Why Investors Should Accumulate Shares Of Quicklogic

Aug. 4.14 | About: QuickLogic Corporation (QUIK)

Summary

Weak third quarter revenue guidance amid Samsung and worldwide tablet market supply issues initiated a sell-off, resulting in a 40% valuation drop in the past week.

QUIK is expected to grow in line with previous guidance as connectivity and flexible fusion sensor hub production begins in the second half of 2014.

Sell-off is an opportunity that entails substantial growth potential in connectivity and sensor hub market.

Second half 2014 is on target with previous connectivity and flexible fusion sensor processor roadmap guidance.

Quicklogic developing software and MEMS portfolio.

Quicklogic (NASDAQ:QUIK) was slammed by short-selling and the panic by some retail investors last week following third quarter guidance. The stock lost around 19% of its value in just one day. Investors ignored the second quarter revenue and the EPS beat as the company gave weak guidance for the third quarter due to slowing demand for display bridge products used in tablets. Hence, the stock price tumbled over investor confusion about the roadmap being paved by the new CEO Andy Pease. We need to give CEO Andy Pease's conectivity/sensor hub roadmap the time he stated is required for the roadmap strategy to play out. Despite the third quarter guidance, the fact remains that fundamentals are quite healthy, and QUIK is trading rather cheaply on a forward looking basis, which adds to the reasons why this stock holds significant capital appreciation potential.

I would suggest, given Quik's historically thinly-traded stock, this weakness appears to be transient, and a great opportunity to accumulate shares because of favorable connectivity and sensor hub processor growth prospects, technology leadership and market leadership in Quik's new flexible fusion connectivity/sensor hub processor and sensor application software market segment. Let's see if I can clear up the confusion, with a detailed analysis of catalysts announced in the second quarter conference call, along with my own investment thesis. I cannot emphasize enough the unique Flexible Fusion Sensor Engine platforms that Quik is bringing to market in the second half.

1. What investors should watch for going forward

Historically, Quik has relied on its customers' intellectual property and design specifications to make products. Quik's new approach is to develop its own intellectual property to pave the way to make always-on sensing and processing features a reality. For the very first time Quik's reorganized engineering group has developed processor chips for the smart devices of tomorrow by extending its expertise to proprietary flexible fusion engine sensor processors that go beyond inertial and magnetic sensors, such as, making user context activity detection or bio sensors part of its roadmap. Quik also is partnering with industry leaders in adjacent technologies to be able to bring the pieces of the context awareness puzzle together, leading the integration of new data sources to provide always-on context aware services that will simplify users' lives. Quik's CEO Andy Pease has cleverly completely overhauled the company's engineering organization with the mandate to accelerate time to market, and positioned the company in the connectivity and sensor hub processor space with the only in-system ultra low power and reprogrammable sensor hub processor chip.

Going forward look for progress in Quik's press releases and investor official blog to find evidence that the activities identified in last week's conference call are progressing. Quik started sampling its second flexible fusion sensor hub platform, the ArcticLink 3 S2, which is pin-for-pin compatible with the S1. OEMs can use either sensor processor hub depending on the value proposition they seek to achieve with the customer or end user. Quik's CEO stated the S2 sensor processor platform doubles computational capability, cuts power consumption by approximately two-thirds, reduces QUIK's manufacturing cost, and opens sufficient, programmable fabric to support the smart connectivity functions that many Tier 1 OEMs are developing. I would expect some additional progress in the display bridge products, which are still important with demand expected to pick-up again later this year, given the unexpected world wide tablet demand decline.

Today, we were able to confirm Quik CEO's statement that display bridge design wins are still being expected going forward:

"However, we continue to win new display bridge designs with Chinese (IDXes) for tablets with other customers for industrial and enterprise applications."

Consistently, Quik announced that its PolarPro II-based CSSP has been chosen by Japan Radio Company, Ltd. (JRC) to enhance the connectivity capabilities of its next-generation Personal Handy-Phone System (PHS).

More importantly, keep an eye on Quik's focus and guidance for the second half of 2014, which has always been the key strategic roadmap to bring the company to profitability. Quik's revamped engineering group shifted toward the more lucrative and massive market in connectivity and flexible fusion sensor hub products after performing independent market research. By the fourth quarter Quik should evidence some penetration with these sensor processor products, consistent with the trend in the connectivity and sensor hub business that is expected to grow in coming years. Quik's execution and timing in the market for flexible fusion senor hub processors should show traction, as OEMs shift their reliance from rigid and battery power hungry micrcontrollers. Smartphones are currently the largest market, but also look to confirm that Quik is leveraging the technology into other areas, especially wearable devices for multi-sport, health, fitness, medical, industrial and other commercial applications.

In the recent conference call, Quik did not disclose all of their ongoing design engagements for the Polar Pro III because of nondisclosure agreements and competitive reasons, but suffice it to say, the statements were laced with hints that Quik will intercept new mobile devices being introduced in the coming months. Investors should feel some relief that QUIK identified several connectivity and flexible fusion sensor hub processor engagements that are expected to begin production this year and beyond:

1.Quik has two new production wins with Kyocera and Japan Radio Corporation. QuickLogic initiated production shipments to support both of these designs during the June quarter.

2. The Polar Pro III socket in a high-end Chinese smartphone market.

3. In the December quarter the ArcticLink 3 S2 chip will begin production for a wearable device to be sold by a Japanese OEM.

4. The ArcticLink 3 S1 with only QUIK algorithms for a wearable to be sold by a top ten mobile OEM with high brand name recognition. This is expected to begin production in first quarter 2015.

5. Quik's Polar Pro III design is expected to intercept a Tier 1 (Samsung) smartphone OEM, which will generate major production volumes. Interesting to note, Quik did not say when this production could be announced, but I believe we should have a better idea by October 2014.

Quik stated its sensor hub platform, the ArcticLink III S1 and S2, is generating a "large number of ongoing engagements." CEOs don't use statements like this unless there is concrete evidence of future developments. I believe investors are under the mistaken belief that Samsung is no longer Quik's customer. Quik's CEO gave a clear pronouncement that Samsung is very much interested in Quik's products:

"We have ongoing engagements at Samsung that we anticipate will enter production later this year and during the first half of 2015."

It was hard to find the technical language, unless you are familiar with the products, in listening to the call for the first time, but Quik confirmed several interesting designs expected to move into production:

" A key element of our strategy was to provide customers with a pin-for-pin compatible extension of the S1, so that they could seamlessly transfer their S1 designs to the S2 platform. In fact, this strategy enabled a top 10 smartphone OEM to move quickly from our S1 to our S2 platform. We believe we will initiate production shipments of the ArcticLink 3 S2 to support this design during Q4 2014.

This migration strategy is also enabling a Japanese OEM to use our sensor hub design in an innovative wearable product. They initially started the design using our S1, and are scheduled to enter production during Q4 using our S2 platform."

Again, Quik should be providing investors with some evidence that these engagements and production wins are moving forward by the end of the third or fourth quarter. Quik is showing some additional progress in the three flexible fusion engine sensor hub processor platforms designed and developed by its engineering group. The third most capable and complex design will be introduced by early 2015, dubbed the S3 platform. Quik emphasized that the development strategy allowed OEMs to easily transition between S1, S2 and S3 sensors. Thus, OEMs will have a choice between a S1 or S2 sensor hub platforms, depending on the degree of functionality and power consumption that the low to high-end mobile devices and commercial applications they will be used in. Yes, it became apparent in this conference call that consumer mobile devices will not be the only users of Quik's flexible fusion sensor hub platforms.

The sensor hub market is huge. Semico forecasts that the market for sensor hub controllers will reach 2.5 billion units by 2018, CAGR (2013 to 2018) 27.4%. The wearable market will see CAGR of 114% reaching over 300 million units for devices with 9-axes or more. However, please note the sensor hub processor-based microcontrollers on the market today do not support always-on context aware and reprogrammable applications that Quik's flexible fusion sensor hub solution supports. Quik's Flexible Fusion Engine processor offers a unique technical solution with in-system re-programmability. The proprietary Flexible Fusion Engine, in-system re-programmability, is not currently being offered by any other sensor hub manufacturer.

To be fair, Quik's CEO Andy Pease is meeting expectations previously set in company conference calls that connectivity and Flexible Fusion sensor hub business growth will start in the "second half" of 2014.

Noteworthy, we have seen some consolidation in the sensor hub application space in the recent months because its important to pair fusion sensors with algorithms. INVN acquired two algorithm companies. Unlike prior product introductions, QUIK's engineering team has qualified market leaders on its vendor list (QVL) for sensors such as InvenSense, Analog Devices, ST Microelectronics, Bosch Sensortec and others:

"Additionally, we implemented a formal, qualified vendor list, or QVL, program for sensors. This assures our customers that we have tested and qualified specific sensor devices for use with our platforms. Our engineering team has already qualified sensors from analog devices, Bosch, InvenSense, and (SV) Micro."

Quik provides its prospective customers with listing (QVL) of sensors that have tested and are known to work with the ArticLink 3 S1 Sensor Hub processor. QUIK has already validated these market leaders and is pursuing reference sensor design applications, in partnership with these companies, for their most advanced and low-power flexible fusion sensor hubs processors yet. OEMs and partners can rest assured that Quik's sensor hub processor is compatible with all software algorithms being offered by INVN or developed by Movea, as their is a legally enforceable licensing agreement in place with Sensor Platforms. I think most investors missed the fact that Quik's CEO alluded to some ongoing discussions with Audience (NASDAQ:ADNC) executives. Although the color given was sketchy, I find this very interesting, since QUIK has a license agreement with Sensor Platform which ADNC acquired recently. Most likely, Quik is working out a cross-license agreement with access to Quik's flexible fusion sensor chips and ADNC's sensor fusion software portfolio e.g., Sensor Platform algorithm license. This leads me to believe Quik is planning on having software application license fee revenue, which I will talk about next.

2. Quik is Developing Sensor Hub Software Algorithm Applications for license fees

Investors should look to confirm statements in the conference call that Quik revealed it is developing a sensor hub software application business. Quik clearly stated it has been aggressively hiring PhDs to develop complex applications for the sensor hub processor to meet the ecosystem demands of mobile OEMs and commercial applications. This can be a significant source of revenue, since ecosystem application software is known to be licensed for a fee. In a follow-up with other investors close to Quik management, I have learned that one of the PhDs hired is a world-renowned expert in pedestrian dead reckoning (PDR). Also, I would expect that Quik's in-system re-programmability function is a significant competitive advantage for OEMs that develop their own applications or open source applications for third-party developers that can be sold as applications for a fee after the mobile device is sold to the end user. Clearly, investors who do not understand the ecosystem component in mobile devices fail to see the revenue opportunities and functionality possibilities, which are really unlimited here, for both Quik, OEMs and partners who elect to develop their own solution that is driven by application software algorithms.

As a quick reminder, the Flexible Fusion sensor hub technology used by Quik combines data from multiple sensors in the hub and derives intelligence from that data. The reprogrammable sensor processor and algorithm application is the foundation for motion tracking, navigation, context awareness, location based services, augmented reality and more. Undoubtedly, this is the basis for future innovative applications which necessitate Quik's highly functional flexible fusion sensor hub processor technology. The brains behind sensor fusion are in the software algorithms that Quik is developing with the PhDs hired. The flexibility in the reprogrammable sensor fabric used by Quik in its sensor processor is the distinguishing feature when it comes to application software, that can be flexibly changed in the mobile device, after deployment with the Quik sensor chip inside the device. Technology investors have been challenged to find any comparable Flexible Fusion sensor hub processor device, which is unique to Quik's powerful processing device, known as an ultra-low power in-system reprogrammable sensor hub platform, based upon its patent pending proprietary flexible fusion engine architecture. The bottom line investors are missing is that Quik's Flexible Fusion Sensor Engine is moving into smartphones, tablets and going directly into wearables and other products later this year.

Today, Quik's outlook is overshadowed by third quarter guidance especially since details cannot be given because of the company's policy not to provide details unless it has an actual production order. Investors are separated from speculators when they can look into the future by performing some critical thinking about their investment thesis, which I have tried to focus on here.

3. Quik MEMS Product Portfolio

Lastly, on June 24 2014, Quik announced Steve Whalley, a leading authority in the MEMS Industry, joined the company's advisory board. I find this very interesting in the face of the MEMS revenues due to sensor fusion that will grow to $7.7 billion by 2018 CAGR ('13 to '18) of 20.3%. In 2013 MEMS revenues in sensor fusion applications accounted for 23.6% of the total MEMS market. By 2018, this will grow to 34% of the MEMS market. We should see confirmation that Quik MEMS engineering software group is developing high performance proprietary algorithms, such as the recent pedometer algorithm that is preloaded in cellphones. Here is a recent demonstration by Quik engineers showing two of the transportation contexts available in the ArcticLink 3 S1 Ultra-low Power Sensor Hub.

I therefore conclude that Quik is rapidly developing a portfolio of MEMS products, using its unique proprietary Flexible Fusion Engine sensor processor technology. Please stay tuned for more information about this roadmap milestone development later this year.

Bottom line:

Unmistakably, Quik is executing ahead of schedule on the connectivity and sensor hub roadmap outlined in previous conference calls. Quik has a low float and is a thinly traded stock, which can present some investor accumulation problems when the production orders are announced, and the roadmap vision actually translates into revenues we have all been waiting for. Institutional ownership doubled to 23.63% of float. I believe investors are confused and have overreacted because of the overshadowing effect the short-term display bridge guidance has caused on the blossoming second half of 2014 and beyond. It will be hard to accumulate shares when the picture becomes crystal clear. Investors should strongly consider accumulation at currently discounted price.

Disclosure: The author is long QUIK. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I do not have any position in ADNC.