QuickLogic Corporation

Gentlemen, good afternoon. At this time, I would like to welcome everyone to QuickLogic Corporation's fourth quarter and fiscal year 2020 earnings result conference call. As a reminder, today's call is being recorded for replay purposes through February 24th, 2021. I would now like to turn the conference over to Mr. Jim Finucchi of Darrow Associates. Mr. Finucchi, please go ahead.

Thank you, Sherry, and thanks to all of you for joining us. Our speakers today are Brian Faith, President and Chief Executive Officer, and Dr. Sue Chung, Chief Financial Officer. Following current social distancing practices, management is doing this call from different locations today. As a reminder, some of the comments that Logic makes today are forward-looking statements that involve risk 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, scheduled changes in projected 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 in 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 recent filed periodic reports with the SEC. QuickLogic 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, 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 webpage shortly after the conclusion of today's earnings call. I would now like to turn the call over to Brian.

Thank you, Jim. Good afternoon, everyone, and thank you all for joining our fourth quarter and fiscal 2020 financial results conference call. Before I discuss our quarterly results and review the status of our strategic initiatives, I'd like to take a moment to reflect on the past year. 2020 was full of challenges for all of us, both personally and professionally. I want to personally thank the QuickLogic team for their tireless efforts as we work through the COVID-19 challenges. With the recent introduction of multiple COVID-19 vaccines, and improvements in COVID-19-related treatments, there is finally a clear path to getting past the pandemic. 2020 was a transformational year for QuickLogic, as we accelerated our move from being primarily a product company to a platform company, leveraging artificial intelligence and open-source software, especially for our programmable logic technology and the multitude of devices that include it. This move will significantly broaden our addressable markets and is expected to deliver improved financial results in fiscal 2021 and beyond. I am often asked to share more perspective on the evolution of our strategy. One way I describe the transformation is that we are pivoting away from high-risk, high-reward opportunities in the high-line consumer market and instead focusing on delivering a more scalable platform that is tailored for the masses. Implementing this change took an incredible shift in mindset here at QuickLogic, and I am proud of our team for being open-minded, resilient, and committed during this process. We persevered through the difficulties that came with 2020, and I believe we are now about to enter a period of sustained growth for the company. With that as a backdrop, I want to spend some time discussing the pillars of our expected financial improvement in fiscal 2021. There are three key areas that will drive our growth. The first and overarching one is Artificial Intelligence and Machine Learning, or AIML for short. Second is our previously announced open source programmable logic collaboration with Google and App Micro initially, and now expanding rapidly to include several additional partners. And third are the initiatives behind our growing SAS and IP licensing model. Let me start with an overview of our AIML initiative. To understand the size of this market, I would like to note that based on research by an international consulting firm, edge AI alone will enable tens to hundreds of billions of units in the coming years and potentially drive a semiconductor TAM north of $4 billion by 2025 just for edge inferencing. This opportunity is easy to see. For example, think of the devices inside a home. There are likely dozens of sensors already in place in devices such as Internet-connected speakers, doorbells, cameras, thermostats, TVs, streaming media devices, numerous tablets, and appliances, to name just a few. The patented technology and deep domain expertise that QuickLogic and Sensible possess, including FPGA technology, AI software, and low-power MCUs, all fit within this market. We are addressing these opportunities using our end-to-end hardware and software solutions. Quite literally, we are structuring our product development in all of these initiatives to make the products more accessible for large, high-growth markets such as wearables, hearables, smartphones, consumer electronics, industrial, military, and IoT. Second is our programmable logic collaboration with Google and App Micro called the QuickLogic Open Source Reconfigurable Computing, or CORQ, initiative. We began work on this program in 2019 and publicly announced it in 2020. What we are doing with our CORQ initiative is groundbreaking. This open source tool chain, which sits on top of our hardware, makes the technology more accessible to the masses and easier to use for software engineers. We are also providing support for our EOS S3 MCU and future support for new SOCs, FPGAs, and eFPGA IP, which will be an important part of our revenue story starting in late 2021 or early 2022. The third pillar is around our sensible SAS and eFPGA IP business. The sensible model is subscription-based while the customer is using the tool during development. with per-unit royalties upon production shipment. Our eFPGA IP business model has an upfront license and back-end royalties on unit shift. What that means is we have stickier revenue as customers start subscribing or using the IP, and then as they ship in volume, we get the benefit of having the royalty coming in from the unit shift on the different products. This also has a positive impact on gross margins. We expect the SaaS part of our business will show significant growth in 2021. We continue to ramp our ecosystem partners, which includes STMicroelectronics, NXP, Nordic Semiconductor, Arm, and our authorized design partner, Optimus Logic. Moreover, we have had deep engineering and business engagements with two additional large semiconductor companies in the recent two quarters. both of which we expect to announce as ecosystem partnerships with Sensible in the coming months. In December, we launched the Sensible Community Edition, expressly for the needs of experimenters, innovators, and product R&D teams. The Community Edition provides the means to build fully functional edge IoT infrastructure models using one's own existing label or unlabeled data sets, newly captured sensor datasets using Sensible Data Capture Lab, or models built leveraging Sensible's growing Data Depot library of example and community datasets. Since the start of the year, we have added more than 100 Community Edition users and expect the number to increase throughout the year. In addition, we are seeing a surge in new large enterprise pipeline activity. While the cycle to turn these enterprise opportunities can take several months, the size of these potential deals means even a few wins can contribute meaningful revenue. With that overview, I wanted to shift to a discussion of some key events in Q4 and the beginning of this year. Within our voice-activated products program, we finally completed certification testing of our voice-activated hearable reference design with Amazon's AVS team. This has been a long and difficult process, taking much longer than we ever thought. The delay was brought on by challenges working with a communications chip that was not ours. We also had to overcome COVID-19-related work restrictions that prevented our engineering team from working onsite to solve the issues. In spite of these challenges, we persevered. In addition, another voice-related project was completed towards the end of Q4. When combined, We are now confident that these voice-enabled solutions, which are scheduled to come to market later this year, will materialize into revenue for us in the second half of fiscal 2021. During the quarter, we shipped a few hundred more quick-feather development kits, leading to approximately 700 by the end of the year. The pace accelerated with the Hackster.io Climate Change Challenge and has steadily continued during the first quarter. Our goal for 2021 is to ship more than 2,000 dev kits, continuing the proliferation of our devices and software into the masses. Toward that dev kit goal, we are in the process of launching three new dev kits. The first is launching this week in conjunction with our Amazon ABS certification called the Quickfeather ABS Reference Design, which can be ordered from the QuickLogic website. Shortly, We will be launching the next generation of Quickfeather called SparkFun Thing Plus, QuickLogic EOS S3. As the name would indicate, this dev kit is being manufactured and sold by SparkFun, a very popular online retailer of electronic dev kits and components. This new dev kit will launch exclusively on CrowdSupply, after which QuickLogic as well as SparkFun will also distribute it through our collective worldwide distribution channels. SparkFun has a diverse set of sensor boards that can connect seamlessly with the ThingPlus dev kit, making it easier for our customers to build proofs of concept for AI ML-enabled systems using ESS3 and Sensible. And last, but certainly not least, we announced our smallest dev kit ever last week called Cuomo. Cuomo is a tiny form factor dev kit that brings the power and capability of our ESS3 SOC into a USB Type-A port. It launched exclusively on CrowdSupply and will become available on QuickLogic's website after the CrowdSupply campaign ends in about a month. All of these dev kits are enabled by and optimized for our Quark initiative. The kits are supported by a wide variety of vendor-supported open-source development tools, including Zephyr, FreeRTOS, Symbaflow, and Renode. which broadens access and enables designers to develop applications virtually anywhere. In addition, these development kits should drive EOS S3, SOC, and sensible revenue in 2021 as customers engage and turn them into actual products with real volume behind them. The momentum in our smartphone business continues with the addition of another two 5G-enabled smartphones. 2020 was a very good year for our smartphone business as we exited 2020 with a total of 10, up from three at the start of the year. These new phone launches should lead to much stronger revenue in 2021 and beyond for the smartphone segment for us. In our eFPGA IP business, one of our early engagements has recently taped out their test chip. Barring any geopolitical related risks, We could see a full eFPGA IP license in the first half of this year from this customer. Test chips are back now, and the customer's testing is progressing. During the past few conference calls, we have not gone into detail on our IP strategy, and I'll share a little more today. QuickLogic and the University of Utah, or U of U, initiated discussions approximately 18 months ago to research how we could integrate advanced semiconductor layout automation techniques into QuickLogic's FPGA IP compiler tool called Borealis. This endeavor sought to leverage UofU's research in open source automation techniques, which is DARPA-funded research as part of the Electronics Resurgence Initiative, and QuickLogic's deep domain expertise in commercializing FPGA technology across numerous boundaries and process nodes with high reliability, quality, and manufacturing volume. The results are game-changing. What previously took 18 months and millions of dollars now has been reduced to approximately three months and a fraction of the cost. With this significant overhaul to Borealis complete, QuickLogic was able to go from customer engagement to new IP delivery in record time and close a new production IP license in this quarter. There will be more we can share on this in the future. Lastly, in our mature segment, the COVID-19-related issues remain a challenge, primarily for the civilian aerospace sector. While we did see a seasonal uptick in Q4 revenue, there has been no change to our outlook for mature product revenue and continue to expect it will be flattish with 2020. I know I have covered several items. but the intent is to offer context around the many pieces of QuickLogic that I believe will lead to better financial performance starting this year. As I've said before, if you believe that AI and machine learning is here to stay, if you agree with the research that programmable logic brings value in these use cases where algorithms are evolving faster than ASIC technology can keep pace, then I think you will believe that QuickLogic is a very strong opportunity to take advantage of this evolving market. I believe the wind is at our back and I'm personally very excited about where we are and what 2021 is going to bring on all these different fronts. Before we review the financial results, as many of you know, today is Sue's last day with the company. I want to thank Sue for her important contributions since joining the company in 2007 and for her guidance as our Chief Financial Officer since 2016. She was a partner to me as we started the transition of our business, and was an asset to the company during the challenges COVID-19 brought. Sue leaves us in a sound financial position. All of us at the company thank Sue for her leadership, partnership, and friendship, and wish her the best going forward. Starting tomorrow, Anthony Contos assumes the position of Chief Accounting Officer. Over the span of his 30-year career, Anthony has held many senior-level accounting and finance-related positions. I have been impressed with his efforts to date and I am confident he will build on the foundation Sue has created. With that, I will turn the call over to Sue.