Quicklogic Corp (QUIK) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the QuickLogic second quarter 2011 earnings conference call.

(Operator instructions).

As a reminder, today's conference call is being recorded.

Your hosts for today's conference are Andy Pease, CEO, and Ralph Marimon, CFO.

It is now my pleasure to turn the conference over to Ralph Marimon.

Thank you, and good afternoon.

Before we get started, let me take a moment to read our 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 from our new and mature 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.

This conference call is open to all and is being webcast live.

For the second quarter of 2011, total revenue was $5.7 million, which was $200,000 above the midpoint of our guidance of $5.5 million. New product revenue totaled $1.2 million, which was flat from Q1 and aligned with the midpoint of our guidance. Our investors should note that while we were pleased about the release of the Pantech Vega 5 Tablet-Phone, we faced challenges in other segments that will affect new product revenue in the third quarter. Andy will discuss this in more detail during his remarks. Mature product revenue in the quarter totaled $4.5 million, which represents a 5% sequential increase over Q1. Our non-GAAP gross profit margin for Q2 was 66%, and was above our guidance due to the mix of product shift.

Non-GAAP operating expenses for Q2 totaled $5.5 million, which was $1.1 million above our guidance. The increase in operating expenses was due to the timing of two significant engineering expenses from our third-party developers. As we have discussed, we are working on multiple platform development efforts this year, and we rely on third parties to provide key elements for these platforms. The higher expenses we incurred in the second quarter included the early delivery of an IP block for next-generation product, which had been expected in early Q3 of this year. In addition, we occurred higher than expected expenses on development work being done on our previously discussed ArcticLink II CX solution platform family.

Our other income in the second quarter totaled $24,000. Our total non-GAAP loss for the quarter was $1.6 million, or $0.04 per share.

Our cash usage for the quarter was $1.1 million, which was just above our guidance of $1 million. Cash usage was slightly higher than expected due to the higher loss that was partially offset by an 11-day decrease in DSOs to 50 days in the second quarter. Our Q2 GAAP net loss was $2.1 million, or $0.05 per share. Our GAAP results include stock-based compensation charges of $436,000. Please see today's press release for a detailed reconciliation of our GAAP to non-GAAP results.

Now I'll turn it over to Andy, who will update you on the status of our strategic efforts. Following this, I'll rejoin the call to present our Q3 guidance.

Thank you for joining us this afternoon.

Given the press release issued last week, the first thing you probably want to hear about today is our new design with Pantech. The Vega 5 is a high-end multimedia computing and communications device that Pantech classifies as a tablet-phone. This classification is due to the fact that, while it is designed to fit in your pocket, it incorporates a 5-inch display.

When you look at the specifications, you will see Pantech did not compromise in the design of the Vega 5. The Vega 5 uses a Qualcomm 1.5-GHz dual-core Snapdragon processor with 1GB of DRAM memory. It incorporates an 8-megapixel rear-facing camera and a 1.3-megapixel front-facing camera to support video chat, and it supports full high-definition 1080p video playback and recording. These features make it an ideal phone for consumers who are interested in high-resolution multimedia, web browsing and gaming applications.

Pantech chose our ArcticLink II VX CSSP, which includes VEE and DPO. These technologies significantly improve the consumer viewing experience, including viewing experience while in bright sunlight conditions, and increase the battery life by an impressive 15% during high-resolution video chat, video playback, web browsing and gaming use cases. The Vega 5 is clearly a leading-edge design, with specifications that would impress even the most critical geek.

What impresses me the most is the care that Pantech took to address the subjective human design elements, particularly as they pertain to minimizing weight and optimizing feel. QuickLogic's DPO technology enabled Pantech to minimize weight through the use of a smaller battery while still delivering impressive battery life.

If you're interested in learning more about the Vega 5 and how it compares with other high-end smartphones, please keep an eye on our QuickLogic blog. Today, the Vega 5 is only available to subscribers using the SKY network in South Korea. If you go to the iSky website, you will see the Vega 5 prominently promoted on their home page. While it is impossible for us to predict rollout schedules with other carriers, Pantech has indicated they are promoting the Vega 5 to other major carriers around the world. Since we don't have a listing of these carriers, we can't say for sure which are included. However, other Pantech handsets are sold worldwide and in the United States by AT&T, Sprint and Verizon.

So, what's next? We are working on a VEE/DPO design with a new smartphone customer. We hope to start production and shipment for this design in Q4 of 2011. In addition, we are working on several VEE/DPO designs in smartphones, tablets and other new and exciting consumer form factors that we hope will enter production in the first half of 2012.

Manufacturers around the world are trying to figure out how to compete with the Apple iPad. Recently, our VEE/DPO partner, Apical Limited, developed a unique technology demonstration tool. By hacking into the iPad video path, adding an external ambient light sensor and writing some creative software. Apical delivered a platform to quickly demonstrate how VEE can make even the iPad notably better. The good news is after presenting the demo to a number of the tablet manufacturers trying to compete with Apple, we have been provided with their tablets and specific instructions as to how to hack into the video path on their designs and return them VEE and DPO enabled. These are not design win commitments, but given the high level of requests they present solid opportunities. I know several people on this call have seen the iPad demo. For those of you who haven't, the difference it makes is compelling.

We are very pleased with the progress we've made with VEE and DPO technologies since our last conference call. During that time, we initiated production with Pantech, moved closer to production with an additional smartphone manufacturer, and gained a very high level of visibility with a number of major OEMs competing against the iPad. In addition, we shared and aligned our next-generation ArcticLink VX roadmap with the product plans of these same OEMs. Given this progress, we believe the combination of this new demonstration tool and providing visibility into our roadmap has positioned us to increase the momentum of VEE/DPO designs going forward.

In the wireless data card market, we participate in two segments, the 14.4Mbps and above segment and the lower end 7.2Mbps segment. In the 14.4 and above segment, we continue to experience inventory digestion due to the rapidly changing dynamics in the market, including high competition among OEMs bidding for operator business and competing baseband solutions. At the beginning of the year, we saw the 7.2 segment as a potential growth area. However, demand for the 7.2 wireless data cards has been driven mostly by emerging markets, where price sensitivity is extremely high. This has resulted in a much lower attach rate for the microSD memory card feature that we enable with our CSSP. This limits our ability to participate in this segment. Due to these combined factors, we are expecting lower wireless data card revenue in the third quarter.

Last quarter we discussed the work we were doing with a Tier One OEM on a new form factor cellular data card that will plug into a full-size SD memory slot. There are a growing number of consumer devices that could benefit from the cellular connectivity because they don't offer the typical USB connector found on laptops and notebook computers. These include some tablets and consumer products such as digital still cameras, video cameras and gaming devices that typically only support WiFi connectivity. Since WiFi is not always available, users of these devices need an alternative method for network access. One practical way to enable this access is with an SD form factor cellular data card. The belief is that a large number of consumers would utilize a single data card solution to connect all of their devices to the cellular network. We expect to initiate production and shipment of this design in Q4 to support our customer's goal of a Christmas season launch.

In the mobile enterprise segment, one of our largest OEM customers has expanded its use of our CSSPs to five unique products. However, during Q2 we learned its contract manufacturer had stockpiled excess inventory. We've been advised that most if not all of the excess inventory will be used during Q3, and that we should begin shipping at a rate similar to finished goods production sometime during Q4. While this excess inventory will limit our shipments in Q3, we remain positive about this segment moving forward.

After a two-quarter drought in the security segment, we should begin to slowly ramp shipments during Q3. Through our activity in the wireless data card and security segments we saw an opportunity for two of our customers to combine their design and marketing talents to develop a unique, secure-access wireless data card. Our CSSP design has been completed and should move to pilot production in Q3. The initial build will be used to support customer security qualification efforts and wireless carrier certification approval.

On June 29 we announced the release of our Jupiter reference design that supports our new ArcticLink II CX solution platform family. CX is our first product that includes an embedded processor and is well suited to support the rapidly growing need for security in a wide variety of market segments and applications. We are using Jupiter to further design efforts in the security, enterprise, machine-to-machine, tablet and smartphone market segments. Our lead customer in the security segment is using the Jupiter platform to complete product development so that they can move rapidly into the final qualification stage with their customers once we begin production [to] qualified CSSPs based on ArcticLink II CX platform.

In the smartphone and tablet segments we are focusing primarily on secure sideloading. In enterprise and machine-to-machine segments we will be introducing a variety of value-added applications to the market over the next six months. We believe we are developing meaningful traction for CSSP-based designs in our strategic marketing segments. This progress is directly attributable to the consistently high level of effort put forth by the QuickLogic team and the credibility we've earned through these efforts.

With that, I'll turn the call back over to Ralph so he can present our guidance, and, following that, Ralph and I will responded to your questions.

Thanks, Andy.

Although we are expecting an increase in revenue due to our success at Pantech, this increase is being offset by the reduced demand in the wireless data card segment. Therefore, we are forecasting that new product revenue will be flat, at $1.2 million, in Q3. Based on our bookings and backlog, we are estimating that our mature product revenue will be down from the Q2 level to $2.4 -- $4.2 million. Total revenue is forecasted to be approximately $5.4 million, plus or minus 10%.

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 impact our actual results significantly.

On a non-GAAP basis, we expect gross margin to be approximately 65%, plus or minus 3%. The gross margin percentage is driven by the forecasted production rate and the anticipated mix of products shipped during the quarter.

We are currently forecasting non-GAAP operating expenses to be $4.6 million, plus or minus $300,000. Non-GAAP R&D expenses are forecasted to be approximately $2.4 million, while non-GAAP SG&A expenses are forecasted to be approximately $2.2 million during the third quarter. Our other income and expense will be a charge up to $60,000 during the third quarter. Our stock-based compensation expense during the third quarter is expected to be approximately $430,000.

At the midpoint of our guidance, our non-GAAP loss is expected to be approximately $0.03 per share. Excluding the impact of additional warrant and stock option exercises, we expect to use approximately $1.2 million in cash, primarily due to lower revenue levels and higher engineering expenses.

This concludes our prepared remarks, and we'd now like to open the call for questions.

(Operator instructions).

Our first question comes from Jason Rechel, of Needham & Company. Your line is open.

Yes, hey, Ralph and Andy. Thanks for taking the questions. I guess first congratulations on the Pantech win. I think that's a good win for you guys. Could you maybe provide a little bit of color around what type of unit expectations you have at least initially for the Vega 5? And you talked a little bit about some of the moving parts in the new product revenue guidance, so maybe what contribution do you expect from Pantech for the first couple of quarters? Thanks.

Well, so far, Pantech, as we're finding out with many of these consumer mobile device guys, are very leery about giving you any visibility behind what is absolute certainty for them. So, up till now we've only received forecasts that go out into most of Q3, and our guidance is set accordingly. And beyond that we keep trying to get further and longer term commitment, and it seems like we're not going to get that. So, I wish I could. One thing I will say, though, is go to the iSky website. This Pantech phone is really a nice piece of work. We are very proud that they have included us in this design, and I can tell you that we are very proud to be in it.

Great. And that kind of leads me into my next question. It's kind of the larger screen size tablets/smartphone kind of seems like a nice niche where VEE may ultimately carve itself out. I guess, first, am I correct in assuming that? And then you talked about some other OEMs that you're currently engaged with. Are those Tier One customers? Are you making any traction with Tier One customers? Thanks.

So, first of all, Pantech, their belief was that a tablet's too large and a smartphone is too small to be able to watch video. That was their primary premise, and they really wanted to come out with an in-between screen size that, frankly, would fit comfortably in a shirt pocket. Interestingly enough, despite its size, it frankly, even though it actually weighs more than iPhone, it feels like it's the same weight because of how they distributed the weight. But to answer your second question, yes, we are working with all of the major OEM guys, I think that's safe to say, and they are all interested in how they -- all the major guys that are non-IOS.

Excellent, thanks. And then, switching gears a little bit, you talked about revenue starting to ramp here with your secure banking customer. Is that -- do you expect that to be kind of a steady-state business going forward, or is that kind of a few quarters when you ramp to production and then that's expected to tail off as you maybe start to ramp other platforms on top of that?

No, one of the attractive things about the security market is it doesn't have the very short product life cycles that the consumer market does. And it is absolutely our expectation, and, frankly, that's why we engaged with this opportunity about three years back, that this would be a very good steady state of revenue that would grow slowly, particularly as security expands its footprint beyond just the banking industry.

Great. Thank you. And then, last question for me, and then I'll step back in the queue, I saw the press release yesterday talking about your second generation DPO, could you maybe just talk a little bit or provide a little more color around the specs of that, maybe specifically what resolution that can now support going forward?

So, the resolution is the same as the resolution of our existing products, and in our roadmap we have actually shown people that we are capable beyond high definition, and certainly this new what we call Proven System Block that we call intelligent backlight control will be a contributor to that. We feel that this is a really good thing that we're adding, because it adds to the DPO approximately 10% power beyond what they would see from the normal DPO.

Excellent, and, sorry, just one last one if I could, you talked about pulling some OpEx ahead into the June quarter from the third quarter, and then we've kind of got another kind of incremental step up in September from March, so I guess my question is, is that, this $4.6 million where you guided, is that kind of a good steady-state run rate to think about in OpEx going forward? Thanks.

No, Jason. I think the issue we have right now is that we actually have three major development programs going on right now, and so two of them the expenses really are peaking in Q2, Q3, and it'll go into a little bit of Q4. So we have what I would call higher than normal expenses for the next couple -- for Q2, Q3, and potentially into Q4. I don't think it'll come rapidly back down. But, again, in the past we've only really had one development program at a time that we've been working on. This time we have three, which is why you see the higher engineering expenses. But we think it's absolutely critical that we do all three to pursue our strategic roadmap.

Okay, great. Thank you, guys.

Thank you.

Thank you. Our next question comes from Brian Coleman, of Hawk Hill Asset Management. Your line is open.

Great. Thank you. My first question is on Pantech. In addition to the Vega 5 they had the 4-inch Vega Racer come out at about the same time, and without you speaking specifically about that design, I'm curious if you're seeing any different kind of level of acceptance in the smaller form factor phones than you are in the larger 5-inch phones and tablets, or if there's any kind of a more challenging sales process there.

Well, Brian, quite honestly, I don't track how these things are doing necessarily, but I do know that there is another 5-inch phone that hit the market that didn't do particularly well, but it was mispositioned, and it was overweight. And really it's all about the use cases. I think the use cases will dictate how the Pantech phone is actually going to do long term.

But you don't see any reason that over time you're not going to see VEE/DPO in the smaller, 4.3-inch form factor phones?

We could. Yes, we could. I'm not saying it's limited. But one thing to keep in mind, the DPO aspects, the larger the display the more we can actually help save power, and we've actually shown this with our table. So, the value proposition just in pure dollars and cents and how much we save by extending battery life increases as the screen size increases.

Okay. The phone you referred to as a design that's, I think you said, targeted for Q4 '11 production, a smartphone, is that a 4- or a 5-inch phone?

You know, I have to double check on it. I think it's a 4.3-inch phone.

Okay. And is that something that's being spun out of the Qualcomm reference design or is this a -- is this something different?

Actually, this is a direct result of the Qualcomm reference design, yes.

Okay. That's great news. And is there anything else you can share with us qualitatively on the Qualcomm reference design? Is the activity continuing? Is it along the lines you were hoping to see?

Well, one thing I will say about the Qualcomm reference design is we were -- the processor that Qualcomm used is the 8x500 series, and that actually has an MDDI interface, and as you probably know as of last year that Qualcomm is going more towards a MIPI interface. So, this design has been great for us because it's gotten us into a lot of doors, but keep in mind that Qualcomm has moved to a different video interface beyond MDDI.

Okay. The RGB-Split PSB that was -- it was announced, then it seemed like there was a bit of a lull in terms of any updates on it, and then I think there was a comment, I think it was on the blog, or maybe it was a -- something you press released in the last month, and I'm just wondering if you can share with us anything -- any updates on where those types of designs might fit in your sales funnel.

Yes, well, we're not prepared to talk about anything definitive other than the fact that there are many large OEMs, when they want to start implementing a multiscreen in which you can spread the image across multiscreens, especially with small bezels, are very interested in this technology. But, frankly, these projects are out there far enough that I don't feel comfortable talking about them yet.

Okay. The -- how would you -- again, nothing -- I'm not asking for anything quantitative, but the BenQ 100 tablet's been out for probably about six months now. Are you seeing any good traction on that one, and what are the lead times like? Is there any kind of visibility in those forecasts?

So, very little visibility in the BenQ, but I can tell you that what they have told us is that going into the consumer space and competing head-up against the iPad was not boding well for them. And what they have done is they have retrenched outside the consumer segment into segments that they are much more comfortable with. Recall when we talked about BenQ probably back as far back as Q4 we said that they were taking their eReader technology and trying to go into the consumer tablet space. And this was -- I think their introduction was a little disappointing for them, and they're refocusing in areas that they're more comfortable in.

All right. And then my last question is on the SDIO modem. Is that a market that's being driven by the data card OEMs, or is it really being driven by your silicon partner?

It's being driven absolutely by the OEM, for sure.

Okay.

Yes.

Okay. And so we should -- go ahead.

I said, they're pretty excited about this opportunity.

Okay. And we should see, then, SDIO modems out for Christmas among several vendors, or is there one particular design that is kind of the trailblazer?

We're only working with one guy, so I can't speak for anybody else if there will be a competitive product out there.

Okay. All right. Thank you.

You're welcome.

Thank you. Our next question in queue is from Hamed Khorsand, of BWS Financial. Your line is open.

Hi. Just a couple of questions here. Are you seeing any comments from potential customers as far as the VEE and DPO pricing just being too high, or if they're requesting pricing come down before they can really incorporate the technology?

Hamed, have you ever seen an OEM that said that your pricing was too low? So, yes, but for them the price is always too high. And, frankly, any time you try and add new functionality to a [bomb], it's tough. Frankly, that's why we introduced the DPO aspects of it, so we could give some tangible, very objective measurements that would show tangible value, because obviously the visual enhancement, while that really is what attracts people to the technology, it's very hard to quantify that. So, clearly pricing is an issue, and, as Ralph said, few of these engineering projects that we're working on are directly targeted at that.

Okay. And then, are you guys engaged in any designs that could be out for the Christmas period?

Well, the -- we talked about two of them, so clearly the SD wireless data card is one that our OEM is absolutely targeting for the Christmas season, and the smartphone release is also targeted for the Christmas season. So there are two for sure that we talked about today.

Do you know if any these releases will come into the US, or are they all international?

I don't think any of them are targeted for the US right now. However, I can say that both of them have presence in the US, similar to Pantech, like Pantech's first release will be in Korea, but their expectation is for sure that they will expand beyond the Korean market.

Okay. My last question is, as far as the Pantech business goes, how long did it take you guys to go full circle as far as from initial contact to the production volume contract?

That's a great question. It's been one year, maybe a little bit more than that. I wish I had my VP of Sales and Marketing here. I think it's been a little bit more than one year. And I can tell you that their initial expectation, what they told us was this would be a post-Christmas season launch. And, as all the processors were changing and the operating systems were changing, they delayed for six months, and they actually put in a new processor. So, they -- when they saw that Qualcomm was going to come out with the dual core and they thought that would be well worth waiting for, so that's why we had the six-month delay. But, frankly, in Q3 we thought that this would be a design win in production in Q1.

Okay. Thank you.

Thank you.

(Operator instructions).

Our next question comes from Bob West, of NI Technical Research. Your line is open.

Good afternoon, Andy and Ralph.

Hi, Bob.

I wanted to begin with a question on DPO 2.0, a follow-up question on that. Since this has been executed in a Proven System Block, I've got a question. Can it coexist, is there enough power in the CSSP for it to run with other Proven System Blocks like your MDDI bridge and your RGB-Split screen technology, maybe others that are important to customers?

Absolutely, Bob. It -- as a matter of fact, this has been architected to interplay with the DPO so that the two work hand in hand, which we've shown in our own lab studies helps improve the battery life by as much as 10% above what you get with DPO by itself. And, by the way, I might add that this DPO, this Proven System Block, actually goes into our fabric.

Okay. So, when you say goes into your fabric, would you -- well, you're planning to put it into your fabric in next generation or it's in there now?

We will put it into the next-generation hard logic, but the beauty about having CSSPs is we can implement new technologies immediately (technical difficulty) prove this out for our existing VX2/VX4 families, we are immediately adding this DPO 2.0 into it. And then in subsequent families we will actually harden it, which will obviously limit the amount of silicon space it uses, and put other things in the fabric.

Okay, great. I wanted to ask a second question. This DPO 2.0, was it developed by Apical Limited or QuickLogic or a combination of the two of you?

It was actually developed by QuickLogic.

So this is QUIK's IP, then?

Absolutely. It is absolutely our IP. And we do know that Apical was thinking about doing something similar. We actually came out with it. We showed it to them. We said, "Wow, this works great." So, we work hand in hand with them, and so we actually came out with it first and will be implementing that.

Can that be implemented, just out of curiosity, independent of your basic VEE/DPO technology?

You know, I don't see why it couldn't. I don't see why it couldn't. But we -- it probably works best when you're using it with VEE and DPO.

Yes, I understand. Next question --

Certainly it has more --

I'm sorry.

I'm sorry. Certainly it has more value when it's implemented with DPO -- when it's implemented with VEE and DPO.

I understand. Next question, Andy, is on your VEE 3.0. Out at DigiTimes' presentation I think Brian mentioned that QuickLogic would be sampling VEE 3.0 toward the end of the year. Can you give us any update on this, and from that point when customer engagement for VEE and DPO 3.0 would begin next year, I mean, some idea of how much time from sample to beginning of customer engagement?

Sure. We've already told all our major people -- that was what I was referring to hen we've aligned our roadmap -- and the major OEMs are very interested in -- actually it will be called [VEE] high-definition 1080p is what the technology will be called. And we will be sampling customers in January of 2012 is the current schedule date.

Okay. And then, how -- when would, from sampling, when does the customer engagement process, when can you begin customer engagements with customers then? Is there a period of time?

Well, we can begin customer -- we can begin customer -- we've already started customer engagements, and right now what we're doing by demonstrating the technology, as we talked about in the conference call, that is the engagement, where we're doing what we call technology evaluations. So, this is basically letting the customer see how VEE and DPO will work in their actual platform, and, frankly, that's what all of the major guys would like to see before they move forward. From there, once we sample, then it's a matter of getting into their next -- aligning with their own product introduction, and that varies from customer to customer.

Sure. Next question, on your CX platform, at what point will you begin soliciting or accepting customer engagements in the smartphone and tablet markets for the CX?

We're actually demonstrating the CX capability with the Jupiter platform right now.

Okay, so that means you can begin engagements if you have interested customers?

Well, we can begin engagements, but as far as ready silicon, ready silicon for the CX won't be until January of 2012.

Okay. I got you. And, thanks, final question possibly, I've got a question on your Pico Projector. Again, out at DigiTimes' presentation it was mentioned that that product could be in the market by year end, and I wanted to ask is does that mean in time for Christmas selling season or maybe for -- is it for the beginning of (inaudible) next year?

Actually, I'm not totally familiar with what you're referring to. We have been involved with Pico Projector guys for a while, and right now we're not quite in a position to do any sort of preannouncement on that, I'm sorry to say.

Okay. Okay, well, just a final comment, I think, congratulations on this Pantech win. I know there's a lot of people in the Company, a lot of organizations had a part in making that thing happen, so I think it's really an accomplishment, and congratulations on one and all.

Thank you very much. I appreciate it.

I think that's my questions, Andy.

Thanks, Bob.

Thank you. I'm showing no other questions in queue at this time.

I'd like to turn the program back to Andy Pease.

Well, thank you all for joining us. We appreciate your interest in QuickLogic, and we'll look forward to talking to you in our next earnings call. Thank you very much.

Ladies and gentlemen, thank you for joining today's conference. This does conclude the program, and you may now disconnect.