QuickLogic: Some Insights Into The Next Samsung Wearable

| About: QuickLogic Corporation (QUIK)
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Summary

A new Samsung wearable called Gear Fit Pro is becoming visible and is the likely “Top Tier smartphone maker” wearable expected to ramp soon with QuickLogic’s EOS S3 inside.

As of three weeks ago, Samsung wearables are now iOS compatible, which should increase the market potential for them, especially new models with new feature sets.

QUIK shares may be “choppy” in the near term, but I believe they should trend higher as 2017 unfolds. QuickLogic’s 4Q 2016 earnings release is on February 15th.

Many QuickLogic (NASDAQ:QUIK) investors are eager to see the beginning of a revenue ramp, driven by initial volume shipments of the new and potentially very compelling EOS S3 sensor processing System-on-Chip (SoC).

  • QuickLogic management stated in its C3Q 2016 earnings call in early November 2016 that it was planning to build inventory in its C4Q 2016 for a potential ramp of a new "high volume" wearable device from a "Top Tier" smartphone maker, that was likely to be introduced between December 2016 and the Mobile World Congress in Spain in late February. This should be the first "high volume" product containing QuickLogic's EOS S3 product. My understanding of "Top Tier" smartphone maker is Samsung (OTC:SSNLF) and Apple (AAPL). Further, my understanding of "high volume" in QuickLogic "speak" is in the upwards of 500K units per month range.
  • QuickLogic then stated in its January 10th presentation at the annual Needham Growth Conference that the customer's product was undergoing human trials and that an introduction by Mobile World Congress in Spain in late February was "still possible" - as long as the trials did not dictate a hardware revision.
  • On Saturday, January 7th, Samsung released iOS apps for its Gear smartwatches and its Gear Fit wearables. This should expand the market for Samsung wearable products, especially in the United States.
  • The week of January 23rd, Samsung filed for a trademark application with the European Agency for Intellectual Property under the name Gear Fit Pro. The trademark application did not provide more details about the wearable nor when or if it would be commercialized. As such, it isn't really clear how this fitness tracker would be different from the currently available Gear Fit 2 in terms of appearance and features. However, according to SamMobile, a site dedicated to providing Samsung Mobile news, they speculate Samsung may be developing the Gear Fit Pro wearable with its Simband health platform in mind. The company reportedly announced the platform for cloud-sourced health tracking in 2014. The reference wearable sported a number of sensors that worked by measuring data points like heart rate, oxygen level, body temperature and many more. This does seem to be in line with my expectations that whatever this product is exactly, it's likely to push fitness wearables into a new level of features. Ironically, a person commenting at the bottom of an article discussing the Gear Fit Pro trademark application stated "here's hoping for much improved battery life." QuickLogic has stated publicly that a major reason it was chosen for this product is because of the extended battery life associated with the ultra-low power consumption of the EOS S3. QuickLogic further stated in its early November 3Q 2016 earnings call that the customer, we will assume Samsung, said the EOS S3 exceeded battery life specs in development for the said wearable product. So bottom line, it looks like a new, next generation fitness wearable is coming from Samsung that is iOS compatible and this is likely the product that QuickLogic has been referencing of late.

In early November, QuickLogic stated that this product was likely to be introduced between December and Mobile World Congress in late February and that it would build inventory in 4Q 2016 to be ready for this, and also some expected 1Q new display bridge business - for Motorola (MSI) and Sanyo I believe.

At the Needham Conference, QuickLogic's management "pre announced" 4Q 2016 results basically in line with guidance. However, it stated that the balance sheet had a "higher than expected" level of cash at $14.9 million at the end of 4Q 2016, but did not explain why. My "guesstimate" is that the company built less EOS S3 inventory for the upcoming (likely Samsung) wearable as it increasingly looks like it is going to be introduced at the latter end of the expected window or beyond. With that said, according to many news stories, given a slight battery related delay for extra quality control, many observers believe the Samsung Galaxy S8 will not likely be introduced at Mobile World Congress in late February per the norm, but is more likely to be introduced in late March or early April 2017. So it remains to be seen if the new Gear Fit Pro is launched at Mobile World Congress in late February or along with the new Galaxy S8 in late March or early April prospectively. Either way, it looks like it is coming relatively soon.

Stock

At $1.50, QUIK shares are up 100% in two and a half months from the mid-November low of $0.75 when I first published on QuickLogic. Clearly, the stock is expecting a revenue upturn in the near future and increasing EOS S3 design to production business as each quarter of 2017 unfolds. At the Needham Conference in early January, QuickLogic management restated its objective of reaching or exceeding breakeven by 4Q 2017. The original statement was presented in the early November 3Q 2016 earnings call. However, management did not provide an expected trajectory from 1Q through 4Q 2017. A lot of the 1Q and 2Q revenue potential depends upon the timing and magnitude of the initial wearable ramp, but more importantly the timing of expected initial Chinese smartphone business. Management stated that it thinks some Chinese smartphones may be introduced in the spring, but a larger group of design wins ramping simultaneously is substantially more likely for the fall time frame. So it is still not clear if we see a linear progression throughout the year or a "hockey stick" revenue growth scenario in the second half, or from a risk perspective, a disappointment.

My "guesstimate" is that the Samsung wearable is worth $1-3 million per quarter to QuickLogic depending on popularity (i.e., volume) and the ASP for QuickLogic's EOS S3, meaning $1.25-1.50 or closer to $2.00. Exactly how long the product lasts in the market and whether or not QuickLogic maintains its "socket" position in the follow-on products is currently unknown. Hopefully, a plethora of smartphones design wins will swamp it before it matters.

Exactly how QUIK shares react to 1Q 2017 revenue guidance when the company reports on February 15th is a wild card. It depends on how much revenue growth is guided for 1Q, how confident management remains or not on its goal of reaching breakeven or better by 4Q 2017, news flow on the new wearable, news flow on smartphone design activity, potential news flow on liquidity as the company has discussed the possibility of pursuing further non-dilutive financing and anything else new that might pop up.

In particular, it will be VERY INTERESTING to see what QuickLogic management says about the wearable, assuming it is not yet announced by its customer (likely Samsung) when the company reports. They may not guide for it but may say they are ready to deliver the product as soon as it is announced and that an introduction by late February (i.e., Mobile World Congress) is "still possible." Or they might guide for it if the customer says it's a go and allows them to.

My gut feeling is the stock is likely to "digest" for a little while in the $1.00 to $1.75 range and exhibit some choppiness, but that is really a guesstimate. The stock has moved off the bottom and I just don't think QuickLogic has super compelling revenue growth guidance in its pocket for 1Q, given that this wearable will likely only contribute towards the second half of the quarter or later and any "lightness" in revenue guidance will likely bring out the liquidity boo birds.

But as I suggested above, other potentially compelling positive news flow could "trump" those concerns (excuse the pun please). QuickLogic clearly can't control its customer's introduction dates. But it will continue to focus on penetrating the market and driving new design wins as fast as possible and the initial design win at Samsung is certainly a good relationship sign for potentially penetrating its massive smartphone business in the future. As such, despite the potential for some near-term choppiness, I believe QUIK shares are on a trajectory to move higher as 2017 unfolds and I reiterate my $4 stock price target.

Risks:

The primary downside risk to the QuickLogic story and thus QUIK shares is failure to execute broad-based new design win penetration with the company's flagship EOS S3 sensor processing device. Also, success in penetrating the market with EOS S3 devices but a delay in timing could drive a need for QuickLogic to raise money, which may or may not be a dilutive event if it happens.

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.