QuickLogic Corporation (NASDAQ:QUIK) Q3 2022 Earnings Call Transcript

QuickLogic Corporation (NASDAQ:QUIK) Q3 2022 Earnings Call Transcript November 15, 2022

QuickLogic Corporation beats earnings expectations. Reported EPS is $-0.07, expectations were $-0.11.

Operator: Greetings. Welcome to QuickLogic Corp’s Third Quarter 2022 Earnings Conference Call. I would now like to turn the conference over to Alison Ziegler, Investor Relations. Thank you. You may begin.

Photo by Jamison Lottering on Unsplash

Alison Ziegler: Thank you, and thanks to all of you for joining us. Our speakers today are Brian Faith, President and Chief Executive Officer; and Elias Nader, Senior Vice President and Chief Financial Officer. As a reminder, some of the comments QuickLogic makes today are forward-looking statements that involve risks and uncertainties, including, but not limited to stated expectations relating to revenue from new and mature products; statements pertaining to QuickLogic’s future stock performance, design activity and its ability to convert new design opportunities into production shipments; timing and market acceptance of its customers’ products; schedule changes and production start dates that could impact the timing of shipments; the company’s future evaluation systems; broadening the number of our ecosystem partners; and expected results and financial expectations for revenue, gross margin, operating expenses, profitability and cash.

Actual results or trends may differ materially from those discussed today. For more detailed discussions of the risks, uncertainties and assumptions that could result in those differences, please refer to the risk factors discussed in QuickLogic’s most recently filed periodic reports with the SEC. QuickLogic assumes no obligation to update any forward-looking statements or information, which speak as of the respective dates of any new information or future events. In today’s call, we will be reporting non-GAAP financial measures. 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 business. Such information may be deemed material information, and QuickLogic may use these channels to comply with its disclosure obligations under Regulation FD. A copy of the prepared remarks made on today’s call will be posted at QuickLogic’s IR web page shortly after the conclusion of today’s earnings call. I would now like to turn the call over to Brian. Go ahead, Brian.

Brian Faith: Thank you, Alison. Good afternoon, everyone, and thank you all for joining our third quarter of fiscal 2022 financial results conference call. Our third quarter revenue of $3.5 million was right inline with the midpoint of the expectations provided on our second quarter call. Included in this revenue is the first month associated with our new $6.9 million U.S. government contract for the development of a new strategic radiation hardened FPGA technology that we referenced on last quarter’s conference call and officially announced on September 08th. The program is expected to be a significant contributor to this quarter’s revenue. Given that this contract is by far our largest to-date, let me spend a little time reviewing what it means for QuickLogic.

First, as you saw in the announcement, the base contract is worth $6.9 million, with deliverables due over the course of 12 months. QuickLogic will act as the prime contractor, a first for us, and we will collaborate with a team composed primarily of SkyWater Technologies, Everspin Technologies and Trusted Semiconductor Solutions. Upon successful performance of the base contract and at the discretion of U.S. government, the contract allows for options totaling approximately $72 million, which be realized over the span of four years. And while today the contract only contemplates the development of the chip, the desire and intention of QuickLogic is to become the storefront, selling the device once it has been completed. We believe the market size for radiation hardened programmable logic is several hundred million dollars annually, so becoming the storefront for such a device would substantially increase our served available market in the coming years.

In previous calls, I have shared that one of our strengths is that, we can offer our customers more than just eFPGA IP. We have the capability to offer a full spectrum of solutions from eFPGA IP all the way to full chip designs that incorporate that IP. I am very pleased to share for the first time that we have taped out a new device that incorporates our eFPGA IP for a customer. Due to confidentiality requirements, I am not allowed to share any further details on the specific design win, other than I believe it represents tens of millions of dollars in potential device revenue starting in a couple of years. What I want to emphasize is that, these two wins demonstrate how eFPGA related opportunities can and are turning into multi-year substantially higher revenue design wins and we have several additional opportunities in our sales funnel that could follow a similar path, namely starting as an eFPGA IP engagement and expanding to full FPGA based device and or triplet developments.

These recent design wins and the increase in our sales funnel will buy another $10 million this quarter to a total of 110 million, our proof that our strategy to develop eFPGA IP and related products is transforming QuickLogic into a sustainably growing and soon to be profitable business. As the first programmable logic company to market with a robust and comprehensive platform that blends open source technology with decades of product shipments and engineering knowhow in the FPGA market. QuickLogic has established first mover advantage in this quickly evolving market. The main enabler of this pipeline of new opportunities is our Australis eFPGA IP generator, which can define and deliver customized eFPGA IP and/or devices in a highly automated way in a matter of months while providing QuickLogic, tremendous operating leverage from our R&D resources.

The breadth of our active eFPGA customer engagement spans the world’s largest semiconductor foundries, including TSMC, GlobalFoundries, Samsung, UMC, and SkyWater Technologies. Now moving to our SensiML business, SensiML continues to have its best year ever delivering its largest revenue quarter yet in Q3. SensiML ecosystem continues to gain momentum with growing new customer and partner interest. A top tier semiconductor company is also integrating a SensiML powered solution to address its own customers demand for AI at the IoT edge across its broad microcontroller line of products. This month, SensiML was also recognized by leading electronics industry portal in China with over 1 million registered members who voted SensiML solution with on Semi as most innovative value product award.

The award recognizes industry leading products with innovative value and far reaching influence in the AI market. Moving to chiplets, as discussed last time, chiplets have been steadily taking market share from more traditional monolithic semiconductor devices and have been a center of discussion at several industry events in the past quarter. The chiplets market is expected to grow significantly over the next decade. Industry research firm transparency market research recently noted that the chiplets market is expected to exceed $47 billion by 2031, representing a CAGR exceeding 40%. In the past quarter, we advanced discussions with partners and potential lead customers to define an FPGA chiplets template. Now I will quickly touch on some other areas of our business.

Display Bridge product sales and design ends continued this past quarter as we benefit from the continued global supply chain issues. We expect demand to continue into 2023 and have inventory to meet customer needs. In our mobile fund business, we continue to believe we are being designed into new models of phones that will ship well into 2024. With the very muted consumer spending in recent months, we believe our fourth quarter sales to our smartphone customer will continue to be weak with Q4 now being the low point in demand. Finally, in our mature product segment, we are forecasting a sequential decline as we see macroeconomic factors impacting current quarter demand by as much as $400,000 from the prior quarter, which would result in fiscal 2022 mature revenue being down around $1 million from fiscal 2021.

Fortunately, we are starting to see some stabilization and mature product bookings for the balance of this year. Mature products will continue to be an integral part of our revenue profile, even though our growth will primarily come from eFPGA IP related design wins. Before turning the call to Elias, I want to provide our revenue outlook for Q4 and offer a peak into 2023. Over the last two years, we have made significant progress building our software in IP related business. While we saw some lumpiness in our revenue recognition in Q3 due to a slightly later start date of our $6.9 million agreement, we did see initial revenue in September, and a significant contribution is expected to be realized in Q4 and into the first half of 2023. With this pause in our growth trajectory behind us, our current expectation is for revenue and Q4 to be approximately $4.3 million plus or minus 10%.

This incorporates our forecast for an aggregate sequential decline in our smartphone business and mature product segment of around $600,000. This puts us on pace to increase fiscal 2022 revenue, approximately 30% over fiscal 2021, and we continue to believe we will get close to reporting break even or profitability on a non-GAAP basis again this quarter. And looking at our sales funnel, the early outlook for 2023 is shaping up nicely. With our newly executed contracts, we are projecting revenue growth of approximately 40% next year, and assuming current gross margin and operating expense levels, I believe we have a good chance of seeing non-GAAP profitability in every quarter of 2023. Let me now turn the call over to Elias, who’ll review of the financial results.

Elias, please go ahead.

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Elias Nader: Thank you, Brian, and good afternoon, everyone. Our performance in Q3 was in line with our expectations with revenue of $3.5 million, reflecting the later than expected start date out of our large new $6.9 million contract for strategic radiation hardened FPGA technology. We reported a non-GAAP net loss of 0.9 million with a full quarter of contribution from this contract plus growth in other areas. We continue to believe we will get close to reporting breakeven of profitability on a non-GAAP basis again in Q4 2022. Let me now turn to the review of the results for the third quarter. Revenue in Q3 was $3.5 million. This compares with $4.5 million last quarter at $3.9 million in the third quarter of 2021. In addition to the delayed contract startup, we also saw softening of smartphone sales has anticipated.

Within our Q3 revenue, sales of new products were approximately $2.3 million. This compares with $3.1 million last quarter and $2.8 million in a third quarter a year ago. Mature product revenue is approximately 1.2 million compared with $1.4 million last quarter and $1.1 million in Q3 last year. In Q3, we had five customers that each accounted for 10% or more of our revenue. Similar to the prior quarter, non-GAAP gross margin in Q3 was 49.8% compared with 58.6% in the prior quarter, and 72.8% in the same quarter of 2021. The pressure on gross margins in the quarter was due to the lower revenue as well as increased expenses in EFPG IP professional services, inclusive of non-recurring costs of specialized tooling associated with the customer tip out that Brian referred to and his prepared remarks.

Now that our engineering team has completed that tape out, we anticipate returning to more normalized margins in Q4. Non-GAAP operating expenses in Q3 were approximately $2.5 million. The OpEx for Q3 was lower than our forecast, mainly due to a reclassification related to certain R&D expenses to eFPGA IP and support of eFPGA IP professional services. This compares to operating expenses of $2.8 million last quarter and $3.2 million in the third quarter year ago. Non-GAAP net loss was $0.9 million or loss of $0.07 per share based on 12.6 million shares. This compares with a net loss of $47.000 or $0.00 per share last quarter and a net loss of $0.4 million or $0.03 per share in the third quarter of fiscal 2021. Total cash at the end of Q3 was $20 million compared with $18.5 million in the prior quarter.

The continued investments of supported the new design wins we have discussed was offset by the approximately $3.2 million private placement raised in September near market rates from existing investors. Additionally, timing issues related to cash receipts from customers contributed to net higher utilization of cash from operations. Now moving to our guidance for the fourth quarter of fiscal 2022, which will end on January 1, 2023. As Brian discussed, revenue guidance for Q4 is approximately $4.3 million plus or minus 10% due to the reasons he outlined. Revenue is expected to be mainly comprised of approximately $3.7 million of new products and about $0.8 million of matured products. Based on this revenue mix, non-GAAP gross margin for the quarter will be approximately 52% plus or minus 5 percentage points.

Our non-GAAP operating expenses will be approximately $2.8 million plus or minus 10%. Longer-term, we believe OpEx will remain in the below $3 million range which occasionally increases to support new programs. After interest expense, other income and taxes we currently forecast and non-GAAP net loss would be approximately $0.5 million to $1.2 million or net loss of $0.04 to $0.11 per share based on roughly 12.9 million shares outstanding. The difference between our GAAP and non-GAAP results is related to non-cash, stock-based compensation expenses. In Q4, we expect this composition will be approximately $463,000. As a reminder, there will be movements in our stock-based compensation during the year and it may vary each quarter based on the timing of the grant.

Moving to the balance sheet. Even with continued investment to supporting new design wins that we have discussed at the midpoint, we expect cash usage to be approximately $1 million. As we stated earlier, with the new large design wins and overall momentum in our business and a lean operating structure we are driving the company to profitability. I’d say thank you for listening in. With that, let me now turn the call back to Brian for closing remarks.

Brian Faith: Thank you, Elias. As our revenue growth resumes in Q4 of the current fiscal year and into 2023 on the strength of our U.S. Government strategic radiation hard and FPGA technology contract and the newly taped out customer design as well as a sales funnel exceeding $110 million. I’m even more confident QuickLogic is on the cusp of sustainable profitability. I would like to, again, thank all our key stakeholders, including investors, customer, suppliers, and most of all the QuickLogic and sensible teams for their continued support. That completes our prepared remarks. Operator, I would now like to open the call for questions.

Q&A Session

Operator: Our first question is from Suji Desilva with Roth Capital Partners.

Suji Desilva: A tough environment certainly. Brian, maybe I could start with you. On the chiplets you talked about, I know that’s a little bit longer term, but are there particular end markets or verticals that the chiplets would be an appealing form factor for, or would it be broad based, the opportunity?

Brian Faith: End market segment question, Suji?

Suji Desilva: Yes. Verticals and end market for chiplets.

Brian Faith: I would say the two ones that we’re looking at right now that we’re getting some pull for, one is on the defense side and one is on the high performance computing side. Use cases are different between the two ultimately, but those are the two end markets that are the dominant ones in the funnel right now for chiplets.

Suji Desilva: And then digging into the moving parts of your guidance, I got the mature decline. The new products goes up. Now I’m wondering if the government contract of $6.9 million is linear on a per month per quarter basis, if that is the case, it would be a million incremental versus the one month 3Q. So I’m wondering does the rest of the growth there additionally FPGA licensing or are the display and consumer processor markets, are those recovering somewhat?

Brian Faith: You’re correct on the increase in the quarter on the government contract roughly. The other thing that’s coming back, we see some other I would say, older FPGA business, but it’s still in our new product bucket. It’s not classified as mature, mature, obviously we’re forecasting down sequentially, and then we are forecasting some other eFPGA IP related revenue in the quarter.

Suji Desilva: And then last question perhaps for Elias, as in your profitability, can you talk about the remaining cash burn implied and the guidance, and I guess that’ll flip around to €˜23 at some point?

Elias Nader: Yeah, even if I look into €˜23 Suji, the new wins are going to require us to definitely hire people. But when we started these the $6.9 million contract for example, we had to spend more money on certain POs right to get things going. So I think we’re going to be around that $2.8 million to $3.2 million range when 2023 hits. So OpEx will be controlled, for sure.

Brian Faith: If I could jump in here for a second — go back. Hey, Suji, just to circle back to that previous question on the revenue jump up, there’s also some revenue associated with that customer tape out and being able to provide some test chip devices to them in the quarter.

Operator: Our next question is from Richard Shannon with Craig Hall Capital Group.

Richard Shannon: I guess Brian, I wanted to ask first on the tape out you’re referring to. I know you’re going to talk about the customer application, but can you say whether this is the FPGA related and/or chip related and was it included in the funnel or the increase in the funnel you talked about relative to last quarter?

Brian Faith: It’s a discrete device not necessarily chiplet related. And the second question related to inclusion in the funnel, is that what you’re asking?

Richard Shannon: Yes.

Brian Faith : So the revenue that we’re recognizing now for the IP and the design work, it’s definitely part of the funnel. The end chip sales that I mentioned earlier, the tens of millions of dollars, that is not included in the funnel.