Quicklogic Corp (QUIK) 2015 Q3 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 third-quarter 2015 earnings results conference call. During the presentation, all participants will be in a listen-only mode. A question and answer session will follow the Company's formal remarks.

(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 Marketing.

At this time I would like to turn the call over to Sue Cheung, Principal Accounting Officer. Please go ahead, Madam.

Thank you, operator, and thanks to all of you for joining us today. Before we begin with our prepared remarks, I will take a moment to read our Safe Harbor statement.

During this call, we will make statements that are forward-looking as the forward-looking statements involve risks and uncertainty, including but not limited to stated expectations relating to revenue from our new and mature products, statements pertaining to our design activities, and our ability to convert new design opportunities into production shipments, market acceptance of our customers' products or expected results and our financial expectations for revenue, gross margins, 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 for 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 third quarter of 2015, total revenue was $4.2 million, which was below our guidance range. As we stated in the preannouncement of our Q3 results, our primary reason for this shortfall to guidance was an unexpected and a temporary decline of mature product revenue. As a result, mature product revenue was approximately $1.3 million. Our new product revenue was $2.9 million, which reflects increased shipments of sensor processing and a display bridge promotion that were offset by a larger than expected decline in smart conductivity solutions.

Samsung accounted for [67%] of total revenue during the third quarter as compared to 41% during the previous quarter. Due to lower mature product revenue and a notable increase in display bridge shipments to Samsung, our non-GAAP gross margin for the third quarter was 30% and was below our forecast. Non-GAAP operating expenses for the third quarter totaled $5.7 million, which was in line with our forecast. On a non-GAAP basis, the total for other income expense and the taxes was a charge of $59,000. This results in a non-GAAP loss of approximately $4.5 million or $0.08 per share.

We ended the quarter with a cash balance of $23.4 million. Due to the timing of our working capital needs, cash declined by $3 million, which was at the low end of our forecasted cash usage.

Our Q3 GAAP net loss was $5.1 million or $0.09 per share. Our GAAP results include stock-based compensation charge of $479,000, restructuring charge of $77,000 and $8000 of fixed asset write-offs. Please see today's press release for a detailed reconciliation of our GAAP to non-GAAP results and other financial tables.

In addition, you will also find a financial table published on our IR webpage that provides current and historical non-GAAP data. With that, I'll turn the call over to Andy Pease who will update you on the status of our strategic efforts.

Thanks, Sue. While the temporary decline in mature product revenue of Q3 was disappointing, our strategic initiatives are progressing in line with our expectations. Before we focus on the status of those initiatives, let's take a minute to baseline some of our other activities.

Order flow for our mature products is usually fairly predictable; however, an unusual customer demand pattern led to a shortfall from last quarter's outlook. As Sue will note, we expect mature product revenue to rebound to approximately $1.7 million into Q4. We think that will be the new norm going forward.

As discussed in our July conference call, revenue for the smart conductivity products declined again in Q3. This decline was primarily driven by lower demand for PHS handsets in Japan. At the peak we were supporting five unique PHS handset designs with our smart conductivity solutions, and some of these designs use two of our devices. Due to the market shift away from PHS, we anticipate supporting only one PHS handset design during Q4.

While the decline in PHS demand negatively impacted new product revenue during the last two quarters, we continue to win new designs and believe smart conductivity revenue will begin to rebound modestly in Q4. Our recent smart conductivity design wins include Thinkware and Sharp. These are new customers for QuickLogic, and we hope to win new designs with them in the near future.

Thinkware is a rapidly growing soft ring company. It is the world leader in dash cam video recorders. Thinkware is using our PolarPro 2 solution for smart conductivity applications in two new products -- a dash cam and an automotive navigation device. Dash cam videos of events like meteor showers, earthquakes, floods and plane crashes are common on YouTube and are often used worldwide by news reporters. Dash cams are also gaining popularity for recording vacation memories and are increasingly being used to protect drivers against liability claims following accidents. Thinkware dash cams are available worldwide. In the United States, they are sold at Best Buy, Sam's Club and Amazon.

Sharp selected our PolarPro 3 silicon platform for smart conductivity application in its innovative RoBoHoN design. RoBoHoN also uses V-enabled display bridge for its built-in pico projector. RoBoHoN is a mobile robot phone. While RoBoHoN won't begin shipping until the first half of 2016, Sharp gave in prominent placement at the recent CEATEC tradeshow in Japan and will feature it at CES in January.

If you run an Internet search on Sharp RoBoHoN, which is spelled r-o-b-o-h-o-n, you will find numerous articles and videos.

In addition to our recent successes in smart conductivity, I am also very proud to announce we have won our seventh display bridge design at Samsung. We believe revenue from display bridge designs will continue through at least next year. However, our customers are forecasting a sequential design in overall demand in Q4 that we do not think will be fully offset with increased revenue from smart conductivity and sensor processing solutions.

Before I provide an update on our sensor processing solutions, I am very pleased to announce we have been awarded our first patent for the new programmable fabric design that is used in our PolarPro 3, PolarPro 3E, and throughout our sensor processing platforms. We are aggressively seeking patents to protect our new innovations and currently have several key patent applications that are still pending.

In line with our prepared remarks from last quarter's call, we shifted sensor processing solutions to support eight unique designs during Q3. We expect to support at least that many designs in Q4. This will include initial production shipments to support a new wearable design that will be branded by a major Asian cellular carrier. All of these designs use our sensor processing silicon platforms and our SenseMe algorithm library.

Revenue generated from our sensor processing solutions grew again in Q3. We expect this trend to continue, and by the end of 2016 we believe sensor processing solutions will drive the vast majority of our total revenue.

Supporting this outlook is the fact we are rapidly gaining traction with large OEMs that have high brand name recognition and substantial volume potential in the smartphone, wearable and IoT markets. Today we have engagements and/or design wins with nine OEMs that have high brand name recognition and are top-tier players within their product sectors. We look forward to providing you with more detail on these activities and design wins in the future.

In addition to concentrating our engineering resources on top-tier OEMs, we are narrowing our focus to a select number of large ODMs and IDHs that are actively incubating innovative designs in our target markets. This strategy allows us to leverage our engineering investment across a broad set of end products and markets while focusing our direct design support efforts with large OEMs and the selected ODMs and IDH companies. This represents a major shift from where we were at the start of this year.

Last quarter we introduced you to our new EOS sensor processing platform. Since then we have initiated sampling of the first members of his family, the EOS S3 to strategic customers. This includes our alpha customer, a top-five smartphone company, as well as one other smartphone company with high brand name recognition. We are scheduled to deliver samples and a development platform to a third smartphone company in November that is a top-tier OEM with high brand name recognition.

We also have early S3 engagements with several high-profile wearable device manufacturers that we expect to support with samples and development tools in the near future. We are on schedule to initiate production shipments of our EOS platforms during the second quarter of 2016.

In July I described how our SenseMe algorithm library licensing strategy led us to win an S2 design with a well-recognized European company. Last month we identified this company as Runtastic, which is now a part of Adidas. We are extremely pleased our SenseMe license engagement led us to a production win for our S2 sensor processing solution. We have already shipped orders to support initial production of the Runtastic Moment family of smartwatches. For additional information about the Runtastic Moment and how our sensor processing solutions enabled some of its key features, please see the September 9 press release on the QuickLogic website.

As you know, things change quickly in the tech sector. As recently as 18 months ago, our strategy was to partner with algorithm development companies and focused on silicon solutions. However, after learning our lead algorithm partner would be acquired, we decided to establish an internal algorithm team. The resulting SenseMe algorithm library represents a significant differentiating advantage for us in the market.

Earlier this year we announced our SenseMe algorithm licensing strategy. With this strategy, we can engage with customers that may not be ready to adopt our silicon solutions. As was the case with Runtastic, we think some of these SenseMe engagements will lead to customers using our silicon solutions.

Today we have three active SenseMe licensing engagements with large OEMs. All three OEMs have high brand name recognition and two are sector leaders. I am very pleased to announce that we have received our first purchase order for a SenseMe license from one of these OEMs, and we expect to announce further details on the design once the customer releases his new product in conjunction with CES.

I can't get into the detail right now, but I am excited about the number of new products using QuickLogic's sensor processing solutions that will be displayed at CES in 2016. If you plan to attend CES in January, I encourage you to make an appointment to visit us.

With that, I'll turn the call back over to Sue for our Q4 guidance. Following that, I will rejoin you for my closing comments.

Thank you, Andy. Our guidance for Q4 2015 is for total revenue of $4 million, plus or minus 10%. The total revenue is expected to be comprised of approximately $2.3 million of new product revenue and $1.7 million of mature product revenue, while we expect the revenue from our sensor processing solutions in the smart conductivity applications to increase sequentially in Q4. These increases are not expected to fully offset the reduced shipments of the displaced bridge solution.

As in prior quarters, our actual results may vary significantly due to scheduled variations from our customers which are beyond our control. Schedule changes and the projected productions to our base could push or pull shipments between Q4 2015 and Q1 2016 and impact our actual results significantly.

On a non-GAAP basis, we expect the gross margins to be approximately 42% plus or minus 3%. The anticipated increase in gross margin reflects the impact of product and customer mix. We are currently forecasting non-GAAP operating expenses to be [$16] million plus or minus $300,000. The expected increase in OpEx is primarily driven by engineering expenses associated with the release of the EOS S3 platform and the ongoing development of our EOS hardware and software solutions.

Non-GAAP R&D expenses are forecasted to be approximately $3.7 million, and our non-GAAP SG&A expenses are forecasted to be flat at approximately $2.3 million. Our other income expense and taxes will be a charge of up to $60,000. And at this point of our guidance, our non-GAAP loss is expected to be approximately $4.3 million or $0.08 per share. Our stock-based compensation expense during the fourth quarter is expected to be approximately $660,000. This increase is due to the timing of our annual employee stock grants during Q4. We expect it 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 stock-based compensation and the fixed asset write-offs.

Including the favorable impact of an additional $1 million loan from our bank line of credit, we expected to use approximately $3.8 million to $4.3 million in cash. This was the result in a quarter ending cash balance in the range of $19.1 million to $19.6 million. The increase in cash usage in Q4 is primarily driven by that lower revenue level from the prior quarter and planned increases in our inventory level and other anticipated increases in working capital.

With that, let me now turn the call back over to Andy for his closing remarks.

Thanks, Sue. I'm pleased to announce that Mark Sprague has joined the QuickLogic family as our new Vice President of Worldwide Sales. Mark is an experienced sales leader with more than 23 years of semiconductor and system-level experience. He has a strong track record of consistently exceeding revenue targets, along with his excellent business development, account management and solution selling skills.

Immediately prior to joining QuickLogic, Mark was the Director of Worldwide Sales at Trimble Navigation. Mark has held a variety of sales management positions at a number of companies, including RFMD, IDT, Xilog, AMD, and Marvell. Mark started last week and is in the process of assuming responsibility for our entire sales process. This is key as it will enable Brian Faith to focus his efforts on product marketing, business development and investor relations.

Our sensor processing solutions have generated considerable interest that have enabled us to shift the focus of our go to market strategy to larger brand name OEMs and narrow our focus at ODMs and IDH companies. This is a significant development in our evolution which will enable us to scale our business by engaging in opportunities that have much higher revenue and ROI potential.

As you can see from the steady increase in our R&D activities, we have made substantial investments in our sensor processing solutions. These solutions include sophisticated programmable SoC platforms, a wide variety of sensor software algorithms and a comprehensive reference design for our targeted markets. We expect these investments to establish QuickLogic as a premier supplier for sensor processing solutions in 2016.

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

(Operator Instructions) Krishna Shankar, ROTH Capital.

Yes, Andy. Congratulations on the design win momentum. You mentioned I guess nine OEM customer engagements where you have I guess design activity or joint platform development. Can you give us some sense for how those nine OEMs split between top-tier smartphones versus wearable companies and which of those have you announced already, including this Runtastic Adidas thing? Can you sort of give us a little more color on that?

Well, of the nine, I think that Runtastic is the only one that we have announced, and we have not announced any of the eight others. In terms of a split between smartphone and wearable, most of them are in the wearable market and -- but there are a couple of smartphones in there as well.

And these include both S2 and EOS 3? Can you give us some sense for are you getting more design wins now with the EOS 3, or does it include S2 and S3?

So we are definitely starting to engage customers with our S3 platform now that we've started sampling it, but there are continued activities with the S2 as well.

Okay. And I guess given the timeframe for these design wins, as we look at 2016, we should expect revenues from these sensor processing platforms to ramp more in the second half of 2016?

I think that's a fair comment. We've been maintaining for the past several calls that the EOS S3 is a platform that definitely targets the flagship smartphones market and that that will begin shipping in the second quarter of this year. So that's when production will begin. Meaning that they ramp will be more towards the second half of 2016. That's correct.

Okay. And then with respect to display bridging, I guess seeing a little bit of decline here in Q4 and you said that you've got your seventh design win with Samsung, how is that going to trend through the course of 2016?

In terms of display bridges, the good news is we definitely see display bridge revenue continuing through 2016. However, we do not expect the volumes to increase. Actually we do see a declining volume in some of these products, especially the ones that are in production run their course in production.

Okay. Got you. Thank you.

Gary Mobley, Benchmark.

Hi, everyone. Thanks for taking the question. Andy, correct me if I'm wrong, but isn't the S3 better suited for smartphone use cases versus the S2? And then as well, when you're engaging with potential smartphone customers, how does EOS stack up against some competing types of configuration technologies, such as ARM big. LITTLE and even advances in packaging your 2.5d and 3.5d packaging technology, which I guess may reduce the interconnect between MEMS and the apps processor? Just any feedback there would be helpful.

I think I'll let Brian tackle the second half of the question as I do the first half. But we've been fairly clear throughout the year that the S2 is definitely geared towards the wearable market, and I will certainly admit that a year ago we were hopeful that the S2 because of its always on context to wear nature could fit in a smartphone, and that did not turn out to be the case. And I think we were pretty open with the community earlier this year that the S2 would really go into the wearable market.

The S3, however, is absolutely designed and, frankly, has always been targeted at the flagship smartphone market, and that's because it has the computation capability of being a standalone sensor hub next to an AP. But it also is actually a very good host in the wearable market, and it will complement the S2 very nicely in that market.

In terms of competitive nature, I'll let Brian tackle that.

Gary, so I think in the smartphone space as far as discrete sensor hubs go, we see mostly M4-based solutions today, flash-based microcontrollers. And I hope from the last presentation we did on the earnings call, you can see that there's a dramatic power savings by using the EOS S3 as compared to those, just from a micro lot per megahertz point of view.

Further to that, we've made some special enhancements of the EOS S3 to view always listening voice applications at much lower power. We did that through integrations of certain features like the low-power sound detector from sensory that we feel are fairly well differentiated against any of the other typical MCs used in smartphones.

Getting to your other question about stacking technology or different types of packaging, we see that from a PCB space point of view those are relevant for wearables more so than smartphones. But wearables are also where you have the biggest issue with power, which goes back to the advantage I was talking about earlier compared to those microcontroller-based solutions. So we feel if you really care about power especially in wearables, then the EOS S3 is very well suited for that.

Okay. Thanks for that detail. And trying to establish a new baseline for new product revenue, I think your guidance for Q4 was $2.3 million, and it sounds like you have a moving target for the display bridge business as you were expecting some volume declines as 2016 unfolds. So I'm just trying to get a sense of the magnitude of what sort of headwind that display bridge volume decline may represent in 2016 off the Q4 base. And then as well how that may be offset or more than offset by a ramp in some of the sensor processors?

I'll take that question, Gary. Definitely the display bridge does have some headwind. You can tell from the current quarter guidance. I think that we are seeing quite a bit of activity in the sensor processing, as Andy outlined. We are hopeful that that will overcome some of those headwinds on the display side, but we only forecast or give guidance a quarter out, and I think our OEMs have just as much difficulty forecasting beyond that window. So I think we have to leave it at that for this call.

Okay. Last question for me. The $70,000 restructuring charge in Q3 and the one you are expecting in Q4, what does that relate to? Is that personnel reduction? And if so, in what specific area if any sort of target at all, and what sort of headcount are we talking about at the end of Q3 versus the prior quarter?

Gary, this is Sue. The $78,000 accrual related to Canada employee. With two employees left there, we have a period of six months for them to work until year end. So we accrue that throughout the six months.

To give you some color on the total restructuring charge, Gary, we announced midyear that we are doing a restructuring of about nine people, other than Canada which, frankly, those people will be replaced in Sunnyvale. So we are consolidating our engineering activity to be centric to Sunnyvale and Bangalore, India. But the other people that were involved in the restructuring were really in operations and finance. So we pretty much left engineering untouched as we really are trying to ramp up our engineering. As I think you can definitely see, we are definitely becoming more of an IP company than we have been in the past.

Okay. Thanks for the responses, guys.

(Operator Instructions) Rick Neaton, Rivershore Investment Research.

Andy, are you still targeting the fourth quarter of next year as your initial timeframe at which the Company could breakeven?

Rick, we are targeting that to hit a breakeven by the end of next year. That is what our plan is to do. That's as we see it today.

Okay. And is the breakeven point still the same as it was at the last call? $11 million to $12 million of revenue at 50% gross margin?

Yes. There's no change in those numbers. That's right, Rick. That's how we see things.

Okay. And last quarter, the last call you also mentioned that you thought the middle of this particular calendar year we are saying to be the bottom. Given the uncertainty in display bridge revenue in 2016, should we look at this bottoming process as more ending in Q1 of next year?

Rick, it's hard to have a crystal ball to go into Q1, but obviously this quarter is a little bit less than last quarter. That was at the time that we did the last call something that we didn't anticipate. We didn't anticipate the decline that we see in display bridges at least in their forecast. That could change as we near the holiday season. So clearly we have a bridge to gap to get to the EOS S3 production volume. That is clear. And I think we've always been telling people that that's the bridge that we have to clear since the S2 is only targeted towards wearables. And right now the wearable business does remain small.

I will say, though, that the thing -- and if you noted in our prepared remarks we did say that we are seeing a big shift in the type of customers that we're attracting. So instead of a lot of ODMs and IDHs that can actually amount to high numbers, we're actually seeing names that are absolutely recognizable. And so that will mean more volume for engagement, and I think that's very good news. And that applies for the S2 as well as the S3.

In looking at your SenseMe algorithms, do you see application for them in other Internet of Things markets like automotive, autonomous driving, industrial similar to the way you have your display bridge now in a dash cam?

This is Brian. I'll take that question. We do see the flexibility of some of our algorithms in other segments that are more IoT related, especially as it comes to the multiaxis sensor fusion and the motion fusion aspects of the SenseMe library. Not so much we step counters and things like that because those are very consumable consumer wearable centric, but the under the hood motion fusion definitely can be applied to other industries and other markets.

Okay. Typically you were talking about the EOS being targeted for production in the second quarter and really being a second half of 2016 phenomenon. Typically with smartphone OEMs, what's the lead time that they order products and design slots for new models of their smartphones?

Let's step back and talk about design cycle and ordering cycles. So from a design cycle point of view, I've met with customers that will turn out a smartphone in six months from the point of engagement all the way up to 18 months, really depending on the type of customer and where you are inserted into the design flow. The sensor processing capability like this EOS S3 is something that's going to be architected in early on in the architecture, which is why it's so important that we were able to get the [Alamosa] out on time, the S3A sampling as we did to the smartphone customers we were talking about.

When it comes to purchasing devices, this also varies by OEM. They can give you four weeks of lead time or some of them can give you a couple of months lead time when it comes to forecasting and purchase orders for units. And, again, that varies very much by the OEM.

Okay. Thanks, guys. Appreciate it.

Thank you. At this time, I would like to turn the conference over to Andy Pease for closing remarks.

Before we conclude this call, it is with great sadness that I share with you the passing of Evelyn West, the long time spouse, companion, and soulmate of Bob West. I met Bob about seven years ago, and one of the great aspects of being in this business is you get to meet some clearly extraordinary people. And Bob is certainly one of those people.

Over the years, Bob has become more than just a business associate to me, and I am honored to call him my friend. Please join me in letting Bob know that he and his family are in our thoughts and prayers.

We will be participating in a number of industry events during the next three months. Dr. Timothy Saxe will be presenting at the Wearable Sensors and Electronics Show in Santa Clara November 16 and 17. Sue and I will be at the ROTH Technology Corporate Access day in New York on November 18. Sue and Brian will be at the Benchmark Microcap Discovery Conference in Chicago on December 10. We have our largest private suite ever at CES in Las Vegas on January 6 through the 9th on 2016. Both Brian and I, along with several of our other key executives, will be there, and we would love to see you there.

And finally, Sue, Brian and I will be at the Needham conference in New York on January 12 through the 14. Details will be included in our upcoming media events. I want to thank you all for your continued support, and I look forward to reporting our strategic progress on our next earnings call, which is scheduled for Wednesday, February 10, 2016.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone have a great day.