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Executives

Thomas Hart – CEO

Ralph Marimon – VP Finance & CFO

Andy Pease - President

Analysts

Edwin Mok - Needham & Company

Brian Coleman – Hawk Hill Asset Management

QuickLogic Corporation (QUIK) Q3 2009 Earnings Call October 27, 2009 5:30 PM ET

Operator

Good day everyone, and welcome to the QuickLogic Corporation third quarter earnings results conference call. With us today from the company, Chairman and Chief Executive Officer, Thomas Hart; Chief Financial Officer, Ralph Marimon; and the President, Andy Pease. At this time I’d like to turn the call over to Thomas Hart; please go ahead sir.

Thomas Hart

Good afternoon ladies and gentlemen, and thank you for joining us today for QuickLogic’s third quarter conference call. Joining me here today is our President, Andy Pease, and our CFO Ralph Marimon.

Ralph will take you through our third quarter 2009 financial results and then I’ll share my perspective on our business. Finally Ralph will detail our guidance for the fourth quarter of 2009 and then we’ll take questions.

Ralph Marimon

Thank you Thomas, I’ll take a moment to read a Safe Harbor statement. During this call we will make statements that are forward-looking. These forward-looking statements involve risks and uncertainties including but not limited to stated expectations relating to revenue growth from our new products, statements pertaining to our design activity, and our ability to convert new design opportunities into customer activity, market acceptance of our customer products, the effects of our customer specific standard products or CSSPs, our expected results, and our financial expectations for revenue, gross margin, operating expenses, profitability, and cash.

QuickLogic’s future results could differ materially from the results described in these forward-looking statements. We refer you to the risk factors listed in our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, and prior press releases for a description of these and other risk factors.

QuickLogic assumes no obligation to update any such forward-looking statements. For your information, this conference call is open to all and is being webcast live. It can be accessed from the Investor Relations area of the QuickLogic website located at www.quicklogic.com.

For the third quarter of 2009 our total revenue was $3.3 million which was an increase of 14% over the Q2 level. New product revenue increased by 67% sequentially to $1.4 million or 41% of total revenue.

The increase in new product revenue was driven by our data card customers who began initial production. Our legacy product revenue was $2 million which was down slightly from the Q2 level of $2.1 million.

On a non-GAAP our gross margin declined to 41% which was just below the low end of our guidance of 45% plus or minus 3%. The decrease in gross margin from the second quarter was primarily due to an increase in inventory reserves related to an older CSSP solution platform.

Without this reserve gross margin would have been approximately 48% which would have put gross margin at the high end of our forecasted range. As was the case in the second quarter overall gross margin continues to be negatively impacted by the fact that the fixed portion of our cost of goods sold were under absorbed at the growing but still low revenue level.

Non-GAAP operating expenses for the second quarter totaled $3.2 million which was below our guidance range. R&D expenses declined by approximately 32% to $1.2 million. This decrease was primarily due to a reduced level of third party chip design costs.

This savings is directly attributable to the operating model changes we implemented during the second quarter of 2008. Due to the vast design resources available in the world today, we have been able to reduce and refocus our internal fixed design budget to leverage and manage these external resources at variable costs.

This not only allows us to reduce aggregate costs over time but also allows us to go quickly and easily to the best design resources in the world for what is now a wider variety of design requirements. As we move forward I expect this strategy will continue to enhance our ability to react quickly to customer needs, service a wider variety of opportunities and keep total costs under control.

SG&A expenses declined to $2 million from $2.4 million in Q2. The primary reason for the decrease in SG&A was that several one-time adjustments were recognized that lowered administration spending during the quarter.

Without those adjustments SG&A expenses would have been approximately $2.2 million. On a non-GAAP basis total operating costs declined by 22% sequentially from $4.1 million in Q2 to $3.2 million in Q3.

Other income and expense and income tax expense totaled approximately $68,000 during the quarter. Our non-GAAP net loss of $1.9 million or $0.06 per share. Our ending cash position of $13.9 million reflects a sequential decrease of $2.6 million from the second quarter of 2009 which was slightly above our guidance of $2.5 million.

The cash usage was higher then anticipated due to the fact that 57% of the Q3 shipments occurred in September and therefore not collectible during the quarter. Given our bookings trends for new products, positive design funnel activity and the success we’ve had with cash management, we continue to believe cash usage will be lower as we move forward.

Our GAAP results include stock based compensation charges of $858,000 plus an asset impairment charge and fixed asset write-offs totaling $248,000. A stock based compensation charge was higher then prior quarters due to the previously announced program of granting restricted stock units in lieu of salary that began during the third quarter.

Our third quarter GAAP net loss was $3 million or $0.10 per share. Please see today’s press release for a detailed reconciliation of our GAAP to non-GAAP results.

I’ll rejoin you in a few minutes to discuss our guidance for the fourth quarter, but first Thomas will update you on the status of our strategic efforts.

Thomas Hart

Thank you Ralph, Q3 marks another quarter of tangible progress in the execution of our customer specific standard product, or CSSP, business model. The new product revenue increased by 67% sequentially. This follows the 24% sequential increase we posted for Q2.

In total new product revenue accounted for 41% of sales in Q3, up from 28% in Q2. New product bookings increased by 53% sequentially. We even saw a modest increase of 9% in legacy product bookings.

In total bookings increased by 27% sequentially. In addition to these quantifiable measures, we also significantly enriched our design funnel, received production orders for two new production wins, and pushed several strategic design opportunities much closer to revenue.

Clearly our sales and marketing team with the closely coupled support of our engineering team, is executing well. R&D performed equally well by accomplishing the launch of our new VX 2 and VX 4 platforms on time, on budget, and working to specification on the first pass through wafer fabrication.

These new platforms enable us to bring the value of our visual enhancement engine and our display power optimizer to the handheld displays used in our target markets. As you may know the VEE and DPO technologies are based on Apical Limited technology which we licensed exclusively for mobile applications.

As Ralph presented we also saw a strong validation of the new operating model we implemented during the second quarter of 2008. Leveraging this model has allowed us to respond to a broader array of opportunities, shortened our time to solution, lowered aggregate engineering costs, and provided us with the flexibility necessary to better manage operating costs.

In short, we are building measurable traction. In reality the race however is just getting under way and as is the case with all good races, we expect excitement will build with each lap. As you may recall from previous quarterly conference calls our efforts are focused on the high growth segments of the mobile market.

Our first segment to revenue has been data cards, a segment that includes both wireless broadband USB cards and strong authentication secure access memory cards. Longer term, our largest revenue segments will include Smart Phones and multimedia phones, Smart Books, Net Books, mobile internet devices, or MIDS, which are also known as pocketable computing devices, or PCDs.

To optimize our leverage in addressing these markets, we’ve employed a three pronged strategy. The first prong was to develop direct relationships with the targeted customers. This ability was greatly enhanced when Andy Pease joined us after serving as the VP of Worldwide Sales for Broadcom.

We further enhanced this capability with the addition of Frank Ellis who has held senior sales management positions at large semiconductor suppliers that are active in our target customer base. The second prong was to develop strong partnerships with leading applications and base band processor companies as well as a select number of ODMs.

This led us to the third prong which was to jointly develop reference designs with these partners. These reference designs provide us with two very distinct benefits. The first of course is the ability to provide targeted customers with complete turnkey solutions.

The second and more subtle benefit is that the large and well connected sales and marketing teams of our partners are selling our parts by association. This significantly multiplies the selling effort for QuickLogic CSSP platforms.

The simple story here is the customers we engage require complete solutions that enable them to quickly respond to changing market demands. As we’ve learned from working closely with our partners even though they include large and highly capable companies, our CSSP platforms allow them to bundle a complete solution quickly.

In addition our CSSP platforms significantly extend the breadth of the markets our partners can address and add flexibility to their designs, an increasingly important benefit we provide to our partners.

While each of these prongs is obviously an ongoing process our progress in their implementation is accelerating and the evidence suggests the strategy is working. As it stands today we are actively engaged with Tier 1 customers in all of our targeted market segments and have seen the first ramp of production revenue in the data card segment.

During the July conference call I announced that we have received production orders from two Tier 1 broadband data card manufacturers and a preproduction order from a third. During Q3 we shipped against both production orders and received our first production order from the third customer.

This means we’ll be shipping production quantities of our CSSP platform to two of the five largest players in the wireless broadband data card market during Q4. In addition to these three designs we are working on two new designs with one of our existing customers and have new designs active with three additional companies in this market segment.

To further these efforts and maintain design momentum we have completed our second reference design with our broadband data card partner, Icera. With the continued ramp of production activity that we’re forecasting for the broadband data card market, we’ve also received a scheduled production order from the strong authentication secure access memory card customer we discussed during our July conference call.

This schedule calls for a shipment ramp starting in Q4 which is consistent with our July forecast. We’re engaged with the same customer on two new designs and with a second customer in the segment on one design.

Now this is probably a good time to pause and discuss the poorly defined term, design win. The short story here is a design win is simply a milestone in the process of getting to revenue which is of course the goal.

In the market segments we’re addressing its not uncommon for customers to design a number of products that don’t reach production for a variety of reasons. Therefore to count design wins before the receipt of a production order is like counting chickens before the eggs hatch.

While its good to know how many eggs you have that will potentially hatch, it’s the chickens or in this case the production orders that deliver revenue. This is why we carefully speak to investors in terms of production wins, preproduction orders, and what we have in the active sales funnel which may include what some other companies classify as design wins.

For the record, we define a production win as having the scheduled order in hand for at least one-twelfth of our estimated annual production volume for that opportunity. Accordingly in the broadband data card market segment we have three production wins with three unique customers and eight designs in process with six customers.

Two of these designs are with existing production customers working on next generation products. We also have the two reference designs with Icera that I referred to earlier. In the strong authentication secure access memory card market, we have one production win with one customer and four designs in process with two customers, one of which is our current production customer.

The next focus segment which we believe will generate significant revenue is the Smart Book, Net Book arena. This is a market that Intel opened with its [Atom] processor but will soon be challenged by a variety of entrants offering what QUALCOMM has termed as Smart Books sporting various arm core processor designs.

Strong contenders here will likely include QUALCOMM, Marvel, Invidia, and Free Scale. This extremely exciting market is ideal for QuickLogic. The combination of our display power optimizer, DPO, and our visual enhancement engine, VEE technologies, can provide up to two extra hours of battery life and radically enhance the viewing experience.

This is also a market where no one really knows what features and functions consumers will end up embracing. This means manufacturers in this market segment are keenly focused on designing flexible platforms that can be rapidly adapted as consumers vote for what they want with their wallets.

As you’ve undoubtedly read there will be several top line trade-offs in the upcoming battle between Net Books based X86 processors and Smart Books based on the arm core processors. Among these the most often discussed include compatibility with Microsoft Windows, aggregate processing power, and how long a particular machine will run on a single battery charge.

However when you look deep inside the machines as we do when working with our customers, there are a number of more subtle trade-offs that are invisible to consumers. The arm core processor grew up in the Smart Form market where it is virtually 100% market share.

While it is clearly a robust processor, and supported by a vast ecosystem due to its heritage, the implementations of the arm core processors available today lack the connectivity needed to enable features required by Net Books and Smart Books.

These features include connectivity to a full sized keyboard, hard disk drives, and solid state drives to name just a few. This has and we believe will continue to create numerous design opportunities for our proven system locks which enable a wide selection of flexible connectivity CSSP platforms.

We currently have five active designs in process with four unique customers in the Net Book, Smart Book market segment. In addition to these we have two reference designs in process, one with a Tier 1 semiconductor company and the other with a Tier 1 subsystem OEM that is active in numerous Tier 1 OEMs and ODMs.

Based on what we can see at this juncture, we believe our first production ramp from this segment will start mid 2010. Moving to the Smart Phone segment, we have six opportunities in the active funnel with six different OEM ODMs. We are also working on three reference designs, two with a Tier 1 semiconductor company and one with a Tier 1 ODM.

As you may know the design cycle for these products is relatively long and we do not expect to see significant revenue until the second half of 2010. However the market volumes are large and rapidly growing and we believe this segment represents the potential for truly explosive revenue growth for QuickLogic.

Sitting between the Smart Phone and the Smart Book, Net Book market segments is what was originally termed by Intel as the mobile internet device market segment but has more recently been referred to as pocketable computing devices, or PCDs.

This segment represents opportunities for QuickLogic that are very similar to those we are seeing in the Smart Book, Net Book market. In this segment we have two designs in the funnel with two unique customers and one reference design with an ODM partner.

As you may have seen in our press releases we recently announced that we’re now sampling our ArcticLink II VX2 platform, with an embedded second generation visual enhancement engine using VEE 2.0, display power optimizer, an optional frame buffer and low power programmable fabric, the ArcticLink II VX2 solution platform provides an ideal display path CSSP solution for Net Books, Smart Books, Smart Phones, multimedia phones, as well as for MIDS and PCDs.

As you can see there are plenty of opportunities for CSSPs. OEMs and ODMs see that CSSPs offer a clear path to getting to market quicker with lower risk while offering hardware based flexibility to enable the differentiation desired. Ralph back to you.

Ralph Marimon

Thanks Thomas, we are estimating that our total revenue for the fourth quarter will increase approximately 20% to $4 million, plus or minus 10%. Because of increased visibility and the customer demand for our new products, we are breaking out our new product forecast and estimate that new product revenue for the fourth quarter will be approximately $2 million, plus or minus 10%, or a 47% increase from the third quarter level.

As in past quarters we are keeping a fairly wide range for our revenue estimate in our guidance. As we have discussed in earlier calls our actual results can vary significantly due to schedule variations from our customers which are beyond our control.

Due to our lower revenue level, a schedule change from a customer could push shipments into the following quarter and this potential push could change our actual results significantly. On a non-GAAP basis we expect gross margin to be approximately 45% plus or minus 3%. This gross margin percentage is driven by the mix of new and legacy products, and by the fact that our fixed costs associated with our cost of goods sold, are being under absorbed at the currently forecasted revenue level.

Excluding the one-time adjustments that occurred in the third quarter non-GAAP operating expenses will increase by approximately $300,000 to $3.7 million plus or minus $200,000 in Q4. The increase is primarily due to costs related to year end activities and this being a 14 week quarter.

On a total year to year basis operating expenses are forecasted to decline by 26% due to the reorganization instituted during the second quarter of 2008. Our other income and expense will be a charge up to $60,000 during the fourth quarter. Any tax provision will be negligible.

Our stock based compensation expense in the fourth quarter will be approximately $700,000. This is primarily due to the previously mentioned restricted stock program that is offsetting reductions in cash compensation for employees and the executives. We are expecting to use approximately $1.5 million in cash during the quarter which is primarily due to the expected loss and increase in working capital to support our new product revenue ramps.

Now I’d like to turn the call over to Thomas for his closing comments.

Thomas Hart

I’d like to take this opportunity to publically thank our ArcticLink II team for bringing VX2 and VX4 to the stage where we are now sampling customers with these exciting platforms. A very complex design activity done on time, on budget, and sampling straight out of the fab on the first pass.

I think these results provide a clear indicator of the quality of our team here at QuickLogic. This is our first CSSP platform done with the new product development model we implemented last year by moving context activities to outside partners. Well done folks and thank you.

I think the message to embrace here at the bottom line is that we are seeing tangible evidence that validates our CSSP business model and the effectiveness of our operating model. We are seeing design opportunities move into production engaging current production customers with next generation designs and have established ongoing design activity in all of our targeted market segments.

While accomplishing these strategic goals we are also controlling our operating costs, yet doing so in a way that has actually expanded both the scope and scale of what we can offer and shortened the time it takes to present complete solutions.

In addition to these notable accomplishments we’ve also cultivated meaningful partnerships with a number of industry leaders in our targeted market segments that have not only expanded both our reach and our influence with key customers.

In short, things are going well and we believe they will continue to improve as we move forward. Our fourth quarter 2009 earning conference call is scheduled for February 9, 2010, at 2:30 pm, Pacific Standard Time.

Now let’s open it up for your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Edwin Mok - Needham & Company

Edwin Mok - Needham & Company

First off just a question related to the financial statement—

Ralph Marimon

You’re cutting out on us try it again.

Edwin Mok - Needham & Company

So regarding your operating expense, it appears that it came in pretty good operating expense, I was just wondering if there was additional cost cutting that you took during the quarter.

Ralph Marimon

That certainly helped it, absolutely, so that was part of it. In general our expense levels are down just by cost control but the cash savings program we instituted certainly helped that.

Edwin Mok - Needham & Company

And do you anticipate, assuming the new product continue to ramp, do you anticipate that OpEx might go back up in the, beyond the fourth quarter into 2010 timeframe.

Ralph Marimon

I think the biggest impact on OpEx will be the third party chip design activity that we do and I think that the potential is there in the first half of the year for OpEx to go up but it depends on the timing of the chip designs that we do.

Edwin Mok - Needham & Company

And then on gross margin, it came in a little bit lighter then how [inaudible] was that just the [mix] or any other reason why it came in a little light.

Ralph Marimon

No the biggest factor on gross margin was the fact we took an inventory reserve on an older CSSP platform where the demand is much lower now. Its an older platform. Without that reserve gross margin would have been about 48%.

Edwin Mok - Needham & Company

And then lastly on this later financial statement, you basically have minimal tax so far, do you anticipate it to stay that way or do you think you might have more write-off given that you have quite a bit of loss.

Thomas Hart

I hope our taxes don’t stay that low. That’s a reference to the fact that I expect us to make money and therefore we’ll be [inaudible] on taxes.

Ralph Marimon

Right now because of the loss position we pay tax only in our international subs but the, and we have NOL going forward so hopefully we’ll make money but it will be a little while before we pay tax because of the NOLs.

Edwin Mok - Needham & Company

And then related to the product side first one, it looks like your basing your guidance, you’re effectively guiding that your new product revenue will be probably in line with your mature product, your mature product has come down quite a bit this year, do you expect that to stay at that level or is it more just because of slow down in certain market, or do you expect a slight bounce in that area.

Thomas Hart

We’ve seen a slight recovery. We don’t expect to see a full recovery. As you probably remember those products are basically in the industrial and military segment. Our largest customer as an example year in and year out has been Honeywell and those, their products are primarily aimed at avionics applications for commercial and general aviation.

And of course that market is pretty soft as you’re well aware. So I guess the shorter answer is we don’t expect to see it recover to last year’s levels. We think it’s a pretty good bet that it will be flat. But as we said before we’re really betting on the new product revenue. We’ve really got our energy focused on what’s happening there.

Edwin Mok - Needham & Company

On the new products, you have gained momentum especially on this data card market, but also it looks like the secure memory card is also starting to ramp. Are those the few projects that you expect to start driving revenue in the 4Q and the follow-up question to that is given that some of these products are starting to ship in the fourth quarter do you expect maybe if you look beyond the fourth quarter into the first half of 2010 that you might not see much of [inaudible]. Because its typical you have a seasonal slowdown maybe in the first quarter but given that you’re shipping new products maybe you won’t see seasonality in your first quarter.

Thomas Hart

We don’t think we’re going to be involved or be impacted by traditional seasonality. These are new products, if you look at broadband data cards and you go look at what’s happening in the market relative to broadband data cards the growth there is unbelievable. In fact if you followed any of the what the operators are saying, their 3G networks are being overloaded by these cards and in fact if you look at what AT&T did, they recently opened up all of their Wi-Fi networks to unload the 3G network from a data perspective.

So I don’t think any of believe there’s going to be a slowdown or anybody sees any slowdown in the relatively short-term relative to broadband data card usage.

Edwin Mok - Needham & Company

So assuming these things ramp, looks like you are having some visibility in your first half and [inaudible].

Thomas Hart

I’m sorry you kind of broke up in the middle of that.

Edwin Mok - Needham & Company

Sorry about that so just in terms of sequential growth looks like based on what you can see so far, you sound confident that even the first quarter, second quarter you may see sequential growth on the new product area.

Thomas Hart

You’re trying to sucker me into giving you forward going guidance and I’m not going to do it. We give guidance one quarter at a time.

Edwin Mok - Needham & Company

Another question I have beyond that, I think your Net Book opportunity looks like it’s a good opportunity, can I get the clarification when you say there’s a Tier 1 OEM you mean they are an ODM for the large manufacturer like whatever DELL, HP and those guys, is that correct and just a follow-up on that, is that design onto your Intel base or QUALCOMM base platform or maybe a different way of asking it does it really matter if its Intel or arm based platform.

Thomas Hart

So let me address the answer to your question is both on both counts. We’re working both with Intel and with arm based processors in both the Smart Books and Net Books and we don’t, one of the advantages of having programmable fabric on board is that we can in fact connect to proprietary buses that these people have in a very efficient fashion and offer them the highest performance at the same time offering very low energy to transfer information.

So we don’t care if its an arm based processor or if its and Intel based processor; we’re Agnostic. And we’re working with both Tier 1 OEMs and Tier 1 ODMs for Smart Book and Net Book products.

Edwin Mok - Needham & Company

So you are in a [inaudible] space right now.

Thomas Hart

Correct.

Edwin Mok - Needham & Company

And you expect those designs to translate to a ramp sometime in 2010 basically, that’s correct right.

Thomas Hart

Correct.

Edwin Mok - Needham & Company

If I can circle back to the margins and I guess tied to your break-even model, looks like these new products are in terms of percentage margin wise maybe closer to the 50% range, are you still targeting the $8.5 million break-even revenue level, and what kind of target margin are you looking for at that level.

Ralph Marimon

The answer is yes around those ranges. We probably can do a little better then that on the break-even but we expect that gross margin will be 50% and above as we go forward. So the timing on break-even just depends on what revenue operating expense level as well as the mix of the products being sold.

But we believe looking ahead that we can maintain a 50% margin.

Operator

Your next question comes from the line of Brian Coleman – Hawk Hill Asset Management

Brian Coleman – Hawk Hill Asset Management

Can you clarify a little bit dovetailing off of Edwin’s question, which market is more important to you, is it the Net Book market or the Smart Book market. Is one more levered towards CSSPs or is there more design activity that you’re experiencing with one or the other.

Thomas Hart

Well let’s look at the two camps, the X86 camp comes from the compute world and what they bring into that Smart Book, Net Book and let’s just use one term, the term Net Book was really used by Intel, Smart Book was coined by QUALCOMM, but they’re really aimed at the same kinds of applications as far as a customer is concerned.

If you look at what Intel is bringing to that market segment, or that class of products, they’re coming from the compute world and so what we have to offer them is not connectivity to keyboards or hard drives or any of those kinds of things, they’ve already got that.

What we have to offer them is VEE. And DPO, and what we’re offering specifically there then is the ability to significantly reduce the back light levels but like up to 80 or 85% which, and still give you the same visual quality of viewing experience that you would have had without using VEE.

So if you think about what we’re adding to the X86 world its probably mostly aligned with VEE and DPO. If you look then at the arm world, the arm world really hasn’t been used in PCs and therefore when you look at a Net Book they’re missing a whole bunch of things that the PCs used to have.

They can’t connect to an 84-pin keyboard as an example. They’re not used to connecting and didn’t have connectivity to hard drives or solid state drives. So that’s what we offer the arm world is more about connectivity. What we offer the X86 world is more about our visual enhancement engine and the display power optimizer.

Is that clearer for you.

Brian Coleman – Hawk Hill Asset Management

Yes, that’s good. Over time then do you expect the arm based processors to start to incorporate more of the IO connectivity that the X86 processors do which again then makes the CSSP opportunity in Smart Book over time become more of a VEE opportunity as well, or do you think those connectivity applications will exist for quite a while for you.

Thomas Hart

I think they’ll exist for a while but I share your view, I mean that’s the nature of our business. You can’t bet against integration so eventually the arm guys will in fact start to add those kinds of things that we’ve added in the short-term for them.

But I think then VEE represents a significant opportunity for them in the long-term. VEE looks better and better as the screen size goes up because the amount of power you need in the back light on these screens goes up significantly.

So if we can, you’re talking about several watts for a 10 or 12 inch Net Book and if we can cut that by 80% we’ve significantly extended battery life.

Brian Coleman – Hawk Hill Asset Management

And a question on your guidance if I take the comment that I think you used in your prepared remarks that 57% of CSSP sales in the third quarter were in September that would translate into about $800,000 of revenue or $2.4 million on a quarterly basis and your guidance for new product revenue for 4Q is $2 million. If you could just square those two numbers, kind of the $2.4 million run rate with another design going into—

Ralph Marimon

I don’t think I gave, the 57% number was not CSSP, it was total revenue. So I didn’t break out CSSP as a separate line item there. So we have a pretty detailed sales forecast that we can see going from the $1.4 number to $2 million, but I don’t think you can correlate the two based on that 57%.

Brian Coleman – Hawk Hill Asset Management

Is there anything you can talk about with respect to linearity, with that such a back end weighted September it would just seem that there should be some kind of follow through into 4Q off of that or are we just talking about an inherent lumpiness associated with some of these designs going into production.

Ralph Marimon

No I think what you saw is a little bit of an initial ramp that happened in September for some CSSP, for some of the customers, so that’s why it was a little bit higher but also legacy was higher in September as well.

So I don’t think we have as much of a linearity issue in Q4 that we saw in Q3.

Operator

Your next question is a follow-up from the line of Edwin Mok - Needham & Company

Edwin Mok - Needham & Company

Just a quick follow-up, what was your OpEx guidance again for 4Q and does that have any [inaudible] outsource R&D expense that you mentioned.

Ralph Marimon

The first part I caught which was, what was the OpEx guidance for Q4, and that guidance was $3.7 million plus or minus $200,000. I didn’t catch the second part of your question.

Edwin Mok - Needham & Company

The second part is does that include any of these R&D outsource R&D expense that you talked about.

Ralph Marimon

It includes some but at a reduced level.

Operator

Your next question is a follow-up from the line of Brian Coleman – Hawk Hill Asset Management

Brian Coleman – Hawk Hill Asset Management

I wanted to follow-up on when you reviewed the three prong sales strategy and the one prong I remember you talking about in the past namely getting to know your customers’ customer, you didn’t necessarily address. I’m just wondering if there’s anything you can update us on that, if you’ve got any success or how active that is.

Thomas Hart

Actually that turned out to be not as fruitful initially as we believed that it would be primarily because the, even though they are the customer of these handheld devices, typically the operators, their willingness to go derive specific solutions from specific vendors is problematic for them.

And the reason for that is, is that as soon as they tell an ODM or an OEM to include something from QuickLogic they feel that they get held up from a cost perspective or a bomb cost perspective in that kind of a scenario. So they’ll serve as cheerleaders for us, but they typically will not be directive of incorporating our silicon in the handsets as they originally indicated that they would be.

Operator

There are no additional questions at this time; I would like to turn it back over to management for any additional or closing comments.

Thomas Hart

We enjoyed having the opportunity to share with you folks what we’re up to. I think, I hope you can sense that we’re pretty ebullient about what our forward going prospects are here and we’ll look forward to chatting with you on our next conference call. Thank you.

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