QuickLogic Corporation (NASDAQ:QUIK) Q3 2019 Earnings Conference Call November 6, 2019 5:30 PM ET
Jim Fanucchi - Darrow Associates, Investor Relations
Brian Faith - President & Chief Executive Officer
Sue Cheung - Chief Financial Officer
Conference Call Participants
Suji Desilva - ROTH Capital
Richard Shannon - Craig-Hallum
Martin Yang - Oppenheimer
Rick Neaton - Rivershore Investment Research
Ladies and gentlemen, good afternoon. At this time, I'd like to welcome everyone to QuickLogic Corporation's Third Quarter Fiscal Year 2019 Earnings Results Conference Call. As a reminder, today's call is being recorded for replay purposes through November 13, 2019.
I would now like to turn the conference over to Mr. Jim Fanucchi of Darrow Associates. Mr. Fanucchi, please go ahead.
Thank you, operator, and thanks to all of you for joining us. Our speakers today are Brian Faith, President and Chief Executive Officer, and Dr. Sue Cheung, Chief Financial Officer.
As a reminder, some of the comments QuickLogic makes today are forward-looking statements that involve risks and uncertainties, including but not limited to stated expectations relating to revenue from new and mature products, statements pertaining to QuickLogic's future stock performance, design activity and its ability to convert new design opportunities into production shipments; timing and market acceptance of its customers' products; schedule changes and projected production start dates that could impact the timing of shipments; the company’s future evaluation systems; broadening our ecosystem partners, expected results and financial expectations for revenue, gross margin, operating expenses, profitability and cash.
These statements should be considered in conjunction with the cautionary warnings that appear in QuickLogic's SEC filings. For additional information, please refer to the company's SEC filings posted on its website and the SEC’s website. Investors are cautioned that all forward-looking statements in this call involve risks and uncertainties and that future events may differ materially from the statements made.
For more details of the risks, uncertainties and assumptions, please refer to those discussed under the heading, Risk Factors in most recent annual report on Form 10-K, most recent quarterly report on Form 10-Q, recent Forms 8-K and other documents we periodically file with the SEC. These forward-looking statements are made as of today, the day of the conference call, and management undertakes no obligation to revise or publicly release any revisions of the forward-looking statements in light of any new information or future events.
In today’s call, we will be reporting non-GAAP financial measures. These non-GAAP measures should not be considered as a substitute for or superior to financials prepared in accordance with GAAP. You may refer to the earnings release we issued today for a detailed reconciliation of our GAAP to non-GAAP results and other financial statements. We have also posted an updated financial table on our IR webpage that provides current and historical non-GAAP data.
Please note, QuickLogic uses its website, the company blog, corporate Twitter account, Facebook page, and LinkedIn page as channels of distribution of information about its products, its planned financial and other announcements, its attendance at upcoming investor and industry conferences, and other matters.
Such information may be deemed material information, and QuickLogic may use these channels to comply with its disclosure obligations under Regulation FD. A copy of the prepared remarks made on today’s call will be posted on QuickLogic’s IR web page shortly after the conclusion of today’s earnings call.
And with that, I would now like to turn the call over to Brian.
Thank you, Jim. Good afternoon, everyone, and thank you all for joining our Q3 Fiscal 2019 financial results conference call.
I would like to start-off today’s call updating you on our near-term outlook, including some significant new developments, and then discuss the pathway we will follow with the goal of achieving profitability early next year. Later, Sue will review our financial results.
As I mentioned in our call on August 6, there were several factors outside our control that caused us to reset our revenue expectations for both the third quarter and all of fiscal 2019. While some of these factors have been rectified, there are still some items taking longer to complete than our customers initially expected. These items will have an impact on our fourth quarter outlook.
In the continued dialogue with our customers, it has recently become clear that some of the programs we believed would come back in Q4 are not going to materialize this quarter. As a result of these evolving conditions, we are taking a conservative approach to our outlook.
Currently, our fiscal 2019 guidance is for total revenue of $10.4 million plus or minus $300,000. This translates to annual sales approximately $3 million lower than the previous outlook. In addition, while we expect Q4 gross profit margin to be approximately 60%, for the full year 2019 we will see gross margin in the high 50s, slightly lower than the range we thought in August.
While we generally don’t give financial outlook more than one quarter at a time, I want to offer the following: We currently believe that we should see a healthy increase in revenue in Q1, accompanied by a stronger gross profit margin, as our revenue mix should include a higher percentage of SaaS and eFPGA IP sales.
When combined with continued cost controls, we should be close to non-GAAP operating income breakeven at the end of Q1 2020, and we anticipate being breakeven or profitable in Q2 2020. Furthermore, as Sue will discuss later, while we will use some cash in Q4, we expect the burn to be minimal in Q1 and close to neutral in Q2.
We are obviously disappointed with these near-term conditions. However, there have been several positive developments that we believe will serve as revenue and gross margin drivers starting at the beginning of fiscal 2020.
I’d now like to expand on some of the items influencing the fourth quarter. There are four specific areas that comprise the majority of the approximately $3 million delta between our current expectations and the previously forecasted revenue.
First, our EOS S3 Hearable business continues to be impacted by changes in how customers are developing products that meet Amazon’s AVS specification. Most recently, Amazon has released their own proprietary voice software. This has influenced some of our customers to wait for the integration of that Amazon software onto EOS S3 prior to bringing their products to market. This factor, combined with Amazon releasing their own TWS headphones for this holiday season, has resulted in $1.1 million in lower revenue. To be clear, this is not a lost opportunity; rather, it is just a push out into fiscal 2020 due to the delayed development schedules of our customers.
Second, one of our larger expected eFPGA licenses has pushed out to next year, impacting current quarter revenue by approximately $750,000. I’ll offer additional color on our eFPGA business later in my prepared remarks.
Third, within our mature product revenue, while our business with the U.S. Navy is solid and budgets have been confirmed, some of the other military business we expected in Q4 has also been pushed into the first half of 2020. This will negatively impact fourth quarter revenue by approximately $400,000.
Lastly, several of the SensiML/QuickAI customers we expected to convert to full SensiML SaaS subscriptions have taken longer to get through their evaluation period, thereby shifting revenue from these two areas to 2020. This resulted in lower than expected Q4 revenue by about $500,000.
Combined, these four factors account for nearly $2.8 million of the $3 million delta. While each of these areas are below our recent expectations, we are confident the issues are short-term. We expect a portion of this revenue to be realized starting in Q1.
I now want to offer some additional color on each area and discuss why we are confident the revenue ramp is imminent. Starting with our mature product segment, the push out of shipments to the U.S. military customers that impacted our revenue over the second half of fiscal 2019 is being resolved. While we expect to see some of the military orders starting to come back this quarter, it will not be at the pace we anticipated when we spoke back in August. We expect to see the balance of the delayed military orders come back in Q2 2020.
Moving to our EOS S3 related products, the ongoing trade conflict with China has caused several of our customers to delay their new product introductions. As I mentioned in our last call, a specific Chinese consumer electronics manufacturer pushed out the introduction schedule for one of our largest 2019 design wins that we were originally told would happen for the 2019 holiday shopping season. We still believe this project will be deployed for the 2020 product introduction cycle.
The silver lining with this issue is that we have successfully leveraged this always-on technology for a voice-enabled remote control with a well-known and fast-growing streaming and smart TV provider. They recently gave us a firmer launch date of Q2 2020. The reason I say the date is firmer is that the timing is not dependent on any TV manufacturer bringing it to market; this new design is completely in the hands of the consumer platform provider. The potential could be into the hundreds of thousands of dollars per quarter.
In the Hearables market, we have a clear path forward for Amazon AVS or Alexa Voice Service compliant hearable designs. We have successfully concluded a large suite of tests and believe that we have two viable solutions for customers that pass both Certification and Qualification testing. With these hurdles behind us, and the revised schedules we have received from our customers, I believe revenue generated by hearable designs will ramp more significantly in Q1 2020.
Separately, we recently established a partnership with Atmosic, which is rapidly developing traction for its new ultra-low-power Bluetooth Low Energy solution. Leveraging this and our new partnership with Retune DSP, we have already won a new design with a large consumer electronics OEM for a 2nd voice-enabled TV remote control.
The release schedule for this design has shifted to Q2 2020. The customer expects to ship several hundred thousand units next year. In addition, we are engaged with this customer on a second design that has significantly higher volume potential that is scheduled to launch in 2020.
In addition, our largest ODM customer was the only third party company that we are aware of that was showing Truly Wireless Stereo, or TWS, AirPod-like headphones in Amazon’s booth at the September IFA Conference in Berlin. This customer has started several engagements now with OEMs who are interested in white labeling this product as their own AVS-compatible TWS headphones.
Our partner is still targeting to be complete with their AVS dev kit and AVS ODM design on the Amazon web pages during this quarter. We believe inclusion on Amazon’s AVS web sites will lead to several, new OEM engagements that will result in volume shipments from QuickLogic in the first half of 2020.
On another positive note, I'm very pleased to confirm our Japanese smartphone customer is integrating our technology across a broader range of their products. Their first phone with EOS S3 inside was on carrier shelves in August, and we have now shipped pre-production orders of EOS S3 for three additional phones that they expect to launch before year end, bringing our total number of models to four. Since we are meeting this OEM’s stringent power requirements, we hope to expand the number of models that include an EOS S3.
In June, we announced a new Integrated Alarm System or IAS reference design from Infineon that targets home, commercial and industrial IoT applications. Several well-known consumer-focused companies continue to evaluate the IAS reference design for integration into their products. While it is too early to predict specific launch dates by end customers, we do believe we will generate revenue from this starting in the middle of 2020.
On top of this, a large module manufacturer has already designed a new low-cost module based on the Infineon IAS that OEMs can easily integrate into finished IoT designs. This module is scheduled for introduction in early 2020.
Now, I'd like to cover several positive updates on our eFPGA business. As I mentioned in the last call, in Q2 we finalized a license agreement with a prime military contractor that has been commissioned by the DoD to evaluate and recommend embedded FPGA solutions and suppliers. As an update, they continue to progress with their evaluation of our test chip as well as our eFPGA core through their design flow.
As I have noted before, military contractors already represent a large market for discrete FPGAs, and the Department of Defense is taking steps now that will make it easier for its contractors to incorporate embedded FPGA in ASIC designs. We believe we are well positioned to address this trend for certain ASICs that will use FD-SOI manufacturing processes.
As further evidence of this emerging trend, we are now more deeply engaged with a separate military contractor for our 22-nanometer FD-SOI eFPGA. We are targeting an evaluation agreement for the first part of fiscal 2020 that could lead to a full license in the second half of the year.
Last quarter I had told you we expected to finalize testing of the ETH Zurich Parallel Ultra-Low Power IC that includes our eFPGA IP. After a longer than anticipated delay, the test chip is up and running now in our labs. I want to highlight that this test chip has led to a new engagement that we will touch on shortly.
In September, we announced that Nations Technologies selected our eFPGA to power its Next Generation Low Power IoT SoC. While this agreement generates only modest revenue in the near term, it enables us and the customer to fast-track SoC license agreements that we believe will generate considerably more revenue starting in the second half of 2020.
Our eFPGA strategy continues to evolve and we believe the promise it holds for our future is significant. I have often discussed the need for a more scalable go-to-market strategy and we believe that comes through tapping into the reach of more Platform Companies.
By platform companies, we mean well-known, mega-cap sized companies, or ones that have a strategy around connecting a massive number of users with services. These massive users in fragmented markets, drive sufficiently large volumes that create a served available market large enough for our SoC business to co-exist with other SoC players where we can license our eFPGA.
Last year, we signed an evaluation license with C-Sky who was acquired by Alibaba to be their SoC company moving forward. C-Sky was subsequently renamed to Pingtogue and now is driving all the semiconductor development for Alibaba. Ultimately, Alibaba wants more devices connected to their services. As such, they are creating an ecosystem similar to SiFive, what SiFive is doing, creating SoC templates such that semiconductor companies and system OEMs can bring derivative products to market quickly and cost effectively.
I am pleased to announce, we were selected by Pingtogue to join their IP Ecosystem Alliance, and that we are the only eFPGA company included in their recently announced template SoC, codenamed Swordless. This IoT SoC template is targeted for tape out in 2020. Barring any worsening of trade tensions with China, we believe that it will drive significant eFPGA adoption moving forward.
Pingtogue will use the license we had previously agreed to under our MTLA for this Swordless test chip, and then any future users of the template for their own SoC will generate an IP license and royalties upon unit shipment. We are very optimistic about the potential of this initiative with Alibaba for our eFPGA business.
Another exciting initiative for us related to our more scalable go-to-market strategy for eFPGA has now expanded in the last month to be of much broader scope than originally anticipated. This one is also with a well-known mega-cap sized global company. What started as an eFPGA discussion has broadened significantly.
I am very excited to announce that we have signed an agreement with this company to jointly develop and bring-to-market an IoT development platform that is based on the EOS S3 as the host processor. To enable the broadest served available market, we will launch this platform with open source tooling support for both the ARM MCU and the eFPGA core in the EOS S3.
We are now jointly engaged with a third-party company who has a track record of delivering open source tools. We also have a commitment from this mega-cap company to launch thousands of low-cost development kits into the market, our largest deployment ever by two orders of magnitude. We are targeting to launch these before the end of Q1 2020. Moreover, we believe multiple AI Software solutions will be ported to this platform, including SensiML.
We believe this initiative will be a catalyst for each of our business units. First, it could drive an EOS S3 user base two orders of magnitude larger than what we have today. Second, it should drive significantly more exposure for SensiML and subsequent SaaS subscriptions. Lastly, we believe it will drive a more meaningful eFPGA IP license agreement with the same company I alluded to earlier.
One of our assumptions from our previous earnings call was that the above IP license would be executed in Q4 and drive a near seven-digit license fee in the quarter. While the push out of this IP license to next year is disappointing, I firmly believe the resulting agreement we have negotiated with this company is of substantially higher aggregate value to QuickLogic, which will commence in the current quarter. We look forward to updating progress on this initiative during our next call.
I’ll conclude with some additional comments on our QuickAI and SensiML business. SensiML continues to gain momentum as more companies explore how AI can be integrated into their suite of products. As this macro trend accelerates, and more dollars are invested in this area, we are dedicating more resources to the SensiML team and technology.
The funnel for SensiML continues to expand, including additional Global Fortune 500 companies. SensiML closed Q3 with a total of 26 customers, seven of which are Global Fortune 500 companies. This total is up from 12 customers in Q2 and three in Q1. Currently, the majority of them are still using the low-cost, evaluation version of the product, not yet on the full SaaS product that generates significantly higher revenue. We anticipate increasing that total during Q4 from our initiatives with our distribution partners, as well as with MCU partnerships such as our most recent one with STMicro.
We currently expect SensiML will end the year with approximately 40 customers, most of which serve the Industrial markets. These types of customers tend to have much longer evaluation and decision-making periods.
As a result, we have seen that the conversion time from evaluation to full SaaS license is taking longer than we had anticipated. Therefore, our objective of cash flow and non-GAAP profitability for the SensiML business unit is more likely to be achieved in mid-2020.
The good news is that Industrial customers tend to have a much longer and more predictable revenue stream, which should offset the seasonality of our consumer-oriented business. In order to accelerate scalable growth, we have recently hired a director of software sales, with experience in AI Software and SaaS business models.
I’ve covered a lot of ground in these opening remarks. The bottom line is that, while there is short term lumpiness in our business, I am confident that we have the levers in place to deliver revenue growth and improved overall financial performance in 2020.
I would now like to turn the call over to Sue for a discussion of our recent financial performance and full Q4 Outlook. Sue?
Thank you, Brian. Good afternoon and thanks to everyone for joining us. For the third quarter of fiscal 2019, total revenue was $2.2 million. This compares with revenue of $3.5 million in third quarter last year. The decline from Q3 last year, which was our highest revenue quarter since the fourth quarter of fiscal 2015, was mainly due to lower shipments of our mature and display bridge products.
Within our Q3 revenue, sales of new products were $1.0 million. This compares with $1.5 million in the third quarter last year. While we did have higher revenue from other new product sales, they did not make up for the significant decline in display bridge sales.
Our mature product revenue was $1.1 million, a decrease compared with $2.0 million in Q3 last year. The change was due to lower shipments to customers in the military and aerospace sectors. In the third quarter of 2019, we had four customers each accounting for 10% or greater of sales.
Non-GAAP gross margin in Q3 was 48.9%, compared with 50.5% in the same quarter last year. The flat gross margin profile comes despite of a nearly 40% lower revenue than Q3 last year, showing the strength of our diversified product and customer mix.
Non-GAAP operating expenses for Q3 2019 were approximately $4.5 million, which was the same as Q3 last year. As a reminder, our OpEx from Q3 last year was prior to the expenses associated with the SensiML acquisition that closed earlier this year.
Within our Q3 2019 OpEx, R&D expenses were $2.6 million and SG&A expenses were $1.9 million. This compares with R&D and SG&A, both at $2.2 million in Q3 2018. The approximately $300 thousand decline in SG&A from the same quarter last year resulted from a combination of items, including lower consulting expenses and reduced costs resulting from our facility move earlier this year.
The net total for other income, expense and taxes in Q3 was a $78,000 charge, compared with an expense of $33,000 in the third quarter last year. Non-GAAP net loss in Q3 was $3.5 million, or $0.03 per share. This compares with a net loss of $2.7 million, or $0.03 per share in the third quarter last year.
Finally, the total cash at the end of Q3 was $24.8 million, compared with $28.2 million at the end of last quarter. Our cash balance at the end of the third quarter also includes the $15 million draw from the revolving line of credit.
Now, moving to our forecast for the fourth quarter of fiscal 2019, which will end on December 29. Our revenue guidance for the fourth quarter is $3.0 million, plus or minus 10%. We believe total revenue will be comprised of approximately $1.3 million of new product revenue and a $1.7 million of mature product revenue.
With our guidance for higher revenue, which includes additional SaaS sales, and the corresponding better absorption of manufacturing overhead, we currently believe our non-GAAP gross margin will improve to approximately 60%, plus or minus 3%.
We are forecasting total non-GAAP operating expenses will decline to approximately $4.2 million, plus or minus $300,000. Within operating expenses, we expect our R&D to be approximately $2.5 million and SG&A to be approximately $1.7 million. This continued improvement in our OpEx is being driven by ongoing cost controls, the lower costs of our new facility in San Jose, and the roll-off of the one-time moving expenses we discussed last quarter.
After interest expense, other income and taxes, at the midpoint of these ranges, we currently forecast our non-GAAP net loss will be approximately $2.4 million, or $0.02 per share based on about 116 million shares outstanding.
Most of the difference between our GAAP to non-GAAP results is our stock-based compensation expense, which we expect to be approximately $760,000. We expect this expense will remain in the mid $700,000 range for the foreseeable future.
Finally, in Q4, we expect lower cash usage in the range of $2.8 million to $3.2 million. As Brian mentioned earlier, we should be close to our non-GAAP operating income breakeven at the end of Q1. This in turn should translate into minimal cash usage for the first quarter next year, and cash flow breakeven in Q2 of 2020.
With that, let me now turn the call back over to Brian for his closing remarks.
Thank you, Sue. Before concluding my remarks, I’d like to take a moment to discuss the preliminary proxy filing we made on October 7th, asking for shareholder approval to execute a reverse split of our common stock if this is needed to remain listed on the NASDAQ Capital Market.
As I discussed in the blog post that accompanied the filing, there are steps we must take to maintain our compliance for trading on the NASDAQ Capital Market if our stock does not close with at least a $1 bid price for 10 consecutive trading days prior to January 13, 2020.
The Board has not made a final decision on whether it will execute a reverse split, nor determined a final split ratio. The special meeting is simply to have shareholder approval should it need to use the reverse split path to remain in compliance with NASDAQ.
In closing, while we are disappointed to not have achieved our fiscal 2019 financial goals that we discussed during the year, I am convinced that the design wins with recognizable OEMs, new ecosystem partnerships, and product introductions addressing new growth markets creates a clear pathway to delivering improved financial performance in fiscal 2020.
During this ramp to profitability, I believe we have the balance sheet to support our financial objectives. I am again reiterating that we currently do not expect the need to raise further cash via an offering. While it is too early to discuss a detailed outlook for fiscal year 2020, the commitments we have received from customers, and mix of business we currently expect, gives us greater confidence that we will not only significantly increase revenue, but again deliver a solid increase in our annual non-GAAP gross profit margin for the fourth straight year.
Before opening the call for Q&A, I want to let everyone know QuickLogic will be participating in some upcoming investor events. A few of the highlights include, The Craig-Hallum Alpha Select Conference in New York on November 12th, The LD Micro Conference in Los Angeles on December 11th; and The Consumer Electronics Show in Las Vegas, January 7th through the 10th. All the events we plan to attend will be available on the Events Section of our website.
That completes our prepared remarks. Operator, I would now like to open the call for questions.
[Operator Instructions] Our first question will come from Suji Desilva, ROTH Capital.
Hi, Brian. Hi, Sue. So just to get some standing in the revenues, how much display bridge is left to the run rate?
It's deminimis now as of this quarter.
Okay. And then the large consumer companies talking about the last few quarters over the last few years, I didn't -- I don't know if I heard an update about that customer on the call or in some other comments. So, you can kind of remind us what was happening with that customer.
Yes, so the electronics company that we talked about for January when they had the product demonstrated to us, that for the first OEM deployment. With these trade issues -- China, specifically tariffs that were going to be applied to that end product coming into the U.S. on this last day of the tariffs.
So what I've done on a previous call was that they were not going to launch that this year. And they were going to push it to next year. And what I reiterate on the call this time was that we were so expecting that to be in 2020 product lifecycle. That's specific one. Now, what we also get more clarity on this call was that design led to a remote control design for a content and streaming company. And they are doing a remote control that is completely under their own control. And we are the primary record that's the design win for us. And that we expect that will actually have a launch date of Q2 of 2020. And again, instead its firm because they have control their own destiny. They're not doing this as a design that a TV manufacturers have to ultimately buy off on.
Okay, that's helpful. And then on the headset market, you know, having most of the Amazon AVS [indiscernible]. And then hearing that there's, you know, a near term challenges for the China customers, couple of Amazon putting out their own, can you just kind of wrap that whole dynamic into what - what's made it harder for you to seize your customers ramp?
Yeah, so, obviously, some of this was competitive with the trade tensions and what could be shipped into the U.S, without any advice. I would say the more recent challenges that’s been that Amazon put out their own voice recognition software, which we alluded to on the call here.
Because that software is free. Customers are wanting to integrate free software from Amazon as a voice recognition as opposed to paying another company for the voice recognition. So that's pushed out the actual launch cycle for some of these guys as a result of that.
As it relates to Amazon, specifically with the AVS, I think it's actually, it's somewhat disappointing we're not in the first product away from them. But it's not a last opportunity for us. I think in many ways this actually makes the market more real to people.
And you could imagine that a lot of OEMs that we're talking to now that are working with the ODN that we are in can be using that as a white label product for the foreseeable future. Meaning that when you go to your consumer electronics store, you're not going to just see Apple AirPods and Amazon TWS, you're going to see a whole host of together very similar in some factor and hopefully white labeling the products that we're in.
Okay, good, Two last topics for questions. First of all in Japan on the smartphone customer you have there. What were your expectations for units at the end of 2019? Are you -- where do you expect to be or ahead or behind that and if so, what's the delta versus what you're expecting to see quarter ago?
So from a few quarters ago I think on the last call, we said that we were below expectations for the year by a few hundred thousand units so that customer would translates into a little more than a few hundred thousand dollars.
But we were expecting that we would be in around four phones shipping this year, and we are going to hit from a phone launch point of view, I think we're going to hit that based on when we return this call. Just the $3 million will be a little bit below what we had expected earlier in the year.
Now, it's worth noting also since you brought up that customer, remember we have this view that covers two years worth of phones. So I am expecting that we're going to be in this next wave of phones next year based on the same customer, where they're taking the current design, and then iterating that leveraging all of the software that is put into our iOS chip, or they spend like almost two years building their software and iOS and they want to maximize that R&D investment in that part as well.
And last question eFPGA, embedded FPGA what's good expectation or kind of way to frame what the 2020 revenue opportunity is to that, any royalties in that Brian?
Because I would not sanction any royalties, I think the royalty roll starts in 2021 at this point if you look at a lot of their designs that we have now that I talked about on the call, they're typically like 2020 to 2022 because that's going to result in a 2021 royalty flywheels.
As far as the licensing revenue goes for next year, I don't think we're at a point to nail down a specific number, but I definitely think this is going to be in the couple of million type range. Based on again these current customers that we talked about and then getting that larger IP deal in place with this company that I mentioned on the call for the first time today.
Okay, all right. Thanks for answering the question, Brian.
[Operator Instructions] And next we'll hear from Richard Shannon, Craig-Hallum
Hi, Brian and Sue, thanks for taking my questions as well. Lots of things to ask about, some of my topics covered here, but maybe just as a simple question here. I think for 10% customers you mentioned there were four of them, any of the opportunities that you've discussed over or you've seen some ramps in newer products amongst those four customers or 10-percenter’s?
Yeah, yeah, there are these having these new products, Richard.
Is one of them via the Japanese-only?
Definitely, I guess. Let’s see, jump over to sensible. Sounds like you're making some good progress, maybe not as fast as you'd hoped. But certainly addressing the industrial market here certainly understandable that evaluations takes some time. I guess, Brian, maybe I could check off the bad case scenario here about evaluations taking longer, are you seeing any customers doing evaluations and dropping off in any manner, are you still see them engaged, it's just taking a little bit longer?
It’s largely, it’s them taking longer. I think in lot of cases what we found is that customers are trying to use some of their own hardware to gather data and use the SensiML cloud. And inevitably, they introduced error into their systems and the way they test, which is why we're trying to influence people to use our hardware development kits instead of their own systems for that level of testing, to kind of get through this evaluation phase much faster.
And we've also come out with a new launch of software. Actually, recently, we didn't get our time fit on the call today, but we've come out with a new version on the website that supposed to make it easier and faster to get through this evaluation phase. So, now I have the phone in front of me, I didn't see anybody that's fallen off – there was – there was falling off the room our point of view, they're still ongoing and just exercising that before they commit to the level of tasks that we would like them to.
Okay. And you said you just hired a new – a new person here for the central division is who is a sales or engineering point of view, but is their experience. So how long these evaluations stay consistent with their experience in the past before coming to QuickLogic?
You know, I haven't asked that question of this individual yet. I'm intending to actually just started last week. But, yeah, the sales director, that's going to be out of the some organization really driving for, closing more of these deals with really a focus. So one of the nice piece – background of this individual is that they have experienced selling SaaS and selling AI software. So I think the ramp time will be short. They're going to be handed over these thousands of leads that we have now generated from these different webinars and distribution programs that we have. And I think we're going to start to see an increase in the closure rate and decrease in the amount of time it takes to get to that point from that experience.
Okay. Fair enough. And maybe a couple of quick questions for Sue on the numbers here, I think you're – if I caught your comments, right. You're expecting improvement in the first quarter approaching breakeven and getting there in the second quarter. Maybe if you could detail what minimum level of sales you think it'll take to get to break even?
So we're thinking now about revenue – total revenue level of approximately $6 million plus/minus 10% and where's the gross margin at above the low 60% level?
Okay. And well I probably can't do the math quick enough in my head, but does that imply OpEx that kind of a similar level that you got into for the fourth quarter?
I’d say very much stable as what I guided for Q4 that level.
Okay. I think that is all my questions here. You give us a lot of information observe here and I'll do some more of that and talk to you offline. But thank you very much.
Our next question today comes from Martin Yang, Oppenheimer.
Hi, Brian. Hi, Sue. So my question first is on the 1Q expectations. Is the $750,000 license agreement, is that expected to be push-out into 1Q 2020? Or do we expect that to be realized later than 1Q 2020?
It’s for model a being spread out through the year, not all lumped in Q1.
Got it. And for when you mentioned the mega cap customers that can increase your S3 platform, are they intended to focus only on industrial IoT, or is that a mixture of consumer industrial and other verticals?
It's actually a mixture. It's -- it is not just industrial. It's definitely I would say, more on the consumer side than the industrial impact. But I think the development that we're doing with them will lend itself very well to people that would like to use an industrial type application.
And have you discussed are more specific and devices that those platforms are targeted to?
No. I haven't in fact, this is the first time, I've ever spoken publicly about this, this whole engagement that's been going on for a while.
According to show Wednesday that the majority of people on this call use products like it every day.
Understood. And last question for me. So for -- in a hearable space, an Amazon changing software is writing some of the delays. Are you seeing other drivers for instance your partnership with Airoha, are you seeing any new developments from them?
So I don't know if you're talking about new partnership opportunities or new competitive situations, which one you are asking?
I was referring to are you engage with for instance, the equivalent chip designers similar to Airoha to deepen your penetration in the hearable space?
Oh, yeah. Yeah. In fact, that's given how long we spend on the prepared remarks already those types of details. So off the table, I think on the call but I can iterating here in Q&A. So yeah, I mean, in the last quarter, we announced several new partnerships, I think one was with Airoha, we're working with [Indiscernible], which is a Chinese Bluetooth company, the Atmosic, which we did during the call. All of these are folks that have some level of penetration into these application spaces already. And we're kind of getting on the bandwagon with him as far as bringing a whole solution to the same customer.
So yeah, these partnerships are definitely helping. In some cases, they're bringing us to decision makers that we aren't already calling on, in other places, it's a reversal we're bringing in two different people. And it's really important actually, because in the consumer space, in particular, customers like to start from a known good, verified starting point. They don't like to do a lot of development on-the-fly. And so by us pre-verifying these solutions with these big semiconductor companies it sort of validates what we're doing, and it accelerates the customer development cycle.
Thank you. That's it for me.
Next up is Rick Neaton, Rivershore Investment Research.
Hi, Brian. Hi Sue.
I'd like some re-clarification about Infineon. Last call you mentioned that you expected some production late in Q4 of this year of that -- of a module or a product coming from that reference design. Is that one push-outs or is that still on track?
So, we are expecting to shift some from us to them to build out some of these systems. And but I think the bigger launch from them will actually be pushed out a little bit from what we thought last time and some of that shift through the qualification of all of their AI software that they're running on the EOS S3. But we do have them on our forecast to ship to that design in this quarter.
Okay. You didn't -- I didn't hear you mentioned anything about a feature smartphone that your Japanese customer had scheduled to release in Q2 of next year. Is that still on track?
Absolutely. It's on track.
Okay. And speaking about your expectations for Q1, is this guidance or should it be viewed as something short of guidance?
Well, I'm not going to change our policy, which is to give guidance for current quarter. But I would say it's a very well thought outlook and the driver of that it's going to take to get to that point of the operating income and the balance sheet.
And so Sue, we should model $4.2 million of non-GAAP operating expenses for Q1 of next year. Is that what you're saying?
I want to model a bit lower than that, so $4.2 million is my midpoint. I want to model that at a lower end of that midpoint -- that range to get up to breakeven point.
I was trying to reconcile your $6 million plus or minus with 60% gross margin leaves about a $600,000 delta between breakeven and your $4.2 million. So, okay
Right. So, yes, it could captured at the -- still was 2 point out of gross margin improvement or the OpEx level adjustment. So that’s where we started getting close to breakeven and to Q2 next year then we're comfortable saying breakeven.
Are you seeing a non-GAAP OpEx at about $4 million a quarter than in each of the two quarters in the first half of next year?
That's our goal to achieve that level of OpEx spending.
Okay. But that's not a forecast yet. That's a goal.
That’s true. And we're pretty comfortable saying that as well.
Okay. Brian, at the last conference call, you said you expected 50 to 100 SensiML customers by year end. And now you've scaled that back to 40. What's the reason for the big difference in your expectations?
It really boils down to two things, Rick. One is that, as I alluded to in the call, we did think that people would get through this evaluation phase of SensiML much faster than what they've shown. Some of those are -- have actually caused us to go back and come out with this more reduced fixed version of the eval software that we just launched. So that's one thing that we're doing to try to accelerate that.
The second is that, I did mention in the call so that we are officially partner of STMicro, so SensiML has their software running on the STMicro MCU. We had a very prominent kiosk at the ST Developer's Conference in Santa Clara leading SensiML.
And our vision there was that they would also be pulling in more these opportunities that would convert to SaaS licenses sooner than what they have. I think, I maybe overestimated how fast the large European company would move and I was on the wrong side of that estimate.
So, I think, we're rescaling this to 40 for the year. But I still think SaaS foundationally and fundamentally being part of ST's ecosystem partner program and them actually getting trained up on the solution now and becoming an arm, a sales arm for SensiML, I think, at the end it's going to accelerate this once they get more comfortable.
And then the last thing I'll say is just, having a semiconductor company sells software is just like challenging people's DNA at some point. And so we hired this new salesperson for SensiML, because we wanted to get -- break through that wall. And I think having somebody that's got experience selling AI and selling SaaS, it's getting these thousand leads, they're going to be able to convert that in a much faster rate.
So, in retrospect, I wish we hired a salesperson dedicated for this sooner. But we're trying to be very mindful with of our investment in cash movement on that path. Hopefully that answers your question.
Yeah. It does. Thank you, Brian. As an investor, how should, that person be viewing the confidence in your outlook for Q1 2020. Given all the changes that have happened in the past two conference calls?
Yeah, I think about that before the call. And I think this is where we need to step back and look at the forest for a second and just realize that now we really have so many different items as wins with big customers that we didn't have like a year ago that was so well diversified.
And I think if we, if we look at those different milestones and these different partnerships that we've put in place. And these yields now that I talked about that we signed, I think that should give it certainly get me and our management team, I hope that it gives investors that same sense of confidence that I have, because it's just a much more diversified customer's different commitments
I mean, think about last year, we still had to ship the phones yet with the Japanese smartphone guys. And now we're going to exit this year with the four phones launch. So I think the evidence is there now that this really is on the cusp.
Okay. Any you…
Anyway, you know what I'll add one of the things that I've just started interrupting you this whole deal with this mega cap company. Again, I haven't talked about that feel before its up today is a big company putting money and resources behind this initiative with thousands of kits out into the market with this software.
That you can argue that's a big company. But they're going to have their reputation attached to this as well. And they chose you out of the three as the host processor. So I think there's something there that we can all take from that. And also, that's another reason why we're getting the confidence that the tide is turn now. Thank you. I will be that quarter.
Okay, thanks, Brian.
And everyone, that's all. At this time the time we have no further questions today. And I'd like to turn the conference back to you, Brian, for any additional or closing remarks.
Yeah. Thank you for your participation in today's call and continued support, we look forward to speaking with you again when we report our fiscal fourth quarter results in early February next year. Thank you and goodbye.
Ladies and gentlemen, that does conclude today's conference. Thank you all for your participation. You may now disconnect.