QuickLogic Is Another Way To Ride The Coming Wave Of Always-On-Context-Aware Devices

| About: QuickLogic Corporation (QUIK)


QuickLogic's always-on context aware sensor hub transforms Internet of Things and wearables from science fiction to reality.

Wearables, smartphones and tablets incorporate ultra low power sipping sensors.

Mega-trend in new low power reconfigurable sensors that make always-on context aware technology possible.

The Internet of Things is certainly a hot topic these days. QuickLogic (NASDAQ:QUIK) sits right in the middle of this mega-trend with its new always-on context aware products. The company recently announced two new products using in-system reconfigurable programmable logic architecture and its two newest silicon solutions (Arcticlink 3 S1): Programmable Logic and Ultra-Low Power Sensor Hub solution platform families. It's basically designed to help transform the Internet of Everything and wearable devices into a reality. QuickLogic's ArcticLink 3 S1 Ultra-Low Power Sensor Hub (ULPSH) is the first device to meet the power thresholds and support the sensor reprogramable processing functions required to make always-on sensors in smartphones, tablets, and wearable devices a mainstream reality.

QUIK's business model is very simple. QUIK sells products that consume ultra-low power, making always-on context awareness possible in ways not previously thought possible. Context refers to the users' state -- walking, running, sitting, riding in a car/train/bus, sitting with the phone in front of them, etc.

The Economist Intelligence Unit found that 75% of companies across a wide range of business segments are actively exploring the Internet of Things. QuickLogic's CEO Andy Pease was busy presenting at the recent Roth Capital Conference and SensorCon 2014. At the Roth Conference, the slide presented on page 14 points to more than $10 million in revenue this quarter, with growing new product revenue in several QUIK products introduced. QUIK's presentation highlighted a growing list of new customers using QUIK chip solutions in high growth mobile markets.

As reported by Design News, QuickLogic's new sensor hub products allow "OEMs and application developers to be quickly and easily reconfigurable to allow different sensor management algorithms to be used both initially when the device is first purchased by the user, as well as 'future-proofed' through software updates and application downloads." I stress "reconfigurable" because this feature is unique to QUIK's sensor hub.

QUIK's ultra low power always-on sensor hub is poised to see widespread adoption among higher-tiered consumer electronic manufacturers. QUIK's chip customers are Samsung (OTC:SSNLF), Hewlett Packard (NYSE:HPQ), HTC (OTC:HTCKF), Nokia (NYSE:NOK), Kyocera (NYSE:KYO), Huawei, ZTE (OTCPK:ZTCOY) and Pantech. QUIK is poised to capitalize on the emerging demand by establishing an early lead on its patent pending fusion sensor hub. At the Roth Conference, slide #12, QUIK identified three additional sensor products it will introduce in the future, dubbed AL3S2, AL3S3 and AL4S4, to stay ahead of competition. As testament to the growing sensor mega-trend that QUIK is starting to tap into, it seemed clear to me that all the experts at SensorCon 2014 agreed that sensor hubs will play an increasing role in the capabilities of products and the way we connect to them. Mr. Jay Estandyart of ST Microelectronics stated "The internet of Things is driven by the rise of mobile computing in smartphones and tablets and low costs, low power and high performance sensors." Dr. Janusz Bryzek opines that the abundance movement "is expected to require (among others) 45 trillion sensors, many not yet developed." Dr. Kevin Shaw, Sensor Platforms' (a QUIK sensor hub software partner) Chief Technology officer, stated "sensor usage is exponentiating and soon we will have dozens of devices surrounding us at all times." Evidently low power sensors are revolutionizing the always-on context aware trend that consumer products OEMs like Apple (AAPL), Samsung and Google (NASDAQ:GOOG) are aggressively pursuing with smartphones, tablets, wrist watches, and eye-wear.

New smartphones, wearables, and tablet devices are intended to take the internet to the next level, allowing us to be connected everywhere we go. According to CISCO's research, the Internet of Everything is a huge, emerging trend:

"In terms of phases or eras, the Cisco® Internet Business Solutions Group (IBSG) believes that we are currently experiencing the Internet of Things, where millions of new devices are regularly being connected to the Internet. As these "things" add capabilities like context awareness, increased processing power, and energy independence, and as more people and new types of information are connected, we will quickly enter the Internet of Everything (IoE), where things that were silent will have a voice."

In order to get a better idea about the size of the coming mega-trend in sensor hub usage, I discovered IBI research forecasted in 2013 the wearable computing device market will grow to 485 million annual device shipments by 2018.

Sensor Platforms, Inc., an ecosystem partner with QUIK, has developed algorithms that are sensor agnostic. Sensor Platforms has been able to develop some of the most advanced fusion and context aware algorithms in the market today. Software algorithms are instructions that provide the means to use sensors in a hardware device to process the data gathered by the sensor. QUIK is using Complex Instruction Set Computing as the Run time reconfigurable Arithmetic Logic Unit coupled with a finite state machine to make up its patent pending Flexible Fusion Engine (FFE). QUIK's Patent Pending Flexible Fusion Engine is the only solution of its kind that I could find on the market today that enables always-on reconfigurable sensor management, which gives the smartphone OEM the ability to leverage run-time variable context awareness at less than 1% low power consumption. ArcticLink 3 S1 can also monitor up to 12-axes2 of sensor inputs simultaneously, and be reprogrammed in real-time for changes in context and changes in how the user wants to use the sensor data for changes in their predicament. ArcticLink 3 S1 is sensor agnostic, algorithm agnostic, AP agnostic and operating system agnostic using Android drivers at this time with other drivers that can be developed in the future.

QUIK's sensor defies Moore's Law because always-on sensor management provides the necessary sensor technology to fuse context aware algorithms in a smart sensor hub that not only provides the flexibility and processing power needed, but also sets new low power consumption standards that will allow smartphone manufacturers to get the entire sensor system using less than 1% of battery power. If we were to analogize this with a human example, we could say our touch is a two dimensional sensor (size and texture of an object) that sends data to our brain where algorithms "fuse" (combine) the data and allow us to interpret a three dimensional interaction with our environment. During GlobalPress, QUIK stated its ArcticLink 3 S1 consumes typically 0.3mW in the active state. That is approximately 95% less than the Atmel (NASDAQ:ATML) solution used in the Samsung Galaxy S4 and more than 97% less than the Texas Instrument (NYSE:TXN) solution used in the Moto X smartphone.

Based on their comments at the SensorCon 2014 conference, experts expect to see a sensor hub of some sort in virtually every high end smartphone released in 2014. Naturally, the trend will eventually spread down into the midrange smartphone models. If we assume an average selling price for a QUIK sensor of say, a couple bucks, I would project a first year market potential in the range of $400M to $500M, and I think sales have the potential for $1 billion-plus in the total near-term market potential.

However, QUIK is not just about sensors in the high growth mobile market. QUIK won a follow on design in Samsung's new Galaxy Tab 3 7.0 Lite. QUIK also won a display bridge design with a tier one PC manufacturer for two new tablets, which I believe is Hewlett-Packard. According to DigiTimes, Chinese Independent Design House white-box tablet manufacturers will see pressure from new low cost tablets introduced by Samsung, Google , Amazon (NASDAQ:AMZN), Hewlett-Packard, Lenovo (OTCPK:LNVGY), Acer and ASUS this year. QUIK is also a supplier to these Chinese Design houses who manufacture various tablets. QUIK appears well-positioned on both sides of this equation. QUIK established Qualified Vender List (QVL) status for its ArcticLink III BX/VX with Broadcom (BRCM) and MediaTek during 2013. We also know its ArcticLink III BX/VX platform has been used with processors in at least Qualcomm (NASDAQ:QCOM), Marvell Technology Group (NASDAQ:MRVL), Samsung and Rockchip. QUIK's partnering relationships with strategic processor suppliers will help drive adoption. Don't fortget QUIK announced two new smart connectivity design wins at Kyocera, both of which use two QUIK CSSPs. This brings the total number of handset and smartphones at Kyocera using QUIK smart connectivity solutions to five, and provides further evidence that QUIK CSSP technology is providing a value proposition to OEMs.

Based on the Roth Capital presentation, QUIK is also developing a more advanced smart connectivity chip called PP3E, which should be available by the second half of 2014. The $8.1M forecasted for Q1 2014 would result in 77% growth from the average $4.6M per quarter in fiscal year 2013. QUIK is just starting to fire on all cylinders, so to speak, in its effort to accelerated sales growth, and I think modeling for 50% and 75% revenue growth going forward would not be out of range:

Sales Growth Percentage 2013 2014 2015 2016
50% Projected Sales Growth 26.1M 39.15M 58.7M 88.08M
75% Projected Sales Growth 26.1M 45.67M 81.67M 142.92M

I use these conservative growth percentages because from 2012 to 2013 QUIK grew sales 74%. I think this will be conservative modeling given the size of the market and the unique value proposition that QUIK products give OEMS.

Thesis and Opportunity

As I mentioned, QUIK sits in the center of the huge wearable always-on-context-aware Internet of Everything trend. Cisco Systems (NASDAQ:CSCO) estimates 10 billion devices will connect to the internet in 2013, many of them smartphones, tablets, PCs, and wearable devices. However, thanks to always-on wearable devices, over the next seven years that number should grow to over 50 billion. So then, I believe this presents an incredible opportunity for QUIK when compared to just the beginning of QUIK's sales of $9 million last quarter. QUIK wants to harvest the value of the device connections by helping companies optimize their products size, usage, battery power consumption, and improve their customer's experiences. QUIK's Roth Capital webcast can be viewed, here, where CEO Andy Pease provides the roadmap and describes the sensor hub market as a huge mega-trend. Management expects this always-on sensor hub opportunity to begin impacting revenue in the second half of 2014. The stock chart clearly shows a strong uptrend:

Source: finviz.com

Source: finviz.com

QUIK has the reputation and the know-how to serve its existing and future customers ultra-low power chips. Its experience brings the customers the very first in-system reprogrammable and customizable ultra-low power sensor chip into the mix to distinguish their products from competitors. Using QUIK's sensor hub is a great way for OEMs to distinguish the look and feel of their products to avoid patent infringement lawsuits. The trifecta combination of customizable "ultra low power," "in-system" and "reprogrammable" sensor hub devices will help QUIK build its portfolio of connected always-on-context-aware smartphone, tablet and wearable device OEMs.

Financials and Valuation

QUIK has enjoyed some success over the past year by tripling new product revenue year-over-year, as it focused more attention on its display power enhancer (DPO), visual enhanced engine (VEE) and ultra-low power connectivity chips. Sales have grown by 74% in 2013 compared to the year before. New product revenue was up 208% compared to 2012. Its gross margin is 31.2%, but expected to move closer to 50% in fiscal 2014-2015 as the sales of new product mix grows. Rising sales and margins should translate into more and more cash flow. Seeing the opportunities ahead, management has increased its cash position to $46 million by tapping the equity markets in October 2013. QUIK now has 53.8 million common shares outstanding. Float is measured at 31.16 shares. Institutional ownership has grown to 16.4% of the total shares and should lead to an increasingly tight supply of shares. That's exactly what investors want to see from a company that wants to capitalize on a large, growing trend.

Looking ahead, analysts see QUIK sales growing in fiscal 2014. As profitability and cash flow generation increases, the market should continue to reward shareholders with a higher valuation. Although the market has just started to recognize QUIK's potential, I still think investors can earn big returns over the long term.

One last thing to note: QUIK does not have a very large group of analysts following its progress. But success has a funny way of drawing a crowd, which could lead to higher sales and earnings estimates.

Risks and When to Sell

QUIK faces a couple of risks: competition and commoditized chip. Huge market opportunities such as the Internet of Things attract competitors looking to reap the same rewards. QUIK will go up against companies such as Xilinx (NASDAQ:XLNX) and Lattice (NASDAQ:LSCC) when competing for future deals. Fortunately, QUIK's product has a modular architecture that has advantages over competition. For example, Electronic Engineering Journal compared variants of sensor hubs available, and right now QUIK has the first to market in-system reprogrammable and customizable ultra-low power chip, and the opportunity is large enough that it's unlikely to end in a winner-take-all situation. Increased competition actually does increase the likelihood of chip commoditizing. Smart chip buyers can learn to play suppliers against each other to reduce prices and diversify their supply source over time. The key to mitigating this risk will be for QUIK to continue to leverage the technology and offer innovative in-system reprogrammable, customized, ultra-low power chip solutions for its customers.

Because always-on-context awareness is a new trend with plenty of potential, investors should not consider selling simply because QUIK's stock price has run up. Instead, look to QUIK's business momentum for the signal to sell. I would recommend selling if its design wins or revenue momentum begins to wane because the company isn't able to generate new chip solutions for its markets.

The Bottom Line

The Internet of Everything will be built on small always-on-context-aware devices. QUIK has the knowledge and expertise to build ultra-low power programmable chips to build connectivity solutions that help customers use the devices in more productive ways. This emerging trend is starting to build momentum, and QUIK is an attractive opportunity for early investors ready to ride the wave.

Disclosure: I am long QUIK, GOOG, AAPL, CSCO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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