QuickLogic And Sensor Hubs

| About: QuickLogic Corporation (QUIK)

Sensor Hubs are a new wrinkle in your smartphone and other future mobile devices. Here's some highly abbreviated information on Sensor Hubs and how they work:

A Sensor Hub monitors the data flow from sensors. These can include the sensors that are in smartphones, sensors that are in wearable technology and sensors that are increasingly in our environment (the Internet of Things, etc.). When data flows to the Sensor Hub it uses algorithms to process the data and turn it into information. It can also combine or fuse the data from various sensors. This is called Sensor Fusion, and with Sensor Fusion the Hubs can create new information.

The real trend that is enabled by Always-On is Context Awareness, meaning the Sensor Hub can tell where the phone is (on a table, in a pocket, in your hand, etc.) and what the user is doing (standing still, walking, speed, location, etc.). If connected to an exercise monitoring product like FitBit, it can read, process and interpret the data it sends.

Heavy processing is still done in the App Processor - the hub does what it can, and then taps the AP on the shoulder and says, hey, you take over. The AP does this job in brief processing bursts that take only minimal power.

The functions of a Sensor Hub could easily be performed by the smartphone application processor (AP), except that for that to happen would mean the AP would have to running all the time, which would drop battery life to a couple of hours. The idea of a Sensor Hub is to allow "always on" sensor operation without killing the battery. The Sensor Hub runs separately from the AP at as low a power as possible. If the information gathered by the Sensor Hub is important in some way it can wake up the AP which will determine whether further action is required such as triggering an alarm or even making an automatic call to some pre-determined number.

Sensor Hubs are already being used in the latest generation of smartphones, the most noteworthy being the M7 chip in the Apple (NASDAQ:AAPL) iPhone 5s. The M7 chip operates as a so-processor for the AP and allows certain features and functions today and more complex features and functions in the future.

So Sensor Hubs are being used today and will be used to monitor more sensors in future designs. Since the Sensor Hub is always on, even when the rest of the phone is in deep sleep mode, the less power consumed by the Sensor Hub, the better. The present Sensor Hubs use a very small microcontroller to do the sensor fusion process. While these microcontrollers only consume a handful of milliwatts, it is still undesirably high and will get even more undesirably higher in the future.

The M7 chip in the iPhone 5s is actually a customized version of an NXP Semiconductors (NASDAQ:NXPI) ARM M3 micro with other functions included. The Samsung Galaxy S4 uses an Atmel (NASDAQ:ATML) Sensor Hub based on their AVR microcontroller.

The QuickLogic (NASDAQ:QUIK) Sensor Hub is a first member of a family of Customer Specific Standard Products (CSSP) that the company will introduce that include hard cores for some purposes and some amount of reconfigurable logic that provides the ability to customize the device by specific customer requirements. Thus we have a very flexible, customizable standard product. The time to market implications of such products are incredibly valuable.

As such, QuickLogic has developed a Sensor Hub based on hard wired core functions and some amount of static ram Field Programmable Gate Array ((FPGA).) Instead of an embedded microcontroller, the QuickLogic Sensor Hub uses a Finite State Machine to do the sensor fusion. The QuickLogic device has the benefits of very low power consumption of 300 microwatts (1/30th of the next best unit), and field programmability. This means that as new sensor fusion algorithms are developed, the QuickLogic part can be reprogrammed, even in an existing phone, to take advantage of the improved functionality or new apps. Here is a 30 minute video introduction of the QuickLogic ArcticLink 3 S1 Sensor Hub.

Now for the investment opportunity:

The market for Sensor Hubs will be the upper half of the 1 billion smartphones expected to be sold in the next 12 months, so about 500 million Sensor Hubs will be sold. The QuickLogic solution offers lower power that might amount to about a half hour longer battery life and field reprogrammability that is a high value feature in a developing usage base. The QuickLogic part is destined to be the Sensor Hub solution of choice for mid to high range smartphones of the immediate future.

There is a rumor from a good source that the QuickLogic Sensor Hub has been designed into a new Samsung (OTC:SSNLF) smartphone. The interesting thing is that the AP in that Samsung smartphone is a Qualcomm (NASDAQ:QCOM) device that has a Sensor Hub integrated into it, yet they chose to use the QuickLogic part and turn off the QCOM Sensor Hub section. That is a very big deal and demonstrates the perceived value of the QuickLogic part.

The ArcticLink 3 S1 comes in a 2X2.5mm package, so the chip is about 4 sq. mm in size. The process is 65nm, so the chip probably costs $.05/ sq. mm or $.20. The package will be expensive at about $.30 per chip. So, we have about a $.50 cost. The selling price is estimated at about $1.80. The apparent addressable market is $900 million, with low power leadership and a patent pending moat, you can make your own assumptions on market share for QUIK.

Gross margin looks like 60%++ net profit at fully realized market should be a minimum of 20%, or $180 million. QuickLogic has 45 million shares outstanding. That would be $4 per share. The share price today is $4.73. At $4/share earnings, it would be safe to say the stock price could be substantially higher than $4.73. Does this run happen immediately? No, but the QUIK part could become a checkbox part for all new mobile designs and, therefore, the stock price run could get underway and move very quickly.

The stock is cheap given the potential. As for me, I am playing the August 2014 $7.50 call option. I wish I could get it out to January of 2015, but August is the best there is.

This has the potential of another Micron Technology (NASDAQ:MU), I think we can see a 200% increase based on design wins even before actual product shipments rise to a high level. The fourth quarter earnings report is scheduled for February 5th. The results will be nothing to get excited about, but guidance and design win information could get things started.

Disclosure: I am long QUIK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.