QuickLogic's (QUIK) CEO Brian Faith On Q2 2016 Results - Earnings Call Transcript

| About: QuickLogic Corporation (QUIK)

QuickLogic Corporation (NASDAQ:QUIK)

Q2 2016 Earnings Conference Call

August 3, 2016 17:30 ET

Executives

Sue Cheung - Principal Accounting Officer

Brian Faith - President & CEO

Analysts

Gary Mobley - Benchmark

Richard Neaton - Rivershore Investment Research

Operator

Ladies and gentlemen, good afternoon. At this time, I would like to welcome everyone to the QuickLogic Corporation’s Second Quarter 2016 Earnings Results Conference Call. During the presentation all participants will be in a listen-only mode. A question-and-answer session will follow the Company’s formal remarks. [Operator Instructions] I will repeat these instructions after management completes their prepared remarks. Today’s conference is being recorded.

With us today from the Company are Brian Faith, the President and Chief Executive Officer; Sue Cheung, Principal Accounting Officer.

Before we begin our call with the QuickLogic executives, I will read a short safe-harbor statement. Some of the comments QuickLogic makes today are forward-looking statements that involve risks and uncertainties, included, but not limited to, stating expectations relating to revenue from our new and mature products, statements pertaining to QuickLogic’s future stock performance, design activity and its ability to convert new design opportunities into production shipment.

Market acceptance of its customer’s products, expected results and financial expectations for revenue, gross margin, operating expenses, profitability and cash. I would like to remind you that the same as must be considered in conjunction with the cautionary warnings that appear in QuickLogic’s SEC filings and this is a caution that all forward looking statements in this call involve risk and uncertainty and the future events may differ materially from the statements made.

For additional information please refer to the company's Securities and Exchange Commission's filings which are posted on its website or available from the company without charge. This conference call is open to all and is being webcast live. We will start today's call with a review of the second quarter financial results like QuickLogic’s principal accounting officer Sue Chung. Then company’s C.E.O. and President Brian faith will discuss the company's strategic and initiatives in the quarter. Since it will provide financial guidance for the third quarter before Brian's closing remarks.

At this time I would like to turn the call over to Sue Chung Principal Accounting Officer. Please go ahead madam.

Sue Cheung

Thank you operator. Good afternoon and thank you everyone for joining us today. For the second quarter of 2016 told post revenue was $2.7 million which was at the low end of our guidance range or new product revenue was approximately $1.2 million and the mature product revenue was an approximately $1.5 million.

Samsung accounted for 31% of the total revenues during the second quarter compared to 35% in the previous quarter. We were in the second quarter we took an inventory reserve off $203,000. This was a primarily driven by the write off of our first generation portal Pro3 inventory. Even though this was a non-cash expense, we usually didn’t know that just before inventory reserves you know at non-GAAP presentation.

As a result as the reserve lowered or GAAP or non-GAAP gross margin by about 8% resulting in a recorded non-GAAP gross margin off 30%. Excluding the inventory write off on non-GAAP gross margin would be 38% which was within your guidance range. Non-GAAP operating expenses for Q2 totaled $5.6 million which was favorable to our guidance. Some of the GAAP operating expenses were primarily due to our efficient use of resources and the lower than expected engineer related expenses.

On non-GAAP basis the total of income expense and the taxes was a charge of $76,000. As a result the non-GAAP loss of approximately $4.8 million or $0.07 per share which was better than our guidance. We ended the second quarter with approximately $19 million in cash which was favorable to our guidance. Cash usage during the second quarter was $4.3 million which reflects the operating loss and the changes in working capital requirements.

That were partially offset by borrowing $1 million against our existing line of credit with Silicon Valley bank. Our Q2 GAAP net loss was approximately $5.6 million or $0.08 per share which was within our guidance range. Our GAAP results include a stock based compensation charges of $439,000 and a non-cash write off of $312,000 for first generation sensor max set. Again both the GAAP and non-GAAP results included the previously mentioned inventory reserve charge.

For detailed reconciliation GAAP and non-GAAP results and other financial statements please see the press release we issued today. We also posted and updated financial table on the IR webpage that provides current and the historical non-GAAP data. Last week we implemented the strategic re-alignment measures that resulted in a reduction of 8 employees. We expect to incur a onetime severance charge of approximately $170,000. In the third quarter of 2016, associated with this reduction.

Later this quarter we also we also planned to implement the constant reduction measures associated with all site services. On non-GAAP basis we estimate the quarterly savings with these initiatives will be between $500,000 and $800,000 beginning with Q4 2016. In addition to notably lowering our quarterly cash usage and given the same assumptions we've shared in past conference calls. We expect those costs savings will lower that revenue level required to achieve cash flow breakeven by $1 million to $1.6 million.

With that I'll turn the call over to Brian who will update you on the progress of our strategic initiatives.

Brian Faith

Thank you, Sue. Sorry folks, a technical difficulty with my microphone. Thank you, Sue and thank you all for joining our quarterly conference call. As I'm sure you are aware, following the announcement Andy's retirement, I took over as CEO on June 24. Andy will continue to work with us as an active member of the Board of Directors. Although his condition is defined as early stage one, his neurologist emphasized Andy that best therapy for slowing the progression of Parkinson's Disease is to reduce stress and increased physical activity, his retirement optimizes both. We wish Andy the best as he embarks on a well-deserved retirement.

Since this is my first conference call as CEO, I'll take extra time to provide you with some background of fresh baseline of our strategic initiatives and my outlook for the future. During the past 20 years at QuickLogic I've held a variety of positions in engineering, product line management, marketing and sales. Since I had P&L responsibility as a product line manager, I spent a considerable amount of time being mentored by our then CFO. With this background, I'm very familiar with the operational structure of the company, all of the companies that are affiliated with our ecosystem, and all of our major investors.

Most importantly, I am intimately familiar with our target markets and have longstanding relationships with our key customers. Needless to say, I learned many lessons during the past 20 years. Most importantly, I learned what works and what doesn't work. With those lessons in mind, I believe what we are doing now is working and I believe the during the coming year we will generate the results to not only prove it is working very well but also to demonstrate that we have a durable business model capable of delivering long-term growth and profitability.

With QuickLogic has executed successful business models in the past, none of them proved to be durable. The reason is that those models competed against the persistent cadence of semiconductor integration that is commonly described by Moore's Law. As a result, the value propositions of our past business models were eventually integrated into higher functioning chips by our competitors. Said in other way, we were operating on the wrong side of Moore's Law and that doesn't work. With our sensor processing solution business model, we are the integrator and that means for the first time since I've been at QuickLogic we are on the right side of Moore's Law. In addition to this, I believe we have the best solution in the market today and are at the front end of what will prove to be a very significant growth opportunity for QuickLogic.

New product development by Top Tier customers in our targeted markets is rapidly trending towards immersive user experiences that substantially increase the demands placed on sensor processors. With these trends, customers are focusing more on the power consumed by the sensor processing solutions. I believe we're extremely well positioned to capitalize on these trends and my goal is to capture as much of this emerging market as possible. While my confidence in realizing this goal is bolstered by the fact we've receive from many of the leaders in our targeted markets, it remains difficult to predict the timing and shape of the production ramp for the products that will incorporate our solutions.

Let's take a minute now to baseline activity and some recent developments. First, let's start with the strategy behind the strategic realignment initiatives Sue briefly covered. With that the EOS S3 now qualified for production, our hardware design engineering requirements are much lower than they were a quarter ago. Due to this, we reduced our hardware design engineering staff in Sunnyvale [ph] last week. This provides us with the opportunity to expand our software engineering capabilities and reduce costs at the same time. Going forward, our biggest challenge is keeping pace with the engagements we have with Top Tier OEM in our targeted markets.

Once a customer engagement is established, it quickly becomes very software intensive. The trend we are seeing tells us this intensity will increase as OEMs implement features that require sophisticated sensor fusion of voice and sensor data. These trends increase the demand and duty cycle for the sensor processing system and that benefits us. However, to realize that benefit we need to increase the number of software engineers we have available to support customer engagements. To accomplish this and enable to 24/7 support for our customers, we are increasing our software engineering staff in India.

As we forecasted in our last quarter earnings conference call, we shift a modest quantity of our production qualified EOS S3 to a Tier 1 smartphone customer last quarter to support its pre-production of a new wearable device. During the Q&A session of the last conference call, we stated that while this customer told us its new wearable device is designed to be a high volume product, the marketing team had not decided how it would stage the launch or if it would couple it with the launch of other products. While these decisions are still not firm, the indications are the new wearable device will launch during the three month window that concludes with Mobile World Congress in February of 2017.

The good news is that customer is extremely pleased with the design of our EOS S3 sensor processing solution, and is timing its introduction to maximize the value potential and media coverage for the product. Moreover, we have continued to broaden our engagement activity with this customer on other potentially high volume sensor processing applications. Unfortunately, the anticipated launch schedule means the significant revenue ramp we were anticipating in Q4 will likely be pushed out by one quarter.

During the last six weeks, I've spent a considerable amount of time auditing our operational structure and our strategic customer engagements. This includes visits to our field sales offices and customer locations in South Korea, China and India. With data gathered from these efforts and the support of our executive team, we have prioritized our engagements and to find the resources we need to optimize our success. While this process led me to temper our outlook for the second half of 2016, it also increased my confidence in our longer term growth potential. This optimism is based on the fact that 14 out of the Top 15 Smartphone OEMs in the world today have expressed interest in evaluating our EOS S3 sensor processing solution.

That being said, not all of these OEMs have a product they are ready to target for development this time. To optimize the return on investment we have refined our active engagement focus to include opportunities with OEM as a target product with high volume potential that can benefits from the unique advantages of our sense of processing solutions. With this filter in place, we removed several engagements from our active list and replaced them with a similar number of new engagements that meet those criteria. Most of the engagements that we suspended were engagements where the OEM either removed a product from its development pipeline or had not yet assigned a specific product to the engagement. In all of these cases, the OEMs remain interested in our sensory processing solutions and as stated, they will welcome re-engaging with us when they can identify a high volume target product.

As a result of these adjustments, we now have a more qualified set of active engagements with nearly half of them being with Top Tier Smartphone OEMs that have very significant volume potential. At this juncture, we believe there will be several new devices launched during the second half of 2016 by Top Tier OEMs that use our sensor processing solutions. Among these is the design we have mentioned in the past with the Top Tier semiconductor company that we now expect will enter production in very late Q4. We are currently working with one of these Top Tier OEMs on a press release that announces our sensor processing platform and algorithms have been designed into a highly sophisticated VR camera but we are not anticipating this will be a high volume product, it is designed to set new standards for VR Video Recording which makes it a great showpiece for the capabilities of our solution.

We are also working with a Top Tier Smartphone company on a press release that will announce the use of our display bridge and a new smartphone accessory. In addition to these press releases, that we plan to announce this month or next, we believe we will get permission from other customers to issue additional design and press releases later this year.

While we are on the subject of press releases, I would like to take a moment to highlight the recent press release issued by our ecosystem partner Sensory. Sensory is the clear leader in voice triggering and recognition software, and its technology is used pervasively by the leaders in the Smartphone, wearable and IoT markets. In its press release Sensory announced partnerships with us and two other companies. Of the three, QuickLogic is the only company that offers a hardware integrated version of Sensory's technology in a sensor hub or MCU. We view this as a very significant competitive advantage that plays favorably to the designs trends we're seeing in the market today.

New designs from Top Tier OEMs expand the use of always-on voice applications such as, 'Okay, Google' to improve the user interface and enable new immersive user experiences. The main challenge they face is to accomplish these goals while still maximizing battery life. Our EOS S3 integrated hardware solution supports these applications while reducing power consumption by approximately 50% relative to the traditional MCU solutions being used in the market today.

Going forward the best route to further optimize our unique silicon platform and leverage our engineering resources is by partnering with leading software companies such as Sensory. With that in mind, we are in the process of establishing a partnership with an Asian software company who Smartphone solutions are used by many of the Top Tier Chinese OEMs. Once this initiative is completed, I believe our design engagements in China will accelerate significantly.

While I believe we have the best sensor processing hardware platform in the market today, the strategic steps we are taking now will bolster that strength with software solutions that enhanced its value. We believe these steps will not only help us extend our value proposition but also better leverage our investments in engineering and customer support. At the bottom line, I firmly believe that with the engagement activity we have today, the strategic steps we've taken during the last six weeks and plan to expand on during the second half of 2016, we will accelerate our ability to finalize design wins and with that drive our revenue growth in 2017.

I'll now turn the call over to Sue for our third quarter guidance and rejoin for my closing remarks.

Sue Cheung

Thank you, Brian. For the third quarter of 2016, we're forecasting total revenue of approximately $2.8 million plus or minus 10%. The $2.8 million in total revenue is expected to be comprised of approximately $1.4 million of new product revenue and $1.4 million of matured product revenue. As in prior quarters, our actual results will vary significantly due to things that are beyond our control such as schedule variations from our customers, schedule changes and a project production start days to the post or pull shipments between Q3 and Q4 2016 and impact our actual results of significant.

Non-GAAP basis, we expect the gross margin to be approximately 38%, plus or minus 3%. Gross margins are driven primarily by the mix off customers and products that during the quarter and continued unfavorable absorption of operational overhead. We are forecasting non-GAAP operating expenses at a $5.3 million, plus or minus $300,000. We expect that the decreasing OpEx is a result of the cost of reduction measures we discussed earlier. Non-GAAP R&D expenses are forecasted to be approximately $3 million and our non-GAAP SG&A expenses are forecasted to be approximately $2.3 million.

Our other income expense and the taxes will be a charge of up to $60,000. At the midpoint of our guidance, our non-GAAP loss is expected to be approximately $4.1 million or $0.06 per share. Our stock-based compensation expense for third quarter is expected to be approximately $400,000.

As mentioned before, during Q3 we expected to incur one-time severance charge of approximately $170,000. As was the case in prior quarters, our non-GAAP results will not reflect this charge or charges associated with stock-based compensation. Including a favorable impact of additional $1 million of borrowing from our bank line of credit, we expect that net Q3 cash usage to approximately $2.2 million to $2.7 million. The forecasted cash usage is primarily due to your working capital needs and the payments associated with our new product development costs.

With that let me now turn the call back over to Brian for his closing remarks.

Brian Faith

Thank you, Sue. The feedback we've received from literally every Top Tier customer we've shown the EOS S3 to tells us it is the right part at the right time and that it is priced correctly for the market. We are engaged today with many of these Top Tier customers on specific programs. While the aggregate number of engagements is held fairly constant, the quality and potential of our engagements has improved significantly. Approximately half of our engagements are targeting specific new Smartphone designs with Top Tier customers and virtually all of those engagements have multi-million unit, annual volume potential. After auditing every aspect of our business, we have implemented a strategic realignment that will significantly lower our fixed costs, and at the same time provide us with the software engineering resources we need to accelerate our ability to win new designs. With this progress, I'm more confident than ever that we will grow our revenue very significantly in 2017 and end the year as a profitable enterprise.

Operator, I'd now like to open the call for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question is from the line of Suji D'Silva with ROTH Capital. Your line is now open.

Unidentified Analyst

Hi, Brian. Hi, Sue. Brian, best of luck in the new role there. So with the OpEx and the movement you have there. The puts and takes of the restructuring and the need for software investment, house should we think about the run rate from the guidance going forward? Is there more room for that to go down or it will be stable -- just some color there would help.

Brian Faith

Hi Suji, this is Brain. So I think the way to model right now is based on what you gave in the guidance which is roughly $500,000 to $800,000 less than what we have been doing on a quarterly basis. And that as Sue said, will lower the breakeven level on the revenue side because of the lower OpEx. So I would model with what she had for Q4 2017.

Unidentified Analyst

Got it, thanks a lot. And then the customer pushing out to the Barcelona timeframe for the launch, can you give the rationale on the customers that thought the thinking process there to help us understand the reasoning for the push out?

Brian Faith

Yes, it did and as I can't really get into detail and I think that some of the product management decisions that our customers make are definitely behind closed doors and we're not involved in. The best what I can say right now is that, I know that they are trying to maximize the impact of the launch of that product, and so they are trying to time it around certain industry events that would maximize the exposure. So I'll leave it at that.

Unidentified Analyst

Just to be clear, it was not a technical challenge with the U.S. product or anything…

Brian Faith

No, absolutely, there is no technical challenge like EOS S3. As we've said in the prepared remarks, the customer is really happy with our solution and what they are seeing so far.

Unidentified Analyst

And then the pipeline -- customer pipeline on rationalization, I'm just curious there, with the refocusing on the large ticket opportunities. How many potential customers and model could theoretically ramp volume sometimes in the second half of '16 given the rationalization you've done on the pipeline?

Brian Faith

So I'm going to -- previous to what we've been doing, I'm not going to give detailed numbers on the actual pipeline, the movement there but what I will say is that the number has remained fairly constant where we've talked about previously. As far as one of the your ramp in '17, I mentioned that [indiscernible] they are getting good feedback on the EOS S3. This is really a matter of project timing when they can actually assign resources, look at the platform and then find a product that actually design it into. I think on previous calls, we actually talked about the development cycle of some of these Smartphone OEMs and it tends to vary. So what we said previously is that varies between 6 months and 15 months. And then there is very specific windows of opportunity where they're going to launch a product.

So lengthening the cycle to some extent is actually good for us because we're playing such an integral role in these systems and it enables OEMs to develop new user experiences and applications.

So I'll also say it's really critical that we won these first designs at these OEMs because once we win our first design it gets really sticky, they are writing software, they are writing algorithms, putting them onto the platform; that stickiness factor hopefully will snowball. So if we win designs in the first half the '17 it's actually early to sort of multiplicative effects in the second half of '17 [Technical Difficulty].

Unidentified Analyst

Okay. And then Brian, just last few questions, on the EOS S3, the platform is flexible enough to enable a lot of different features. I'm wondering if you could kind of give us a sense of what the one or two key hot features of smartphone customers are going to compete on in the second half and into detail is it something that you enable out of the many features you could possibly enable?

Brian Faith

Sure. So keep in mind the overriding value here is battery life, we're at least 50% lower power than competing microcontroller-based solutions. So first we care about customers that hear about power, that's a great fit there. Once you dig a little further into the details and you look at EOS S3, there is a few areas that are highly differentiated. So the first, and this relates back to the Sensory discussion we had earlier, we have a highly optimized way subsystem some of which is based on IP from Sensory. So this notion of -- this immersive experience where you can speak to your device and tell it to do things as opposed to your hands, that's huge, and that's getting a lot of traction right now. So that's an area that we see as highly differentiated for EOS S3.

The second is actually our proprietary core, the flexible fusion engine. What we're doing with that is we're allowing people to do all sensor processing on the motion sensor side at much lower power than a microcontroller-based solution. And then the third area of differentiation that we've talked a lot about in the past is our heritage, it's that low powered program logic that allows people to do integration of other components into the single chip, and actually some of these engagements that we have talked about on this call and previous calls are taking advantage of the program logic. And if you think about the mobile consumer space, cost is always a factor, the fact that we can integrate these multiple devices in the one is huge from sales [ph] point of view.

So those are the three main drivers, and just think the overriding factor here is this more immersive, always on user experience that lengthens your battery life.

Unidentified Analyst

Great. And then one last question for; can you update us on the China Smartphone customers and give us a thumbnail of where that customer base stands relative the opportunity for you? Thanks.

Brian Faith

Sure. So I would love all of those into this category of all these OEMs that have given us positive feedback. I've been there myself multiple times, in fact Bob Schoenfield, our VP of Sales, he isn't on the call today because he is in Asia, headed into China to talk to his customers. So where we are at various stages of engagement. Some people are doing what we call technicians [ph] where they're actually measuring power consumption and validating our claims, other people are a little bit further along in the process. And, again I'll go back to the typical smartphone development cycle we talked about. So it typically ranges 6 to 15 months in China that does tend to go faster. Once they finish evolving [ph], they find an actual specific program to intercept. So we're comparing areas of that in China but a lot of those ones in China are what we're thinking will drive the growth in 2017 for us, specifically because of the value proposition resonates there, and they can get to market very quickly when they make decisions on products.

Unidentified Analyst

Okay. I appreciate the detail Brian, thanks.

Operator

And our next question comes from the line of Gary Mobley with Benchmark. Your line is now open.

Gary Mobley

Good afternoon, thanks for taking my question. Sue, I want to sort a question for you. Could you refresh our memory as to what the new breakeven will be on the non-GAAP basis in quarterly revenue?

Sue Cheung

Yes Gary, the new breakeven will be around $10 million to $11 million of revenue. This is off the reduction measures that we implemented this quarter that reduced our burn rate by our $1 million to $1.6 million per quarter.

Gary Mobley

Brian, did you say that your goal or perhaps anticipation that you will hit that breakeven number by Q4 '17?

Brian Faith

Gary, actually I'm a conservative guy so yes, actually we ended the year as a profitable enterprise. If the ramp happened sooner with the smartphone OEM and that could happen sooner in '17 but for the purpose of today's call, yes it's the end of the year.

Gary Mobley

If I go back, I think you mentioned that you have solid growth prospects with Japanese OEMs moving to the power code 3. I'm assuming since there was $200,000 inventory in the year, perhaps those opportunities might have slipped. Am I assessing that right?

Brian Faith

It's actually slightly different. So the reason why we accept the reserve on the first generation, particularly in S1 and the associated partner and program logic [ph], those are the first generations of those. If you remember, we actually fairly quickly came out with second generation, the Arctic Range 3S2 [ph], and pulled it for 3ED. And because those are more cost effective and lower power than the first generations, all of this difficult efforts are really coming with the second generations and not the first generations So because of that we decided it was prudent to take the reserves on the inventory right after the fixed asset of the mass. But I want to remind that we have done these inventory reserves in the past and we still seem to find places to find -- to sell these devices. So when we do go through, when we sell them, it will be at 100% margin. Again, from a financially prudent point of view, we thought it made sense to the write-offs of the inventory and the fixed asset at this time for the first generation.

Gary Mobley

Alright. And could you give us an update on the prospects for video bridge sales, perhaps even any sort of specific with Samsung? And how you see that business shaping up and continuing with what has been your largest customer?

Brian Faith

Again, due to NDA I'm not going to give specific on Samsung, we'll report in actuals when we actually end the quarter and we tell about the percentage breakups for them. But just from a general point of view, we actually continue to see demand for this labor solutions, in fact they are adding up today another design opportunities, not with Samsung, with other people. So we continue to see opportunities coming in for this. So I'm confident we're going to see just revenue well into '17, maybe beyond that. But I don't see a material revenue increase in the near-term but I definitely see it continuing well into '17 and beyond that.

Gary Mobley

Got you. Alright. That's it for me. Thank you.

Operator

And our next question comes from the line of Richard Neaton with Rivershore Investment Research. Your line is now open.

Richard Neaton

Thank you. Hi Brian and congratulations on becoming CEO. I'd like to follow-up on some things that were discussed in the last conference call. There was some discussion by Sue about an inventory build timeline, and I'm wondering if you can provide some color forecasting inventory for third quarter, and even fourth quarter?

Sue Cheung

Hi Rick, this is Sue. I take this question now. So inventory build, we modeled out to ramp up in Q4 this year. So Q3 -- consistent with that prior quarter. So for Q4 given the uncertainty in production schedule of the Tier One Smartphone OEM wearable project, we have already step to build the inventory to support our RAM towards the end of the year. We believe that ramping demand were more likely earlier next year where I have a capacity to support it if that happens earlier in Q4.

Richard Neaton

Okay. So Brian, based on that inventory forecast and your statement that you are a conservative person are you entirely ruling out a chance that a smartphone in the fourth quarter or are you just being a little more conservative. Can you provide a little bit more color here?

Brian Faith

Sure. And I'm definitely not ruling out that there could be a smartphone going to market in the fourth quarter. I'm just trying to be more conservative as we're giving our revenue outlook for the balance of the year, of course you know we're only providing guidance for Q3. There is a lot of things going out with these customer opportunities right now, and really -- I think what we've been trying to convey on this call is it's really a timing thing. And so once we get better visibility in that then I think we'll be able to speak with more concrete detail it's definitely not off the table to have a smartphone go to production in Q4 this year. We just see that the ramp where you're layering in several of these at the same time that would be something that builds under 2017.

Richard Neaton

So what are you saying that the description of very significant basically being is being -- could possibly be pushed out another quarter into the first quarter of next year? In other words, the last conference call Andy talked about him being -- about confidence of a very significant revenue ramp in the second half of this year. And you talked about -- maybe due to the -- your important customers production schedule and marketing plans, there is a possibility that this very significant ramp would fall in 4Q '16 and 1Q '17 instead of 3Q '16 and 4Q '16. Is that the color you're trying to convey to us?

Brian Faith

Yes, so let me actually provide a little more color on that. So the primary factor behind the changes in our second half outlook is really due to Tier One smartphone OEM using our EOS S3 in variable product. We know that they have delayed it and they are trying to determine when they are actually going to launch it between December and February, that Mobile Congress. And so that has a big impact on what we had previously said would be significant growth in the second half of this year, simply because we don't know exactly how they're going to go to market with that and when it will start to ship in volume production.

As Sue mentioned on the inventory side, we are building some inventory to support that if they do decide to launch it in Q4 and we would enjoy obviously the revenue from that. So I'm trying to provide a more conservative view of the second half at this point given the visibility. That being said there is also several things that we need to take a bit more of a conserved outlook in the first half of '17 but also I think optimistic view for the second half of '17. And really the short story here is I see that we have these improving value of our engagements; I try to convey it in the prepared remarks about this the shift in the funnel and what's exactly in there, what was suspended.

I just don't know how quickly those are going to go to production and how successful the first guys to market with our solution will be, a lot of it's dependent on them or how quickly the demand for their products will ramp. So there is a lot of variables we're trying to play with and again due to my conservative nature I'm trying to paint what I view as a conservative picture to you as investors.

Richard Neaton

Okay, and following up on your statements about how you have reconfigured the design funnel -- their engagement. Have you lost any engagement due to EOS S3?

Brian Faith

No, we haven't lost any engagements, we've seen some suspension of engagements I would say, all of the OEMs that we've talked to -- I think it's a fantastic device, they love the power, they love the features and integration, it's really more of a timing thing I will say that there were a couple of smaller opportunities that we purposely moved to the suspended area where OEMs were asking us to do things that the management team felt would be more of a one-off development and not really worthy of the type of volume that would be commensurate with that development and so we purposely decided to move it off. Making a decision that opportunistic revenue is not as important as really making sure that we focus on these bigger ones that can move the needle for us more in the smartphone space. So that's why in the prepared remarks we talked about this sort of shift where it's much more high quality funnel at this point as a result of those decisions.

Richard Neaton

Okay, and when you say -- when you concluded your prepared remarks and said that you would end -- you have high confidence that you will end next year as a profitable company, are you talking about the quarter or the entire year?

Brian Faith

As a quarter.

Richard Neaton

Okay. Thanks, Brian. Congratulations and thanks for the clarification here.

Brian Faith

No problem.

Operator

At this time I'm showing no further questions. I would like to turn the call back over to Brian Faith for any closing remarks.

Brian Faith

We thank you for your continued support and I look forward to reporting our strategic progress on the next earnings call which is scheduled for Wednesday, November 2, 2016. Thank you and goodbye.

Operator

Ladies and gentlemen, thank you for your participating in today's conference. This does conclude the program. You may all disconnect. Everyone have a wonderful day.

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