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Edited Transcript of QUIK earnings conference call or presentation 7-Aug-19 12:00pm GMT

Q2 2019 QuickLogic Corp Earnings Call

SUNNYVALE Aug 15, 2019 (Thomson StreetEvents) -- Edited Transcript of QuickLogic Corp earnings conference call or presentation Wednesday, August 7, 2019 at 12:00:00pm 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;Rivershore Investment Research;President

* Sujeeva Desilva

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

* Jim Fanucchi

Darrow Associates Inc. - Head of Silicon Valley Operations

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Presentation

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Operator [1]

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Ladies and gentlemen, good morning. At this time, I would like to welcome everyone to QuickLogic Corporation's Second Quarter Fiscal Year 2019 Earnings Results Conference Call. As a reminder, today's call is being recorded for replay purposes through August 14, 2019. I would now like to turn the conference over to Mr. Jim Fanucchi of Darrow Associates. Mr. Fanucchi, please go ahead, sir.

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Jim Fanucchi, Darrow Associates Inc. - Head of Silicon Valley Operations [2]

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Thank you, operator, and thanks to all of you for joining us. Calling in from Boston this morning in advance of their appearance at today's Oppenheimer conference 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 the customers' products, schedule changes in production -- 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 the 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 this 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 web page 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 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.

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

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Thank you, Jim. Good morning, from Boston, everyone, and thank you all for joining our Q2 2019 financial results conference call. A lot has happened since the close of Q2. Due mostly -- due to recent schedule changes that are outside our control, our full year 2019 revenue is now expected to lag significantly behind the outlook we shared last May and reiterated in June. Our revised 2019 outlook is for total revenue of $13 million to $13.5 million and non-GAAP gross profit margin in the low 60% range. At the midpoint, this projects a total revenue increase of approximately 5% and a 25% increase in non-GAAP gross profit dollars compared to 2018. After carefully evaluating our new design wins and the revised production schedules we have received from our customers during the last several weeks, I believe we remain on track to achieve our goal of non-GAAP and cash flow breakeven in Q1 2020 and profitability for full year 2020. With the cash we raised in June, we have strengthened our balance sheet to support these goals, and I do not expect the need to raise further cash via an offering going forward. Just ahead of our June offering, we became aware that our military customers were faced with delays from their end customer. We were initially assured those delays would be resolved quickly and that production schedules would be accelerated, resulting in full year shipments being in line with our previous outlook. Our sales channel has since confirmed directly with a U.S. Navy Admiral that production will be extended rather than accelerated. This extension reduces our outlook for Q3 and full year 2019 mature product revenue by approximately $2 million.

The ongoing trade war with China has caused several of our customers to delay new product introductions. The threat of tariffs on certain Chinese consumer electronics products has disrupted the introduction schedule for one of our largest 2019 design wins. Our lead customer for this design has advised us that its major retail outlets in the U.S. have purchased enough of its current models to take them through the holiday shopping season. As a result, the new models incorporating our EOS S3 for always-on voice control that it had planned to begin shipping in Q3 2019 have been pushed out to Q1 2020. We have discussed the situation with the consumer company that we worked with to develop the always-on EOS S3 voice control reference design that was the basis for the lead OEM design. Through this, we've been advised, they will wait for the lead OEM to bring their product to market, which has been given several months of exclusivity. Following the release by the lead OEM in Q1, we remain confident the reference design will be used by multiple OEMs across numerous product models during calendar year 2020. While this will clearly benefit us next year, the delayed introduction by the lead OEM reduces our second half and full year 2019 outlook by approximately $1.3 million. In the hearable market, we continue to support production for JD.com, SF Express in a variety of smaller EOS S3 design wins. While we have encountered some new product introduction delays that are attributable to the trade war with China, we finally have a clear path forward for Amazon AVS or Alexa Voice Service compliant hearable design. With that and the revised schedules we have received from our customers, I believe revenue generated from hearable designs will ramp significantly beginning in Q4 2019. Amazon has created 2 levels of compliance for its hearable specification, known as AVS Close Talk, AVS Close Talk certification is the specification for finished devices. Passing certification and testing enables a finished device to be branded as AVS Close Talk compliant.

We believe the first finished device using EOS S3, which was submitted to Amazon last Friday, will pass the certification test later this month and be displayed by Amazon at the September IFA conference in Berlin. To the best of our knowledge, this will be the first in-ear hearable device that is certified by Amazon to be branded as AVS Close Talk compliant. A level up from certification and with much more stringent criteria is AVS Close Talk qualification. This is a standard that reference designs must meet in order to be included on the Amazon AVS development kit web page. The reason this test is more stringent is Amazon wants to ensure that a qualified reference design has enough guard band to enable new product designs to easily pass AVS Close Talk certification testing. Several months ago, we partnered with Retune DSP, which is the only voice processing software that has been awarded AVS Close Talk qualification. We have since ported the Retune DSP VoiceSpot Wake Word software to EOS S3 and confirmed with our internal testing that it meets AVS Close Talk qualification requirements with only one microphone. As a result, our customers that have one-mic designs should be able to move forward with certification testing once they port the Retune software to their design.

We have been working closely with one of the world's largest hearable manufacturers to develop a complete and turnkey reference design using EOS S3 running Retune DSP software. We anticipate that design will be completed and delivered to Amazon for AVS Close Talk qualification testing by the end of Q3. If successful, this reference design will be included on the Amazon AVS development kit web page. In addition to Retune DSP, we have also formalized the partnership with Nuance Communications and ported its widely used Wake Word and voice command technology to EOS S3. Nuance has been involved in voice processing software for over 2 decades and has a wide user base with particularly good penetration in China.

While the delays we have encountered in the hearable market reduced our 2019 outlook by approximately $1.2 million, we believe we finally have a clear path for our customers that are targeting AVS certification for their products. With this, we believe hearable revenue will accelerate beginning in Q4 2019. Beyond the hearable market, we continue to support the Cleer voice-enabled Bluetooth speaker. As Cleer continues its expansion into European markets, we are optimistic that we'll see higher volume requirements for it in the second half of 2019. In June, we announced a new integrated alarm system or IAS reference design from Infineon that targets home, commercial and industrial IoT applications. The Infineon IAS addresses the growing problem of false alarms by processing inputs from sound and pressure sensors. With this, the system can differentiate between noises from TVs or maybe a pet as opposed to a real event like an intruder breaking a window or opening a door. IAS can be implemented as a stand-alone product or integrated into a variety of multi-function IoT devices.

A number of well-known consumer product companies are currently evaluating the IAS reference design for integration into their products. Similar to the strategy used for Wi-Fi and camera modules, 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 before the end of 2019. We recently established a partnership with Atmosic, which is rapidly developing traction for its new ultra-low power Bluetooth Low Energy or BLE 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 voice-enabled TV remote control. This design is scheduled for release in December 2019 and is forecasted to ship several hundred thousand units in 2020. We are engaged with this customer on a second design that has significantly higher volume potential that is scheduled to launch in 2020.

I'm very pleased to confirm the Japanese smartphone OEM that we signed a broad MOU with in 2018 has designed our EOS S3 into 4 smartphones and one feature phone so far. We shipped a modest quantity of EOS S3 as this customer during the first half to support preproduction build of the first smartphone, which is scheduled for release by a Japanese carrier later this month. Following that release, we expect production will ramp during the last 4 months of 2019. The release schedule for the next 3 smartphones has been extended to late Q4 2019. The feature phone, which we expect will have 2x to 4x the average annual volume of the smartphones, is currently scheduled for release in Q2 2020. These release schedule adjustments lower our second half and full year 2019 outlook by approximately $900,000. In eFPGA, we finalized a license agreement with a prime military contractor in Q2 that has been commissioned by the DoD to evaluate and recommend embedded FPGA solutions and suppliers. Military contractors already represent a large market for discrete FPGAs, and the DoD is taking steps now that will make it easier for its contractors to incorporate embedded FPGA into ASIC designs. We are optimistic the evaluation of our solution will be favorable and, with that, help us close one of our ongoing engagements with a DoD contractor and lead to new opportunities to our embedded FPGA IP with other contractors. We had expected to finalize testing of the ETH Parallel Ultra-Low Power IC that includes our eFPGA IP last quarter. However, given the travel and vacation schedules of key people from ETH, the qualification is ongoing. We expect the qualification to be completed during Q3.

We are very close to signing a new MTLA with a semiconductor company and believe we are on track to finalizing a license agreement with another company during Q4. As we've discussed in the past, the MTLA generates only modest revenue but enables us and the customer to fast-track SoC license agreements that generate considerably more revenue. In the broader picture, we have engaged with quite a few OEMs and semiconductor companies that would like to license our eFPGA IP but want us to modify it to suit their application and use case. The challenge here is the requested changes require what is often a significant R&D investment from QuickLogic that is unlikely to be leveraged to other opportunities. While some of these opportunities could work out well if the company develops an SoC or ASIC that moves into high-volume production, we have determined the risk of that and lack of leverage is not the best investment of our R&D resources. Due to that, we are in the process of building out a more scalable go-to-market strategy that leverages the relationship and technology of some of our key partners. We look forward to providing details on this in the coming months. At the bottom line, the balance of these puts and takes lowers our second half and full year 2019 outlook for eFPGA by about $600,000 but positions us for what we believe will be a very significant upside for eFPGA IP revenue beginning in early 2020. Let's shift now to wrap up with QuickAI and SensiML. Late in 2018, we launched a Quick AI Multichip Module or MCM initiative to accelerate our penetration into certain AI vision markets. We have since decided that it will not provide us with the ROI or leverage of our key resources that we originally envisioned. There are several reasons behind this decision. First, the SensiML toolkit provides us with unique competitive advantages in the time-series AI market. And with the rapid advancements made by SensiML, a significantly larger share of the time-series AI market that we thought could be addressed with standard microcontroller architectures. Second, the emerging markets that can benefit from leveraging time-series data to implement AI are much larger than we originally imagined. And with the enabling power of the SensiML toolkit, many customers within these markets are ready to initiate development efforts now.

Third, the initial gross profit margin for MCMs appeared to meet our model in the mid-60% range. However, as we got deeper into the development and market research, we determined the required ongoing R&D investment to customize modules for various AI vision use cases and the fact we didn't own all the silicon in the module would likely drag the margin significantly below our target model over time. Due to these considerations, we have decided to shelve the QuickAI MCM initiative. While it may have generated as much as $2 million in revenue this year, we determined the potential upside does not properly offset the high capital investment, high risk of declining margin and the fact it was outside the time series AI markets we are seeing success with SensiML today.

SensiML continues to gain momentum. SensiML closed Q2 with a total of 12 SaaS customers, 4 of which are global Fortune 500 companies. This is up from only 3 SaaS customers at the end of Q1. We believe SensiML will close Q3 with 25 to 35 SaaS customers. And with that, increase its penetration into the global Fortune 500. While I recognize it is a very broad range, we believe SensiML will close 2019 with a total of 50 to 100 SaaS customers and realize its objective of cash flow and non-GAAP profitability.

We are particularly excited about a new global Fortune 500 SaaS customer that is committed to developing a proof-of-concept design to implement time series AI at the edge of factory automation. In this case, the customer's target is to develop a very small module that can be attached in motors and collect time-series data for real-time predictive maintenance on factory floors. While we are not able to provide you with additional color at this time, SensiML has also taken some major steps that are designed to establish its toolkit as the de facto development tool for endpoint time series AI. Before I turn the call over to Sue, I would like to take a moment to acknowledge Don Alexander, our new VP of Sales, Don has broad-based FPGA experience, a history of closing major deals and excellent relationships throughout the channel that are key to our long-term strategy. We are very proud that he has decided to join the QuickLogic team. I would now like to turn the call over to Sue for a discussion of our recent financial performance and Q3 outlook. Sue?

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

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Thank you, Brian. Good morning and thanks to everyone for joining us. For the second quarter of fiscal 2019, total revenue was $2.1 million, which was within the revised guidance range of $2 million to $2.4 million that was included in our Form 8-K filing on June 18. This compares with revenue of $3.1 million in the second quarter last year. Of the $2.1 million in Q2 revenue, sales of new products were $700,000. This compares with $1.6 million in the second quarter last year. This decline was primarily due to a significant decrease in low-margin connectivity and display bridge sales that were not fully offset by increased revenue from strategic new product sales. Our mature product revenue was $1.4 million, a slight decrease when compared with $1.5 million in Q2 last year. In the second quarter, we had 2 customers, each accounting for 10% or greater of sales. Gross margin in Q2 was 49.8% compared with 50.1% in the same quarter last year.

The gross margin was impacted by unabsorbed manufacturer overhead from low revenue. Operating expenses for Q2 2019 were approximately $4.8 million compared with $4.5 million in Q2 2018. Within our Q2 2019 OpEx, R&D expenses were $2.7 million and SG&A expenses were $2.1 million. This compares with $2.2 million and $2.4 million respectively in Q2 2018. The increase in R&D expenses was mostly due to additional engineers acquired from SensiML earlier this year. The net total for other income expense and taxes in Q2 was $101,000 expense compared with a $233,000 benefit in the second quarter last year. Net loss in Q2 was $3.8 million or $0.04 per share. This compares with a net loss of $3 million or $0.04 per share in the second quarter last year. Now turning to the balance sheet for Q2. The total cash at the end of Q2 was $28.2 million. The main changes in cash were the net proceeds of $8.3 million from the public offering, less approximately $3.5 million cash usage in the quarter. Our cash balance at the end of the second quarter also includes the $15 million draw from the bank revolving line of credit.

Moving to our forecast for the third quarter of fiscal 2019, which will end on September 30. Our revenue guidance for the third quarter of 2019 is $2.1 million, plus or minus 10%. We believe total revenue will be comprised of approximately $1 million of new product revenue and $1.1 million of mature product revenue. With our guidance for sequentially flat revenue, we currently believe our non-GAAP gross margin will be approximately 51%, plus or minus 3%. As was the case for Q2, our gross margin will be impacted by unabsorbed manufacturing overhead due to low revenue. We are forecasting non-GAAP operating expenses of approximately $5.2 million, plus or minus $300,000. Within OpEx, we expect our non-GAAP R&D to be approximately $3.1 million and SG&A to be approximately $2.1 million. The $400,000 increase in total operating expenses from Q2 is due primarily to the timing of engineering consulting expenses and a onetime cost associated with the recent move of our headquarters to San Jose. We believe total OpEx will decline to the high $4 million range starting in Q4 as these onetime expenses roll off and we begin to benefit from the lower cost of our new facility.

After interest expense, other income and taxes, we currently forecast our non-GAAP net loss will be approximately $4.2 million or $0.04 per share based on approximately 116 million shares. The primarily -- the primary difference between our GAAP and non-GAAP results is our stock-based compensation expense, which we expect to be approximately $750,000. We expect our stock-based comp expense will remain in this range of $700,000 for -- the $700,000 range for the foreseeable future.

Finally, in Q3, we expect to use between $3.8 million and $4.2 million in cash. Our expected cash usage will be impacted by low revenue and an anticipated increase in working capital. As a reminder to what I said in our last call, the move to San Jose is expected to be net neutral to cash in 2019, and lead to an annual savings of approximately $500,000 starting 2020. We currently expect our Q4 cash usage will decline by more than 50% from Q3. Before handing the call back to Brian, I do want to mention that Nasdaq has granted us a 180-day extension through January 13, 2020 to regain compliance with its minimum bid price requirement. This news was included in the SEC Form 8-K we filed on July 18. 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. As we entered July, we faced a rapid succession of schedule adjustments from customers that we expected would deliver our revenue growth in 2019. Following this, we met with these customers to ensure that the programs remain solid and reaffirm the new schedules we were provided. With the information we've received from our customers, we are significantly more confident in our belief that we will report breakeven operations on both a cash and non-GAAP basis for Q1 and achieve non-GAAP profitability for full year 2020. We have carefully modeled our cash usage en route to these goals and hold the firm opinion that we will not need to raise additional money through a public stock offering going forward. While the tally of the delays and impact of our decision to move away from QuickAI MCMs totals approximately $8 million, some of that was a guard band above our previous outlook for 2019, and we expect some of it will be offset by new design wins that were not included in that outlook. As a result, and after a careful evaluation of the data, we have adjusted our 2019 revenue outlook to be between $13 million and $13.5 million. We believe mature product revenue will be relatively flat with last year, and that new product revenue from connectivity and display bridge designs will be about $200,000 lower than the outlook we shared in May. We believe other new product revenue will offset that decline and provide us with modest full year revenue growth. With this mix, we are currently modeling our full year 2019 non-GAAP gross profit margin in the low 60% range. This would represent approximately 10 percentage points higher than what we reported for 2018. Let me take a moment to share what gives us confidence in our ability to rebound from our mid-year low and achieve the goals I have outlined. We believe production demand from our military contractors will rebound in Q4 and hold through at least 2020, possibly much longer. By the end of Q4, we believe we will have 4 smartphones running in production. We believe volume will ramp for these 4 smartphones beginning in Q1 2020 and that the feature phone, which is forecasted to have 2x to 4x the average volume of the smartphones, will enter production in Q2 2020. The schedule we have from our large consumer electronics customer indicates that we'll ramp production of its first models in Q1 2020, and as additional OEMs introduce voice control, we believe aggregate volume will increase throughout 2020.

With the anticipated completion of our first Amazon AVS Close Talk certified design this month and an AVS Close Talk qualified reference design being listed on the Amazon development kit web page later this year, we believe hearable demand will increase significantly in Q4 and accelerate moving forward. We believe the first of what could be several voice-enabled TV remote controls incorporating EOS S3 will enter production late in Q4, and we expect production will begin ramping in Q1 2020. We also believe the module based on the Infineon IAS reference design will be in production late in Q4. However, since we don't have any detail beyond that. Revenue from this design win would be an upside to our near-term outlook. We are in the process of enhancing our core eFPGA technology and applying a more scalable go-to-market strategy that leverages the relationship and technology of some of our key partners. We do not want to tip our hand to our competitors. But since these changes will address key concerns that have delayed license deals in 2019, we think that will lead to a sharp ramp of eFPGA IP revenue in 2020, possibly beginning as early as Q1. We also believe we are on course to win one significant license agreement during Q4 2019. Moving from only 3 SaaS customers at the close of Q1 to 12 at the close of Q2 and with solid penetration into Global Fortune 500 companies, SensiML is clearly building impressive momentum. We believe this trend will accelerate in the second half of 2019 and continue for years beyond that. I'll readily admit that SensiML's goal of becoming the de facto software toolkit for endpoint AI may seem ambitious at this stage. However, we think it is a very realistic and achievable target. We look forward to releasing more information about our progress towards this goal during the coming months.

While we are not ready to share our full year 2020 outlook, the mix of business we see today gives us confidence that we will not only significantly increase revenue but, again, deliver a solid increase in our non-GAAP gross profit margin for the fourth straight year and, with that, report non-GAAP profitability for full year 2020. That completes our prepared remarks. 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) And I'll take our first question from Sujeeva Desilva from Roth Capital.

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Sujeeva Desilva, Roth Capital Partners, LLC, Research Division - Senior Research Analyst [2]

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Brian, Sue, so can you talk -- so with SensiML with the adjustments around the module and the chip and the QuickAI, can you talk about what the new revenue run rate estimates are for that segment? And what the size of the SensiML engagements that are building, the 12 customers, what the size of each of those engagements are?

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

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Sure, so the general model for SensiML is that it's $10,000 to $25,000 per quarter for the SaaS license. Some of those 12 are not at that level yet because we were bundling those with the QuickAI HDK as a starter kit for some of the initiatives that we were running with our channel partners. So some of those are lower revenue than what I just said, a handful of them are at that revenue level on the per quarter basis. We expect that, that pricing is going to maintain in that range of that $10,000 to $25,000 depending on the level of data science expertise the customer needs, ramping through the year, as I said, ending the year somewhere between 50 and 100 subscribers to SaaS. Some of that will be based on the QuickAI hardware development kits that we've put out into the channel and sold through to end customers, and some of that will be the SensiML toolkit running on third-party MCUs that we have not announced yet.

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Sujeeva Desilva, Roth Capital Partners, LLC, Research Division - Senior Research Analyst [4]

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Okay. So by end of '19, 50-plus subscribers? Is that right?

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

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Correct. Exactly right.

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Sujeeva Desilva, Roth Capital Partners, LLC, Research Division - Senior Research Analyst [6]

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Okay. And then the Japan OEM -- the smartphone OEM. Can you talk about the reasons the -- some of the phones were delayed in the marketplace? And then what -- as you look at the new product revenue guidance for the second half of '19, is that smartphone ramp the primary driver of the sequential increases there?

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

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Yes. So the primary reason for the second tranche of phones, the number two, number three, number four, those are just the schedules that they're negotiating with their carrier, and they were different from what they originally shared with us, but I've seen product rollout information now that's been agreed to by the carrier specifically, and I am confident in the launch that they've told us now and what I've communicated on this call. As far as the magnitude of the revenue in Q4, this customer is one of the top revenue drivers. Outside of that, it would be the hearables and then also the large IP deal that I mentioned during the eFPGA part of the prepared remarks.

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Sujeeva Desilva, Roth Capital Partners, LLC, Research Division - Senior Research Analyst [8]

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Okay. And then my last question is around the AVS, this concept of Closed Talk. I'm just curious what percent of the addressable market is Close Talk versus -- I guess, the contrast would be just the traditional AVS, I guess. If you could kind of clarify that landscape and what the relative size of the opportunities are just to understand how important Close Talk could be?

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Brian C. Faith, QuickLogic Corporation - President, CEO & Director [9]

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In general, I'd say if you look at the market today, none of it is Close Talk because there aren't really any products out in the market yet, I think, except for a couple of over-the-ear or over-the-head headsets from a couple of the OEMs. I think in general, if you look at Bluetooth headsets, the big growth driver in the market right now is the TWS style, which look like the Apple AirPods. And so that's a double-digit percentage of the hearables market in general. And now that Amazon is going to be having these Close Talk certified and qualified ones, we expect that will actually be a growth driver moving forward. And with our finally getting qualified here and certified, now we can see that opening up for us to be shipping into these products.

In the future, I think most people assume that the growth for the Bluetooth hearable space is going to be the TWS form factor size, like the AirPods, driven by the sort of fashionistas that are likely to follow the Apple AirPods form factor.

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Operator [10]

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We'll now take our next question from Rick Neaton from Rivershore Investment Research.

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Rick Neaton;Rivershore Investment Research;President, [11]

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Brian, Sue, the first thing I'm trying to do is square your reported Q2 product revenue with your June Reg FD disclosure. It looks like you're about 50% short of what you thought you were going to report in Q2. And can you provide some color on what caused that new product revenue to fall short of your implied forecast for it?

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Brian C. Faith, QuickLogic Corporation - President, CEO & Director [12]

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Yes, so you're referring to the original guidance for Q2, correct?

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Rick Neaton;Rivershore Investment Research;President, [13]

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Yes, your original guidance was $3.8 million at the midpoint and $2.5 million of mature product, $1.3 million of new product. Then when you revised your guidance, you said that mature product was the sole cause of the new lower revenue range and that you could -- the sole cause, meaning your range was down $1.4 million to $1.8 million. Your mature product revenue actually fell only $1.2 million short and not $1.4 million to $1.8 million, and your new product revenue was $700,000 instead of $1.3 million. So what caused that $600,000 miss on the forecast?

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

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So the new product miss there, the $600,000, that was primarily the hearables related to these AVS pushouts for qualification and certification. The other aspect of that was the consumer electronics OEM, the big design win. We did think that we would start to ship into them in the Q2 timeframe because if they wanted to be on the shelves for the holiday season, they'd have to start building product, then to make sure it got on a boat in time to come over to the U.S. Those were the primary differences. There was also some, I think, connectivity revenue difference for the new product. And I also believe the display bridge was down a little bit, if my memory serves correctly. But the primary parts of that were the hearables and the consumer electronics.

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Rick Neaton;Rivershore Investment Research;President, [15]

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Okay. You mentioned how the new tariff situation between the U.S. and China are affecting your customers. And I know part of -- one of your contract manufacturers for your own packaging, Amcor, is -- has most of its, if not all of its facilities in China. Is that affecting you at all?

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

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So we do have a new package for EOS S3 that we had started developing earlier this year. That's actually the only package that we have, at this point, that's being done in China and that will have a tariff applied to it. We can apply for credit back if that's shipped out of the country to a non-NAFTA country. We get the majority of that tariff back. If it stays within an NAFTA country, then the tariff still stays. And what that means is we're going to be raising the price on that dilution to the customers, so we're not absorbing that. That's the only issue that we have directly on incoming goods from the tariff situation. All of the other tariff situations that we have or tariff-related are really with our end customer.

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Rick Neaton;Rivershore Investment Research;President, [17]

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Okay. And the consumer electronics end customer that moved its production schedule due to the tariff situation, how certain are you that their new schedule is any more definite than their old one?

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

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I'm very certain because I know that the large retailer that was supposed to have these products on the shelf for holiday still wants them, and they're just not willing to take the risk for this year for the holiday season. But in the next year, they absolutely want to have these in the early part of the year on their shelf, and there's a couple other online retailers that want to carry the same product as well. So I've double and triple checked that now with the OEM and with the partner that we developed this with, and everybody is saying the same thing. So I'm very confident in that revised schedule.

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Rick Neaton;Rivershore Investment Research;President, [19]

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Is that customer going to still manufacture of those products in China? Or are they going to move their production, do you know, outside of China?

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Brian C. Faith, QuickLogic Corporation - President, CEO & Director [20]

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Actually, this particular customer, and a few of our other customers have already started building out manufacturing facilities in Vietnam, and I believe this product will eventually be manufactured Vietnam so that it will not be subject to the same tariffs.

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Rick Neaton;Rivershore Investment Research;President, [21]

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Okay.

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Brian C. Faith, QuickLogic Corporation - President, CEO & Director [22]

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(inaudible).

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Rick Neaton;Rivershore Investment Research;President, [23]

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Okay. So that's a factor that makes you more certain about 2020. Is that right?

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Brian C. Faith, QuickLogic Corporation - President, CEO & Director [24]

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Right. Yes, we're seeing a lot of -- like I said, including hearables that are moving manufacturing to Vietnam. And so, provided the situation with Vietnam doesn't change, that gives us a lot of confidence, that they are going to be able to ship these into the U.S. without being subject to tariffs anymore.

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Rick Neaton;Rivershore Investment Research;President, [25]

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One last thing. I just wanted to clarify your revenue forecast for 2019. You're saying about $7 million of mature product and about $6 million of new product revenue. Is that correct?

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Brian C. Faith, QuickLogic Corporation - President, CEO & Director [26]

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That's correct.

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Rick Neaton;Rivershore Investment Research;President, [27]

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Okay. And there could be a $0.5 million bump in one or both of those segments.

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Brian C. Faith, QuickLogic Corporation - President, CEO & Director [28]

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Correct.

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Rick Neaton;Rivershore Investment Research;President, [29]

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So that means you're expecting about $4.6 million of new product revenue in the second half of this year. How much of that $4.6 million do you estimate will come from what you call strategic new products?

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Brian C. Faith, QuickLogic Corporation - President, CEO & Director [30]

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Well, the majority of it would be strategic new product. I think by the end of this year, we're, for the most part, going to be out of the Samsung display bridge that we sell to their tablets and still have the ongoing connectivity, but the vast majority of that $4.6 million you talked about will be strategic new products.

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Rick Neaton;Rivershore Investment Research;President, [31]

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So basically, if I modeled Q4 revenue at about $5.9 million plus or minus based on your $13 million to $13.5 million forecast, that would be a proper way to model Q4.

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Brian C. Faith, QuickLogic Corporation - President, CEO & Director [32]

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Yes, that would be proper way to model it.

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Rick Neaton;Rivershore Investment Research;President, [33]

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Okay.

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

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And then the...

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Rick Neaton;Rivershore Investment Research;President, [35]

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It could be above $6 million, it could be $5 million -- it could be $5.5 million to $6.5 million basically.

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Brian C. Faith, QuickLogic Corporation - President, CEO & Director [36]

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Yes. And what I was also saying is gross margin is in the mid to high 60s in that quarter.

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Operator [37]

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We'll now take our next question from Richard Shannon from Craig-Hallum.

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Richard Cutts Shannon, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [38]

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Let's see. Maybe a kind of a summary of a couple of things I've heard between your prepared remarks and the Q&A here. Brian, just wanted to make sure I caught all of the kind of offsets from your original guidance for the year in terms of revenues. I think I heard the kind of the embedded FPGA Navy contract, about $2 million, the consumer electronics OEM, about $1.3 million, and then I think I missed a couple of the other buckets there. Can you detail those for me again, please?

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Brian C. Faith, QuickLogic Corporation - President, CEO & Director [39]

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Yes. So starting with the mature, the mature revenue was $2 million with the push out of the military for the mature product revenue. The CE was $0.3 million. The multi-chip module for QuickAI was $2 million and then the [PE] design is $1.3 million, I believe, I said.

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Richard Cutts Shannon, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [40]

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Okay. All right. Perfect. And then I think you made some comments regarding the mature products with the Navy contract of having some confidence that's going to kick in, I think, in a little bit in the fourth quarter and have confidence of remaining throughout 2020. Historically, how good have those forecasts been and it gives you the confidence that it'll stretch through the entire next year?

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Brian C. Faith, QuickLogic Corporation - President, CEO & Director [41]

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Well, it's 2 aspects of that. So one is, are we in the program, period. And then the second one is how many units of that program is the government going to authorize to be built. So from being in the program, that's 100% confidence because we've been in these programs for some time. And when -- the government is not going to change out FPGAs out of military vehicles and aircraft. That's just going to stay there. As far as the unit volume goes, that's really what's changed in the timing in this year. But like I said, this time, we've actually gotten word directly from the U.S. Navy Admiral that controls the purse strings of this, and he's outlined the exact quantity of the aircraft that he wants to build and how that flows through to us. So I have a much, I think, more confident view now of the volume for this year. And it kind of makes sense because I think the government spending cycles tend to start on October 1, and so that's sort of aligned with having more shipments in Q4 from the new funding that will come into them. And then as far as how it goes into next year, like I said, we're not -- the government is not going to change out an FPGA from a military aircraft or a vehicle, those are just going to stay in because the [qual] costs of changing out far outweigh the cost of the component, and so I'm sure that's going to be continuing into next year. We've even had -- from them, it's going to go for 3 years for these different programs, but obviously, we're not going to be giving any outlook for 3 years from now right now.

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Richard Cutts Shannon, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [42]

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Okay, that's fair enough. Brian, maybe my last question here is on embedded FPGA. I think you were referring to it, and I'm probably going to butcher the language you used, but talking about changing the scalability of it so you don't have to do these customizations all the time. Is this going to help you get into kind of new markets or new classes of customers? Or maybe you can help us understand how this is going to help you from more of a revenue and customer-generating point of view?

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Brian C. Faith, QuickLogic Corporation - President, CEO & Director [43]

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Yes. So if you look at where we are today with the FPGA, we target customers that are largely focusing on low-power endpoint markets because that's what our FPGA has been tailored to do for our own use. We're getting a lot of inbound requests for higher-density, higher-performance FPGAs. And what that really involves is porting it to a different process node or a different foundry from what we have today. And those ports can be timing consuming and capital intensive. So in order to make this a more scalable business, we're looking at ways -- and again, I can't be specific because I don't want to articulate the strategy before we're ready to come out big with us. But it's going to be in a way that we can target some of these new process nodes or foundries as well as go to market a little bit differently to get into these customers that are pulling us in that direction but doing it in a more scalable way. So it's not like one port for one customer each and every time because that's just -- we don't want to be in the services business. We want to do IP ports that have several customers behind that port. And I think this new way that we're going to go to market will address some of that.

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Richard Cutts Shannon, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [44]

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Okay. Fair enough. I look forward to hearing more detail about that. Maybe one last question, and Brian, I'll jump out of line here. SensiML, it sounds like you're getting a lot of customer attraction there. What's kind of your pain point for pushing the growth even faster? Is this to your headcount or channel partners? Or maybe you can help us understand how you can extend and even improve the traction you've had to date?

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Brian C. Faith, QuickLogic Corporation - President, CEO & Director [45]

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Yes. So for me, it boils down to 2 things. So one of the big initiatives that we've had in the last quarter is to host a lot of these web seminars and then face-to-face seminars put on by our distributors in Europe primarily, and that's generated something like 700 qualified leads of people, some of which have already bought the HDK SensiML bundle and some of which have not. So converting those qualified leads into people placing purchase orders. What we're trying to do there is ease that friction by moving to a web-based store on the SensiML website, so they can do that by themselves. And we just launched a new website, I think last week, for SensiML that enables people to start doing that. So we're trying to make that conversion, lower resource-intensive on us and easier on the customer. That's one big initiative. The second is the fact that we are -- and even from day 1, we were very clear that SensiML would be able to run on other people's processor, not just our own, and we're starting to see the fruit of that labor. And we'll be more public about who those new microcontrollers are. But that's going to open up a sales channel that we don't have as a company of our scale, where these bigger companies are out pushing the same solution with SensiML. So once that really gets going, I think we're going to see a big uptick in closing of these deals just because we'll have another salesforce effectively behind it. So those are the two primary things that's really -- hey, a third one I'll just throw in there. AI is still very new for people. A lot of people want to use it, but they don't know how. And so we've done some marketing campaigns now where we have these online tutorials with videos that people can do offline, so they're not dragging our data scientists off on a support issue. And that should make it a more scalable business as well, so they can sort of do self-help on how they can apply the power of the SensiML toolkit but in their own office.

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Operator [46]

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At this time, there appears to be no further questions. I'd like to turn the conference back to you, Brian, for any additional or closing remarks.

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Brian C. Faith, QuickLogic Corporation - President, CEO & Director [47]

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Yes. Thank you. So we'll be participating in several investor and industry events this quarter. A few of the highlights include the Oppenheimer Annual Technology, Internet and Communications Conference in Boston today; the Jefferies Semiconductor, Hardware and Communications Infrastructure Summit in Chicago on August 28; the Gateway Conference in San Francisco on September 4; GLOBALFOUNDRIES Technology Conferences in Santa Clara on September 24, Munich on October 11, Shanghai on October 24 and Hsinchu, Taiwan on November 5. All the events we plan to attend will be available on the Events section of our website. Thank you for your participation in today's call and continued support. We look forward to speaking with you again when we report for our fiscal third quarter results later this year. Goodbye.

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Operator [48]

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This concludes today's call. Thank you for your participation. You may now disconnect.