Quicklogic Corp (QUIK) 2014 Q2 法說會逐字稿

Ladies and gentlemen, good afternoon. At this time, I would like to welcome everyone to the QuickLogic Corporation second-quarter 2014 earnings results conference call. (Operator Instructions). Today's conference call is being recorded.

With us today from the Company are Andy Pease, the President and Chief Executive Officer; Ralph Marimon, Chief Financial Officer; and Brian Faith, Vice President of Worldwide Sales and Marketing.

At this time, I would like to turn the call over to Ralph Marimon, Chief Financial Officer. Please go ahead, Sir.

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 related to revenue from our new and mature products; statements pertaining to our design activity and our ability to convert new design opportunities into production shipments; market acceptance of our customers' products; our expected results in 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 2014, total revenue $6.8 million, which was above the midpoint of our guidance range. New product revenues totaled approximately $4.5 million and was at the midpoint of our guidance. Mature product revenue totaled approximately $2.3 million, which was above our guidance range due to higher than expected bookings.

Samsung accounted for 40% of total revenue during the second quarter as compared to 70% of total revenue during the first quarter. Our non-GAAP gross profit margin for Q2 was 45% and was above our guidance. The increase in gross margin is primarily due to the mix of products shipped during the quarter.

Non-GAAP operating expenses for Q2 totaled $5.4 million, which was just below the midpoint of our guidance. On a non-GAAP basis, the total for other income, expense and taxes was a charge of $9,000. This resulted in a non-GAAP loss of $2.3 million or $0.04 per share.

We ended the quarter with approximately $34.3 million in cash. Cash declined by approximately $2.8 million, which was better than our guidance due to timing of working capital commitments. Our Q2 GAAP net loss was $2.9 million or $0.05 per share. Our GAAP results include stock-based compensation charges of approximately $566,000. 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.

I have some exciting updates to share with you about the progress we have made towards realizing our long-term strategic objectives. But first I want to cover the tactical initiatives that continue to drive our near-term results during this transitional year.

The branded android and iOS tablet market continues to face declining unit volume. In Samsung's preliminary Q2 release, it attributed the decline in tablet sales to two factors. Longer upgrade cycles relative to smart phones and higher sales of large display smart phones that have lessened demand for 8-inch and 7-inch tablets.

Due to this market environment, we are forecasting a substantial sequential decline in display bridge revenue for Q3. This is disappointing and below what our customers were forecasting a few months ago.

However, we continue to win new display bridge designs with Chinese [IrDAs] for tablets and other customers for industrial and enterprise applications. We expect these trends to continue.

We also expect to initiate production shipment to a Tier 1 consumer electronics company during Q4 to support a display bridge requirement and a high-end digital still camera.

Although our tablet business with Samsung has declined sharply, we have ongoing engagements at Samsung that we anticipate will enter production later this year and during the first half of 2015.

We continue to expand our market share presence in the PHS market with two new production wins. One of these is with Kyocera, which uses two CSSPs to support a wide variety of smart connectivity functions. The other is with Japan Radio Corporation or JRC, which has the second-highest PHS market share in Japan. We initiated production shipment to support both of these designs during Q2.

Last quarter, I stated that a Tier 1 mobile OEM branded technical approval for our new PolarPro 3 CSSP. We have identified an opportunity with this customer and have an ongoing engagement. Upon acceptance of our product, we will gain production approval and be positioned for major production volume with this mobile OEM.

In addition, we are engaged with a Tier 1 mobile OEM on a smart connectivity design for a high-end smart phone specifically designed for the Chinese market. We expect to initiate production shipment to support this design during Q4 of this year.

We introduced and began sampling our first sensor hub platform, the ArcticLink 3 S1, during Q4 of 2013. During our last conference call, I outlined our roadmap and engagement model. This go-to-market strategy is resonating with OEMs and ecosystem partners, resulting in a large number of ongoing engagements.

One of these engagements is for a wearable product that will be introduced by a top 10 smart phone supplier during Q1. This is a particularly exciting design win. This customer has high brand recognition, and all of the algorithms used in this design were developed by QuickLogic.

Last week, we initiated sampling of our second sensor hub platform, the ArcticLink 3 S2, which is a pin-for-pin compatible evolutionary step in our roadmap. The S2 doubles the computational capability, cuts the power consumption by approximately two-thirds, reduces our manufacturing costs and opens sufficient programmable fabric to support the smart conductivity functions that many Tier 1 OEMs are implementing in mobile FPGAs. During the coming months, we will be announcing several catalog CSSPs based on ArcticLink 3 S2.

A key element of our strategy was to provide customers with a pin for pin compatible extension of the S1 so that they could seamlessly transfer their S1 designs to the S2 platform. In fact, this strategy enabled a top 10 smart phone OEM to move quickly from our S1 to our S2 platform.

We believe we will initiate production shipments of the ArcticLink 3 S2 to support this design during Q4 of this year.

This migration strategy is also enabling a Japanese OEM to use our sensor hub design in an innovative wearable product. They initially started design using our S1 and are scheduled to enter production during Q4 using our S2 platform.

The next platform in our sensor hub roadmap strategy, the ArcticLink 4 S3, is expected to sample during mid-2015. As with current platforms, the S3 is being developed in close collaboration with mobile OEMs and ecosystem partners and will allow customers to migrate the intellectual property they developed on the S1 and S2 to the S3 platform.

I look forward to briefing you on that revolutionary platform during future conference calls.

Success in the sensor hub market requires suppliers to provide complete solutions that include silicon platforms, software algorithms, system-level drivers and development systems. Suppliers also need to support a broad spectrum of engagement models from catalog to focus solutions. These requirements are very similar to the engagement model we developed years ago to support our core CSSB strategy. We believe this experience provides us with a competitive advantage in the sensor hub market.

We have taken numerous steps to broaden the value proposition we can offer our sensor hub customers. During last year, we have substantially expanded the size and scope of our dedicated software group to support our sensor hub strategy. This includes algorithm development, software drivers and system integration tools for both android and various real-time operating systems. This strategy has resonated with our customers.

Additionally, we implemented a formal qualified vendor list or QVL platform for sensors. This assures our customers that we have tested and qualified specific sensor devices for use with our platforms. Our engineering team has already qualified sensors from Analog Devices, Bosch, InvenSense and STMicro.

Finally, as we announced last month, Steve Whalley has been appointed to our advisory board. Steve spent most of his career in various management and executive roles at Intel and is now the Chief Strategy Officer for the MEMS Industry Group. I am thrilled that Steve has agreed to join us to assist expanding the value propositions we deliver in the rapidly growing mobile sensor hub market.

I'll turn the call back over to Ralph for our guidance and rejoin you briefly before the Q&A session with my closing remarks.

For the third quarter of 2014, we are forecasting total revenue of approximately $4 million plus or minus 10%. The $4 million in total revenue is expected to be comprised of approximately $2 million of new product revenue and $6 million of mature product revenue. The decline in new product revenue reflects reduced shipments of our display solutions into the tablet segment as discussed earlier by Andy. We are forecasting a slight decrease in mature product revenue due to the expected booking rate from our aerospace test and instrumentation customers.

As in prior quarters, our actual results may vary significantly due to schedule variations from our customers which are beyond our control. The schedule changes for existing opportunities and projected production start dates for new opportunities 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 45% plus or minus 3%. Gross margin is driven primarily due to the mix of customers and products shipped. We are currently forecasting non-GAAP operating expenses to be $6 million plus or minus $300,000. Non-GAAP R&D expenses are forecasted to be approximately $3.6 million. The increase in engineering expenses is due to outside services costs related to new chip development and new hires within the engineering organization.

Our non-GAAP SG&A expenses are forecasted to be approximately $2.4 million. Our other income, expense and taxes will be a charge of up to $60,000. At the midpoint of our guidance, our non-GAAP loss is expected to be approximately $0.08 per share. Our stock-based compensation expense during the third quarter is expected to be approximately $500,000. We expect to use approximately $3 million to $3.5 million in cash. The forecasted cash usage, primarily due to the increase in operating expenses related to new chip development, which includes higher headcount and outside service expense, as well as capital expenditure.

Before we move to the question-and-answer section of today's call, let me turn the call back over to Andy for his closing remarks.

Given the unexpected decline in the display bridge revenue we are forecasting and the customer production timing of our smart collectivity and sensor hub solutions, I believe it will be difficult for us to report a significant new product revenue increase year on year. However, we continue to develop traction in smart connectivity and sensor hub applications, and I believe we are well positioned to establish ourselves as a leading supplier in a rapidly growing mobile sensor hub market.

Due to the quality of our team, the depth of our roadmap and our engagements in top-tier mobile OEMs, I remain very optimistic about QuickLogic's future.

We'll now open up the call for questions.

(Operator Instructions). Krishna Shankar, ROTH Capital.

Yes, Andy and Ralph, congratulations on the design win momentum and the progress of the platforms. You talked about several design wins which may put -- towards which you may ship production shipments in Q4 in the sensor hub and also display bridge for the top-tier consumer-electronics company. Will all these new production shipments contribute to perhaps growth in new product revenue sequentially in the fourth quarter?

Well, you know, Krishna, we are not in the habit of trying to give guidance beyond Q3. We are encouraged about the momentum we're seeing in our design win activity, especially in the areas of our new products, the sensor hub and the display bridges.

Okay. And then you also talked about -- so most of the customers who are evaluating your sensor hub, it looks like they are moving to the S2 platform; is that right?

A lot of them are moving to the S2 because of its increased value proposition that I tried to highlight in the call, that's correct.

Okay. And then, there have been a number of acquisitions in the industry by Logic players acquiring standalone software and algorithm companies. One of them was Sensor Platforms with which you had a strategic relationship. So can you talk about the industrial landscape going forward with some of these independent software and algorithm companies being part of Logic companies and what your strategy would be?

Sure. You know, our strategy has always been to do a mix of partnerships, outsourcing and developing our own. As you hopefully gleaned from the conference call, we have been very aggressively increasing the depth and the breadth of our own group as some of these acquisitions take place.

I guess if I were to specifically comment on the SPI/Audience thing, all I can say at this point is we are having very interesting and good talks with Audience executive management, and it would really be premature to say where that will go in the future. But I can tell you we are in conversations with them as we speak.

Okay. And then in 2015, do you think sensor hubs are the programmable connectivity? What could contribute in terms of revenues to a larger extent in 2015?

Well, I think again this may fall in the same category of trying to give guidance out beyond our current quarter. But it's clear that our design activities is being dominated by sensor hub opportunities and sensor hub opportunities that can, in fact, integrate more connectivity functionality.

Great. Thank you.

Thank you.

(Operator Instructions). Gary Mobley, Benchmark.

Thanks for taking my question. In your prepared remarks, you talked about your relationship with Samsung and having ongoing engagements with Samsung. Was that in relationship to additional video bridge use cases? And then maybe you can expand on that and talk about what from a video bridge perspective might be different for future design wins versus what you have done with them so far?

Gary, this is Brian Faith. I'll take that question. As you are probably aware, we're under a very tight NDA with Samsung, so we can't really get into more specifics at this point about what the designs are including. But needless to say as we characterized earlier, there are multiple ongoing engagements.

Okay. And looking at your R&D expense guidance for Q3, I don't know exactly what the percent increases on a sequential basis is, but there is an increase there, correct? And you can share with us what are the specifics on the increase? Is it relating to a specific development on the ArcticLink for S3, or is it algorithm development? Anything you can share with us would be helpful, thank you. That's it for me.

Yes, so the engineering expense increase is driven by two factors. One is we are aggressively hiring in our engineering organization. So part of the increase is related to new hires.

The second part is we outsource a lot of the backend design and development work. So when we are doing a new chip, our outside services costs will go up significantly for anywhere from three to six months and then it'll moderate. So that's what you're seeing in the Q3 guidance related to the increase in engineering expenses.

All right. Thanks, guys.

[Robert West], [Oak Grove Associates].

Hi, Andy. Thanks for taking the call.

Our pleasure.

Andy, I wanted to start with a question on your ArcticLink 3 S1 sensor-hub revenue or prospects, I should say. Is your revenue catalog sensor revenue coming up to expectations for the second half at this point? As I recall, the catalog sensor hub would really be the lead revenue you saw it earlier for sensor hubs in the second half. Can you give us some color on that?

I think I tried to address this in my closing remarks when I said that you know we have been maintaining up until this call that we should see significant new product revenue increases in 2014 over 2013, and we don't believe that anymore. And there are two factors behind that.

One is the really what has been an unexpected decline of display bridges, and there's also the customer production timing in both smart connectivity and center hubs. I can tell you that in my opinion, we are executing ahead or -- on or ahead of plan on all our engineering tasks. The thing that we can't control is customer schedules. But I can say that all customers that we are engaged with continue and we are not losing any customers. It's simply a matter of timing.

Okay. So it's not creating any competitive losses here then?

There's no competitive losses.

Great. I wanted to ask a question on your new product revenue guidance for Q2. Given that Samsung was $1.8 million of revenue in Q2, it would appear that you have no Samsung revenue or very little in Q2. Would that be a correct assumption? I mean Q3, excuse me. Would that be a correct assumption, Ralph.

Bob, we don't break it out that way. We'll give it to you on an actual basis as we go forward in the October call. But for guidance, we're not going to break it out that way.

Okay. That's fair. Now it sounds as though you've made tremendous progress in the development of algorithms, but have been pretty quiet about it. You did address this also, Andy, but could you give us more color on this and the engineers you've hired to expand the software group?

Well, all I can say is that we've been aggressively hiring. I would rather not give out the raw numbers. I don't think that that's really appropriate. I can tell you that there -- we probably hired more PhDs in this company than any single time since I've been here, and the talent we're hiring, I'm really impressed with.

As you know, we've got a new VP of Engineering Max Bouvat-Merlin, who is doing a phenomenal job. As you may know, he comes from Qualcomm, and he's bringing a lot of rigor of a large company into QuickLogic, and I couldn't be happier.

I can also say I think with pretty good certainty that we are well ahead of schedule in terms of developing our own algorithms than I thought we would be at this point in time. So I feel very encouraged about that.

Thank you. A follow-on question to that. You know, there's been an enormous amount of intellectual property patent type filings in this whole area of sensor hubs. So is this going to be a barrier to development in the future, or how are you approaching your intellectual property protection, Andy?

Well, needless to say, we have patent attorneys that back up our Chief Council, and we take a hard look at this. And I can also say that we also look for opportunities to do patent filings ourselves. And I think we talked about one that has already been filed in terms of our Flexible Fusion Engine that's used in both the E1 and the S2. So it's something we are very mindful of, and I can tell you so far it's not been an impediment at all in our development efforts.

Okay. Very good. My final question I think is this. Do you expect any ArcticLink 3 S2 revenue this year?

I think I said in the prepared remarks that a couple of the designs that we have right now, we absolutely do expect production in Q4 of this year. So, yes.

Like we have said all along, we do expect sensor hub revenue production to start in 2014, and we are very much on target to make that a reality.

Very good, Andy. Thank you so much for taking the call.

My pleasure.

Rick Neaton, River Shore Investment.

One question. Have the customers -- some of the customer decisions to move ahead with the ArcticLink 3 S2 from the 3 S1, do you see them pushing out some of their order forecasts that maybe you had expected to occur in the second half?

This is Brian answering that question. So I don't think they are pushing out their orders because they're trying to time that with the L3 S2. The L3 S2 is just coming out, and it's matching up with their own development schedules. So I think it's more a matter of timing with our own project schedules rather than the S2.

And also, I can also add to that and tell you that like we said, we have already sampled the ArcticLink 3 S2, and this has actually been for sampleable revenues. So these have been customers that have actually been buying that part, and this is actually ahead of what we initially planned, which was, frankly, an August sample date for the ArcticLink 3 S2. So we are running about a couple of weeks ahead of schedule on a sampleable product.

Okay. So the 3 S1 sampled last year and some of the customers that sampled it now are moving to the 3 S2. So you're seeing a more accelerated move to production from these customers that have got their feet wet on the 3 S1, is that what you're seeing?

I think that's fair. I think it's also fair to say that the ArcticLink 3 S1 and the PolarPro 3 come from a similar development environment. And our plan always was to put some hardened features and really put out a specific product for sensor hubs, which is really the S2, and we always expected that that would help accelerate our growth.

One final question. Do you see -- as you continue to grow your library of algorithms, do you see now more customer interest in your catalog versus non-catalog versions of these processors?

I would characterize it this way. I think there's customers that are always going to be interested in catalog because they don't have their own algorithms expertise in-house.

Okay.

And so if we have all of our catalogs, there is going to be continued certain available market increases. There's another set of customers that have their own algorithms. Those are going to continue to want to use our integrated development environment that we announced back in Q2, and so I think there's going to be another set of customers that continue in that force as well. So both will be adequately served by different offerings that we have.

Okay. I appreciate that color, Brian. Thank you. That's it.

Krishna Shankar, ROTH Capital.

Yes, Andy, in the past call, you had mentioned an existing android smart phone at a top-tier OEM, which was sort of an existing -- not a socket, not pin compatible, but you hope to win that with features such as LED drivers and infrared TV remote and other set of connectivity features. Is that design win still on track with this top-tier OEM, and will that count towards the revenues this year?

Yes, so that was actually part of the prepared comments as well when we said that we were -- that when we said let me get back to that part of the text. We did say that we were -- have the technical approval, and we have identified an opportunity, and we are now giving that customer our product. And once accepted, then that puts us in line for revenue opportunities, right.

So that's really the PolarPro connectivity platform, right?

That would be PolarPro 3, that's right.

Okay. Great.

Now, of course, the timing of this is also something we are not certain about. We not saying when exactly this will happen because there's still a couple of steps, but we are pleased that now a concrete opportunity has been put in front of us, which is very encouraging.

Okay. Thank you.

Robert West, Oak Grove Associates.

Andy, this may be a follow-up to the last question. Last quarter, you talked specifically about an intercept, and I presume that what you are talking about here and the way you answer the question is that intercept from last quarter conference call, would that be correct?

Yes, that's the same one, Bob. We try and keep giving you progress to events or significant design activity. Obviously we are not covering all of our design activity, only the things that we feel like are material and significant for our investors to understand. So I have attempted to update you on the progress on that event.

One final in that area. Is this opportunity -- has this slipped out any, or is it pretty much tracking what you had expected a quarter ago?

I would say in all fairness that this is taking longer than what we expected. I think that is a very fair comment.

Well, thank you, Andy, and best wishes.

Thank you.

At this time, I'm showing no further questions. I would now like to turn the call back over to Andy Pease for closing remarks.

Well, first I want to thank everyone for your continued support, and I look forward to reporting our strategic progress on our next earnings call, which is scheduled for Wednesday, October 29. Thank you for joining us.

Ladies and gentlemen, that does conclude the conference for today. Again, thank you for your participation. You may all disconnect. Have a good day.