Quicklogic Corp (QUIK) 2017 Q1 法說會逐字稿

Ladies and gentlemen, good afternoon. At this time, I'd like to welcome everyone to QuickLogic Corporation's First Quarter 2017 Earnings Results Conference Call. (Operator Instructions) Today's conference call is being recorded. At this time, for opening remarks and introduction, I would like to turn the call over to the company's Investor Relations representative, Ms. Cathy Mattison of LHA. Ms. Mattison, please go ahead.

Thank you, Vicki. Welcome, everyone, and thank you for joining us today for QuickLogic's First Quarter 2017 Results Conference Call. With us today from the company are Brian Faith, President and Chief Executive Officer; and Sue Cheung, Chief Financial Officer.

Before we begin our call, I will read a short safe harbor statement. Some of the comments QuickLogic makes today are forward-looking statements that involve risks and uncertainties, including but not limited to stated expectations relating to revenue from new and mature products, statements pertaining to QuickLogic's future stock performance, design activity and its ability to convert new design opportunities into production shipments; timing and market acceptance of its customers' products; our future evaluation systems; broadening our ecosystem partners, expected results and financial expectations for revenue, gross margin, operating expenses, profitability and cash. I'd like to remind you that these statements must be considered in conjunction with the cautionary warnings that appear in QuickLogic's SEC filings. Investors are cautioned that all forward-looking statements in this call involve risks and uncertainties and that future events may differ materially from the statements made. For additional information, please refer to the company's Securities and Exchange Commission filings, which are posted on its website are available from the company without charge.

The conference call is open to all and is being webcast live. We will start today's call with the company's strategic update from QuickLogic CEO, Brian Faith. Then, Sue Cheung, CFO, will review first quarter 2017 financial results and provide financial guidance for the second quarter before Brian's closing remarks.

At this time, I would like to turn the call over to Brian Faith, President and CEO. Please go ahead, sir.

Thank you, Cathy, and thank you all for joining our quarterly conference call. We have made significant progress since our last conference call in strengthening our balance sheet to support our strategic growth initiatives and sensor processing solutions and eFPGA intellectual property licensing. With this progress, I remain optimistic that we will realize our goal to grow revenue by at least 50% in 2017. I am also optimistic that we will be in a position next quarter to provide more color regarding design wins that we believe will drive the second half revenue growth necessary to realize these goals.

Let's start with the balance sheet. On March 28, we completed an equity offering raising $17 million of gross proceeds and closed the quarter with a cash balance of $26.7 million. We evaluated several alternatives, including non-dilutive options and chose the fastest and lowest risk option. Due to the fact our EOS S3 sensor processing solution is a proprietary platform, large OEMs will evaluate our ability to support their anticipated production ramps with much higher scrutiny than they have when designing in our multisource solutions like display bridges.

By increasing our cash now, we have mitigated the risk of our balance sheet becoming an issue as our engagements with top-tier OEMs move forward. In addition to this, several potential ArcticPro embedded FPGA IP customers have asked us to accelerate certain roadmap items that will better position us to support their needs and broaden our engagements with semiconductor companies and OEMs.

Let's move to our eFPGA IP licensing initiative. Last quarter, we signed an IP license agreement for our ArcticPro embedded FPGA technology with a second top-tier foundry. We have since completed the tape-out of our test chip with this foundry and have initiated engagements with potential customers. We also released our Aurora eFPGA software tools, which complements our previously released Borealis software tools. Aurora supports eFPGA design implementation from RTL through place and route. This provides SoC and ASIC developers the ability to easily determine the amount of eFPGA resources needed to support a given design and calculate the estimated die area associated with those resources. Aurora supports industry standards, including Mentor Graphics' Precision Synthesis and standard EDA simulation tools, such as MCSim, DCS, Questa and ModelSim.

During the past month, we were invited to and participated in the 2017 SMIC Advanced Technology Workshops in Shanghai, Santa Clara and Hsinchu, Taiwan, where our ArcticPro eFPGA IP solutions were very well received by potential customers. Most importantly, we have increased the number of significant ArcticPro eFPGA engagements since our last conference call and believe we will win additional IP license agreements this year.

Now let's move to sensor processing. Last quarter, I mentioned our wearable design win with a tier-1 smartphone OEM moved forward to user testing. The customer is pleased with the performance of our EOS S3 sensor processing platform, but has decided to upgrade one of the sensors to further optimize battery life. This change does not impact the continued use of the EOS S3 in the design. While the delay in the production release is frustrating, we remain optimistic about the volume potential, and we are very happy to be included in a design that we believe will receive extensive media coverage. Since we do not have a formal release date from the customer yet, we have not included revenue for this design win in our guidance. However, we believe the launch could be with short notice. In addition, we continue to make solid progress with other top-tier smartphone wearable and IoT OEMs. During this quarter, we expect multiple smartphone OEMs will move to the printed circuit board, or PCB, stage of the engagement process. In this phase, OEMs use internally developed PCBs to evaluate the performance of our EOS S3 sensor processing platform while running the software and use cases they have slated for their targeted smartphone designs.

Our hardware integrated Sensory TrulyHandsfree technology enables us to offer best-in-class low power consumption and continues to be one of the primary drivers in recent engagements with large smartphone, wearable and consumer IoT OEMs.

During Q2, we will enhance the voice trigger and voice recognition capabilities of our EOS S3 sensor processing platform with the integration of acoustic echo cancellation technology, which is commonly known as AEC. AEC significantly improves the ability of a smartphone, wearable or IoT device to recognize a voice trigger and the ensuing user commands in noisy environments. This in an enabling technology for always-on voice in a number of common use cases. An example of this would be enabling a smartphone wearable or an IoT device to recognize a voice trigger at the same time it is being used to play music. With AEC, you could be streaming Pandora from your smartphone and still use your voice to trigger your smartphone to bring up navigation without muting the song or looking away from the road.

Let's focus for a minute on additional markets where we are gaining traction. These include voice-enabled IoT products, new wearable devices being developed by app companies and the emerging market for smart hearable devices. At Consumer Electronics Show in January, we introduced a voice-enabled IoT demo that attracted the attention of several potential customers. We have since leveraged this to initiate a new engagement with a top-tier IoT supplier. While I cannot share further details at this time, I am optimistic about the prospects of this engagement.

Last quarter, I mentioned several major app companies are in the process of expanding their business models through the development of new hardware products that are designed to leverage their already widely deployed software applications. This trend has enabled us to leverage the relationships we have built with app companies prior to their move into hardware designs. And as a result, win new designs on a relatively fast track.

During the last conference call, I announced a wearable design win with one of these large app companies. This app company has since selected an ODM for production. We are working closely with all of the parties involved to support the targeted production ramp in late 2017.

During the last few months, we expanded what started as a technical evaluation with a second large app company to a design engagement for a new smart hearable devices that requires always-on voice recognition and ultra-low power consumption. We believe our EOS S3 sensor processing platform is uniquely positioned to win this design. The hearable device category has received quite a bit of attention during the last year. Some analysts predict the market for hearable devices will grow to approximately $17 billion by 2020 and represent over 50% of the entire wearable market. One of the primary drivers for this anticipated growth is expected to be a new generation of smart hearable devices that will begin hitting the market late in 2017. Smart hearable devices will include various combinations of always-on voice recognition, biometric sensors and motion sensors. The inherently small size of hearable devices increases the importance of selecting semiconductor solutions that optimize PCB space and lowest possible power consumption. We believe we are very well positioned to address this emerging market.

With that, I'll turn the call over to Sue, who will cover our financial results for Q1 and provide our guidance for Q2. Following that, I'll return for my closing comments, and we will open the call for your questions.

Thank you, Brian. Good afternoon, and thanks to everyone for joining us today. Please note that we are reporting our non-GAAP results here. You may refer to the press release we issued today for detailed reconciliation of our GAAP to non-GAAP results and other financial statements. We have also posted an updated financial table on our IR web page that provides current and historical non-GAAP data.

For the first quarter of 2017, total revenue was $3.2 million, reflecting the benefit of a customer's [pull in], which was recognized earlier than expected. Our new product revenue was approximately $1.9 million, and the mature product revenue was approximately $1.3 million. New product revenue contribution increased to 60% of the total revenue compared to 54% in Q4 and 51% in Q1 2016. Samsung accounted for 22% of the total revenue during the first quarter compared to 29% during the previous quarter, reflecting the seasonality of the consumer tablet market and expanding customer base of our display bridge solution.

Our Q1 gross margin was 44% compared to 33% in Q4. The increase is primarily due to the portion of eFPGA IP license revenue recognized in Q1 and the favorable mix of the customers and products shipped during the quarter. As we continue to broaden our customer base and grow new product revenue, we expect the margins to trend higher.

Operating expenses for Q1 totaled $4.6 million, which was flat sequentially and 18% lower year-over-year, reflecting the cost reduction associated with the strategic realignment that we implemented in the second half of last year.

The total for other income expense and the taxes was a charge of $61,000. This resulted in a net loss of approximately $3.2 million or $0.05 per share. The net cash usage during the first quarter was $3.9 million as we increased the inventory and other working capital needs in anticipation of new product launches in the second half of this year.

As mentioned by Brian earlier, we completed an equity offering on March 28, raised $17 million of a gross proceed and closed the quarter with a cash balance of $26.7 million. The pricing of this year's issues in the offering was roughly a 12% discount to the trailing 60-day volume weighted average price at the close. Over 30 institutional investors participated in the offering, several of whom acquired 10% or more of the offering shares.

With our strength in the balance sheet, we are in a good position to support our anticipated growth and meet the demands of our potential customers.

For the second quarter of 2017, we expect the revenue to be approximately $3.2 million, plus or minus 10%. The $3.2 million in total revenue is expected to be comprised of approximately $1.8 million of new product revenue and $1.4 million of mature product revenue.

On a non-GAAP basis, we expect gross margin to be approximately 44%, plus or minus 3%. As was the case in Q1, we expect our gross margin to benefit from IP licensing revenue recognition and a favorable mix of customers and products offset by unfavorable absorption of manufacturing overhead.

We are currently forecasting non-GAAP operating expenses at approximately $4.6 million, plus or minus $300,000. We expect our non-GAAP R&D expenses to be approximately $2.3 million and non-GAAP SG&A expenses to be approximately $2.3 million. We expect our other income expense and taxes will be a charge to up to $60,000. At the midpoint of our guidance, our non-GAAP loss in Q2 is expected to be approximately $3.3 million or $0.04 per share. As was the case in prior quarter, the primarily difference between our GAAP to non-GAAP results is our stock-based compensation expense, which we expected to be approximately $400,000 for the second quarter.

In Q2, we expect to use between $3.8 million and $4.2 million in cash, which is net of onetime financing fee related to the March equity offering. The forecasted cash usage will be primarily driven by working capital needs, including inventory buildup for future sales. As in prior quarters, our actual results may vary significantly due to things that are beyond our control, such as scheduled variations from our customers, scheduled changes and projected production start days could push or pull shipments between Q2 and Q3 2017, and they impact our actual results significantly.

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

Thank you, Sue. We expect 2017 to be a pivotal year for QuickLogic. We are already establishing ourselves as a technology leader in ultra-low power sensor processing and is one of the most credible sources for its licensing embedded FPGA technology. With our strength and balance sheet, we are well positioned to accelerate our technology roadmap and fund the working capital necessary to support our anticipated growth.

I have been with QuickLogic for over 20 years, and I can say without hesitation that I have never been more optimistic in the future prospects for the company. Thank you, again, for joining our conference call. Operator, we can now open the call for questions

(Operator Instructions) And our first question comes from the line of Gary Mobley with Benchmark.

Brian, I realize that you don't have perfect visibility into what drives second half revenue growth leading to 50% overall revenue growth for 2017, but could you still weigh the different contributors to that growth between S3 and eFPGA and maybe some of the legacy products as well?

Sure. I can provide a little bit of color on that. I think publicly we said that a good model for the mature business is to keep it roughly flat from where it's been historically over the last couple of quarters. We also see display bridge sort of normalizing to where it's at today, plus or minus a little bit around $1 million a quarter given the quarter and that's driven from the fact that we're still shipping to Samsung as we said publicly in addition to these new design wins that we've already talked about and continue to ship with too. The real growth here in the second half and what gives us the optimism around the 50% or greater than 50% revenue growth are the 2 new product factors such as sensor processing and eFPGA. And share point, we don't have a crystal ball. We do have the funnel. With both of those combined that gets us to that number. A lot of this is going to come down to the timing of the decision of these OEMs and when they launch these products. As we all have been talking about for the last couple of quarters. So it all starts with the funnel, and we have the funnel that covers that growth and now it's about execution and timing of the OEMs.

Okay. There is -- in your balance sheet, you have a deferred revenue item for the first time. It's not a large amount, but I'm assuming it's relating to the eFPGA and maybe some NRE [easier] you're collecting from your foundry partners. Is that indicative of both of your lead foundry partners offering to their customers, the ability for this embedded logic? And how would you sort of gauge the licensing pipeline from your vantage point for eFPGA?

First of all, what shows up on the deferred revenue line, you're right, there is -- the lion’s share of that is the embedded FPGA IP licensing. We haven't said if it's one foundry or both foundries that we've public announced that we are working with nor is it representative of the total deal size for the license because some of that was obviously recognized in Q1 and some will be in Q2 and so on. That being said, the magnitude of that license is representative of what you would probably see moving forward with licenses to semiconductor companies. And I just want to be clear that the license for this foundry, in particular, is not given them the rights to sub-license that to somebody else. We will be having our own license arrangements with semiconductor companies or with OEMs doing ASIC separately from the one that you see on the deferred revenue line there.

And our next question comes from the line of Richard Shannon with Craig-Hallum.

Brian, Sue, let me start with your discussion about your Q1 win that you talked about for, I think, a couple of conference calls now. Just to be clear Brian, so you have not lost the socket, but I wonder if you can discuss whether you think it's possible to see those ramping up by the end of this quarter? Are you dismissing that notion? Clearly dismissing it in guidance, but is it still possible to happen this quarter?

I would say it is possible. It's not out of the realm of possibilities, the OEM does move fast. We know that they are changing a sensor as I put in the prepared remarks. I don't think that's going to be a long cycle for them to do that and change the spot on the PCB and do the associated software. And to be very clear, no we have not lost this to anybody else. This is a design change that they're making, and we are still the plan of record as we host processor with EOS S3 in this wearable device.

Okay. Great. Sorry to interrupt you, Brian, have you got any indication that the unit outlook of the product has changed over -- since the last conference call?

Richard, your audio is a bit choppy. Can you repeat the question, please?

Any indication that the unit outlook that the customer has for this over -- for 6 or 12 months or whatever the time frame is, has that changed at all?

No, the unit outlook has not changed at all. And as I put in the prepared remarks, I'm actually optimistic about understanding a little bit more how they're planning to bring this to market because I think there'll be some good news associated with that and I also think that contributes to them maintaining their idea about the unit forecasts.

Okay. Perfect. That's good to hear. Let's see here. Maybe I missed this in the prepared remarks, but the second quarter revenue guidance -- have you -- are you including any expectations for licensing revenue in there? Or is it just completely product revenues?

Richard, yes. We said, include the IP license -- portion of our IP license in 2Q guidance.

Okay. Can you give us a sense of how big that might be quantitatively or compared to the first quarter?

Will be more than rest of the quarter. So apparently if I don’t tell you the number you will see that at the end of the quarter from our balance sheet that deferred revenue will reduce.

Okay. Fair enough. One or two last questions from me on the topic of embedded FPGA. Brian, it sounds like you're getting a lot more traction and interest in the technology. I think you mentioned something about accelerating roadmaps. I wonder if you could give us a little bit more detail on exactly what you’re being driven to by customers. This -- is driving the current technology ArcticPro faster into markets. More customers that are actually asking you to change and enhance the technology for new applications.

I'll be happy to give a little bit more detail into that Richard. So first of all, just so everybody understands, when we talk about semiconductor IP, generally, it falls into 2 categories. One is a RTL-type IP, which is very easily portable from foundry to nodes with very little work. There is also a physical IP or a hard macro, which is very dependent on the foundry and process combination. FPGAs fall into the latter category, which means that we do have to invest for each foundry and process node that we deliver as an embedded FPGA IP. Therefore, today, you have seen in our roadmap that we have already done FPGA in 65-nanometer, 40-nanometer. We have announced 22-nanometer with GLOBALFOUNDRIES. We have also announced the second foundry in addition to GLOBAL for 40-nanometer. Now getting back to your question, Richard, on what is kind of pulling us in this direction for roadmap acceleration, we do have interest now from people going into 55-nanometer technology. 55 is a new process node that we would have to develop as this hard macro, picking the foundry that we want to put it in first and then going off and doing that development. So this is nowhere near the cost of doing an actual chip design like the SoC of S3, but our cost associated with that in terms of layout and test chips and boards to verify that. So those are the types of things we're talking about from a process point of view, which is really applicable, if you think about what 45-nanometer is used for today. It's a very -- I'd call, a workhorse node. It's good for RF for IoT-type devices ones that need embedded flash like microcontrollers and that's really well matched with what the FPGA capability we have today is. Moving forward, we do see opportunities from more of the compute-oriented platform. For that, there will be more architecture enhancements needed not just porting to a different node. And so there is some investment we have to make ahead of the curve on that as well, but that's going to be a further out architecture development for us. The more near term one is the 55-nanometer.

Okay. Great.

Did I answer your other question, Richard?

Yes, that's very helpful. I appreciate that detail, Brian. Just one last quick follow-up on that topic. You said in the past you're hoping to or expecting to get between 1 and 3 direct semiconductor licensees during this year. Are you suggesting that number might be larger based on the engagements you've had in the last couple of quarters or is that progress we see more past this year?

I'm optimistic and that should be higher than that. I think our plan is roughly what you said that I -- the more I talk to customers and foundry partners, I think that there is a legitimate chance that we can get above that.

(Operator Instructions) And our next question comes from the line of Rick Neaton with Rivershore Investment.

Brian, Sue, I'd like to see if I can get a little bit more color on what's driving your expectation to meet your revenue growth targets in the second half of this year. What design wins are you counting on to drive meeting that 50% revenue growth from last year?

So the profile that we're modeling, Rick, for that revenue growth is at least a couple smartphone design wins that do start shipping in production. We are modeling the tier-1 smartphone, doing the wearable going to production and then a handful of the other opportunities that are part of the funnel that's -- and wearable, which we talked about in prepared remarks with respect to the app companies, wearable/hearable. And then now based on the proliferation of the Alexa ecosystem, I think that we are also seeing some opportunities there too, to close and contribute that our revenue growth for more of a IoT-type application. That's on the sensor processing side. We are also modeling to hit that greater than 50% revenue growth on a few IP licenses to Richard's earlier question. And with those, they obviously carry good revenue and they also carry very high gross margin as well. So all of those are encompassed in our plans for this year to achieve a greater than 50% revenue growth.

So you are modeling at least one smartphone production win this year. Is that from a top-tier OEM?

Yes and yes. That's we're modeling with one, and yes, it is top tier -- what I would call, a top tier.

Okay. How much -- what weight or how much does attaining your revenue growth number depend on the smartphone production win?

I'm not going to give a percentage of that because I think that's going into way too much detail for the call. But a double-digit percentage for sure from the smartphone to contribute to that. This is where I come back to my discussion around timing as well, how many months they're going to be shipping us, [as well] fairly impacts that, but definitely we need to have at least a couple of these go-to production for that revenue growth.

That's over and above the production win at the tier-1 smartphone OEM for the wearable. Is that what you are saying?

That's correct. Yes, that is what I'm saying.

Okay. Should we be modeling any significant changes in your customer concentration in the second half of this year given that Samsung is falling off as a larger percentage of your revenue?

I think the way we'll answer that to avoid giving away too much of what's inside our funnel. I think from a non-sensor point of view, the contribution from Samsung will decline because we are winning these other designs with the display bridge products, so the concentration will go down just like what we've seen trending recently. As far as what's on the inside of the sensor processing business, I'm not going to address it at this time because I think that goes too far into who exactly we're talking to and who we're pointing wins from and the same goes to after the embedded FPGA IP as well. To make a point here about this [sharing] we view, and I said this for the last, I think, 6 months, we do want to reduce customer concentration in general. We don't want to be having one person dictate too much of our business. It's not a good position to be in and I think that the funnel that we have is going to enable us to accomplish that.

Yes, and we are trending that way. Starting this quarter, as you can see, Samsung accounted only 22% of total revenue compared to the last quarter 29%. We are in the right trend.

Was that change, Sue, more the addition of the license revenue? Or was it more due to any declines in display bridge revenue?

It is mainly due to the decline display bridge, not a decline as we're picking up other customers other than Samsung in display bridge solution.

Okay. Brian, you talked about the win, the design win at this app company for a new wearable that you said would go into production later in 2017. What range of annual volume do you expect from this?

I would model it as several hundred thousand up to maybe 1 million plus units. Whenever these app companies do hardware, it's a little uncertain exactly how successful they'll be. I think the good thing about an app company is that they don’t necessarily have to make money on the products. They can subsidize them because they make money elsewhere. And so they can price it attractively to move on and get the user base going. So that what gives me some optimism that could be on the high side of that number. But if you're trying to book in this I would use the range that I just mentioned.

Okay. That goods to know. One last question on the hearable design engagement where you're at the designing phase. The only hearable, I know, of is this Vinci headphone set that has like a screen on the side, it looks like a mini TV on a headphone set. Is that what you mean by hearable? Or is that like version 1.0, the 1970s version of what a hearable will be?

I'm not familiar with that hearable, but the one that I'm talking about is definitely not that. To me, a hearable is basically, obviously, it's only going to be on your ear, not on your wrist. And so things that you would do with devices connected to your ear would be listening to music, connecting to other devices you may have via Bluetooth. But increasingly now they're going to be leveraging the same user experience that the people are trying to deploy elsewhere. So there is maybe voice activation. The ear, in fact, is a great place to measure the heart rate. It's actually more accurate to measure in your ear than on your wrist for various physiological reasons. So we see more biometric sensors moving there. And if you're doing all that, you may as well count your steps as well and get some activity measurement, maybe motion sensor. So we see this as an area where not only do they have small batteries and small form factor, but it actually plays very well to the strengths that we believe we have with our multicore S3. So those are the kinds of wearables or hearables that we are referring to.

And I'm showing no further questions at this time. I would now like to turn the call back over to Mr. Brian Faith for closing remarks.

Thank you. Please note, we will be participating in the following events. First, Sue and I will be at the Craig-Hallum Institutional Investor Conference on May 31. Please contact LHA if you'd like to meet us. Second, our CTO and SVP of Engineering, Dr. Tim Saxe, will be participating in a panel discussion at the Design Automation Conference, or DAC, in Austin, June 18 through the 22. We'll also have a booth at the conference. Third, Sue and I will be presenting at the Reach China Investment Conference in Beijing on June 27. And lastly, we will have a booth at the Sensors Expo and Conference in San Jose from June

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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.