Quicklogic (NASDAQ:QUIK) has small legacy businesses in stand-alone programmable logic and display bridges in the $8+ million per year range, but the primary strategic objective is to penetrate the large smartphone and wearables markets with its new sensor processing system-on-chip ((SoC)) products that includes silicon chips and software. Quicklogic is building inventory now in 4Q 2016 for an anticipated initial material ramp of its ESO S3 sensor processing system-on-chip revenue in 1Q 2017.
Separately, Quicklogic had previously identified the Internet of Things ((IoT)) market opportunity for later, as it is a small company and has to focus its limited resources on penetrating and growing its market share in a sustained manner in smartphones and wearables. In fact, I suggested in my recent Quicklogic report that success in ramping into the smartphone and wearables market could drive a future sale of the company in the $10+ per share range and that the acquiring company, with larger resources could potentially drive future IoT upside revenue opportunities utilizing Quicklogic's system-on-chip and programmable logic technology.
However, on November 30, 2016, Quicklogic announced a partnership with Global Foundries, its existing silicon foundry supplier that represents its initial and unexpected foray into the IoT market.
Summary and Implications of Recent News
Programmable Logic Technology Licensing Partnership With Global Foundries
The new technology licensing partnership with Global Foundries for system-on-chip design and production utilizing Quicklogic's programmable logic intellectual property should drive $10 million+ in annualized revenue sometime in 2018, with well above-average corporate margins, representing the company's initial foray into the IoT market. This is a relatively easy way to get involved in the IoT market with a limited use of Quicklogic's human and financial resources as it mainly focuses on penetrating the smartphone and wearables markets with its EOS S3 sensor processing SoC technology.
Access To Global Foundries Leading Edge Chip Fabrication Process Technology
The technology licensing partnership also grants Quicklogic early access to Global Foundries most advanced 22-nanometer process technology for its core sensor processing solutions chips that are currently on a larger line width chip fabrication process. Global Foundries 22-nanometer process will enter volume production sometime in 2017. I presume continued participation in the Global Foundries SoC initiative will grant Quicklogic continued access to Global Foundries most advanced process technology nodes for silicon chip manufacturing as it progresses down the Moore's Law curve.
By moving sooner than later to new smaller line width semiconductor fabrication processes, Quicklogic can stay at the leading edge in terms of device performance, most importantly ultra low power. It may also allow Quicklogic to embed more hard logic, more flexible fusion engine(s), and more programmable logic onto a device the same size as one produced with a larger line width chip fabrication process technology sooner than it could if it wasn't part of this new arrangement with Global Foundries.
Early access to Global Foundries most advanced chip fabrication technology could be an important dynamic in Quicklogic's ability to deliver consistent performance advantages versus its sensor processing solution competitors, mainly STMicro (NYSE:STM), thus the potential ability to establish and hold or steadily expand market share over a sustained period of time.
Take Out Thesis Validated
Separately from the Global Foundries technology licensing deal, there have been two recent offers for semiconductor companies with programmable logic technology.
Skyworks (NASDAQ:SWKS) is interested in buying Microsemi (NASDAQ:MSCC) to diversify away from smartphones and into IoT among other reasons. Some news stories suggest analysts are talking about a potential $70 take-out price. At $70, the purchase price to Microsemi's most recently reported quarterly sales annualized per share would be 4.5x, and at $60 it would be 3.8x. Microsemi is solidly profitable with an 11% net margin.
Separately, Canyon Bridge Capital Partners is attempting to purchase Lattice Semiconductor (NASDAQ:LSCC) for $1.3 billion. Again, using the most recent quarter of sales annualized per share for Lattice this time, the acquisition is slated to be 2.8x sales per share. Lattice is losing money. The Chinese government is the primary financier behind Canyon Bridge and this is one of the largest US semiconductor companies the Chinese have attempted to purchase. Given the new direction the Trump administration is taking towards China, there are viable concerns whether or not this deal will get approved for closure. Importantly, according to regulatory documents filed by Lattice, over the past five or so quarters, 17 different entities engaged in some form of strategic discussions with Lattice, including US-, European- and Asian-based companies.
If Quicklogic grows to a $200 million company annualized by the end of 2018 or has enough design wins to do so by mid 2019 on the back of its sensor processing solutions and some legacy revenue with 68 million shares outstanding, annualized sales per share would be approximately $2.95. At a 3.5x price per share, below the speculated Microsemi deal and above the Lattice deal as Quicklogic should be nicely profitable at that sales level, the result would be a take out at $10.20 per share.
At $250 million in annual sales and a 3.5x purchase price to sales multiple, the hypothetical deal would be worth $12.85. This would be exactly in line with my thesis that Quicklogic should attempt to ramp up its sensor processing business, get the stock to $10 and then sell the company at a premium to that.
Breaking down a potential $200 million annual sales figure I assume 6% unit market share of a 2018 smartphone market of 2.3 billion units, or 137 million units. Assuming an average selling price of $1.35 generates $185 million in revenue plus an additional $15 million from legacy products and the Global Foundries licensing deal. If Quicklogic lands some portion of Samsung for smartphones and a handful of other customers, or just a broad mix of customers, 6% market share seems very achievable. Assuming the company can penetrate the market and expand its share. We will see over the next 2-4 quarters. Assuming $250 million of annualized sales for Quicklogic with the same 3.5x acquisition multiple drives a $12.85 per share take out price. This is my primary end game scenario and assuming Quicklogic can penetrate and expand its sensor processing market share in smartphones to roughly 7%-8% at ASPs of $1.35 it can happen. Of note, this assumes zero wearables revenue and it is very likely that the company may be able to generate material wearables revenue and potentially more legacy and IoT licensing revenue than my assumption of $15 million annualized by late 2018.
Global Foundries Deal Details
Global Foundries is a semiconductor "foundry", meaning it does not sell its own branded products. It "fabricates" silicon chips for other companies, most of which are "fabless" semiconductor companies that focus on design and marketing, like Quicklogic that uses Global Foundries as its main supplier. Global Foundries is the second or third largest semiconductor foundry behind TSMC and in line with UMC. It is multi national. It encompasses former IBM fabs in the United States and several overseas, in Singapore in particular. It originated from the merger of start up foundry Chartered Semiconductor and Advanced Micro Devices fabs then acquired the IBM fabs. The Emirate of Abu Dhabi owns Global Foundries. Global Foundries is headquartered in Santa Clara, CA, right down the street from Quicklogic, which is based on Sunnyvale, CA.
Global Foundries has set up a program called the GLOBALFOUNDRIES FDXcelerator partner Program, which is a collaborative ecosystem that facilitates 22FDX system-on-chip design that is intended to reduce time to market for its foundry customers. 22FDX is a Global Foundries proprietary leading edge 22nm chip fabrication technology that will enter volume production sometime in 2017. The ecosystem includes several chip and chip design companies as well as design software providers. The idea is to help OEMs design new SoC devices quickly and to funnel the production to Global Foundries.
System-on-chip devices are sophisticated semiconductor devices that include "blocks" of functionality that used to be done on separate chips. By having a processing core along with some standard hard logic, memory and programmable logic, SoCs can be configured for different applications more quickly and at less cost then dedicated chips that have their functionality hard wired or fabricated in.
For the IoT market, there are and will be thousands of different products that will require some form of customization but also some similar processing and memory functions. By using known blocks such as processing and memory, SoC designers can skip the time and knowledge necessary to design all the separate blocks and focus instead on the programmable logic part for customization. So in essence, SoCs are sophisticated and flexible semi-custom or configurable devices with broad market appeal.
In fact, Quicklogic's EOS S3 sensor processing device is a SoC just like the ones described above dedicated for the smartphone market. According to the company, it is the only one on the market with programmable logic embedded into it and management says smartphone makers are intrigued by this capability. It may be a key driver of market penetration and sustained competitive advantage, in addition to the ultra low power capabilities. The programmable logic block in Quicklogic's EOS S3 allows smartphone makers to customize the sensor-processing hub to its proprietary algorithms. Thus the open system appeal of the solution versus integrating the functionality to the core apps processor that uses a lot of power or a closed system of sensors, a hub, and proprietary algorithms such as the Invensense (NYSE:INVN) offering.
There is a clear trend towards SoCs in many end market applications such as communications, networking and IoT. The trend is exploding and is driving M&A activity as indicated above.
New Company Presentation
Below is a link to Quicklogic's most recent corporate presentation that it used at an institutional investor conference on December 1, 2016. It includes about ten new slides up front on the Global Foundries partnership deal plus details on the sensor processing solutions business/opportunity.
If the link doesn't work, just go to the company's web site and click on Event Archive at the lower right of the home page, then click view presentation on the December 1, 2016 Benchmark Micro Cap Discovery Conference.
In my view, the new Global Foundries SoC Partnership is not really enough to move the needle very much right now and through the end of 2017, meaning more than $0.10-$0.20 or so in the very near term from roughly $0.88 for QUIK shares when it was announced. There could be more impact as 2017 unfolds if licensing revenue surprises to the upside between now and then and is noticeably appreciative to margins.
The primary stock catalyst for the foreseeable future will be the success or failure of the sensor processing business. However, this deal does illustrate the enduring value of Quicklogic's programmable logic technology and also the integration trend that is inherent in the company's sensor processing SoC products, meaning the combination of processing and programmable logic among other blocks in SoC devices. It's a validation of sorts of Quicklogic's designed from the ground up sensor processing SoC approach that leverages the company's core and historical programmable logic technology. Competitive smartphone sensor processing devices such as market share leader STMicro's microcontroller-based products do not have programmable logic embedded. According to management, having a programmable logic block in its EOS S3 seems to be intriguing to smartphone suppliers Quicklogic is currently engaged with in design activity.
We will see if Quicklogic's programmable logic embedded into its sensor processing devices will help the company penetrate the market and hold share. It certainly plays into general SoC integration trends as evidenced by product evolution in the semiconductor industry and M&A activity, such as Intel and Altera among the others described above.
Combining the technology validation with the recent acquisitions of Altera by Intel and the recent offers for Lattice and Microsemi, suggests real upside value in QUIK shares with additional take out premium potential if the company executes a sensor processing ramp over the next year or two and also experiences a reasonable ramp in its licensing revenue associated with the Global Foundries partnership and soon to be other foundries for IoT SoCs. As such, I believe this deal and the others like it that are coming are worth something sustainable to the stock. Exactly what I am not sure, but I believe $0.10-$0.20 in the near term is not unreasonable.
With that said, I do think the stock needs a 1Q 2017 sensor processing revenue ramp on some level to catalyze the stock through $1.00-$1.10 and to support a sustained move from there until 2Q 2017 and beyond are visible. It is possible that the Global Foundries partnership and some anticipation of a 1Q 2017 revenue ramp may drive enough speculation that the stock may trade up through $1.00 before Quicklogic announces 4Q 2016 results. But I believe the stock will need the aforementioned affirmation via guidance on February 15, 2017 for a 1Q 2017 sensor processing revenue ramp to sustain an upside move from there.
The quarterly 2017 revenue ramp trajectory is currently unknown but there is an expectation set by the company that 2H 2017 should be more robust than 1H and that 4Q 2017 should drive a positive earnings result, north of $12 million+ or whatever break even is at that time. So it is possible that 1Q 2017 guidance is up, but not up enough to move the revenue and investor enthusiasm needles much.
Conversely, as I suggested in my initial Quicklogic note, if the sensor processing business does ramp in line with currently public management expectations or better as 2017 unfolds, there will likely be a series of upside consensus Street estimate revisions. So, in my view, ramping sensor processing revenue from multiple new customers - driving upside Street forecasts for Quicklogic's revenue and earnings - likely remains the primary catalysts for a stock trend towards my $4 target by the end of 2017. With that said, the global Foundries and upcoming similar deals are encouraging in terms of generating value from the legacy technology and penetrating the IoT market, and should equate to some level of enduring value in QUIK shares.
News flow that would suggest bailing out of the investment centers on an inability to deliver an initial near term (i.e., 1Q2017) revenue ramp that was recently indicated by management as being likely and a failure to generate more production orders for the EOS S3 sensor processing device from multiple customers over the next several quarters. There is also risk of dilution related to potential money raising events if the expected ramp is pushed out, doesn't materialize or if a faster than expected ramp materializes. Also, Quicklogic is a small company and is attempting to penetrate the sensor processing device market against larger more entrenched competition. The company has a very compelling solution but like many upstarts, it does lack scale and that does present risk.
Disclosure: I am/we are long QUIK.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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