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QuickLogic Corporation (NASDAQ:QUIK)

Q2 2010 Earnings Call Transcript

August 3, 2010 5:30 pm ET

Executives

Tom Hart – President and CEO

Ralph Marimon – VP of Finance and CFO

Andrew Pease – President

Analysts

Edwin Mok – Needham & Company

Brian Coleman – Hawk Hill asset management

Bob West – Nitech Research [ph]

Operator

Good day, ladies and gentlemen and welcome to your QuickLogic second quarter 2010 earnings call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator instructions) As a reminder, today's call is being recorded.

At this time, I would now like to turn the conference over to your host, the Chairman and Chief Executive Officer, Mr. Tom Hart. Sir, you may begin.

Tom Hart

Thank you, Joe. Good afternoon, ladies and gentlemen, and thank you for joining us today for QuickLogic's second quarter 2010 conference call. Joining me here today is our President, Andrew Pease and our CFO, Ralph Marimon. Ralph will take you through our second quarter results, and then I'll share my perspective on our business. Following this, Ralph will detail our guidance for the third quarter of 2010, and then we will take questions. Ralph?

Ralph Marimon

Thank you, Tom. I'll take a moment to read the 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's products, 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 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.

For the second quarter 2010, total revenue was 6.5 million; this represents a sequential increase of 19% and was at the high end of our guidance range. New product revenue was 2.3 million; this represents a sequential increase of 11% and was within the lower half of our guidance range. During Q2, there were capacity constraints with our packaging, tests and assembly subcontractor. If we had enabled to obtain timely deliveries, we would have reported new product revenue at the midpoint of our guidance.

The good news is that these delays didn't impact our customers and the 200,000 we would have shipped in Q2 will be reported in Q3 in addition to the new product revenue growth forecast I'll share with you in a few minutes.

Our second quarter legacy product revenue was 4.2 million. This represents a sequential increase of 25% and was above the high end of our guidance. As we experienced in Q1, we saw an increase in demand for our legacy products for multiple customers during the quarter.

Our non-GAAP gross profit margin for Q2 was 61%, due primarily to the higher mix of legacy product sales; this was above the midpoint of our guidance. Non-GAAP operating expenses for Q2 totaled 3.5 million. This was better than our guidance of approximately 4 .1 million and when combined with the higher than expected gross profit margin and higher than expected total revenue produced a non-GAAP operating profit of 508,000.

Non-GAAP operating expenses declined versus Q1 due to a decrease in engineering expenses, which was partially offset by an increase in SG&A. The decline in engineering expenses was primarily due to a reduced level of third-party chip design costs. We expect these expenses to increase during the third quarter.

On a non-GAAP basis, tax and other expenses totaled approximately 90,000. This resulted in a non-GAAP net profit of 418,000 or $0.01 per share compared with a net loss of 484,000 or $0.01 per share in the first quarter of 2010. Our ending cash position of 17.8 million reflects a decrease of approximately 473,000 from the Q1 ending balance. Cash usage benefited from higher than expected total revenue, gross margins and lower than expected operating expenses.

Our Q2 a GAAP net loss was 215,000 or $0.01 per share. Our GAAP results include stock-based compensation charges of 633,000. Please see today's press release for detailed reconciliation of our GAAP to non-GAAP results.

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

Tom Hart

Thank you, Ralph. It's been a year of tremendous progress for QuickLogic. I'm extremely pleased with the traction we've developed and the fact that we reported non-GAAP profitability. These are early milestones in what we believe will be our future of sustained revenue growth and profit improvement.

As Ralph noted, constraints in our assembly, package and test subcontractor caused us to miss shipping roughly $200,000 of new products during Q2. Working closely with our customers, our subcontractor and our channel partners, we were able to prioritize product shipments so that none of our customers were negatively affected by CSSP shortages.

In an effort to provide investors with the visibility necessary to measure the early progress of our CSSP strategy, we first shared with you our design funnel. This allowed us to demonstrate our progress towards winning CSSP designs that we believed would move into production. As production orders materialized, we shifted to sharing the number of unique designs, unique customers and unique market sectors that we shipped to during the quarter and what our expectations were for the coming quarter.

This data was presented to help investors measure our progress during the early stages of production ramps. During the second quarter, we shipped a total of 11 CSSP designs to eight customers operating in three market sectors. If we've been able to fulfill all customers' CSSP orders, we would have shipped a total of 15 CSSP designs to 11 customers in three market sectors. This compares favorably to our Q2 forecast of 13, nine and three respectively.

Based on our new product bookings during Q2, which by the way were significantly higher than our Q2 revenue, we believe we will ship a total of 18 CSSP designs to 12 customers in three market sectors during Q3.

The wireless broadband modem sector was again our largest market for CSSPs in Q2. We're scheduled to ship to eight customers in this sector during Q3 including early production to a tier one handset company, whose objective is to become one of the top three market share leaders in wireless broadband modems.

Revenue from our secure, authentication and access device sector fell off somewhat during Q2 as our primary customer worked with their customers in the banking and business sectors to further develop industry standards, regulatory requirements and business models. We share our customers' optimism that these developments will work out well and that this market sector will turn into a strong market for our CSSP solutions.

Our third active market sector during Q2, Mobile Enterprise, showed steady progress during the quarter. This market sector has inherently longer design cycles than we normally see in consumer market sectors, yet the products tend to enjoy longer production cycles and yield higher gross margins. Design trends for CSSPs in the Mobile Enterprise sector continue to provide us with solid growth opportunities.

Consistent with what we've shared during the past conference calls, we continue to believe we will report production revenue for our VEE/DPO technology during the second half. I'm very pleased to announce we've received an order for 3000 VEE/DPO, CSSPs from a Tier one ecosystem partner that will be used to build form-factor reference designs.

Shipments of these CSSPs will begin in Q3. Our partner will send these reference designs to their broad base of customers and numerous design partners around the world. The substantial scale of this project alone speaks to a strategic importance for both of us. To say this reference design will significantly broaden the industry exposure of VEE and DPO would be a gross understatement. Needless to say we're extremely excited about this progress and the demand we believe it will help generate.

In addition, we're enthused about the new relationship we've developed with TAOS, which is short for Texas Advanced Optoelectronic Solutions. TAOS has taken an early lead in the rapidly emerging market for ambient light sensors with its very innovative technology. One of the early challenges we faced in selling our VEE/DPO technology was in order to leverage all the benefits of VEE/DPO, the end product had to include ambient light sensor.

Design prints now suggest that ambient light sensors may end up as a classic check box item, reducing the marginal cost of adding VEE/DPO. We believe that partnering with a leader in this emerging market will broaden the market exposure of VEE/DPO.

Before turning back the call to Ralph – I'm sorry, before turning the call back over to Ralph, I'm going to take a few minutes to share with you what I see as changes in the design trends for mobile communications and computing devices. We all know from headline stories how the new Apple iPad has impacted consumer behavior. Selling over 3 million high-end devices and establishing a new market segment in just 80 days is incredible market acceptance. The success of the iPad has significantly altered the strategies and behaviors of mobile computing and communications companies.

We've been able in working a wide variety of designs in the smartbook – sorry, we've been active in working in a wide variety of designs in the smartbook, netbook, tablet, mid and Smartphone markets. The short story here is that design engineering activities in these products has been high for at least for last 18 months however, excluding Smartphones, the product flow from design engineering to production has been pretty meager.

The problem was no one knew if there would be broad consumer acceptance for these devices and even if consumers embraced the product concepts, no one was sure what functions and features they would demand. The success of the iPad appears to have broken this marketing logjam.

As a result, we anticipate the new generation of designs that are rapidly moving toward completion will go into production. In addition, the iPad has had a real impact of Smartphone designs. What we're seeing in Smartphone designs are strong trends to run multiple applications simultaneously, support the latest version of Adobe flash and monitor multiple system sensors. Processor companies are working very diligently to optimize their processors for both price and power consumption. We believe all of these trends will work to our favor.

For processor designers, these are daunting challenges handling multiple simultaneous applications, and flash video takes more processor power. Having to monitor multiple system sensors means there are fewer opportunities to power down the processor to save energy. Of course, consumers or are unsympathetic to these challenges. They just want more features and longer battery life.

Processor companies and system-level designers are adapting quickly to these challenges and we believe this will lead to higher demand for CSSP solutions. CSSP base solutions provide both processor companies and end-customer system-level designers with the very agile and competitive ways to innovate.

For example, our new WAVE which just stands for wake-up and verify proven system block provides system designers with the ability to monitor system sensors and use the main processor only when absolutely needed thereby optimizing overall system power.

We can provide all of these VEE/DPO, WAVE and a host of other proven system blocks with the single very low power and low-cost CSSP. Our CSSP solutions provide our eco system partners and our targeted end customers with opportunities to expand market penetration, achieve longer battery life and add features that improve the end user experience. Industry design trends are working to our advantage and potential customers are increasingly embracing CSSPs as their preferred solution.

And with that I'll turn the call back over to Ralph, so he could share our outlook for Q3.

Ralph Marimon

Thanks, Tom. We are estimating that for the third quarter of 2010 total revenue will be 7.2 million, plus or minus 10%. As Tom mentioned earlier, we are expecting that we will expand new product shipments in the third quarter to include of 18 designs, shipping to 12 customers in three market sectors. Given this expansion of customers and designs, we are forecasting new product revenue to increase to 2.9 million, plus or minus 10%. At the midpoint, this represents 26% sequential growth for new product revenue. As in prior quarters, our actual results may vary significantly, due to schedule variations from our customers, which are beyond our control.

Schedule changes, particularly those that may impact new product revenue, could push or pull shipments between Q3 and Q4 and change our actual results significantly. During the third quarter, we are expecting revenue from legacy products to increase to 4.3 million, plus or minus 10%.

On a non-GAAP basis, we expect gross margin to be approximately 60%, plus or minus 300 basis points. The gross margin percentage is driven primarily by the anticipated mix of products shipped during the quarter. We are currently forecasting operating expenses to increase to approximately 4.1 million, plus or minus 300,000. The increase in operating expenses is driven primarily by the continued investment in variable costs for chip development for our next generation platform.

Operating expense will also increase due to the end of our cash conservation program. As we have previously noted, in the third quarter of 2009, we instituted a cash conservation program that provided most employees with restricted stock units in return for foregoing 10% of their salary.

This program resulted in cash savings over the last four quarters of approximately $650,000. With the increase in new product revenue and the recovery in revenue for our legacy products, we ended this program as of the beginning of the third quarter of 2010.

Given these changes, R&D expenses are forecasted to increase to approximately 2 million while SG&A is forecasted to be approximately 2.1 million.

Our other income and expense will be a charge up to $60,000 during the third quarter. Our stock-based compensation expense in the third quarter is expected to be approximately $560,000. We expect to use up to $500,000 in cash during the quarter. Cash usage during Q3 will be driven by investments in working capital to support sales growth and variable costs for external design services to support new chip development.

We are extremely pleased that we achieved a non-GAAP profit during the second quarter and our forecast is for its continuation in Q3. We continue to believe our sustainable breakeven point is in the range of 7 to $8 million exactly where within this range will depend on the mix of new and legacy product sales and new chip development activities taking place during the quarter.

And now I'll turn the call back over to Tom for his closing comments.

Tom Hart

The customer specific standard products traction we are clearly demonstrating with revenue and margins. For example, we have grown both since Q1 2009, add more credibility to our view that CSSPs are the future. We believe we are well-poised to grow our business as we move forward and demonstrate the clear value of customer specific standard products.

Thank you. I see our third quarter 2010 conference call is scheduled for November 2 at 2:30 p.m. Pacific Time. We hope you will join us. And now, Joe, let's open up the call for questions.

Question-and-Answer Session

Operator

Thank you, Mr. Hart. (Operator instructions) Our first comes from Edwin Mok with Needham & Company.

Edwin Mok – Needham & Company

Hi. Thanks for taking my questions and congratulations for getting back to a profitability. So the first question I have is on these 18 design phase you are talking about. I was wondering if you kind of look little bit beyond just a first quarter, do you expect some of these designs being more back-end loaded, I mean do you expect more of that – more products to be shipped on the fourth quarter versus the third quarter or how do feel about that?

Tom Hart

Well, first of all these are all the designs that are in production Edwin. So, they will all be shipping in the third quarter, the question is how much will be shipping, where are they and the ramp. Several of them are mature, several of them are just beginning to ramp, obviously we have moved from – let’s see we had an actual of 11 designs in Q2 and we're forecasting 15 designs in Q3. Right?

Ralph Marimon

18.

Tom Hart

Sorry, 18 in Q3. So, we've obviously added new designs and new designs means that guys are ramping. So, these are not design-wins, these are designs that are in production. So, don't confuse this with what people talk about as design wins. This isn't just that we are on somebody's board or we are on their print or whatever. These are things where we have received production orders for. Production wins, when we define production wins if you remember as we've received purchase orders for and are shipping to a minimum of one-twelfth of their estimated annual volume. Does that address your question?

Edwin Mok – Needham & Company

Yeah that – Tom what I am looking for -- I guess, the real one I asked is, how (inaudible) that to ramp if you look beyond the third quarter and obviously how as you said depends on companies – some companies as you said tend to have a much loser way for defining design win but I understand you guys are a lot more stringent on that. And I'm but just curious if there are more projects in your pipeline that you expect to start in the fourth quarter and if any color you can provide there will be helpful?

Tom Hart

The shorter answer is you bet, we have stopped talking about the funnel because we have got revenue and now we are talking about production, designs that were in the funnel that are generating revenue and so typically we classically have not given guidance beyond the next quarter. And so we won't do that for designs and productions either at this point, Edwin.

Edwin Mok – Needham & Company

Okay, that's fair. And then I have a question regarding the 3000 units that you have shipped to your partner for – I guess to 11 design, I was wondering if you have any idea, which markets those are mostly going after and got any way of quantifying that would be helpful? Thank you.

Ralph Marimon

You are asking which market segment, Edwin that this is going into?

Edwin Mok – Needham & Company

Yeah, at least in high level which all market segment are we talking about overall is this industrial?

Ralph Marimon

This is actually a form factor and for those of you who don't know what, we mean by form factor, that is actually a device that could actually be reproduced in this end market place. So it's a regular size, and then in this case it is a Smartphone.

Edwin Mok – Needham & Company

I see. Do you – because that looks like that could be a potentially huge pipeline, how do you kind of work with in terms of with your partner, how do you now segment that with your partner, I mean are you guys more focusing on the tier one customer and that your partner how service the order, the customer in order market is this how we can think about it?

Tom Hart

So the way it works is when we engage with a partner and I think the Icera business is a great example of that where when you are on your form factor board, they tend to make sales calls, they have their market segment, because they have their customers they are going after and then they bring us along and we expect the same thing to happen with the Smartphones as well.

Andrew Pease

Sure. We are companion device; they are not a channel for us.

Tom Hart

Right.

Andrew Pease

They are partner.

Edwin Mok – Needham & Company

Sure. I understand that.

Andrew Pease

They're not reselling our product.

Tom Hart

With this particular partner, we have already been in talk, we have been engaged obviously on an engineering level, deeply with them over the past couple of years and actually an anticipation of this form factor reference design, we have already met their sales and marketing people in the various geographies that are of interest to us.

Andrew Pease

And them.

Tom Hart

And them. Yeah?

Edwin Mok – Needham & Company

Great. That was helpful. And then got a question on the supply constrain issue, you mentioned that it's largely resolved and you expect to be able to ship in the third quarter, I was wondering did you resolve by qualifying the new supplier or did that particular supply just expand capacity (inaudible) basically?

Tom Hart

Well, in this particular instance of that work, we did actually resolve it with this particular supplier although as we increased our output we are always looking at our options. But in this particular instance this – our supplier who has actually been expanding capacity. And as they have expanded capacity and moving equipment around, one end of the pieces of equipment and one down and then it turns out that in this capacity expansion, the actual output in the quarter decreased as opposed to increasing. So it's a challenge for us throughout the quarter to get increasing sales through this particular contractor.

Edwin Mok – Needham & Company

Great. That was good call. And then finally, just a question for Ralph. On the operating expense of 4.1 million, is that basically is there any kind of one-time R&D expense in that and should we think about that as being the kind of normalized operating run rate for the businesses that we are in right now?

Ralph Marimon

There is to one-time expenses in there. You may remember we have moved to this variable model, for quite a bit of a third party or our chip designed cost. So, I would say if you were going to normalize it is indeed in somewhere in the range of 3.7 to 4.1, 4.2 million in that range. But there is no one-time charges in there.

Edwin Mok – Needham & Company

Great, that’s all I have thank you.

Ralph Marimon

Thanks Edwin.

Tom Hart

Okay. Thank you.

Operator

Our next question comes from Brian Coleman at Hawk Hill asset management.

Tom Hart

Good afternoon, Brian. I guess Brian is not there.

Operator

Mr. Coleman, your line is open.

Brian Coleman – Hawk Hill asset management

Can you hear me?

Tom Hart

Now, yes.

Ralph Marimon

Now, we can.

Brian Coleman – Hawk Hill asset management

Okay. My first question for you, your first data card designs went into production may be about a year-ago and I'm just wondering if you were getting any better visibility on what the kind of ongoing sales there might be?

Andrew Pease

Brain this is Andrew Pease. So, our first data card production designs actually occurred in Q3 of 2009. And we expect that we will be shipping into data cards well into 2012, is that was your question?

Brian Coleman – Hawk Hill asset management

No, I'm wondering if you are getting better visibility quarter-to-quarter from your customers on what their order rates are?

Andrew Pease

No, as a matter of fact this is a constant concern of ours and I have regular calls with the general manager at Icera where we constantly compare forecasts, and actually the lead time that we get from our customers is roughly about four weeks, four to six weeks, when you know that certainly they make these product – it's anywhere from 12 to 13 weeks. So, we are lucky to have a good channel partner and our channel partner and us work well together to make sure that we can have product into the market, that is outside our particular cycle times.

Ralph Marimon

(inaudible) Brian.

Brian Coleman – Hawk Hill asset management

Okay. When – thinking out misses in our – we're looking for a forecast but just kind of trying to understand how your revenue mix will change over time. When would you expect the Smartphone, smart book business to be bigger than the data card business? Is that 2011, does it come on that quick?

Andrew Pease

I would expect that by the end of 2011, that business will be larger than the data card business. We do expect our data card business to try to peak, mid to latter 2011, but we also expect a good ramp for the other business, let's say. The display oriented business.

Ralph Marimon

But, you know, what we – it's really hard to read here Brian is, now you guys have asked us repeatedly, where is revenue for VEE and DPO going to come from first, is it Smartphones or smart books and typically I have hedged the bat and said my belief always was that it was smart books, because I thought they could moved faster than Smartphones. But, the challenge here is this that smart books now are kind of taken a back seat to Tablets. And everybody in discussion has got a crash program going for Tablets in light of what the iPad has done.

So, not clear at this point which is going to be the largest of the two. But I think the, I would agree with Andrew, his overall assessment of – the end of 2011 is probably where the cross over will occur.

Andrew Pease

And I'm really talking about the aggregate of both Smartphones, smart books, net books, tablets cloud books and even MIDs. We see opportunity in all of those areas, Brian.

Brian Coleman – Hawk Hill asset management

Okay. Why don't you, I know, you are not breaking out SI sales force any more, but are those included in the Smartphone, is that how you think about them or is that an entirely new category, is there is some cannibalization of the two, how do you think about that?

Andrew Pease

Well, we – with the way we categorize our internal funnels, we do characterize it by separately, Smartphones, Smartbooks, Netbooks, Tablets and MIDs, all those are separate categories to us And we have obviously have a super category that we roll them up to.

But, is there some cannibalization, To add to what Tom said, probably six months ago we were very big on Smartbooks and probably to a lesser extent in Netbooks and we see virtually everybody that is doing those type of form-factor designs are trying to come out with a Tablet to be what they call an early or a graphic follower to the iPad.

The iPad really has changed the game for a lot of these ODMs and OEMs. Everybody feels like they've got to have an entrance into that market.

Brian Coleman – Hawk Hill asset management

Okay. At the Uplinq Conference, you announced an RGB Split PSB. What kind of applications – form factor these applications market does the PSB like that –?

Andrew Pease

A PSB like that would principally going into a pretty complex Smartbook – excuse me, Smartphone, and without telling you too much about what their planning, it is actually a multiple – the screen it is side-by-side. So it's actually to create a bigger viewing area and still keep the small form factor of the Smartphone. So, imagine if you had a Smartphone that hinged in the middle or maybe it could even possibly a multiple hinges, you could open it up and basically see an image that would span across two displays.

Brian Coleman – Hawk Hill asset management

That's not something that you develop on the fly hoping somebody would need it, it sounds like something was developed for a specific project?

Andrew Pease

Well, it was a problem that people came to us with frankly. There was an ODM, that was given a requirement by a fairly large OEM and said that they wanted that type of form-factor and they were trying to solve the problem of taking an RGB signal and splitting it all in one direction in other words serializing the signal up one end and de-serializing the signal on the other end. So, we were able to do that for them.

Brian Coleman – Hawk Hill asset management

Okay. Can you give us an update on the reference design, how many you have customers which one is complete et cetera?

Andrew Pease

Don't have that information at the top of my head right now. The reference designs I can tell you – they have been relatively stable and steadily increasing but not to the extent of the other designs, the OEM designs have been increasing.

Brian Coleman – Hawk Hill asset management

Okay. And then, you have talked about some additional OpEx for chip development and I am wondering if you could give us some update on some of the new development platforms and work you are doing on new chips?

Tom Hart

Yeah, market the chip, if I told you that. So we don't like to talk about products until we're ready to announce them and so I can't talk about that. But when we look at the dimensions, if you just think about what the market needs, we've come from doing – with CSSPs we have coming from doing bridges, to doing video processing in a way if you will with VEE and DPO power management. And just ask yourself, where does that trend go or goes towards more complexity. It goes to being more, taking on more of the functions that offload the processor, those are the kind of things that we are looking at. And I can't talk any more beyond on that.

Brian Coleman – Hawk Hill asset management

Okay. With this deal then we should think about them is new platforms as opposed to just more PSB's on your current CSSP?

Tom Hart

Correct. We are doing both of those, we're doing more PSB's all the time. That's not a privy because it takes engineering talent, but I am talking about new platform, we are talking about new silicon.

Brian Coleman – Hawk Hill asset management

Right.

Tom Hart

So the real average price with CSSP is if you think about it is more PSB's offer existing platforms and it's a lot easier to turn to PSB than it is to turn to a new platform.

Brian Coleman – Hawk Hill asset management

All right, sure. Okay and then my last question, if you can just maybe give us a little bit more detail around the SAFA [ph] customer and I think you said it was a little bit – the business this quarter was a little bit will pull low end of guidance and it sounds like that customer and its customers are kind of rethinking some things and if you just maybe give us a little bit of clarity on that?

Ralph Marimon

That particular customer has multiple designs, so one is really targeted to – in one area it's really a longer qualification cycle than we were aware of. And there are customers basically they have a couple of customers that they are using in its qualification cycle and since it is secure access the qualification cycle is rather complex.

They anticipate that they will be through that before we exit this year. So we definitely feel like we will have recovery in that business. The other piece in our business is really making sure that the specifications that their product has meets the specifications in this new market and that's constantly being tweaked. And once again, they feel like this business will recover before the end of the year.

The latter one by the way is new – a new area for this end customer.

Brian Coleman – Hawk Hill asset management

A new end market for them.

Tom Hart

Plus a new area, it turns out it is – many of their existing customers use this type of product in a different way than the former customer – than the former application.

Andrew Pease

(inaudible) the first one was about – was targeted at banking, second one is targeted at business applications –

Tom Hart

So really –

Andrew Pease

That’s only we can really say about it.

Tom Hart

When we say business application, I think we can give you a little more clarity on that. So they could actually sell the business solution into that same banking customer but they would sell into their MIS department, for instance, where the banking application, people like you and I its customers to the bank would use their solution for a strong authentication for particular bank account with the bank, so that’s what we mean by two different applications.

Brian Coleman – Hawk Hill asset management

Okay, I see. And I do have one other question for you on the – actually there is two here that is tied together. The tier one handset company – did you ship at all for that? I think I know that is, in fact, I think I did the (inaudible) report on it – all right if you are a main customer you can do what (inaudible) but did you ship at all for that customer in 2Q?

Tom Hart

Yeah we did. How would you – you could tear apart if we didn’t.

Brian Coleman – Hawk Hill asset management

I guess it was kind of a mid to late June when I got the part, so I didn’t know if you had – anything material on the quarter?

Ralph Marimon

They were included in the numbers Tom gave you for Q2. Yes, we did ship production volume to them.

Brian Coleman – Hawk Hill asset management

Okay. And then the eight customers in Q2 going to 12 in 3Q, is that all in the data card space?

Tom Hart

No.

Ralph Marimon

No.

Tom Hart

No, it is spread out across all three sectors. Data cards, smart – well sort of broadband data cards, secure access data cards, and mobile enterprise in Q3.

Brian Coleman – Hawk Hill asset management

Okay. All right great. That’s all I got. Thanks very much guys.

Tom Hart

Okay, Brian.

Operator

(Operator instructions) Our next question comes from Bob West with Nitech Research [ph].

Tom Hart

Hello, Bob.

Bob West – Nitech Research

Hi, Tom, Andrew and Ralph.

Andrew Pease

Hi, Bob.

Ralph Marimon

Hi Bob.

Bob West – Nitech Research

Do you hear me?

Tom Hart

Yeah.

Bob West – Nitech Research

Okay, good. Well listen, nice results and an encouraging guidance. So it has been a long steady climb back to breakeven, but it is nice to see $0.01 a share.

Tom Hart

Sure; B, it is negative $0.01.

Bob West – Nitech Research

Yeah, it does, don’t it? Got a question or two for – maybe for Ralph on – I noted a very low cash uses on the balance sheet, are you saying any of the QuickLogic option hold or options from last fall like that could be offered?

Ralph Marimon

Not yet.

Bob West – Nitech Research

Okay. And then a second question on margins. As you have now gotten back to breakeven, on – in your business and balancing out, in the cost of goods area, you’re absorbing I assume all of your fixed cost there. Are you seeing the 50% target on your new product sales that you have targeted to receive?

Tom Hart

I think what we’ve talked before about, Bob, is that as the mix seems to more heavily weighted towards new product, we would see a blended margin of about 50% in total. Obviously, the new products carry lower margin on legacy. But right now, I believe in Q2, new products was about 35% of the total and in Q3, it’s about 40%. And when we talk about the breakeven point and the margin at 50%, we are talking about really reversing those numbers, that new products is closer to 60 or 70% and legacy having a smaller share. So, that’s where – and we think that that 50% margin is sustainable.

Bob West – Nitech Research

Is sustainable. So, the actual part may be below 50%, but a blended result of 50% is sustainable.

Tom Hart

Yeah, that’s possible. I mean, within the product line, within new products, we may be aggressive in selling one particular product to one customer and not so aggressive with the other one. So, the margins may vary, but in general, the blended rate should be 50% or above once we get to the right mix.

Ralph Marimon

And the other aspect of that is, with the newer platforms we are doing, our target is having more value and therefore should generate more gross margin, and the simpler functions that we – that we have done in the past.

Bob West – Nitech Research

Okay. Oh, that’s good – good insight. Tom, in your prepared remarks, you noted the prevalence both last quarter and this of Ambient Light Sensors are now being installed in more and more smart phones. Can you give us some color on what’s driving that change?

Tom Hart

Well, I think it’s – I think it’s a desire for better viewing experience, is the primary driver. I mean, it’s kind of like what’s driving the trend towards higher pixel cameras. So, people want better – first of all, they want better pictures, but they also want better viewability. And basically ALS – sorry, Ambient Light Sensor, ALS is in the ability to implement some pretty – in the past, we have implemented some pretty crude algorithms to control backlight level. And actually, you can see this on some of the feature phones where it’s pretty crude. You can – actually it’s kind of annoying and some examples where you see shipping from various backlight levels, depending upon where the ALS is mounted and how your hand position and all those other kind of things.

So, I think in general, it’s just a trend towards improving quality and the cost should come down. For pretty bread and butter kind of ALS sensors, you are talking of something in the neighborhood of $0.50 now, down from well over a dollar in the not too distant past.

Now, the other thing that’s happening by the way is that they are building more sophisticated ALS sensors, and so they are looking to gain their ASP improvement there by adding more functionality. And we are obviously interested in those as well. I mean, it’s not just brightness – well, if you begin to – just as an example, begin to look at core temperature. The core temperature in daylight is very different than under a fluorescent lamp or under a mercury vapor lamp. And if you could monitor them (inaudible) light and change the way that the information is displayed based on that, you can wind up with a better viewing experience. So, I mean, there is a lot of room to grow there. And all of that by the way is good news for us.

Bob West – Nitech Research

Yeah, that’s what I was going to ask, that is very good news for me even as opposed to DPO. I would think clearly they were prepared to emphasize they suppose and forgive some on battery life.

Tom Hart

Nobody wishes to give up anything on battery life, I can tell you. And the Ambient Light Sensor, of course, is really crucial to maximizing DPO’s performance.

Bob West – Nitech Research

Okay. Yeah. Next question – thank you for that. Next question I would like to follow-up on Brian’s questions and on the Secure Access strong authentication market, as I recall, you had a second customer in that market and perhaps one or two designs and they’ve been able to move that to production as yet. And then a follow-up to that.

Tom Hart

Well, I was wondering you’d ask about that. I – we do have another customer there, we can’t talk about yet, but we do see that moving to production this year.

Bob West – Nitech Research

Okay. And a follow-up is – a question, what’s the activity of these first two customers, has that led to other customers or other interest in CSSP s in that marketplace?

Tom Hart

We see the next move as being beyond just Secure Access and Secure Authentication, and we haven’t talked much about that in these calls and it’s premature. But we think that both of those, Secure Access, Secure Authentication, is going to be required in this whole m-to-m, machine-to-machine market, which is by some people’s estimates is going to explode and be bigger than cell phones. At this point, it’s – I think it’s opinion, but I think we can all believe that there’s going to be a lot more IP addresses out there in all kinds of devices than any of us would have imagined just five years ago.

And if you look at how you get there, it’s going to be – it’s not going to be hard wired, it’s going to be wireless and if you talk about wireless things, you need to talk about security and so this goes hand in glove with what we’re talking about. So, we’re not at a point yet where we can talk about specific designs that we have in the funnel, except beyond the one that we just talked about. But that’s kind of where we are headed with this thing, is really towards getting ourselves set up to be a significant player in machine-to-machine.

Bob West – Nitech Research

Well, thank you. That’s a good insight. Next question also follows up Brian on the Uplinq Conference. And my question there was, was this conference focused both on the – on the smart phone and the smart book area? And did you have some customer engagements come out your presence there?

Andrew Pease

The Uplinq Conference was principally a developer’s conference for Qualcomm and they abided us to come along and show what we were doing. So, most of the engagement that we had there was not so much end customers, but developers and how they could actually write applications and could take advantage of being DPO. So, it was really more of a partner conference for them. The significant piece of the Uplinq Conference, by the way, there was 2,200 registered attendees, so it’s really a well attended conference, and for the first time, I think Uplinq is a new name for Qualcomm because for the first time, they promoted other operating systems other than just a Qualcomm BREW Operating System.

And to answer specifically your question, it was much more geared towards smart phones and not necessarily smart books. It was definitely a smart phone conference and the developers that evolve around that market segment.

Tom Hart

Which, of course, is our historic strength.

Andrew Pease

Right.

Bob West – Nitech Research

Okay. Okay, a comment, a little different question. In early June ahead of this conference, QuickLogic announced well built of a VEE/DPO evaluation boards. Well, could you give us some color on how you are using these boards?

Andrew Pease

The evaluation boards, we use out in the field to demonstrate in a – basically an encapsulated system something that doesn’t have a – an exposed PCB board how VEE and DPO can be implemented with a customer. So, these new evaluation boards actually have two different displays on them. One is more of a netbook/smartbook form factor. And I think it’s a seven inch display or an eight inch display, but it also has a four inch display. So, basically it’s a much more rugged, much more nice looking development of board for the customers to see or a reference platform.

Bob West – Nitech Research

So, Andrew, are you using – are you supplying this to some customers, are they are things that you take in with your sales force?

Andrew Pease

So, we take mem with our sales force.

Bob West – Nitech Research

Okay. Did you have (inaudible)?

Andrew Pease

In some cases – yeah, in some cases, we give – leave them behind with customers to evaluate. We probably have had 20 of them; I think it’s about 20. But these are – these actually have various connectors on them, so a customer can hook right into them much more easily than the last boards that we had.

Bob West – Nitech Research

Okay. Well, then do you take them then to conferences like the Uplinq Conference?

Andrew Pease

Yes, we did have that at Uplinq and like I said, the problem when you are taking around a raw PCB board is, a lot of things can go wrong with that. And this is a much more rugged (inaudible) plus we could attach a tripod to maybe tripod to it, so it’s easy to set an angle for viewability from a demonstration point of view.

Bob West – Nitech Research

Well, very good. I think this is all the questions that I have. Again, nice results and good guidance and look forward to next quarter.

Ralph Marimon

Thank you, Bob.

Operator

I am showing no further questions on the phone. I’ll now turn the conference back over to Mr. Hart.

Tom Hart

Well, thank you for your continuing interest in QuickLogic, in our customer-specific standard product vision, as we are moving this forward. We look forward to you on our next conference call on November 2. Thank you and take care. Bye.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the program and you may now disconnect. Everyone have a great day.

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Source: QuickLogic Corporation Q2 2010 Earnings Call Transcript
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