most exciting adventure we call customer-specific standard products.

Finally, as a retired Naval officer, I'd like to offer the highest honor of a 21-gun salute to our fine team of professionals here at QuickLogic. CSSPs are definitely a team sport, and I think we're getting better playing it every day. We will have a private meeting room, by the way, on the show floor at CES January 6th through the 9th in Las Vegas, and then we'll be presenting the following week at the Needham Growth Conference in New York. We hope you can join us at one of these venues.

Our fourth quarter and fiscal year 2010 earnings conference call is scheduled for Tuesday, February 8th, 2011.

Okay, now let's open up the call for questions and answers, Joe, please?

Thank you, sir. (Operator instructions.)

Edwin Mok with Needham & Company.

Okay, thanks for taking my question. So first question is just on some financials. It looks like your gross margin expand sequentially even though your legacy mix has declined sequentially, because your new product revenue grew more than your top line. Can you help me reconcile that? Is it because of this particular end market that your legacy part is run through, or why is that expand so much?

Yes. I think it's the mix, Edwin. Both product lines increased, but really it's the mix of products that shipped during the quarter. So it'll shift it a little bit, but the increase is really based on the strength of the legacy, and I think that's it.

Okay. And then (inaudible) that you guys talked about, the new product going to market that are more supporting 50%, [however], gross margin. Now that you have several quarter of ongoing [presence] and good -- better visibility into this data -- wireless data card market, would you say that your margin, and at least for that market for your new product, could actually be better than that 50% range?

Not really, but we don't break out our gross margin by market sector, Edwin. I can just tell you that we still believe that CSSPs together will generate 50% gross margin. That doesn't mean that every product is at exactly 50, as you well know. Some will be lower than that and some will be above that.

Sure. Okay, [helps me] understand that. And then, the one question just on the share count, the 38.7 million share. Does that already fully reflect the factor of (inaudible) of [warrant], and should we use that as (inaudible) share count, going forward?

Yes, that's a -- it's a weighted average, but it is our fully diluted, takes into account current options and warrants.

I see. Great, thanks. And then just on the new product front, Tom, if you can help me, so your guidance for -- you guys are guiding for flattish sequentially, but it looks like you have some new business on both this first production shipment on the VEE as well as that [local] end price market. Is it because your -- the inventory (inaudible) reduction in the data market is larger, and therefore, even with this new shipment you're still guiding as flat, or you just -- or is it because more of a lack of visibility and you want to be a little bit conservative about that piece of your business?

Well, I think we're attempting to be conservative. We forecasted it to be flat, is a very conservative position, we believe. The problem is lack of visibility. When our customer is only getting two weeks of order coverage, two to three weeks -- by the way, that's down from last quarter. They were getting four to six weeks last quarter. So when that drops to two to three weeks, what does that do for us? That gives us very, very poor visibility. Nobody orders before they have hard orders anymore. So it's a challenging situation, so we are being conservative.

Yes, I think that's probably the right approach. Can I just get a clarification on the VEE production shipment that you talked about? Is that for tablet design or is that for a SmartPhone? I wasn't very clear on that. Sorry about that.

Tablet.

That was [of a] tablet design. Great. That was helpful. And then, on the SmartPhone--.

--Actually, let me correct that. There's VEE product being shipped into reference designs for SmartPhones, and there's -- in the quarter, but the production shipment will be for a tablet.

So historically, when you start production shipment of one particular end market, usually that gone through -- you have gone through a number of evaluation and production or eval exercise, and they have already gone through a lot of development. Typically, your product will end up getting penetrated in multiple end products in a customer, right? Is that something that you expect for this tablet design, that you start production shipment in the fourth quarter? And is that the reason why you're confident that you have -- your growth will come back in the first quarter?

I'm not sure exactly what you ask. Obviously, when we say we're in production with VEE, we have orders that we're shipping against that are production-level orders that we're shipping against, and we expect to see our business expand on a forward-going basis. So we're at the front end of a ramp with a relatively small number of guys -- customers at of this point. Owing to the delay, which I talked about, which everybody in the tablet space was sooner -- was ready -- let's backup for minute.

Until April, when the tablet -- when iPad was introduced, everybody was set to introduce smartbooks. And if you notice what's happened since then, it was kind of like everybody switched over to needing to chase tablets. And they've done that, but the problem then was that they were using single processor devices, apps processors, and that wasn't cutting it when you coupled that in a tablet format with the fact that Android 2.2 doesn't really address tablets.

So what people have been waiting for is an updated version of Android to accommodate larger screens and better resolutions, and that wasn't originally forecasted by Google to be supplied until Q1. These OEMs and ODMs have now done a number on Google, and they've brought that in, but it's still not the 3.0 version. 3.0 is still scheduled to ship to their customers. Android 3.0 is still scheduled to ship to customers in Q1.

So there's lot of moving parts there, but it sounds to us like they've got hardware ready and they're waiting for Android 3.0.

I see, great. So basically just design is already there, just a matter of waiting for the software to be ready, and then you can get going. And then, subsequently, you talked about having multiple design wins on the tablet market, right?

Correct.

Okay, great. And then, just finally on the SmartPhone opportunity there, with your relationship with your partner -- and I think there was a lot of excitement about that. And with all these reference design [bet] that is being shipped to I guess the design -- the ODMs, or the SmartPhone design company, any way you can kind of help us think about the revenue opportunity for 2011? I think that's probably the biggest moving part and could likely be a very, very strong for you guys. And any way you can help us kind of quantify that or think about that potential would be very helpful. Thank you.

Well, you know that we give guidance -- we learned our lesson about annual guidance several years ago, and we just don't do that anymore. We give quarter-to-quarter guidance. Now, I can just tell you that we're very optimistic on this space. I don't think any of us believe that there's going to be fewer SmartPhones built in the future than have have built in the past, and it's a growing market. The benefits that we're bringing are ones that are needed. Battery life and user visibility is crucial. And so I don't think there's any doubt about we're moving into an expanding market.

Andy, would you like to--?

--Yes. Edwin, this is Andy Pease. Two things.

So Tom talked about two reference designs. The first reference design, which we mentioned in past earning calls that we just up our shipments to 4,000 units, as Tom said, that's going to application developers, so think of that as the people that develop the apps that go onto your Android phone.

And that's nice, but the second one that we just landed into, which we'll be shipping out in Q4, Q1, is really going to OEMs and ODMs. And we are even more excited about that, because that is going to people that are actually going to be building the SmartPhones in the future. How many that will result in we don't know, but we do know that the requirement they placed on us has been 4,000 units, implying that there will be 4,000 of these form factor reference phones that go out into the market.

Great. That was actually very good color. And actually just one follow-up question to that, right? If some of these reference design get adopted and the ODM or OEM decide to ramp those phone, can you help us, like, roughly get a gauge on the timing of when you would expect an order from an OEM or ODM, and how would [Icera] look at the linear IT for the 2011, let's say, right? Should we expect most the (inaudible) order to come in the second and the third quarter? Is that how we should think about that, or -- that would be helpful. Thank you.

Certainly it would at least -- be earlier than the second half of the year. Our experience with data cards has taught us quite a bit on the interface between our customers and their customers.

The SmartPhone is very similar in that the ultimate customer is the service provider who is going to sell the phones to the end market. And we know that, any time that radio is involved, that there is a long terminal acceptance qualification period. And frankly, that ranges depending on who the operator is. We've seen that as long as 16 weeks, as in the case of our own AT&T. We've never really seen any shorter than eight to 10 weeks.

So that's when the OEM or ODM has a phone that's ready to be certified and the operator's bought into it, so you can kind of think of those as the timing requirements.

That's very helpful, thank you. That's all I have.

Okay.

Brian Coleman with Hawk Hill Asset Management.

Thanks. First question, following up on the second reference design. Should we be thinking about that as a -- kind of an offload engine to the apps process or the main apps processor? And does that help kind of think about the attach rate, ultimately, with respect to these potential designs, going forward?

So, in the first reference designs that we're talking about, that has our ArcticLink II B, as in visual X product. And the intellectual property in that device, or that platform for us, is VEE and DPO. When Tom was talking about the offload engine, that is in our new ArcticLink II C, as a communications X product, and that is not what is going into these reference designs, at least at this moment.

Okay, but would the -- is the VX, as the companion processor, integrated -- how integrated is it in this design that a OEM would opt out of it, or should we think about it as being 100% attach rate in these designs?

Well certainly 100% of the reference designs at this point, so the question is whether the ODM or OEM will include it, as well. I guess it is possible to not use it, but the advantages that it brings are pretty significant in terms of battery life. So I -- and in terms of the viewing experience, especially in bright sunlight, so I think the attach rate should be pretty high.

Okay. Did the designs based on these reference designs change your model at all? Do you still -- will you still get orders directly from the OEM or ODM, or do you -- does your order come from you ecosystem partner?

Directly from the OEM or ODM.

And so your revenue model, revenue recognition, doesn't change either?

Exactly.

Okay. On the smartbook versus tablet market, you've indicated in the last couple of calls that there's been a pretty large shift in design activity away from smartbook and towards tablet, and I'm curious. We talked about smartbooks in the past as requiring a lot more of the CSSP connectivity and because the ARM processors were lacking in lot of those necessary functions. I'm wondering if the move to tablet, does that increase, decrease, or leave the same kind of the addressable market for you?

Well, our focus on tablets, where we bring the -- notwithstanding the connectivity aspects, our focus there is really driven by the fact -- and our value proposition is really driven by the fact that big screens take a lot backlight power. And if we can cut -- if we can save overall system power by the mid 30s percent, you've taken a two-hour battery and -- or a three-hour battery and made it a four-hour battery.

So we think that the biggest value proposition, the biggest thing we're bringing to the party for tablets is VEE and DPO. Now, that doesn't mean that we're not supplying other connectivity, as an example, I-Squared-C, and we may or may not be using WAV, which is the Wake-up And Verify, or that we may be using various side-loading acceleration techniques, as well. But our big feature that we're pressing, or that we're selling really into tablets is really about reducing the backlight levels and, therefore, extending battery life.

So let me expand this little bit. So CX is a product that is in production right now, and that will be our shortest revenue application in tablets. As we have just announced our new CX product, which we're very excited about, in our announcement we said we would have engineering samples in Q1. We have also introduced many application solutions that can be accomplished with CX in specifically the tablet market, and also the SmartPhone, smartbook market. So, hopefully that clarifies this.

So we could see, then, designs in tablets that have both a CX and a VX chip, so you'd decrease your--.

--[It certainly is possible], yes.

Interesting. Okay. The tablet that you're going to be -- that's in production in 4Q, based on everything you've said, can we surmise that that's not an Android-based tablet?

No, I don't think you can say that. I can't answer what that is.

Actually, I can't, either.

But I -- but no, you can't assume that.

Okay, all right.

It turns out there are tablets -- there are Android-based tablets that are introduced today in the market. If you look at -- Samsung introduced a tablet that is Android-based, but that's one of the reasons nobody else wanted to, because it comes up lacking compared to the iPad.

Brian Coleman. Right. Okay. Another question for you on the SmartPhone market. As we hear about MIPS architecture starting to find its way into SmartPhones and the handset market, is there any kind of increased opportunity for CSSPs there, or is that over-thinking it?

In what sense are you asking? I don't -- I'm not quite sure what the question is.

Well, I mean, the ARM cores are pretty established in handsets.

That's fair.

And as MIPS moves in, I didn't know if there if there was anything lacking in terms of features or functionality that could be bridged with CSSPs.

That's certainly possible, but we're not betting on that. I mean, we're certainly capable of doing that. That's one of the advantages of having programmable fabric, but that's not something we're betting on big-time. Actually I think it'll -- we happen to be fans of MIPS, as you probably know, because we did two chips using MIPS microprocessors.

But you know that ARM dominates the SmartPhone market. And the question, when you get beyond the A4 for the tablet market, it's not clear who's going to dominate that. I mean, clearly, Intel's making a run at it, and obviously all the other guys -- the Android -- actually they're doing Android for Intel, as well.

So it's not clear whose processors are going to be in there. So I guess what I'm trying to say is that MIPS, we'd love to see them be successful in SmartPhones and in all those mobile devices, but we're not betting on that big-time.

Okay. And then my last question, I just want a follow up on the data card market. Does the CX platform kind of change your view on your -- on kind of the durability of CSSPs and data cards? Do your designs become more sticky, or is this also going to be kind of a bridging technology until the apps processors integrate some of the functionality of CX?

No. Actually, I think what it does is it gets a whole lot stickier, because the whole concept of offload engines is really about -- I mean, you could argue that eventually there'll never be a need for offload engines because everything will get integrated. I guess in the limit you could say that's true, but if you just look back at history of the computing industry, we've had basically offload engines since we've had mainframes. We had I-O processors. We have communication processors. That could have all been done in a mainframe. Why didn't they do it and integrated into a mainframe? Because there is functionality that you're better off if you split off and handle just to manage that function rather than compound the software that's running on the host processor.

So I think there's a future, as obviously that's the reason we picked the processor, put a processor in there, not because we want to be a host processor -- we learned our lesson on that one -- but to be able to manage the kinds of things that you need to be able to do in a security space, as an example, is way beyond just bridging functionality. We're running AES in a microprocessor.

So I think it makes -- CX is clearly a move beyond just bridging and beyond just being a companion device to really becoming a subsystem and-or offload engine, which is what some people are calling it these days. So I don't see this being the end at all. I see it being the front end and the beginning.

Yes. Okay, good. And then I guess the final follow-up on that. The design you referenced with the -- is there a competitor in this market? That was the CX design?

No, that's not a CX design. That is actually going into production in the next quarter. So it's already been done before CX was even available. CX is a good candidate as a follow-on for that design, and the parties that are doing that design are very interested in doing a follow on using CX.

Okay. All right, thanks very much. That's all I got.

Robert West with NI Technical Research.

Hello, Tom, Andy, Ralph.

Hi, Bob.

Hi, Bob.

Hear me? Going to, again, with a question about your initial reference design, the 3,000 unit now going to 4,000 unit, is that product now available and shipping to developers?

Yes. As a matter of fact, we have one.

Oh, you do? Okay. Does QuickLogic have role to play with developers during this phase where they're developing applications for this platform?

God, I hope not. Supporting all those guys who are developing apps, well, I can't imagine helping the guy develop another fart app.

Well, I wasn't thinking so much the application development but the use of VEE and DPO in their app.

Bob, we have written actually our own app to help in the calibration of VEE and DPO. So we have actually -- have our own app that helps developers so that they don't need our constant involvement.

Okay, I got -- I know that app. Okay, I'm -- I think I do.

Okay, the next question is, on this new reference design that you've just received, is that for the same CPU from your OEM, just a different configuration going to developers and OEMs -- ODMs I mean -- that will be actually building product, or is that a different -- is it a different processor from your partner?

It's a different processor.

Okay. Okay, so I'm a little confused, then. Could the first reference design also go to ODMs for development of product as far -- the develop -- of phones in their markets, as well?

That is not the target of our partner. The target of our partner is to actually get this reference design in the hands of a third party, and that third party is actually proliferating this reference design to developers. And that's different from the second reference design, where our partner is going to directly go into OEMs and ODMs with their own channels.

Okay. Now I think understand that. I appreciate that. I'd like to return to the CX platform. With the new CX platform with its embedded CPU in it, will this allow your customers to update software, for instance digital rights management software? And [has it changed] -- maybe if it changed over the useful life of the handset, will there be -- will that give them some additional flexibility, functionality that they didn't have before?

The intent is, Bob, that the firmware that drives that processor is firmware that we will develop. We learned once before that, when you open a microprocessor-based product up to customers, that boy, now you wind up being -- you take on a whole different level of support than you do when you supply them with a solution. So our intent is that our customers will not be writing software for that embedded processor. We'll be solving problems for our customers and offering them the solution rather than them crafting their own firmware.

Okay, very good insight. Thank you for that. Next question is kind of in the same area, Tom. With this embedded CPU running different software, can it be morphed into serving additional markets like the strong authentication secure access market, or maybe others?

Exactly, right on. We see it as being a very broad -- a broadly capable device. See, think about it this way. With our programmable fabric, we have programmable hardware, and now we're going to have programmable software, and we're going to be doing both of those for our customers. So we've got another degree of freedom now that we never had before.

So yes, we can do -- when you talk about security, just as an example, everybody talks about strong authentication secure access. But how about denial of service, where you get flooded by somebody who shuts down your sites or your devices? With a very well constructed front end, you could wind up filtering all that stuff out and not bring yourself down, and CX is capable of doing that kind of a task. And there is just one thing it can do.

So obviously, having software programmability and hardware programmability on the same piece of silicon we believe is very valuable.

Okay. So--.

--And the customers we've talked to about it believe it's very valuable.

So as investors go forward, we can probably -- we'll see over time introduction of new software for new markets and with the same CX platform.

Bob, let me make a clarification. We've always been delivering software with our older CSSP solutions, and they've been in a form of drivers that actually reside on the apps processor that we companion to. We're trying to distinguish that software from firmware that exists inside the microprocessor that's inside our device. So as Tom said, this gives us another degree of freedom and actually more complexity to craft a solution that is specific for our customer.

Okay, I think I understand. I get the firmware in my mind, okay?

Yes, firmware as supposed to software. Firmware is a micro-code that you would load on the microprocessor, and it's really important that you understand we're not actually telling our customers, "Hey, there is a microprocessor here, and here's the operating system." That's not the deal. It just -- it allows us to further customize your device in a more intelligent fashion for them.

Okay. Next question, I wanted to -- a little different. Back in early October, QuickLogic introduced a secure access proven system block for the mobile POS market. Could you give us some color on this applications and how it fits into that market? I know that last quarter you were shipping devices into the point-of-sale market, and you've developed customers in that market that are shipping product. So could you give us a little color on that area and how this [PSB] might add to that market for you?

So we actually have a couple of [PSBs] that we've shipped that go into the security market. One is the AES core, which is the standard core. And in our new CX product, that is actually hardcoded in the -- let's call it the standard cell part of our device. In other words, it's not in fabric. We have other [PSBs] that we've done for customers, namely a secure hashing algorithm, or some people call it a SHA, S-H-A core, and that tends to be more customer-specific, and that actually will reside in the fabric.

We've also started working with CPRM, which is a content protection rights management for digital media. That is actually a Japanese standard, and spawning from that is becoming CPXM, which is something that Hollywood is looking at, which really is a subset of the AES engine. So some of it will be in our hard logic, [mainly] the AES core, and some of it can be in our fabric, which enables us to customize the security algorithm that our customer desires.

Okay. And that's all on the CX platform?

Well, it's anything that has our fabric, we can put it in our fabric, right? But on the CX platform, the AES core is hardcoded in the hard logic.

Okay.

So the whole area, Bob, of digital rights management is one that we're very interested in, primarily because I think everybody has pretty much proven, time and time again, that if you want to secure a content, you can't do with software. It's really -- it's just too easily hacked. So you've got to figure out a way to do with hardware. And we're very interested in that aspect of being able to protect people's content.

Okay. Given -- one other question on the CX. Given the availability -- sampling availability in Q1 '11, which I assume probably toward end of Q1 '11, how long does it take you to -- roughly to bring the product to production readiness or production status for customers to begin ordering and using?

Less time than it takes them to get ready to go to production, unfortunately. We're (inaudible) to see significant revenue out of CX. I'd be amazed if we saw significant revenue -- saw anything significant before Q4 and probably until 2012.

Okay. That sounds good. So does this mark (inaudible) -- capability -- market opportunity equal to your VX market, do you think?

Actually, I think in some ways, it can be bigger than VX. By the way, we do have a lead customer for CX. So, Andy corrected me, we could potentially see revenue in the second half of '11. But the real -- from somebody else besides them, and they should be a very significant customer in terms of revenue. But before we see that from somebody else, it'll be well in to [Q '12], in my opinion.

Okay. Well, look, very good and very encouraging, and thank you for taking my call and questions.

Okay, Bob.

(Operator Instructions.) I'm showing no further questions on the phones.

Okay. Well, thank you for listening and your interest in QuickLogic. We're very pleased about returning to profitability, and we hope you are, as well. We'll look forward to seeing you on the conference call in February, or talking to you on the conference call in February, and thank you. Take care.

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