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Edited Transcript of QUIK earnings conference call or presentation 13-Feb-19 10:30pm GMT

Q4 2018 QuickLogic Corp Earnings Call

SUNNYVALE Apr 2, 2019 (Thomson StreetEvents) -- Edited Transcript of QuickLogic Corp earnings conference call or presentation Wednesday, February 13, 2019 at 10:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brian C. Faith

QuickLogic Corporation - President, CEO & Director

* Suping Cheung

QuickLogic Corporation - CFO & VP of Finance

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Conference Call Participants

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* Richard Cutts Shannon

Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst

* Rick Neaton

* Sujeeva Desilva

Roth Capital Partners, LLC, Research Division - Senior Research Analyst

* Moriah Shilton

LHA Investor Relations - SVP

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to QuickLogic's fourth quarter and full year fiscal 2018 conference call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference to your host, Miss Moriah Shilton with Investor Relations. Ma'am, you may begin.

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Moriah Shilton, LHA Investor Relations - SVP [2]

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Thank you, Valerie. Welcome, everyone, and thank you for joining us today for QuickLogic's fourth quarter and full year fiscal 2018 results conference call. With us today are Brian Faith, President and Chief Executive Officer, and Dr. Sue Cheung, Chief Financial Officer. Before we begin, I will read a short safe harbor statement. 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 the company's 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 the annual report on Form 10-K for the fiscal year ended December 31, 2017 the company filed with the SEC on March 9, 2018. These forward-looking statements are made as of today, the date 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.

Please note, QuickLogic uses its website, the company blog, QuickLogic HotSpot, its 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. This conference call is open to all and is being webcast live.

We will start today's call with the company's strategic update from QuickLogic's CEO, Brian Faith. Then CFO Sue Cheung will provide financial results and guidance. Brian will deliver closing remarks and open the call to questions.

At this time, it is my pleasure to turn the call over to Brian Faith, President and CEO. Please go ahead, Brian.

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Brian C. Faith, QuickLogic Corporation - President, CEO & Director [3]

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Thank you, Moriah, and thank you all for joining our Q4 2018 conference call. This is a very exciting time for QuickLogic. We are building traction in our core markets and layering onto that with our more rapid penetration in AI. The enthusiastic reaction from our partners, customers, and distributors following our acquisition of SensiML has been very encouraging. They acknowledge that there is pent-up demand for an end to end solution that we now provide. Large customers are beginning to move EOS S3 designs into production and other key designs are scheduled to ramp during the first half of 2019. The Master Technology License Agreement, or MTLA go to market strategy for our embedded FPGA IP continues to build traction and the customer and partner reception for our QuickAI and SensiML strategies have exceeded my expectations. I'll get into all of this in much greater detail, but first let's take a couple of minutes to review 2018.

There were 3 factors that significantly reduced our new product revenue for Q4. First, the decline in Q4 display bridge and connectivity revenue was much larger than we had originally modeled. We are anticipating another significant decrease in combined display version connectivity revenue in Q1 that will weigh on total new product revenue.

Second, a government contractor that we have been working closely with on an embedded FPGA IP MTLA and license agreement did not receive its anticipated government funding in time to execute the agreements in Q4. Third, while we recorded our first material QuickAI revenue in Q4, one of our QuickAI customers made a last-minute design change to our new EOS S3 AI solution from the originally anticipated module solution. This lowered the ASP and resulting revenue from the sale. The combined impact of these factors was over $600,000.

In our February 2018 conference call, I forecasted our baseline revenue for 2018 would be approximately $10 million. In that call I defined baseline revenue as revenue from mature products, display bridges and existing connectivity designs. For full year 2018, our total baseline revenue was in line with our forecast. However, within the baseline, higher than expected mature product revenue offset a significantly larger decrease in nonstrategic new product revenue than we anticipated. This resulted in a decline of total new product revenue for 2018 and masked the greater than $2 million increase we saw in strategic new product revenue. This shift towards strategic business is reflected in our full year Non-GAAP gross profit margin of 51% which is up significantly from 46% in 2017, and resulted in 15% growth of our Non-GAAP gross profit dollars year-over-year.

While this analysis more accurately portrays the progress we have made toward realizing our 2018 goals than the aggregate decline in new product revenues shown on today's press release, the growth in strategic business was below the expectations we shared a year ago. Looking forward to 2019, we anticipate mature product revenue will be flat to up slightly with 2018 and that nonstrategic new product revenue will decline by approximately $1.5 million.

With that in mind, the question I'm sure all our investors have is, what has changed? My goal today is not only to answer that question, but also share with you some exciting new developments that I think will help you better understand the value of our expanding business model and with that share my belief that we are very well positioned to deliver greater than 50% revenue growth in 2019 and continue our established trend of higher Non-GAAP gross profit margins.

Let's turn now for an update on our ArcticPro embedded FPGA IP business. After determining that our original go to market strategy resulted in us getting stuck in a Catch-22 loop, we changed our strategy in mid-2018 by offering our targeted customers the interim step of an MTLA. Since then, we have signed 3 MTLAs and have a fourth that is pending government funding. The MTLA strategy has benefited us and our potential customers in many ways. It created a low-cost method for our targeted customers to develop test chips that they could use to evaluate the performance and benefits of embedded FPGA. It outlines all the criteria for subsequent embedded FPGA license agreements. This allows design groups to quickly and easily license our embedded FPGA IP for a targeted SoC or ASIC without the need or associated delays of extensive legal and executive level reviews. It also enables us to much more quickly and efficiently qualify whether or not a given engagement is likely to result in a license agreement.

We signed our first MTLA with Chinese semiconductor company C-SKY which was subsequently acquired by Alibaba. We believe this MTLA, which carries a modest quarterly maintenance charge, will lead to multiple SoC license agreements beginning this year. We signed our second MTLA with ETH Zurich which was also licensed to develop its new RISC-V parallel ultra-low power or PULP platform using GLOBALFOUNDRIES' advanced 22FDX fabrication process. Tape-out of the PULP platform incorporating our embedded FPGA IP was completed during Q4 2018 and we expect to receive first silicon in Q2 2019.

We signed our third MTLA with a semiconductor company and recognized several hundred thousand dollars in revenue during Q4. We expect this will be the first of many SoC license agreements with this company. While our NDA with this customer prevents me from adding more color, I am confident that once the details become available, you'll appreciate the significance and value of this agreement.

When we discussed our outlook for Q4 in our last quarterly conference call, we expected to sign a new MTLA and recognize revenue in Q4 from an ASIC license agreement with a government contractor. However, due to delays in government funding, the agreements were delayed. We've worked closely with this customer for a long time and we are confident this agreement will be executed. As it stands today, we anticipate the MTLA and license agreement will be finalized during the first half of 2019.

During Q4, we also expanded qualifications with our fabrication partners by adding TSMC's 40nm node. With this, we now have our eFPGA available at TSMC for 65nm and 40nm, at GLOBALFOUNDRIES for 65nm, 40nm and its unique 22nm FDSOI nodes, and at SMIC for its 40nm fabrication node. There is a good chance we will expand to additional process nodes during 2019, but that expansion is most likely to be driven by customer SoC or ASIC license agreements.

We will begin rolling out several new initiatives this quarter that we believe will not only add to the momentum we have established with our MTLA go to market strategy, but also improve the scalability of our engagement process, shorten the time it takes us to qualify the likelihood of winning an engagement, and provide cross-leverage for our other IP and product offerings.

The ETH PULP platform will enable us to quantify the benefits of running offload engines like accelerators in our embedded FPGA versus running them in software on their RISC-V processor. The SensiML Analytics Toolkit enables designers to run AI models that offload neurons to our embedded FPGA. Here we can leverage the SensiML Analytics Toolkit in conjunction with EOS S3 to demonstrate how embedded FPGA can improve system performance and free up processor resources. This can be used to add new features or left idle to lower power consumption. During Q1 we will release a new Application Programming Interface, or API, that will enable software engineers to leverage the inherent benefits of embedded FPGA. The API is written in an industry standard format and enables software engineers to write code as they normally would and then easily evaluate the performance and/or power savings benefits of running math intensive operations in embedded FPGA.

In conjunction with the API release, we will also introduce our hardware accelerator library. This will include tested software code to instantiate eFPGA-based accelerators optimized for voice recognition applications. We will follow this up with additional accelerators that are commonly used in time series AI applications supported by the SensiML Analytics Toolkit. With these new tools and initiatives, we will increase the number of potential customers and cross-leverage for our embedded FPGA IP, SensiML SaaS license, and EOS platforms; improve the scalability of our engagement process, which will increase the number of engagements we can manage at one time; significantly improve flow of the engagement process by enabling customers to understand and quantify the value of embedded FPGA more easily; shorten the time it takes us to qualify the potential of an engagement to produce an MTLA and revenue generating licenses; and I believe increase the percentage of engagements we win.

Let's turn now to update the status of our traditional EOS S3 business.

A year ago, after displaying nine design wins at CES 2018 and Amazon forecasting it would release its Close Talk specification for always on/always listening devices any day, we were very optimistic these and other similar designs in our pipeline would contribute significantly to our 2018 revenue growth. However, the Close Talk specification wasn't publicly released until last October and the test certification files used in conjunction with the spec have been updated several times since. The headwinds we faced last year weren't just from Amazon though. As we moved through 2018, we continued to win designs, including a major platform design with a large Japanese smartphone company, only to see production forecasts moved forward, often a quarter at a time. The short story is, design engineering groups and even product managers were fairly quick to see the benefit of always on/always listening devices. However, with still solid demand for push to talk, companies were hesitant to move our next generation design wins into production. As a result, outside a few specialty applications, the vast majority of our design wins that sat in a logjam last year were ready but waiting for a production schedule.

Underscoring the delays we faced last year, a design we won in early 2018 with JD.com finally moved into production just last month and was proclaimed by FutureSource Consulting as being the industry's first always-on wake word Bluetooth in-ear consumer headset.

In addition to the design with JD.com, two of the designs we displayed at CES 2018 have moved into mass production. Cleer has initiated production of its Amazon AVS compliant battery powered Stage Speaker. And one of our ODM headset designs, which originally targeted Amazon, won a significant contract with SF Express. We had originally expected both of these designs to enter production during Q1 2018. With the logjam clearly loosened and the Amazon Close Talk spec in hand, we anticipate a number of our other hearable design wins from 2018 to move into production during the first half of 2019. I'm not going to tell you the logjam that stunted our growth last year has been totally cleared. We still don't have committed schedules for all of our design wins. However, the trend is definitely moving in the right direction, and with several of our largest customers now committing to production schedules, the momentum seems to be building.

Last year, a major Japanese smartphone company selected our EOS S3 for a platform design it intends to use in several new models. Following this, we negotiated a broad MOU with this company that covers all MCU applications in smartphones, feature phones and IoT devices. This is a big win for us. We originally expected the first smartphone to move into production in Q3 2018. However, the primary wireless carrier for the design asked our customer to push it out to 2019. This represented one of several significant headwinds we faced in 2018. Things are moving forward well with this customer and we anticipate shipping meaningful EOS S3 volume during Q1 to support initial production of our first smartphone design win.

The consumer electronics company that is using our EOS S3 in a new always on/always listening application displayed the first model incorporating the design at CES last month. The customer constructed an environment more similar to the targeted home use case to demonstrate the voice interface which we were told worked very well. There were two reasons the customer chose to do this versus demonstrate the feature on the CES floor. First, the scheduled release to retail outlets was pushed out to July, 2019. Second, the floor at CES is a very noisy environment. We currently plan to initiate production shipments for the first models from this lead OEM beginning in late Q2. We believe additional OEMs will introduce the platform design in various models during the second half of 2019.

In addition to these design wins, we are also engaged with the original platform design customer on a second EOS S3 application. The engagement with the large consumer goods company that I mentioned last quarter is progressing in line with our expectations. We remain hopeful that if EOS S3 is selected for this design, that it will move into production during the first half of 2019. We are also working closely with this OEM as it evaluates EOS S3 for a new platform design that targets the variety of high-volume consumer products, all of which would represent new product categories for QuickLogic.

On January 17th, JD.com released its new Pilot U-LIFE N1 smart headset with EOS S3 enabled always on/always listening capabilities. With over 300 million active customers and over $60 billion in 2018 revenue, JD.com is China's largest online electronics retailer. With the ultra-low power consumption of EOS S3, JD.com was able to limit battery size and weight to only 30 grams and still deliver 90 hours of standby time on a single charge. Even more impressive, according to Chinese tech news source, EK21, The Pilot U-LIFE N1 provides a voice recognition rate of 95%, which is far better than the recent analysis by 9 to 5 Mac that rates Siri's accuracy at only 78%. This could explain why after only days on the market, there were thousands of reviews posted for the Pilot with what EK21 termed as a praise rate over 98%.

SF Express adopted one of the ODM hearable designs that we displayed at CES 2018 for its new Shunfeng Smart Bluetooth Headset. This all-weather design enables hands-free access to the company's database as well as cloud-based AI resources to accelerate decision making. SF Express is one of the world's leading logistics companies and has said it intends to deploy the headsets to its 600,000 delivery agents in China. The company estimates that the hands-free voice interface enabled by EOS S3 will improve its efficiency by 70%.

Let's shift now to QuickAI and SensiML where things continue to come together more quickly and efficiently than we originally modeled. As I noted earlier, we shipped our first material revenue for QuickAI last quarter. The total was less than I was anticipating because one customer made a last-minute switch from a module solution to our EOS S3AI SoC Platform, which has a lower ASP. EOS S3AI can be used as an SoC running a soft neural network in the MCU and eFPGA, or for more compute-intensive applications in conjunction with a neural net processor like the nepes NM500. Please see the press release that was issued after the markets closed today for more information on EOS S3AI.

One of the more frequent questions I have fielded from investors since our conference call last November has to do with our forecast to ship material QuickAI revenue nearly one year sooner than we had originally forecasted. The short story comes in two pieces. First, we underestimated the pent-up demand for a market-ready AI endpoint solution. There are obviously a lot of companies talking about AI, but surprisingly few have market-ready solutions that are practical to deploy today for edge and endpoint applications. The second reason is, together with the SensiML Analytics Toolkit, we offer customers not only a market-ready solution, but even more importantly, an end to end solution that is quick and easy to adopt without the need for significant data science or even firmware engineering resources. The EOS S3AI platform is a complete hardware and software solution that is ideal for endpoint applications such as predictive maintenance, structural health monitoring, manufacturing process control, and context awareness for wearables. This single-chip solution leverages the SensiML Analytics Toolkit to efficiently identify which complex feature extraction algorithms are ideal for the customer-labeled data sets and generates the AI models and classifiers using machine learning techniques for code development. The AI model that is subsequently generated is uniquely optimized and partitioned to fit in the EOS S3AI hardware blocks, which include its embedded FPGA, Flexible Fusion Engine and MCU.

Following this, the device is programmed seamlessly by the SensiML Analytics Toolkit. This tight integration of hardware and software ensures that the AI algorithms created by the toolkit are optimized for the EOS S3AI platform, enabling low power and efficient endpoint processing. We are working closely with our channel partners and distributors to address this pent-up demand as quickly as possible. It has been a long time since QuickLogic has offered something that is attractive for our channel partners and distributors to market proactively, but with QuickAI and SensiML, that has changed, and our partners are excited.

To build on this early momentum, we have combined our QuickAI Hardware Development Kit, or HDK, with SensiML's Analytic Toolkit to offer a very efficient and low-cost way for OEMs to evaluate the benefits of AI and quickly integrate our unique solution into new designs. With the purchase of an HDK, the customer gets everything they need to develop and test their designs. If the customer likes the result, we end up with both a SensiML SaaS license and a new production design win for EOS S3AI. We have already rolled out this strategy in our new HDK in Japan, Taiwan, South Korea, the U.S. and some European countries. In fact, our Japanese distributors have already committed to approximately 50 HDKs in this quarter. With the support of our distributor network, this is vastly scalable and a near zero touch initiative for QuickLogic.

In addition to our channel partner strategy, we are also leveraging our long-standing relationships directly with key OEMs. This layers on very well with the engagements and customer commitments SensiML had already established prior to our acquisition, some of which are with Fortune 500 companies. The short story here is we have not only hit the ground running; we have done so with good traction.

I would now like to turn the call over to Sue for discussions of the financials. Sue?

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Suping Cheung, QuickLogic Corporation - CFO & VP of Finance [4]

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Thank you, Brian. Good afternoon, and thanks to everyone for joining us today. Please note, we are reporting our non-GAAP results. You may refer to the press 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 web page that provides the current and historical non-GAAP data.

For the fourth quarter of 2018, total revenue was $3.2 million, within our forecasted guidance range. Our new product revenue was $1.3 million, reflecting a higher than anticipated decline of our display bridge and connectivity revenue and a customer design change from a QuickAI module solution to an EOS S3AI solution. Our mature product revenue was $1.9 million, reflecting higher demand from our military, aerospace and defense customers.

Our Q4 2018 gross margin was 52.6%, within our forecasted range. Excluding a onetime inventory reserve, our Q4 gross margin would have been 58.2%, reflecting the benefit of our eFPGA IP license, QuickAI and higher than anticipated mature product revenue generated in the quarter. Operating expenses for Q4 were $4.3 million, below our forecasted range due to the later than anticipated timing of engineering new hires.

R&D expenses were $2.3 million and SG&A expenses were $2 million. The total for other income, expense and taxes in Q4, 2018 was a $13,000 charge, which was below our forecast due to capital gains from the sale of fully depreciated manufacturing equipment. Net loss was $2.6 million, or $0.03 per share.

Net cash usage during the fourth quarter was $3.8 million, within our forecasted range. Cash usage was negatively impacted by a net increase in working capital, driven mostly by end of the quarter shipments that increased the accounts receivable by nearly $1 million. During the quarter, we increased our line of credit from $9 million to $15 million, at the same interest rate. Our cash balance at the end of the year was $26.5 million, which includes a $15 million loan from the revolving line of credit.

Turning to the full year 2018 results, total revenue was $12.6 million, up 4% compared to $12.1 million in fiscal 2017. New product revenue for fiscal 2018 was $5.7 million, down 2% compared to $5.8 million in prior fiscal year. Mature product revenue was $6.9 million, up 9% compared to $6.3 million in fiscal 2017. Due to our continued success in diversifying our customer base, we had multiple customers with greater than 10% for the full year.

Gross margin for 2018 was 51.2%, up from 46.4% in 2017. The higher gross margin in 2018 was primarily driven by revenue generated from eFPGA IP license, Sensor Processing, QuickAI, and mature products. Operating expenses for fiscal 2018 were $18.2 million, which were flat with the prior fiscal year. Due to modest total revenue growth and our higher gross margin, our net loss for 2018 decreased to $11.9 million or $0.14 per share, compared to $12.7 million or $0.17 per share for 2017.

Now, let's turn to the first quarter 2019 forecast. Our revenue guidance for Q1 2019 is approximately $3.5 million, plus or minus 10%. Total revenue is expected to be comprised of approximately $1.5 million of new product revenue and $2.1 million of mature product revenue. The increase in mature product revenue is due to continuing higher demand from our military, aerospace and defense customers. The increase in new product revenue is anticipated to be muted by further decreases in our display bridge and connectivity remedies.

On a non-GAAP basis, we expect our gross margin to be approximately 55% plus or minus 3%. We are forecasting non-GAAP operating expenses at approximately $5.1 million, plus or minus $300,000. We expect our non-GAAP R&D expenses to be approximately $3 million, which includes the new employees obtained through our SensiML acquisition. Non-GAAP SG&A expenses will be approximately $2.1 million. We expect our other income, expense and taxes will be a charge of approximately $60,000. At midpoint of our forecast, our non-GAAP loss is expected to be approximately $3.2 million, or $0.03 per share.

As was the case in prior quarters, the main difference between our GAAP to non-GAAP results is our stock-based compensation expense, which we expect to be approximately $835,000 for the first quarter, of which $210,000 will be a one-time charge related to our all-stock acquisition of SensiML that closed in the beginning of the year. In Q1, we expect to use between $3.3 and $3.8 million in cash, reflecting the timing of working capital and increased R&D spending. I'd like to note, in line with good corporate governance practices, we will be refreshing our $40 million shelf registration in the coming weeks. We will file the Form S-3 right after we file the 10-K. With that, let me now turn the call back over to Brian for his closing remarks.

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Brian C. Faith, QuickLogic Corporation - President, CEO & Director [5]

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Thank you, Sue. 2019 is setting up to be a very good year for QuickLogic. Our EOS S3 design wins are finally moving into production and new strategic design wins of large OEMs are scheduled to begin ramping in the first half of 2019. Our MTLA go to market strategy is working, and beginning this quarter we are poised to introduce our open API strategy, accelerator library, and have the PULP RISC SoC in hand to accelerate our momentum. With our first material revenue recognized nearly a year earlier than we originally expected, QuickAI is already building serious traction and we are taking steps to further leverage what we believe is a very unique solution. SensiML not only puts us in the very solid position of being in control of our own destiny, but also enables us to offer customers the convenience and security of one-stop shopping for a practical end to end solution for AI in edge and endpoint applications.

With the QuickAI platform and SensiML Analytics Toolkit, we have a compelling solution that we have combined into a single HDK that our channel partners and distributors are excited to take to market. Completing the package is the cross leverage we are building between hardware, software and IP and the improving scalability of our processes.

The term Industry 4.0 dates back to 2011. There has clearly been progress towards realizing the Industry 4.0 vision in cloud computing, but not to the edge or endpoint. This is due primarily to a lack of practical solutions that can be applied without the need for extensive data science expertise. I believe we are strategically positioned to fulfill that pent-up demand. Edge and endpoint represent the vast market with hundreds if not thousands of potential customers that together represent very substantial aggregate volume potential. To address these widely varied markets and customers, we are integrating the reach of channel partners and distributors in North America, Japan, Taiwan, South Korea and select European countries. With this and our other initiatives, I believe we are well positioned to expand our market coverage and customer base beyond anything QuickLogic has realized in the past and deliver a balanced model of hardware, embedded software that can be monetized, recurring SaaS revenue streams, and IP that is able to deliver sustainable high-margin growth.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Richard Shannon of Craig-Hallum.

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Richard Cutts Shannon, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [2]

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A lot of great remarks, Brian, creating a lot of questions. Congratulations on all your progress on QuickAI. Before I jump into that, Brian, I just want to make sure that I heard you in your prepared remarks regarding your expectations, seeing at least 50% total growth in sales in 2019, is that correct?

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Brian C. Faith, QuickLogic Corporation - President, CEO & Director [3]

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That's correct, Richard.

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Richard Cutts Shannon, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [4]

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To dig into that a little bit further, you've talked about a number of initiatives. QuickAI, stuff in hearables and wearables and consumer electronics devices and others. Maybe you can give us a sense of where you expect relative growth from those categories to help us kind of think about how to model towards that 50% growth for the year.

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Brian C. Faith, QuickLogic Corporation - President, CEO & Director [5]

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Sure. So if we look at the 50% growth, greater than 50% growth for the year, I would say probably like half of that is going to come from our EOS S3 and the applications that you were just referring to which are that diversified set of applications like smartphone, hearable and some electronics wearables. If we double click on those categories, I would say that the hearables is probably the biggest singular area out of that just because we've been working on that for so long and have quite a bit of the design wins in that area. The other ones are not far behind that though. I think the consumer electronics one we've already talked about as an established application that's touting voice. We see fairly substantial volume with that. And then the fact that we're starting to ship products now for that first Japanese smartphone, I'm hopeful that we'll be in probably 3 models this year of that, so that should start to kick in from the 2Q timeframe. So fairly balanced, but I think probably hearables would have the larger component after the EOS S3. If you look at the other new product categories that we've talked about that would be contributing to that greater than 50%, obviously the IP is one, QuickAI is one and SensiML would be another category. And I think from a modeling point of view, those would be fairly well evenly distributed at this point. I think as we get through the year more, we get a sense a little bit more about the SensiML business model and the customers that they have and see how this SaaS revenue is going to kick in, that may change. But I think for now we're modeling all of those, kind of splitting the difference. Did that answer your question?

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Richard Cutts Shannon, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [6]

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Great, that helps a lot, Brian. That gives me a lot of context to think about some other pieces here. QuickAI obviously as I recall when you did that first introduction back in I think May last year, you were thinking revenues toward the end, latter part of this year, and you've already seen some material revenues now. I'm wondering if you can -- I don't remember hearing anything about the scale of revenues you pulled forward in the fourth quarter, if you can tell us that. But also just kind of give us a broader sense of the size of the pipeline, how fast people are moving through this, and maybe we can get a sense of how big each individual engagement might be. Are we talking about units in the tens of thousands, hundred thousands? Are you seeing any in the millions of units sort of thing? Any just broader, a more detailed view on that pipeline.

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Brian C. Faith, QuickLogic Corporation - President, CEO & Director [7]

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There's a lot of questions in that one question, Richard. I'm going to try to answer them, but if I don't, just remind me of the question and I'll answer. So starting with Q4, it was definitely material but not enough to break it out as a 10% item. It was not just one customer, as I alluded to in the prepared remarks. I would say it's -- the first applications are more in the time series data. Time series are things like motion sensors and microphones and applying AI to those for industrial type applications. The reason why I distinguished time series is because when we first launched in May of last year, we encompassed time series and vision. Some of these initial engagements we have that are moving faster is on the time series side, and I think that's probably, a, because there is pent-up demand; and b, it's a less congested space. I mean if you talk about AI, everybody that's doing AI generally is glomming onto the vision path of it, and I think time series is sort of an underserved market at this point. Getting into the future, I think the distribution channel for us is really important, and that gets to your question about the types of customers. So the initial customers that we focused on for May were ones where we were largely doing the business development of that with partners because we didn't want to turn on our channel until we knew we had something that was going to be easy for the channel to sell. We had a sales conference, a worldwide one, in Asia specifically a few weeks ago where we turned on the channel to this. And the benefit of using distribution channel is that they can now make a 10,000 unit a year customer a profitable customer for QuickLogic. Whereas if we had to send our own folks on site, obviously revenue gets -- or ROI gets upside down pretty quick in that situation. So with them wanting to take these 50 HDKs in Japan, and I'm sure there's going to be more as we roll these out with other distributors, we're going to start to see opportunities come in that are less than the typical $100,000 a year that we have the minimum cutoff for in our previous consumer market model, which means we're going to be able to serve a lot more customers. The ones that we've been directly calling on are still ones that are north of $100,000. We have engaged with some very large customers that are sort of the industry leaders in Industry 4.0 and bringing predictive maintenance or condition monitoring into the industrial place. There are big companies in there that have scale, not just in terms of how many customers they end up populating factories of but also they tie up to the cloud services. So there's a lot of leverage there for us for the direct engagement, and then we'll use the distribution channel for the masses. By the way, that's one really key component around this HDK that I talked about in the prepared remarks. The starting price for that is going to be $500. It's going to include a few months of the SaaS subscription for SensiML. That makes it so easy and frictionless for the channel to sell. This is really -- it's going to be a multiplicative effect on the channel's incoming opportunities. So it's actually pretty exciting. And if I missed any, just remind me.

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Richard Cutts Shannon, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [8]

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No, I think you picked up most of them, so I will move on to a different topic, but that's some great detail there, Brian. Sue, maybe a couple quick questions for you. Maybe on the guidance for the first quarter, your gross margin range is a little bit higher than we've seen in the past or the past quarter, although I understand there was some inventory reserve charge last quarter from pairing those. But if you can give a sense of directionally, what's implied about product gross margin in there. And also on licensing, will that be flat or up or down sequentially in the first quarter?

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Suping Cheung, QuickLogic Corporation - CFO & VP of Finance [9]

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Richard, thanks for the question. Yes, so for Q1 guidance, we guided at 55%, plus or minus 3% on gross margin. This is based on more mature products with high gross margin. The other is with the QuickAI side that carries much more gross margin. Now some portion of new product revenue also comes from SensiML SaaS revenue. So that helps with the gross margin. As we are moving forward, more revenue coming from SaaS, from QuickAI and from eFPGA, we will see our gross margin is going to be in that range, 55% range. So I hope I answered your question, Richard.

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Richard Cutts Shannon, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [10]

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Yes, you did. One last quick one for you, Sue. I think you gave us a number of OpEx for this quarter. Is that a good range to think about going forward absent any big growth? Or is this kind of a baseline or we're just not capturing the full run rate we should expect?

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Suping Cheung, QuickLogic Corporation - CFO & VP of Finance [11]

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Yes. For the OpEx side, so because of the acquisition, so the more -- we expect the R&D expense will be up at a range that I guided, $5.1 million for Q1 2019. I think that's a good range to model it. I would model it between -- at about that range, $5.1 million, $5.2 million, that range.

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Operator [12]

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(Operator Instructions) Our next question comes from Suji Desilva of ROTH Capital.

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Sujeeva Desilva, Roth Capital Partners, LLC, Research Division - Senior Research Analyst [13]

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Brian, Sue, on the embedded FPGA opportunity, can you remind us when you go from an MTLA to a full license what kind of bump up that is on a per customer license? And also, Brian, can you touch on -- I thought it was per customer, but it seems like it's more per chip or per project. So if you could clarify that, that would be helpful.

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Brian C. Faith, QuickLogic Corporation - President, CEO & Director [14]

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Sure. So generally speaking, the MTLA is just a support of maintenance agreement, so it's tens of thousands of dollars. When it jumps up to an actual license where they're taking IP to embed into a chip they're intending to take to production, that's on the order of a few hundred thousand dollars or higher depending on the process node. And then to be clear, to your second question, it's a per use license fee. So every tape-out that they do for a production chip would carry an individual license fee and then royalties thereafter once the actual device starts to ship in production.

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Sujeeva Desilva, Roth Capital Partners, LLC, Research Division - Senior Research Analyst [15]

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Okay. That helps clarify that. Then on the QuickAI customer who opted for the EOS instead in the design, can you just walk us through the puts and takes of that decision and the dynamics there and why one customer would go with a QuickAI module versus the EOS Wallback? It's a lower ASP there, but I don't think that's the only element there. So any color on the dynamics there would be helpful.

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Brian C. Faith, QuickLogic Corporation - President, CEO & Director [16]

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Yes. So when we launched the QuickAI initiative in May, the vision partner that we launched with was nepes with their NM500. And the specific engagement that we're talking about for Q4 was going down the path of using that nepes device which made our module with our device with the nepes and the EOS S3 a very compelling, easy-to-integrate solution. Then they have decided to change their mind and not going with the nepes NM500 and said they're going with somebody else. And so we don't have any module at this point defined with that other company or other vision partners. And so there was a pretty seamless transition for them to go back to EOS S3AI as a device and then they would take on the responsibility of doing the hardware design with the other vision chip by themselves. The other thing is that they are looking at using EOS S3AI for time series applications as well. And in that case, it would be an entirely different PCB, and so there's no vision chip needed and therefore no module needed as well. So those are sort of the dynamics involved in that. From a financial point of view, I mean we talked about the module solution from us being mid-double digits driving down to a single digit kind of number per unit, so you can see the impact that would have on overall revenue at the same kind of volume.

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Sujeeva Desilva, Roth Capital Partners, LLC, Research Division - Senior Research Analyst [17]

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And just to be clear, a follow-up on that question. Is the module meant to be a production solution? Or is this transition from module to the EOS S3 at high volume a natural way that this would play out for a given customer?

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Brian C. Faith, QuickLogic Corporation - President, CEO & Director [18]

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It was originally intended as a demonstration vehicle in May. It became pretty clear that this one particular customer had value for just using that module as is. So we're actually productizing it to be a salable, production-worthy module. And by the way, we're still looking at what modules it makes sense for us to do. We have not abandoned that idea by any stretch of the imagination. But we're going back and refining what that is so that we can actually make sure we define it correctly and with the right ASPs. We're still targeting those much higher ASPs than the devices are.

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Sujeeva Desilva, Roth Capital Partners, LLC, Research Division - Senior Research Analyst [19]

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Great. Then last question for me and I'll pass it on, the mature business, Sue, you guided it higher in the first quarter. What's a more normalized run rate we should think about for the mature businesses in 2Q going forward? I'm presuming the 1Q is an elevated level or perhaps it is the new run rate. Any color there would be helpful.

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Suping Cheung, QuickLogic Corporation - CFO & VP of Finance [20]

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Right. Hi, Suje, thanks. For mature products, I would model at about $1 million plus/minus 10%. I would say that's probably at the high end. So $2.1 million for Q1 -- I would model at -- because this is totally not under our control, if there are like orders coming we take it. There is no sales marketing effort or any effort today. To be conservative, I would model for the year at about $1.6 million plus/minus, that level. Per quarter. Per quarter of course.

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Operator [21]

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Our next question comes from Rick Neaton of Rivershore Investments.

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Rick Neaton, [22]

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At CES earlier this year, did you have any other customers other than the consumer electronics customers showing products with Quick's S3 in them?

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Brian C. Faith, QuickLogic Corporation - President, CEO & Director [23]

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Yes, absolutely we did. We had a couple of hearable products. We had a new, how would I describe it, it's a head worn device with our EOS S3 in it as well, that was being shown in addition to the consumer electronics. Several. Those are the ones that come to mind.

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Rick Neaton, [24]

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And these were being shown outside of your suite? That's what I was getting at.

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Brian C. Faith, QuickLogic Corporation - President, CEO & Director [25]

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They were being shown outside of our suite, yes.

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Rick Neaton, [26]

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By the customer, okay. With the issues you had last year involving Close Talk and all the other specifications on the move from push to talk to always-on, did some of the hearable products that you showed in January 2018, are you still working with those customers on redesigns for the new Amazon specifications? And are most of these designs involving multiple microphones now?

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Brian C. Faith, QuickLogic Corporation - President, CEO & Director [27]

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Yeah. I didn't get into that level on the prepared remarks, but it's worth bringing up here. So the designs that we had in the CES 2018 were all one microphone designs. And since then we had announced a partnership with DSP Concepts which has noise suppression and beam forming software for multi-microphone designs. And it was good that we did that actually, because the new specs from Amazon are really forcing everybody into a two-microphone configuration. This is nothing specific to QuickLogic, it's just the better performance you get with a two-mic system. So the majority of the customers that we were engaged with at that time, in 2018 CES, have either already changed or are already starting changes from one microphone to two microphone designs. So the ones that have changed, I think there's a couple now that have already done the change and they are going to be entering into the certification process. Others are having to go through that change now from the one mic to two-mic configuration system. It's not a big deal, but it still involves changing the hardware, adding the two mics and looking at from a system design point of view, how do you put that pinhole for the microphone to get the sound from, the industrial design.

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Rick Neaton, [28]

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Okay, so you have all of these particular design engagements that you continue to work on in 2019 that you didn't call out in detail in your prepared remarks, is that right?

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Brian C. Faith, QuickLogic Corporation - President, CEO & Director [29]

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Yeah, that's right. And by the way, the reason, or one of the primary reasons why we didn't call out as much detail in the prepared, A), prepared remarks were obviously getting quite long for this call since it was a yearend call and we wanted to give detail. The second is that there have been a few instances now where we've tried to be very forthcoming with information for investors, which I know is interesting and exciting. But it also leaves a lot of breadcrumbs for our competitors to go chase. And we've had a few instances now where that's caused some headaches for me. So we're trying to limit the names that we use on the call now to ones where we don't view that to be a risk and still at the same time try to provide enough clarity for everybody on the call to understand the traction and be able to do the models that you guys need to do. But yeah, the short answer is there was other stuff that was at CES with other ODMs or IDHs that we've talked publicly about that we decided not to include in the call specifically today.

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Rick Neaton, [30]

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Okay, so then given that in your prepared remarks you mentioned that you had been working with JD.com for almost a year, and then finally announced the design win in the last few weeks, how many design wins are you working on right now that involve EOS S3 and QuickAI? Without getting into specifics on who they are about, how many things are in the funnel and can you provide any overall color about the nature or the average value of these wins or designs?

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Brian C. Faith, QuickLogic Corporation - President, CEO & Director [31]

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Yeah, it's a good question. I'll answer it, I actually have looked at the funnel obviously periodically to understand where we are in progress and so on. I would say that some of the macrotrends firstly, if we look at funnel from like 2017 and now funnel from 2018, the last 2 years separately, we're talking about design wins, definitely double-digit design wins, like several double-digit design wins. And that spans primarily EOS S3, obviously some QuickAI and some eFPGA, but primarily EOS S3 because that's what we've been working on for the longest. The interesting note I would say is that in the last year, the hit rate has gone up like noticeably in terms of I think good targeting and having a good solid value proposition with a product that we have less losses as a percent of the total funnel. Which is really good for efficiency for a smaller company. The second thing that I think is even more interesting is that I like to call this we're going big game hunting now in some sense for EOS S3. If you remember, in the beginning we were doing mainly business with Chinese IDHs and ODMs and that's sort of like bait fishing. The average size of a design is like 100K or less. Now the average size of our design, I just ran a report on it actually, is over a $1 million per design. So it's a pretty dramatic increase and I think that's a testament to the fact that we have a more complete solution. We have something that's actually very needed in the market now with voice for these bigger customers. And we're getting much smarter about how we target. And saying no to people that may want to use it that frankly we don't need their business. Does that answer your question on design wins?

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Rick Neaton, [32]

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Yes, that's very helpful. I appreciate the color on that. That's all I have for now.

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Operator [33]

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Thank you. I'm showing no further questions at this time. I'd like to turn the call back over to Brian Faith for closing remarks.

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Brian C. Faith, QuickLogic Corporation - President, CEO & Director [34]

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Thank you, Valerie. We will be participating at The Embedded World 2019 Exhibition and Conference in Nuremberg, Germany on February 26 through 28th and we look forward to potentially seeing some of you at this event. Our next conference call is scheduled for Wednesday, May 8th at 2:30 PM Pacific Time. Thank you for your participation and continued support and good bye.

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Operator [35]

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Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you for your participation and have a wonderful day. You may all disconnect.