Q3 2022 Quicklogic Corp Earnings Call
Greetings welcome to quick Logic Corp, third quarter 2022 earnings conference call. At this time, all participants are in a listen only mode.
<unk> and answer session will follow the formal presentation, if anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad. Please note. This conference is being recorded I will now.
Now I'll turn the conference over to Alison Ziegler Investor Relations. Thank you you may begin.
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 quick logic makes today are forward looking statements that involve risks and uncertainties, including but not limited to stated expectations relating to <unk>.
Revenue from new and mature products statements pertaining to quick logics 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 in production start dates that could impact the timing of shipments the company's future.
<unk> systems broadening the number of our ecosystem partners unexpected 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 discussion of the risks uncertainties and assumptions that could result in those differences.
Please refer to the risk factors discussed in quick logics. Most recently filed periodic reports with the SEC quick logic assumes no obligation to update any forward looking statements or information, which speak as of their 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 webpage that provides current and historical non-GAAP data. Please note quick logic uses its website the company blog corporate Twitter account Facebook page and Linkedin page as channels of district.
Information about its business such information may be deemed material information and quick logic may use these channels to comply with its disclosure obligations under Reg S. T. A.
Copy of the prepared remarks made on today's call will be posted on quick logics IR web page. Shortly after the conclusion of today's earnings call I'd now like to call turn of Atlanta like to turn the call over to Brian go ahead, Brian .
Thank you Allison.
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 in line with the midpoint of the expectations provided on our second quarter call.
Included in this revenue as the first months associated with our new $6 9 million dollar U S government contract for.
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 eight.
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 quick logic.
First as you saw in the announcement the base contract is worth $6 $9 million.
With deliverables do over the course of 12 months.
Quick logic will act as the prime contractor a first for us.
And we will collaborate with her team composed primarily of Sky water technologies ever spend technologies.
And trusted semiconductor solutions.
Upon successful performance of the base contract and at the discretion of the U S. Government. The contract allows for options totaling approximately $72 million, which would 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 quick logic 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 it'd be coming 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 E. F. P. G. A a P.
We have the capability to offer a full spectrum of solutions from E. F. P. J a 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 E. S. P. G. A I P for our customer.
Due to confidentiality requirements I'm 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 E. S. P. J related opportunities can and are <unk>.
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 E. S. P. G. A I P engagement and expanding to full FPGA based device <unk> chip with developments.
These recent design wins and the increase in our sales went up by another $10 million this quarter to a total of $110 million or.
Our proof that our strategy to develop E. S. P. J at IP and related products is transforming quick logic 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 know how in the FPGA market.
Quick logic has established first mover advantage in this quickly evolving market.
Yeah.
The main enabler of this pipeline of new opportunities as our australis E. S. P. G a IP generator.
Which can define and deliver customized E. S. P. G. A a P. Android devices in a highly automated way in a matter of months, while providing quick logic tremendous operating leverage from our R&D resources.
The breadth of our active E. S. P. G a customer engagements spans the world's largest semiconductor foundries.
<unk> TSMC, Globalfoundries, Samsung UMC and Sky water technologies.
Now moving to our sensible business. Some small continues to have its best year ever delivering its largest revenue quarter yet in Q3.
<unk> ecosystem continues to gain momentum with growing new customer and partner interest.
A top tier semiconductor company is also integrating a sensible powered solution to address its own customers demand for AI at the Iot edge across its broad microcontroller line of products.
This month sensible was also recognized by a leading electronics industry portal in China with over 1 million registered members, who voted sensible solution with on semi as most innovative value product award.
The award recognized as industry, leading products with innovative value and far reaching influence in the AI market.
Moving to triplets as discussed last time chipsets 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 triplet market is expected to grow significantly over the next decade.
Industry research firm transparency market research recently noted that the triplet 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 customers to define an FPGA triplet template.
Yeah.
Now I will quickly touch on some other areas of our business.
Display bridge product sales and design ins 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.
And our mobile phone business. We continue to believe we are being designed into new models of phones that will ship well into 2024.
With a 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 $400000 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 in 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 E. S. P. G. A IP related design wins.
Before turning the call to Elias I want to provide our revenue outlook for Q4 and offer a peek into 2023.
Over the last two years, we have made significant progress building, our software and 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 dollar 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 in Q4 to be approximately $4 $3 million plus or minus 10%.
This incorporates our forecasts for an aggregate sequential decline in our smartphone business and mature product segment of around $600000.
This puts us on pace to increase fiscal 2022 revenue of approximately 30% over fiscal 2021, and we continue to believe we will get close to reporting breakeven 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.
Now I'll turn the call over to Elias for a review of the financial results Elias. Please go ahead.
Okay.
Thank you.
Brian and good afternoon, everyone.
Our performance in Q3 was in line with our expectations with.
With revenue of $3 5 million.
Reflecting the later than expected start date of a large new $6 $9 million contract for.
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 our 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, and $3 9 million in the third quarter of 2021.
In addition to the delayed contract start up we also saw softening of smartphone sales as 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 the third quarter a year ago.
Mature product revenue was approximately $1 2 million compared with $1 4 million last quarter on $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% comp.
Compared with 58, 6% in the prior quarter.
And 72, 8% for 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 FPGA IP professional services, Inc.
Inclusive of nonrecurring costs of specialized Julie associated with the customer tape outs that Brian referred to in his prepared remarks.
Now.
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 the reclassifications related to certain R&D expenses.
So FPGA IP and support of E. S. P G AIP professional services.
This compares to operating expenses of $2 8 million last quarter, and $3 2 million in the third quarter a year ago.
non-GAAP net loss was 0.9 million or a loss of seven cents per share based on 12 6 million shares.
This compares with a net loss of $47000 or zero cents per share last quarter and a net loss of Europe on 4 million or three cents 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 investment to support the new design wins, we have discussed was offset by approximately $3 2 million.
Placement raised in September and you know market rates from existing investors.
Additionally, timing issues related to cash receipts from customers contributed to net to higher utilization of cash from operations.
Now moving to our guidance for the fourth quarter of fiscal 2022, which will end on January one 2023.
As Brian discussed revenue guidance for Q4 is approximately $4 3 million plus or minus 10%.
Due to the reasons you outlined.
Revenue is expected to be mainly comprised of approximately $3 $7 million of new products and about <unk> 8 million of mature products.
Based on this revenue mix non-GAAP gross margin for the quarter will be approximately 52% plus or minus five 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.
With the occasional increases to support new programs.
After interest expense other income and taxes, we currently forecast our non-GAAP net loss will be approximately 0.5 million to $1 2 million or a net loss of four cents to 11 cents per share based on roughly $12 9 million shares outstanding.
Okay.
The difference, but youre not GAAP and non-GAAP results is related to noncash stock based compensation expenses.
Q4, we expect this compensation will be approximately $463000.
As a reminder, there will be movement in our stock based compensation during the year as it may vary each quarter based on the timing of the grants.
Moving to the balance sheet.
Even with continued investment to support the new design wins that we have discussed at the <unk>.
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 will say thank you for listening in with that let me now turn the call back to Brian for his closing remarks.
Thank you Elias as our revenue growth resumed in Q4 of the current fiscal year and into 2023 on the strength of our U S government strategic radiation hardened FPGA technology contract and the newly taped out customer design as well as our sales funnel exceeding $110 million I'm, even more confident quick logic is on the cusp of sustainable profitability.
<unk>.
I would like to again, thank all of our key stakeholders, including investors customers suppliers and most of all the quick logic and sensible teams for their continued support.
That completes our prepared remarks, operator, I would now like to open the call for questions.
Thank you and see you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if he would like to remove your question from the queue.
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Our first question is from <unk> Desilva with Roth Capital Partners. Please proceed.
Hi, Brian Hi, Elias congratulations.
That's helpful environment, certainly, Brian maybe I can start with you on the triplets you talked about I know, it's a little bit longer term, but are there particular end markets or verticals that the triplet would be an appealing form factor for or would it be brought three o'clock yep. Okay.
And market segment question C. J, yes vertical as a network right a catch up.
I'd say the 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 triplets.
Okay great.
And then digging into the moving parts of your guidance I got the mature decline or the new products goes up now I'm wondering if the government contracted $6 9 million as linear on a per months per quarter basis. If that is the case it would be a million incremental versus the one month of <unk>. So I'm wondering does the rest of the growth there.
Additionally, F P J licensing or are the display.
Display and end consumers a consumer Pos served markets are those recovering somewhat.
Youre correct on the 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.
Classified as mature mature obviously, we're forecasting down sequentially and then we are forecasting some other E. S. P. J I T related revenue in the quarter.
Okay great.
And then last question perhaps for Elias.
As you near profitability can you talk about the remaining.
Cash burn implied in the guidance.
And I guess that'll flip around the 23 at some point.
Even if I look into 'twenty three tsuji you know the new wins are going to require us to definitely hire people.
But when we started this these.
$6 9 million contract for example, we have to spend more money on such an.
It was right to get things going so I think we're going to be around that two to $3 $2 million range when 2023.
So opex will be controlled for sure.
Okay, alright, thanks, I've been here for a second go back so Jay just to circle back to that previous question on the the.
The revenue jump up Theres also some revenue associated with our customer tape out and being able to to provide some test chip devices to them in the quarter.
Okay very helpful. Thanks, Brian Thanks, a lot.
Okay.
Our next question is from Richard Shannon with Craig Hallum Capital Group. Please proceed.
Hi, Brian Thanks for taking my questions.
I guess, Brian I wanted to ask first on the the tape out you're referring to I know you're going to die. So I'll talk about the customer application, but can you say whether this is the best FPGA related <unk> chip related and wasn't included in the in the funnel or the increase in that suddenly you talked about relative to last quarter.
Okay.
It's.
Discrete device.
Not necessarily triplet related.
And the second question related to conclusion in the funnel because every asking yes, yes.
It is.
So the revenue that we're recognizing now for the for the IP and the design work is definitely part of the funnel.
He and chip sales.
I mentioned earlier, the tens of millions of dollars that is not included in the funnel.
Okay.
Perfect that is helpful here.
Question on gross margins you are guiding to a number.
We have your 52, plus or minus from this quarter and <unk> 48.
I'm, assuming some element of that as being lower than than a lot of the court as seen in the last year and a half or so on the 16th and 17th just because of the additional professional services.
And then eventually were I guess, hopefully we'll see some chip.
Chip sales as well how do we think about the kind of long term gross margin as they see a mixed between all these different product lines books older ones newer ones in IP.
The goal the goal of the company for sure.
It's been.
Even close to 70% a sudden for the last few press.
A few earnings calls.
But literally what we're realizing is that most of these professional services win is pushing a lot so that range of about close to between 50 and 60% right.
So that's why the guide for Q4.
We're looking at 52%.
Mainly because of what we're seeing in terms of the professional services.
Furthermore, if you look at Q3 by itself.
Uh huh.
Okay.
9%, it's mainly because of the fact that you know definitely gross I mean sales.
Sales were very low right.
So when he was $49 eight so very close to 50, so I think.
Anything closer to 60 to me is one of them I won't land.
So I think if I could.
40 is less.
Yeah.
And just let me add onto that as you know in.
At the very beginning of any of these initiatives there is a services component but as.
Customer starts to take IP and integrate into their chips and becomes a royalty stream for us or we start selling devices as a storefront those are definitely going to carry a much higher gross margin. So I think the longer term margin model is still intact as we start turning some of these early service engagements into the the royalty or the device shipments.
Okay, perfect, maybe one or two last questions for me, Brian or me, if we could talk about the embedded P. J a final final and pipeline here.
You talked about it going up roughly $10 million from last quarter, which is great to see.
Obviously the contract you signed in the last quarter.
Seems to be somewhat larger or a fair amount larger than normal maybe if you can kind of talk about the median deal size that you're seeing or expecting.
In the near term or over the next year or something like that just to give us a sense here.
Whether the government contract is truly.
A much bigger deal size, where we could see stuff more like that down the road.
Yeah, I mean, the the full scope of the government contract that we've talked about could be as high as 72, I don't think there's going to be a lot of opportunities in that range, but there are you know a handful I think the normal size range for us is going to be more in like the low seven digit range.
So maybe like say a million plus or minus on the IP side, and then to the extent that we started doing other.
Chip developments where people.
That'll typically carry a price tag that's north of $5 million, depending on the process node and the nuances of that but yes straight IP deals is probably going to be right around $1 million plus or minus.
Of which there aren't many of those types of opportunities.
Okay.
Okay.
I think that's all from me ill jump out of line. Thanks, a lot guys.
Thanks Richard.
Our next question is from Martin Yang with Oppenheimer <unk> Company. Please proceed.
Hi, Good afternoon. Thank you for taking my question.
My first question is Oh.
So up on the gross margin discussion.
When you.
Let's say after you go through some of the engineering cost associated with the gross margin do you expect the new component or new product gross margin overall.
<unk>.
Eventually converge with mature products.
As you have more licensing a higher higher margin licensing.
Elements, the new product revenues.
Yes Martin.
Go ahead, Bruce let me ask to clarify let me ask a clarification question Martin are you asking.
At what point do the.
Due to the service revenues dropped down enough as a total percent of revenue so they're not a drag on gross margin.
So can you just the company, but gross margins are more like the mature products.
Because my impression is that the new products overall still good margin gap versus mature products do you think that will eventually.
The two segments will converge matrix of gross margin.
Well in fact, I think the long term or is that the new products for IP and software will actually exceed mature product revenue.
And Mitch mature products' gross margins.
Because once we get to the point of doing the royalty on the IP shipments that's almost pure gross margin at that point.
It takes a while for that flywheel to get started.
To generate the significant royalty revenue.
But the other thing I'd say is that some of these devices that we're doing like the the U S government based one.
The gross margins associated with that specific market segment are quite high.
And so once that hopefully we will be the storefront for that and when that does start taking place then we will start to see some uplift on gross margins even beyond what our mature products were.
Got it yes that's.
My.
In tuition so when you talk about some of the more.
Royalty revenue streams coming off does that mean two to three years' time, when you start shipping devices or longer or shorter time.
Well they have to be from device shipments where their royalty bearing.
We've talked to in the past about the time between IP license to royalties start.
Like 18 months or so so I think that is still true.
So at some point next year, we should start to see some royalties for their earlier licenses that we did.
Late last year or early this year.
If you talk about sensor mall for a second then those royalties can start faster because they're not they're not being embedded into a chip like an IP license that software running on an existing microcontroller. So.
As people start to go to production with those AI models than the the royalty stream from those should start sooner.
Got it thank you, Brian I have no more questions.
Thanks Mark.
As a reminder, this star one on your telephone keypad, if he would like to ask a question. Our next question is from Rick Meehan with wherever shall I investments. Please proceed.
Thank you Hi, Brian Hi, Elias.
In your last 10-Q U.
Broke down some color into your <unk>.
New product revenue between your FPGA IP hardware and SAS can you give us that breakdown for.
Q3 and.
How you see it breaking down in Q4 and your guidance.
I don't think we're breaking it down to that level in the guidance Rick.
And I don't have it off the top of my head for the for the Q3 actuals for the.
This service was a.
Particularly high in the quarter like Louis Elias and I had mentioned related to some tooling costs for their customer tape out.
But I don't recall the exact number I don't know if you're that buy less.
Okay.
In terms of those sales funnel that you described with a $110 million.
Can you give us a rough.
Breakdown.
That sales funnel.
Most three revenue categories that you.
Itemized in the 10-Q.
August .
Most of that is IP license and device revenue.
There is some service I don't recall, the exact percentage, but it's the lesser of the three categories. You just mentioned.
Okay by the way I'm not going to get in the habit of breaking out down to that level of granularity in the funnel.
On every call. That's that's just too much to track and put forth, but I think the bottom line is that the.
The lion's share of that funnel.
As represented by IP licensing and device shipments not services to be very clear, we're not trying to become a services company. We are monetizing our services to generate IP licenses to get into the royalty stream and to do customer funded development for devices that we can be the storefront.
Because that carry such a higher gross profit dollar.
<unk>, then even a royalty would be in the future and I think that best positions quick logic for delivering a lot of sustainable high value revenue.
Potentially decades into the future.
Just to be clear.
Okay I appreciate the color there.
You mentioned that.
A couple of specific opportunities.
And in doing so you talked about royalties in the future when can we.
Expect royalty revenues to begin.
On those particular items you spoke about.
I do think we will start to see some royalty in 2023.
The earlier licenses that we talked about last year in fact have.
Gone through some development with the customer.
In fact, one of our customers just just received some test chip spec from one of those IP licenses. So.
That means they're probably a couple of quarters away from actually starting to take that into volume, but that's the point at which that we would start to see royalties. So at some point next year.
In.
When you gave your.
Outlook general outlook or a target of 40% growth for next year.
In looking at that are you.
And looking at how your business is developing are you seen any.
Elements of seasonality.
In this business as it evolves.
Or are you seeing.
In your forecasts are more and more stability in your.
Revenue flows arising.
In 'twenty three and beyond.
So I definitely see there's more stability coming from these contracts that are longer term in nature that does provide us a lot more visibility.
Revenue layering on revenue not just you know one shot and done each quarter.
I think the market that still has seasonality to it as the smartphone market. So as long as we are selling into that market.
We will see a little bit of that.
But like I said on the call I think that's going to start to become a lesser and lesser percentage, which is a good thing right to get more of these longer time in revenue higher gross margin wins is actually a good thing so.
I don't really see a seasonality to it yet on these new wins very much.
Okay.
Thank you very much for answering my questions.
Thanks, Rick.
There are no further questions I would like to turn the conference back over to Brian for closing comments.
I'd like to thank everybody for participating in today's call and for your continued support we look forward to speaking with many of you again, when we participate in upcoming investor events.
In November and December and when we report our fourth quarter and fiscal year of 2022 results in February .
Have a good day. Thank you.
Thank you. This does conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.
Okay.
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