Quicklogic Corp (QUIK) 2015 Q2 法說會逐字稿

Ladies and gentlemen, good afternoon. At this time, I'd like to welcome everyone to the QuickLogic Corporation's second-quarter 2015 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; Sue Cheung, Principal Accounting Officer; and Brian Faith, Vice President of Worldwide Sales and Marketing. At this time, I'd like to turn the call over to Andy Pease, President and Chief Executive Officer. Please go ahead, sir.

Thank you and good afternoon. The conference call is being webcast and a portion of it will be accompanied by a slide presentation. You can access the slides by going to the events section at ir.quicklogic.com.

As was noted in our April 30th 8-K filing, our former CFO, Ralph Marimon, left QuickLogic to accept a similar position with Aviat Networks. This was a very good opportunity for Ralph, and we wish him well.

After careful consideration, we decided to delay appointing a new CFO. Instead, we will invest in bolstering our customer-facing efforts by splitting the roles of sales and marketing and hiring a new VP of Sales. As VP of Marketing, Brian Faith will focus on closing the strategic opportunities he-s been driving, expand our marketing efforts around the EOS platform and lead our newly formed investor relations council.

Brian will also be responsible for business development, including expanding our growing list of ecosystem partners.

While our longer-term plan is to add a CFO, in the interim, we have promoted our Corporate Controller, Sue Cheung, to Principle Accounting Officer reporting directly to me. Sue joined QuickLogic in 2007 and was promoted to corporate controller in 2008. As controller, Sue drives our accounting and financial budgeting functions, and maintains our Sarbanes-Oxley and SEC reporting compliance. Sue holds a PhD in business administration, a masters degree in accounting and is a certified public accountant. With that, please welcome Sue to her first quarterly conference call.

Thank you, Andy, and good afternoon. I am excited to participate in this call.

Before we get started, I'll take a moment to read our Safe Harbor statement. During this call, we will make statements and refer to the presentation slides that are forward-looking. These forward-looking statements and the slides 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 production shipments, 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 and slides. 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 the second quarter of 2015, total revenue was $5 million, which was at the low end of our guidance range. New product revenue totaled approximately $3 million and was impacted by lower-than-expected shipments to Samsung. Mature product revenue totaled approximately $2 million. Samsung accounted for 41% of total revenue during the second quarter as compared to the 39% during the first quarter.

Our non-GAAP gross margin for the second quarter of 2015 was 44% and was above the mid-point of our guidance. The higher gross margin was driven by a more favorable mix than we anticipated. Non-GAAP operating expenses for the second quarter totaled $5.7 million, which was favorable to our guidance. This is primarily due to the timing of engineering-related expenses and a reduction in administration costs. On a non-GAAP basis, the total for other income expense and taxes was a charge of $69,000. This resulted in a non-GAAP loss of approximately $3.6 million, or $0.06 per share.

We ended the quarter with approximately $26.4 million in cash. Cash declined by approximately $1.8 million, which was better than our guidance due to timing of working capital commitments. Our Q2 GAAP net loss was $4.3 million, or $0.08 per share. Our GAAP results included stock-based compensation charges of approximately $491,000 and the restructuring charges of $169,000. Please see today's press release for a detailed reconciliation of our GAAP to non-GAAP results.

During the second quarter, we completed an operational re?alignment initiated earlier in the year. This resulted in a reduction of 9 employees or 9% of our Company's global workforce. Pursuant to this plan, we will incur approximately $300,000 in total severance-related costs. We recorded $169,000 in restructuring liabilities in Q2, and the remaining amount will be accrued during the second half of 2015.

Our total annual cost savings will be approximately $1.2 million with the savings split about 50/50 between cost of sales and operating expense. We will benefit modestly from the cost savings during the second half of 2015 and anticipate the full benefit beginning in Q1 2016. Now I will turn it over to Andy who will update you on the status of our strategic efforts.

Thank you, Sue. Our engagement and design win activity continues to grow. In line with our expectations, we received purchase orders for our S2 from five customers last quarter. However, one order came in late in the quarter, and that pushed the shipment into early July.

Since our April conference call, customer engagements have increased by more than 20%, and we are currently scheduled to support eight unique wearable design wins with production shipments of our S2 platform this quarter. However, volume in the wearable market remains modest and based on our current customer forecasts, we think the growth in S2 shipments will be offset by an anticipated decline in smart connectivity shipments in Q3.

Last quarter, we formally announced our decision to expand our business model to include licensing our SenseMe algorithm library. As noted during our April conference call, we believed that establishing SenseMe license contracts would enable us to secure commitments for QuickLogic Silicon with some customers that initiate with SenseMe.

As it turned out, that is exactly what happened with one of our first engagements. This customer is a well-recognized European company that provides a suite of applications, products and services that track and manage health and fitness data. We have already received additional production orders of our S2 platform for shipment this quarter.

In addition, we have ongoing SenseMe engagements with very large OEMs that all have high brand name recognition. We expect to close one or more of these opportunities this year.

Tomorrow, we will be issuing two press releases. The first is to introduce our new revolutionary EOS sensor processing platform, previously referred to as ArcticLink4 S3. In the second, we will announce our partnership with Sensory, the leading supplier of voice recognition technology.

Brian Faith has spent the last two weeks briefing the technical press and market research analysts on the EOS platform. He will now share an abridged version of that briefing ahead of tomorrow's press release. A PDF version of this PowerPoint presentation will be posted on our IR webpage on Thursday.

Thank you, Andy, and thank you all for joining us this afternoon. Tomorrow's EOS press release will be quite a bit longer and more detailed than our typical press releases. We want our customers, investors and editors to better understand why we believe the EOS platform is a truly revolutionary design approach that supports the need for high computing capabilities at an ultra low power consumption level that cannot be achieved with traditional MCU architectures.

EOS is designed specifically to address the smartphone market where it will be used as a companion to the applications processor and as a true system on a chip, or SOC, for wearable and IoT applications. According to IHS iSuppli, these markets are expected to grow to over 2 billion units by 2019.

The vast majority of the sensor processing applications deployed today require minimal processing power. This means the processing can be done in a typical MCU running at a very low duty cycle and power consumption. The challenge these designers face today is they can't deliver the processor-intensive applications like those shown on the right with the current design approach without increasing power consumption far beyond what they say is a tolerable limit.

The industry standard measure for computing is MIPS. This represents how many millions of instructions are being processed per second. On slide 4, you'll see a chart that plots MIPS across the horizontal axis and power consumption on the vertical axis. The color coding on this chart shows the approximate power consumption levels that smartphone designers find acceptable, unacceptable and in the shaded yellow band, negotiable.

As you can see, a typical Flash-based MCU using an ARM Cortex M4F core moves into the red area fairly quickly. That means to enable the advanced applications that consumers want, smartphone designers will need to take a fundamentally different design approach.

EOS is different, and we believe marks the dawn of micro-power sensor processing. EOS represents a unique, purpose-built multi-core architecture that is optimized for processing sensor data. And from day one, software engineers will be able to implement their designs using a programming environment similar to what they have historically used for MCUs.

Slide 6 shows a high-level block diagram of the EOS multi-core architecture. We designed the EOS platform to run the majority of the always-on, real-time processing in purpose-built hardware and then occasionally use the industry standard ARM Cortex M4 general purpose processor for other tasks.

As compared to previous generations, we have hardened our sensor manager and our patent pending Flexible Fusion Engine in the EOS platform. This radically improves our computing capability, reduces the required silicon area and further lowers power consumption.

As you can see in the dark green block on the right, we also maintained the embedded ultra-low power, in-system reprogrammable FPGA. This provides a unique way to deliver hardware differentiation that is not found in any of the MCU sensor hubs in the market today.

This graph is similar to the one we shared with you during our April conference call. The primary difference is through design optimizations we are now able to target even higher performance with our FFE. The Flash-based Cortex M4 MCUs running at maximum processing capacity take more than 3.5 times the power of the EOS S3. The EOS S3 also has 70% more processing capacity. This combination of processing capacity and ultra?low power, enables smartphone designers to deploy the advanced algorithm-?driven applications consumers want.

Smartphone and wearable device manufacturers are rapidly moving towards applications driven by voice recognition. Sensory is the leading supplier of this technology, with over a billion handsets in the market using its TrulyHandsFree product.

The challenge today is smartphone and wearable device manufacturers need to reduce the power consumption of voice recognition applications. EOS addresses this problem by implementing Sensory's Low Power Sound Detector block in hardware, thereby lowering power consumption by 80%.

This next slide illustrates a typical smartphone system architecture and shows how the EOS S3 platform can be used as a companion to the application processor. In this design implementation, EOS handles the always-on, real-time sensor processing, as well as the always-listening voice recognition applications. This minimizes the need to wake the application processor resulting in lower system-level power consumption.

This slide illustrates the EOS S3 in a wearable, or IoT architecture, using a real time operating system or RTOS. Since there is no need for an application processor in a RTOS system, EOS is used as the host, sensor and voice processor. This means wearable and IoT designers using an RTOS will be able to minimize chip count, cost, and power consumption by using EOS as a system on a chip, or SOC.

We could talk for hours about the EOS S3, but I think Tom Hackenburg from iSuppli sums it up very succinctly in this quote. Power efficient sensor hubs, such as QuickLogic's EOS platform, will be the enabling hardware that allows device designers to quickly and easily incorporate multiple advanced features without increasing power drain. Thank you for your patience in going through our high level briefing on the EOS S3. For those of you with more detailed questions, we will have a longer presentation available on our website at www.quicklogic.com/EOS.

Thank you, Brian. As you might guess, we are enthusiastic about the EOS platform and I think for good reason. I am pleased with the reaction from the technical editors and research analysts Brian has briefed during the last two weeks. As I noted last quarter, we initiated an EOS Alpha engagement earlier in the year with a top five smartphone customer. This Alpha customer remains deeply engaged. We've been very selective in committing resources to these intense engagements, focusing our efforts on the ones that will deliver meaningful feedback and have high ROI potential.

With the experience we've gained from the first Alpha engagement, we're in the process of evaluating a second Alpha engagement with a well-recognized smartphone company. We will continue to enlarge our engagement funnel as we move towards releasing EOS samples later this quarter.

While our focus today is on our sensor processing systems and software solutions, we continue to win new display bridge and smart connectivity designs. During the coming weeks, you'll see press releases covering two recent display bridge wins with Lenovo for wearable products. While we don't anticipate these will drive significant near-term volume, we're excited to be involved with a market leader like Lenovo.

I want to take a few moments to provide you with more color on the realignment program we announced in our press release today. Sue has already provided you with the data you need to model the costs and savings, but that's only part of the story. Our goal was simple -- reduce overhead and increase the percentage of customer-facing and technical employees driving our sensor processing initiative. We achieved that goal. I'd like to turn the call over to Sue who will provide our Q3 guidance and then I will return for my closing remarks and Q&A.

For the third quarter of 2015, we are forecasting total revenue of approximately $5 million, plus or minus 10%. The $5 million in total revenue is expected to be comprised of approximately $3 million of new product revenue and $2 million of mature product revenue. New product revenue reflects continued shipments of our display solutions into the tablet segment. Our expected ramp of S2 production shipments will be partially offset by a decline in smart connectivity CSSP revenue.

As in prior quarters, our actual results may vary significantly due to schedule variations from our customers, which are beyond our control. Schedule changes and the projected production start dates 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 41%, plus or minus 3%. The anticipated decline in gross margin is due to an expected shift in our product mix. We are currently forecasting non-GAAP operating expenses to be $5.7 million, plus or minus $300,000.

Non-GAAP R&D expenses are forecasted to be approximately $3.4 million. The increase in engineering expenses is primarily due to costs associated with the release of our new EOS platform. Our non-GAAP SG&A expenses are forecasted to be approximately $2.3 million.

Our other income expense and the 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 $3.9 million, or $0.07 per share. Our stock-based compensation expense during the third quarter is expected to be approximately $500,000.

During Q3, we expect to accrue approximately $70,000 in restructuring charges. As was the case last quarter, our non-GAAP results will not reflect these charges or charges associated with the stock-based compensation. We expect to use approximately $3 million to $3.5 million in cash. The forecasted cash usage is primarily driven by inventory purchases of certain new products and expenses related to new chip development. Let me now turn the call back to Andy for his closing remarks.

Again, thank you for joining us. Our ArcticLink 3 S2 platform has been well-received by wearable device manufacturers. This is evidenced by the fact we are forecasting production shipments for eight unique designs this quarter and a growing number of engagements that we believe will continue to deliver new design wins going forward.

While this is impressive, the aggregate volume of the wearable devices remains relatively low, and that continues to weigh on our near-term revenue outlook.

Our SenseMe algorithm initiative has been a critical component in our engagements. All of our designs that are scheduled to move into production include our SenseMe algorithms, and we expect it will continue to benefit our sales effort for the S2 and EOS platforms going forward.

We continue to make good progress with our EOS Alpha customer, and with the EOS platform to be formally introduced tomorrow, we anticipate our engagement activity will accelerate. We believe EOS is the right solution for the high volume smartphone industry, and that it enables the next generation applications customers want.

With that, we'll turn the call back to the operator and open the floor for your questions.

(Operator Instructions). Krishna Shankar, ROTH Capital.

Yes, congratulations on the EOS platform introduction. Andy and Brian, I wanted to get a sense for these eight new engagements that you have. I guess you are starting to ship modest volumes to these wearable customers. I think in the last quarter, you had mentioned Telepathy in Japan and also Foxconn. Can you give us some sense for the new customers for these wearables and what the volume opportunity may be over the next several quarters for these wearables, which use the S2 platform?

Krishna, I will take the question about the types of products and then I think Andy will address the outgoing quarters. Basically these are all wearable devices, wrist-worn wearables for these new projects. And previously, we had talked about wearables that were running a high level operating system like Android, but what we are seeing now is some of these engagements moving to smaller form factors and more real-time operating system-based. So I'm actually pretty excited to see that we are getting beyond just the standard Android wearables in this case.

Yes, so in terms of the volume, right now, the visibility, as you might expect, is somewhat limited. One thing I will say is we alluded to this European customer and we hope to be able to announce this customer later this quarter. I think by getting into the more namebrand companies, that will give us an entree to actually hitting the leaders in this industry. And once we get into the leaders in this industry, I would hope that the revenue potential for each one of these opportunities will pick up. But for right now, like I said, it's relatively modest and I think Brian's second spoil in the chart, iSuppli kind of confirms it, sensor hubs in the wearable market is a very thin market.

Okay. And then so you said you had eight qualified engagements. Are you shipping limited volumes to all of them, or where do you stand with respect to the other unannounced partners in that eight?

Right. So of the eight, five we have actually shipped already. So remember we said we would ship five in Q2 and one of them, the order came in so late in the quarter that it really shipped in July. So it has certainly shipped now, but I don't think we can count that as a Q2 shipment.

The others we expect to get purchase orders during the quarter making it a total of eight that we will ship what they are calling production volume. We are trying to be careful not to include preproduction in this. This will be products that will be announced.

Okay. And then I know you just give -- forecast one quarter at a time, but would you expect good sequential growth in Q4 just given these new customers ramping products and perhaps some positive seasonality in the tablet display bridging market in Q4?

Right. Yes, I think we typically only forecast one quarter out and what you are really asking for is can I give more color beyond that. And I think I owe it to the investment community to try to be as open as I can without obviously going through NDA issues or anything else.

I personally believe that this Q2/Q3 time period is really going to be the bottom for us both in new and total revenue. I believe that the S2 will continue to be shipping in increased numbers and I am hopeful that, as we get these namebrand people under our belt, that the volumes should be able to increase in that.

In terms of smart connectivity, I also believe that smart connectivity revenue should stabilize out also in this quarter and that we should see the bottom in this quarter and that should also increase.

I am happy to believe that the display revenue business should increase into 2016 and with the sampling of EOS occurring at the end of this quarter, then we should start seeing production wins that should occur in the first half of 2016. Of course, timing of these things vary and all the comments I think I made really are independent of any political or economic situations that could occur in the world. But I am trying to give you my best view of our business and how I believe it will layer in in the next year.

So production wins for the US also with the Alpha customer you talked about last quarter, you would expect that to potentially materialize in the first half of 2016?

Yes.

That and the second top-five customer that you announced today?

Right, right. Yes, so if you think about it, this Alpha customer that's -- this EOS Alpha customer has actually been working with us for probably a couple of months in that we have a emulation platform actually emulating the chip because they obviously don't have working silicon, which will be provided to them this quarter. So once they have working silicon, then we go through the normal design process. And I think most people on this call understand that smartphone design processes can take anywhere from 6 to 9 months.

Great. Thank you.

Gary Mobley, Benchmark.

I had a question about EOS and how it differentiates from the S2. From a customer perspective and from an end-market perspective, correct me if I am wrong, but is it transformative for the Company from the perspective that it allows you to address the smartphone market more aptly versus what you had in the S2 product portfolio, which was for the most part confined to wearable device-type design wins?

Yes. I think that you hit the nail on the head, Gary. When we first came out with the S2, we believed that the market would need to have always-on context awareness and that the MCUs could not do that as these applications got more complicated. It turned out that the MCUs could handle that with very low duty cycles. In other words, they are mostly off as opposed to on and also you are dealing with a phone that had a much bigger battery. And we talked about this at the beginning of this year that the S2 was really very well-suited for the wearable market, especially the [non-Androidware] wearable market.

We also said as we were trying to tell people about the S3, what we were calling the ArcticLink4 S3 probably a year ago, that that was always being targeted for flagship smartphones. And I think you can see from the architecture -- the brief architectural description that Brian gave you -- that this is every bit of what MCU guys are doing and then some.

We call it a multi-core because it has three hard cores and we can also put a fourth hard core in the programmable logic and so the possibilities and the capabilities of this product are really amazing. And frankly, the real technical savvy, technical press people that have heard about this are really amazed that an FPGA company has come up with this type of programmable really SOC. I think this is the first true SOC that QuickLogic has ever done and that's why I'm very excited about it.

Okay. Could you give us an update on the longevity and the health of your video bridge design win with Samsung?

I'll let Brian take a stab at that.

Yes, I will speak in general terms because, due to nondisclosure agreements, I can't be specific about Samsung's business or their roadmap. But I will say that, in general, when we look at all of our customers that we are selling the bridges into, the display bridges, we do see that going well into 2016. We continue to get new designs, as Andy mentioned. The designs we do have we keep getting forecasts that are solid for and so we are optimistic that's going to go well into 2016.

Okay. I see on your balance sheet you have a new line item, deferred revenue, of about $150,000. Is that indicative of the upfront license payment for the algorithms and is there any ongoing royalty component to it? And if not, could you maybe talk about how you can transform that seemingly fairly small license payment into something more meaningful from a revenue contributor whether it be in the form of royalties or actual parts?

Yes, so I'm going to let Sue take a stab at that.

We have very little software revenue in the Q2, but I'd like to say that we have (inaudible) or a software revenue recognition policy that we have three main components. First, we have the fixed range of maintenance and support portion, which we recognize over the term of the contract. And the major part of it is the license fee. We recognize in the quarter that we invoice the customer. The third part is royalty revenues that we recognize the quarter after a customer ships their products.

Yes, we've spent quite a bit of time with our auditors structuring a software licensing policy that would be obviously conforming and that's why we divided it up into these three buckets.

Okay, all right. That's helpful. Last question for me relates to the cost-cutting initiative. The handful of employees that were laid off, was that sort of across-the-board administrative squeezing, so to speak, or is it specific to a project that was not going to generate a sufficient ROI?

Yes, that's a good question. So of the nine employees -- seven of them were actually what we would call in the SG&A category, mostly in operations with a few in finance and there was two people that we would call technical, although we are going to replace one of them down here in that we closed our Canadian operations. We were down to two people in Canada and it cost -- the complexity of maintaining a separate operation in Canada didn't make any sense, especially when we have -- most of our engineering is either in India or in Sunnyvale.

Okay. All right, thank you, guys.

(Operator Instructions). Rick Neaton, Rivershore Investment Research.

I'd like to go back to some of the color you provided to Krishna when you were looking beyond the third quarter. Two conference calls ago, Ralph suggested that next year would be the likely breakeven year. Is that still the operating goal right now?

Yes, it is, Rick. As a matter of fact, we've done a first rollup of next year. I had the organization do that ahead of when we normally do it and it does show that we will be breakeven by the end of next year given all of the forecasts and so on and so forth.

Okay. And that would be breakeven in quarters by the end of the year, not for the entire year?

That's right. It would be a -- on a quarterly basis, it would be breakeven by the end of the year.

Okay. What is your breakeven point?

Well, so, right now, we see obviously it depends on the gross margin we are getting and it also depends on the timing of the expenses that we have for new chip development because, as you know, we have somewhat of a variable chip development model. But given those things with the restructuring we did, we are down to about $11 million -- $11 million to $12 million per quarter based on a gross margin of 50 points, which, by the way --.

I was just going to say so if you can get back to where you were in 1Q 2014, that would be breakeven versus the small net (multiple speakers)?

Yes, absolutely.

Okay. And you were going to add to your answer?

Yes, now I've lost my --.

Okay. Your cash situation, is it enough to reach that breakeven point in the second half of next year?

Yes, we believe that our current liquidity with both cash and our line of credit will support us to reach that point. Of course, if the ramps of new product shipments exceed our expectations, we may need to reach out for some more working capital. But, of course, I think that would be a great problem to have. But the way it looks right now, we think that we are in okay shape for cash. We are ending this quarter with $26 million.

Okay, I'm a little confused by your comments on smart connectivity. Can you explain how you, on one hand, are growing smart connectivity design wins, but the revenue is not growing?

That's a great question and I will definitely hand that over to Brian.

Yes, I will take that one. So first of all, I think you may know that there have been some fundamental shifts in the demand for PHS handsets in Japan due to some carrier acquisitions going on over there. So that's definitely adversely affected some demand for our connectivity solutions going into those products. That's been offset recently by purchases of certain new products by customers that tend to take single shipments every few quarters and we've had those the last couple of quarters and we see that that is going to stabilize, as Andy said in his other comments. So that explains some of the [machination] that's going on there in connectivity.

Yes, and, Rick, you may recall that maybe a couple years ago as we were going through our design activity before we got into the sensor market, the PHS market was pretty prominent in our earnings call release as we talked about various design activity. So those designs have been shipping for a while now. Now they tend to be bottoming out, as Brian said, mostly because of a shift in carrier and the focus of PHS market in Japan.

Okay. Appreciate that color. One other subject concerns your SenseMe algorithm library. Going forward, are you looking at a lot of licensing activity independent of your silicon going forward? In general, is that part of the color you were giving to Krishna?

Yes. I think that was part of the color we were trying to give. It's definitely a key aspect of our engagement model now with customers. They like the fact that they have options where they can have world-class algorithms in their own systems or in our devices at lower power. It really comes down to a timing question with the customer. They may be at a point in their roadmap where they are willing to spin hardware to adopt these algorithms and our silicon, or they may be at a point where they can't change hardware, but they really still want to have access to the high quality algorithms that we have.

So in the latter case, that's where we will start to see a pickup in the SenseMe licensing and in the former case, that's where we will be having the more vertically oriented solution that includes our software.

How quickly can say a smartphone OEM add the SenseMe library to an existing piece of hardware if it just wants to license your software?

It really depends on the OEM that we are talking about and how familiar they are with the inner workings of the sensor framework in Android. If they are very familiar with that and they have that framework built up and that's their own framework, then it's very straightforward. It's only a matter of weeks, in fact, that they could get that up and running with the help of our technical team.

If it's somebody that is looking to completely outsource everything to do with sensors, including the framework, then that's going to be more like months as opposed to weeks.

Okay. So an OEM with a product launch late this year or early next year could conceivably decide to license SenseMe, but not use your silicon until their next model, is that what you are saying?

That is conceivable, yes.

Right.

Okay. One last question and it's more of a financial or an accounting question. Is there an issue with developing vendor-specific objective evidence for recognizing your SenseMe revenue if it starts to grow?

Yes, we realized that problem. We discussed with our auditors -- so our option action, and we put that into our software license agreement as well, we fixed standard range for our PCS, which is the support and maintenance support portion, so we would be able to carve out this amount from our license revenue, be able to recognize that net license revenue in the quarter we invoice.

Do you anticipate breaking that out on your top line at some point?

Yes.

Okay. Thanks and thanks for allowing me the time -- questions.

Robert West, Oak Grove Associates.

Thank you for taking the call. I wanted to start on the S3, if I could. You indicated that it should sample sometime in the next 60 days. I was looking to see if I can get a little more color on that and like has it taped out yet?

Well, ???-.

Absolutely. And what we've committed to customers, as well as the press that we've been briefing is September 25.

Okay. Very good. So it has taped out then?

Absolutely.

Yes, clearly.

Okay, great. So will you have that in-house for some period of time before it goes to customers, or will it go from you directly to customers or from the fab to the customers?

In the case of these early tapeouts, Bob, we always bring silicon back in-house. We have all the systems and the engineers here ready to do all the verification that they've been preparing for. I will actually remind you that Andy talked about the emulation system that we've been giving out to this top-tier guy already for working with the functionality of the silicon. You can imagine that all of the verification suites are actually built up around that emulation system and so when the silicon actually comes back here, all of the infrastructure will be set up to do a very quick verification so that we can get the samples out to the customer.

Great. Okay. That sounds really good. I'm pleased to hear that. I wanted to come back to the Alpha program with our S3 early access. I guess it's EOS early access, excuse me. Clearly, this program, I presume, was aimed primarily at smartphone OEMs and it sounds like that you have one customer and that it is going to be hard for that customer to, if they've got a 6 to 9 month leadtime, it's going to be end of first half before revenue -- EOS revenue. Is that the way to look at that?

Yes. So I think with the large guys, I think you can certainly go with that timeframe. Once we have the silicon out with the general population, I can tell you that there are a lot of people that have looked at our S2 and said that the S2 does not have sufficient compute capability. They like and they do know about the S3. So with the Alpha customer, I think it is safe to say that they will follow along those lines, for sure.

Okay. That really leads me to the presentation, Brian, that you gave. I wanted to ask you if you'd give me a little more color on the QuickLogic Sensory TrulyHandsFree program partnership and describe that in just a little more detail if you don't mind.

Sure. So one thing I will mention is that the silicon level I talked about, the Low Power Sound Detector Block, that's a Sensory piece of IP that we have developed in our device with their permission by licensing it. That's just the silicon level. If you look at the entire solution, what does that capability give customers? So basically what it does is it allows people to do voice recognition for things like, okay, Google, call Bob West. That entire phrase matching of what I just said can be done deeply embedded at very low power in our device without waking up the apps processor.

The result is that people can have more voice recognition-enabled applications in their products from phones to wearables knowing that behind that silicon is actually a very reputable voice recognition company in Sensory. So it's an ecosystem partner primarily. Customers will continue to license that from them knowing that it can run in very low power optimized hardware from QuickLogic.

Has that been licensed by Sensory and to any other customer?

Yes, the voice recognition software called TrulyHandsFree, they've actually I think got a footprint of we said over a billion smartphones today have already shipped with it. So they've definitely licensed that already for phones and watches. I believe the Moto 360 watch uses that for their, okay, Google what's my step count, what's the temperature today type functionality. And also some of the larger, very large smartphone OEMs also have existing licenses.

How is that implemented? Is that implemented in a unique part, or in the software of the SOC?

It's all based on software and I think that's one of the beauties of the EOS platform is that now we are taking some of these elements that have already been wrung out in production worthy environments and now we are optimizing those for even lower power consumption, which frees up more MIPS of computational capacity to do other algorithms that these OEMs are wanting to do.

Okay. Very good. That sounds like a really unusually good program and a high demand program, potentially.

I can tell you that's one of the most exciting elements of the platform for myself personally and also through the interactions with the press that I've been briefing.

Okay. Let's talk about one more thing. The readiness from maybe a slide, Bob, I don't know which one, I couldn't read them very well, the numbers on them, but anyway the readiness to roll this out. It's a pretty complicated chip, it seems to me, to roll this out and be ready to go say compared with the S2. As I recall, the S2 came out, but the development tools weren't there. It had a lot of stuff that had to be done and it took a long time and that didn't help the revenue ramp any. So how is the EOS different?

Yes, that was sort of a journey back in time there, Bob. I remember when we first launched the S2, I think we had proprietary tools, a proprietary instruction set. We had algorithms that were from a third party and the development system that we have or demo systems actually had to be carried in a large box and plugged into a wall. And if you go now to what we have, I think you can step back and just see the maturity of the development tools that we have available now.

We have -- the software tools for the EOS S3 have direct plug-in to Eclipse IDEs, which is the standard tool that software programmers use. We have our C compiler so you can take standard C and compile it down into our FSE. And the reference designs even recently not just waiting for the S3 now attach to your wrist and can go for hours evaluating the algorithms that we have. So the maturity of the set that we give to customers is so far beyond what we started with. That's why we wanted to draw emphasis to that during that slide presentation.

Well, a follow-on to that, does that suggest that that's ready now, or when will those tools be upgraded for the OS and be ready?

So when we sample the silicon on September 25, that includes more than the silicon. That includes algorithms running on the EOS S3 platform. It includes software tools that we can enable our customers with and it will include the first reference design that falls into the more form factorish category. So all of those are what we call ready for ES. We don't just talk about silicon platforms. We need to talk about the entire stack up for the customer.

What about your wearables and changes need to be made there for this new architecture or this EOS architecture. When will they be ready?

We haven't put a date out for the wearable aspect of that yet. We are going to get the smartphone out first because we know that the smartphones tend to have the longer leadtime to get to market with all the carrier qualifications. But the wearable one is following very close behind and we don't think at this point it's going to hold up any of the engagements we already have out there with wearable OEMs.

Okay. That's good. Thanks for that help. Now I guess one other question, I think a quarter or two back you first mentioned having a C compiler for the S2 and will that compiler -- is that compiler available? Is that what you were saying, that compiler is available for the EOS as well?

Yes. The compiler basically takes C and it compiles it down into the instruction set that we use for our Flexible Fusion Engine and the early prototype of that was available a couple quarters ago. That's also been maturing and the final product of that is ready with the EOS S3 launch. That can also be used for S2. It's basically taking C down to the Flexible Fusion Engine and in some respects, it's independent of the actual platform.

So is it reasonable to take away that the viewpoint that your toolsets are really very near ready to go with the EOS and should be even more ready at the point that the EOS goes to production qualified?

Yes, that's an accurate statement. In fact, again, to deliver the emulation environment to the lead Alpha engagement, we had to have those tools in place to support that. So in fact, the tools were ready a couple months ago.

Right. Want to turn -- Andy, I want to turn my question, if I can, back to wearables for a minute or maybe Brian. It was reported in the press last summer, earlier in the summer and spring, that there had been a cooling off of the wearable euphoria and of course, with the Apple iWatch launch, it caused some pushout or shrinkage -- it caused, it seemed like, some pushout of OEMs' interest in when they launched. Can you add a little color to what you've already said about that? Does this look like, with eight wearables shipping this quarter, five or four last quarter, and the fifth one in early July, does that look like that's beginning to unthaw a bit or is it going to continue to be -- I know you say you don't have the visibility, but when could we see all of a sudden wearables hopefuls getting serious and ramping their launches?

I'll start and then Brian will probably chime in, but I think when you talk about wearables, you need to split it into two markets because it really is two markets. On one hand, you have the high-end smart watches like the Apple Watch or the Moto 360 that really is Androidware. These are $300 and $400 pieces of equipment and they are kind of niche. Certainly all the hobbyists like to have them and actually we would be a companion in that realm.

The other type of wearable is a fitness wearable and frankly, we see an increase in that market and there's a lot of reasons why we think that there will be increase, not the least of which is it's geared towards healthcare and fitness and certainly with the rising cost of healthcare, there's going to be a lot more attention put on that for each individual. Brian, do you want to add anything to that?

Yes, I'll just add that, through a lot of the press briefings I've had recently, we can see that there's a lot of interest behind wearables that are not just smartphones on your wrist. They are more purpose-built wearables that address certain demographics like aging populations in certain countries or children or those types of things that have very specific use cases that these general watches aren't going to embed.

Moreover, I think a lot of people, they get frustrated when watches last the day, like your smartphone and they have to plug it in. We see there's a lot of interest in demand coming for watches that last three days, five days, seven days where you can really where it all day, get an analysis of your body during the day, including your sleep and start giving you recommendations on how to improve your life, not just simple notifications that you receive a text message or an email. And I think those are the ones that are going to be interesting for us moving forward, not just in terms of volume, but also just how it aligns so well with our value proposition.

Bob, I can send you a couple of analyst reports. One says that they believe that the wearable market has gone beyond the hobbyist phase.

Okay. So clearly I have wondered if you'd had some push-outs or some shrinkage in your engagements, but a 20% increase suggests that that has continued to build. Is that the right takeaway?

It is the right takeaway.

Yes, we are not seeing any --.

Okay. I wanted to ask you for a little more color, if I could, on the major Chinese ODM that has an open platform, a smart watch for kids. Is this program shipping now?

Is that one of the (inaudible) shipping?

Bob, are you referring to our previous design win that we talked about?

Yes.

Yes, yes, JUMPY. In fact, two of my kids have JUMPYs.

They do? Interesting.

So is that going to be a broad release or is it going to be China only or will it be in the US? Do you have a feel for that?

I know that you can buy it if you are in the US. I did. And you can definitely buy it in other countries in Asia. I don't know the extent of their rollout plan. I haven't had that conversation with them, but I do know that they are shipping that and they are also looking at what their next generation may be.

Okay. Very good. That's encouraging. Something about that kind of is I think interesting.

Yes, it's a neat little watch.

Okay, thanks for that. I wanted to come to algorithm quality. Historically, and as you should, you've touted the quality and accuracy of your market-leading pedometer.

Yes.

What about the other dozen of algorithms that you have such as -- just in a number of areas. How do they stack up in quality and accuracy as compared to the pedometer?

I would say they are fairly similar to the accuracies of the pedometer. They probably don't need to be as accurate as the pedometer because whether or not you are in your car within one second or three seconds probably doesn't really impact the user experience, but we do pride ourselves in maintaining a very strict key performance indicator target for all of the algorithms.

I will say, Bob, now that you are asking this question, I think the more important thing with our algorithms is that we are designing them for lowest power and to only use the accelerometer in these systems. If we can start minimizing the number of sensors required by the OEM to get good accuracy, there's a win from a battery life point of view. And so it's not just about getting 99% versus 95%. It's can I get in that range and can I extend your battery life a few more hours. That's actually the more important aspect and that's what we are doing.

Okay. Good. That's an interesting insight. So here's the next question on algorithms. Are you to a point that there's willingness by a licensee to adopt SenseMe branding? Will we see a SenseMe inside or conceptually in the future do you think?

That would be my hope and that's kind of the Holy Grail for this licensing from a PR point of view. In the interim, what we are doing is trying to make sure that we have agreements with customers to do press releases because that's sort of the first step in establishing the brand. If we can get to the point where it's SenseMe inside, then I will definitely be ecstatic.

Okay. Okay, great, thanks. Another question on licensing, the licensing program. Can you give us some color on how many engagements you have for licensing? Are you creating an engagement forum like you did the S2 and will do the S3? (multiple speakers)

Yes, we track the engagements the same way, Bob. We treat them with the same level of seriousness. Obviously, the inner workings in there are a little bit different because it's software versus hardware. I don't think we are ready to actually say exactly how many, but I think Andy did mention that there is multiple in his prepared remarks. So multiple in our mind is more than three.

Okay. Good. One more question in the algorithm area. As you -- whether it's a license or put it out as part of an S2 or an EOS device, will you have an ability to upgrade those over time and to -- if and when there will be some issue arise that needs to be fixed, be able to fix it once it's on a customer's wrist or in their pocket if it's a smartphone?

Absolutely. All of the devices that we have, Bob, for the sensor processing are reprogrammable. They are not non-volatile where you can't change the code. So in fact we do this with customers today when we do bring-ups of systems. We can send over the air to them or through email and algorithm update for them to try it on their device. So it's built into part of their process that we are expecting that in the future they may want new algorithms, they may want updates and we have provisions to support that.

Okay. I've got really just one more I want to come back to and talk about if I can and that's EOS pricing and how to think about the revenue generation potential of that product. And clearly to date the wearables volume has been disappointing. But as you move toward the smartphone with the EOS, it seems like the volume, producible volume there is much, much more predictable and -- I was going back and looking at the Android market, the top nine there I guess and if you exclude the Samsung, the top eight and each -- on an average, they are shipping about 12 million units a quarter as an average across all eight, Android people below the Samsung level. That suggests that an order in there could be -- of their leadership phone -- flagship smartphone could be maybe 3 million to 5 million units a quarter. Would that be reasonable or not?

I think if there is a strong brand behind that, then the flagship would be in that range. If it's more of a geographic-oriented phone, then it would probably be a little less than that. But generally speaking smartphones are not built unless the OEM thinks it can ship a million or more units.

Okay.

Dave Mathisen, Taylor Frigon.

Thanks for the little added detail on the EOS and I'll look forward to hearing more about that tomorrow. I wanted to ask a little bit about -- you mentioned that there's two categories or wearables are dividing into two categories, which is something that we've kind of heard from different sources for some time. And I am wondering if there is a -- and I know this is also an emerging area -- but is there -- have you seen a virtual reality?

Am I mistaken in thinking that virtual reality is going to require a lot of sensors and are there some functions beyond voice activation or step counting or these fitness applications that might require sensor hubs either in a smartphone or in a dedicated VR device and can you talk to that, or am I mistaken about that?

Yes, I think, in general, anything that you want to do with a battery, and if you want to have really precise control of movement, those are very good candidates for adding sensor hubs. And so if you look at a VR type system, even if it's line-powered to your PC or laptop or something like that, if it's going to need precise information for movements to give you that user experience, then using a sensor hub or a sensor processor is probably a good idea.

Great. Thanks. And would you say that there -- I don't know if you have knowledge of capabilities that would go beyond what an M4 could reasonably do?

Yes, I think -- I'll go back to one of the slides that I presented. Most of the M4s that are used in these types of environments cap out at around 100 MIPS or so and with the EOS S3, we are getting up to 180 MIPS, so there's a lot of other processing headroom available to add more algorithms to the platform.

Right, okay. Yes, I was just curious. Can you say if you've had any specific queries in the VR department for the sensor capabilities?

I'll say we've had discussions with certain customers regarding that type of application, but it hasn't gotten to a serious enough point where we felt it was important to put it into the prepared remarks.

Got it. Thanks. Okay, I appreciate that and looking forward to hearing more with the press releases. Thanks a lot and best wishes as you get through the Q2/Q3 bottom that you mentioned.

Thank you.

I'm showing no further questions on the phone lines at this time. I'd like to turn the call back to Andy Pease for closing remarks.

Well, I want to thank you all for your continued support and I will look forward to reporting our strategic progress at our next earnings call, which is scheduled for Wednesday, October 28, 2015. Thank you.

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