QuickLogic Corporation

Ladies and gentlemen, good afternoon. At this time, I'd like to welcome everyone to QuickLogic Corporation's second quarter fiscal year 2021 earnings results conference call. As a reminder, today's call is being recorded for replay purposes through August 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, Operator, and thanks to all of you for joining us. Our speakers today are Brian Faith, President and Chief Executive Officer, and Anthony Contos, Interim Chief Accounting Officer. The company continues to follow social distancing practices, and management is again hosting this call from different locations today. 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 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 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 recent filed periodic reports with the SEC. QuickLogic assumes no obligation to update any forward-looking statements or information, which speaks 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 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 second quarter fiscal 2021 financial results conference call. I am pleased with the progress we continue to make on the transformation of our business. In the second quarter, our revenue grew to $2.9 million, up approximately 30% sequentially, and reaching the highest level since the first quarter of fiscal 2019. During the quarter, we delivered an eFPGA IP core to our first full-license customer using our soon-to-be-announced automated IP generator flow that integrates open-source software with our three decades of experience delivering programmable logic. In addition, we significantly grew both FPGA and eFPGA opportunities, which bodes well for our future revenue performance. We are now at the tipping point for scaling this new FPGA and eFPGA approach much more broadly, and the timing is coinciding with generally increasing market demand. Our pipeline of new business remains strong, with the vast majority of large opportunities continuing to advance. We also saw acceleration in the number of RFPs and RFQs I discussed previously. Some of the more exciting opportunities include several in the IoT, military, aerospace, and defense markets. We should see the number of wins continue to improve through the remainder of the year, leading to a substantial increase in annual revenue, better bottom line performance, and significantly lower cash usage. With each passing quarter, it is becoming crystal clear that our move to leverage and build upon the open source tool model continues to be the right move for QuickLogic. Artificial intelligence and machine learning technologies now power a rapidly expanding range of products and applications. The advantages of open source tools, including decentralization, cost efficiency, transparency, and customization, are things we recognized early on and have been actively advocating. We remain confident we are on the right path and that our results over the next few quarters will show continued progress. Recently, several of the largest semiconductor and related companies have discussed issues around their supply chains and corresponding impact on revenue. While we have not seen these same conditions affecting our business to the degree others have discussed, we are seeing increased lead times for certain packages. We are reacting to this in several ways, including carrying additional inventory to provide some buffer, as well as communicating longer lead times to our customers and distribution partners. We continue to monitor and will adjust our business based on these evolving conditions. Before I get into my more detailed overview of our quarterly progress, I want to provide an update on the status of formalizing a strategic initiative with a consortium of partners. You may remember that at the time of our February call, Allsigns pointed to one such initiative being funded by the end of February. Although we have a signed Memorandum of Understanding and our discussions continue to move forward, the funding of that initiative has not yet closed. We will provide further updates when there is meaningful progress. Now, I will move the discussion to some of the recent events that reinforce the themes we have discussed recently. Our Sensible subsidiary had some important news during the quarter. First, Sensible announced that it has partnered with global semiconductor company Microchip Technology to simplify the development of artificial intelligence code for smart industrial, consumer, and commercial edge IoT applications. Microchip is using Sensible to create an automated design flow. These tools can easily tap into sensor data from the MPLAB X IDE and generate machine learning models that transform physical sensor endpoints into application-specific intelligent sensors. The agreement is a further testament to the robust Sensible analytics toolkit and its capabilities as more top-tier semiconductor companies and OEMs look to add machine learning to their existing designs in may we announced the joint development of an ai enabled industrial iot solution for predictive maintenance applications with our customer ai sensing the solution is based on our quick ai platform which includes the ultra low power eos s3 multi-core sensor processing soc quick feather development kit and Sensible Analytics Toolkit for endpoint AI applications. Through this powerful set of technologies, AI sensing has developed a vibration sensor that employs artificial intelligence and machine learning techniques to intelligently monitor equipment status and identify and signal when different fault modes occur, often called predictive maintenance. I wanted to highlight this specific example to further demonstrate how this combination can be used by companies to develop a near infinite set of AI and ML applications. One other note on Quickfeather. Our order demand remains strong as we have been averaging over two dev kits sold per day so far this year. By the end of Q2, we had sold well over 1,000 boards. As an update to our SparkFun initiative, They have created a version of Quickfeather called Thing Plus EOS S3 that was launched on CrowdSupply. Users can implement some interesting examples with QuickLogic, Sensible, and Google's TensorFlow Lite AI software using this dev kit. This is a perfect example of convergence of multiple platforms into one product that we can sell to a broad set of customers. Board started shipping in Q2, and we ended the quarter shipping more than 100 kits and are seeing no let up in demand. Our distribution channels expanded in the June quarter as we announced new partnerships and agreements for both QuickLogic and Sensible. Sensible signed a worldwide distribution agreement with Digi-Key Electronics. Through the agreement, Digi-Key now offers the basic edition of Sensible's analytics toolkit globally for customers who need a complete development workflow for data collection, labeling, model generation, and test validation of embedded AI. Moreover, we are in the process of adding QuickLogic devices and dev kits to Digi-Key shortly. In doing so, our products will be available via two of the most popular worldwide electronics distributors, Digi-Key and Mouser. Those are some of the recent highlights I wanted to address. Now, I want to briefly touch on a few areas we have discussed in recent calls. Our QuickLogic Open Reconfigurable Computing, or CORQ, initiative that was launched last year continues to gain traction. As a reminder, we are taking some of our proprietary technology and combining that with the open source tools that are being developed specifically for FPGA technology. We currently have some initial support on a couple of different devices and IPs that we control, and I expect it will only grow from there. In addition, we continue to see growth in the SAS software and IP licensing side of our business. including our embedded FPGA programmable technology and our Sensible AI software platform. Our primary focus for Sensible has been building out the platform with different partner companies, some of which include multinational microcontroller companies like STMicroelectronics and NXP, and more recently, Silicon Labs and Microchip. Lastly, Sensible's integration with Google's TensorFlow Lite AI software framework has been going according to plan. A lot of good things are happening as we build out our ecosystem, and I am confident these efforts are going to lead to customers signing up for full SaaS or taking full licenses of our technology in the coming quarters. Work on our embedded FPGA initiative has accelerated after we joined the DARPA toolbox earlier this year. We were invited to join this specifically because of our work in the open source FPGA area. A question I often get asked is, why would DARPA care about FPGA technology? You must remember the US government and defense contractors and companies that create those types of products are buying hundreds of millions of dollars a year in FPGA technology to be used across various applications. They include items such as flight control systems, communications processors, and more. It is true that many of these companies tend to also design their own custom ASICs. But what we are seeing is the beginning of the evolution that over time, we believe will be the blending of ASIC and FPGA into the same chip. This can't be done unless the FPGA that was a discrete chip is now an IP to be integrated into an ASIC. This embedded FPGA IP technology is one of our core competencies where we have a distinct advantage, one which we are building on for the future. Excuse me for one moment. I'm back. Progress with Amazon continues with our design work with the Alexa voice services. The customized design kits were fully certified earlier this year. Designers can prototype a proof of concept using the Alexa wake word kit, and at the heart of the board is our low power technology. They're all very reasonably priced, easy to use, and they're all based on our open source Quark software tools. The proliferation of these kits is about getting the technology out into the masses. The open source tools platform has many advantages, including decentralization, cost efficiency, and customization. Things that we recognized early on and had been actively advocating. In fact, our own Cork initiative has leveraged a complete set of open source tools and platforms. That effort has dramatically broadened our potential user base and increased design activity for our devices. We are pleased to see others recognizing the benefits of this approach, which should broaden the available market over several years. Our smartphone business has been one of the strengths of fiscal 2021, with our technology now embedded in 10 handsets, including several 5G-related phones. We expect one or two additional models to come out before the end of the year, further solidifying our growth in the smartphone area. Regarding our mature product segment, we saw a healthy jump in revenue from the prior quarter. This was due primarily to strengthen our military and defense customer base, coupled with the fact that we have been proactively maintaining an inventory from which we can quickly service customer demand. There is no question our mature product business has been significantly impacted by the COVID related disruptions, especially around the civilian aerospace market, where one of our largest customers, Honeywell, is a large player. While global air travel is beginning to pick up with the recent upswing in COVID cases across many parts of the world, we must remain cautious in our outlook for a mature business. As such, we maintain that our mature product revenue will be roughly flat with 2020. The last 18 months have been an extraordinary time for all of us. The headwinds for QuickLogic in our industry have been changing. However, we are starting to see green shoots across multiple parts of our business. While it is still too early to claim victory, our Q2 revenue growth and expected significant sequential improvement in Q3 are a testament that the reinvention of QuickLogic is translating into significantly better financial results. Finally, we have all seen the recent rise in COVID cases due to the proliferation of the Delta variant. Safety of our team and customers continues to be the most important priority for me, And at this time, I would again like to thank the QuigLogic team members for their continued dedication and resiliency during these unprecedented times. With that, I will turn the call over to Anthony.

Thank you, Brian. And good afternoon to everyone joining us. As Brian mentioned, our revenue results were within the expectation we provided in our previous call. For the second quarter of fiscal 2021, revenue was 2.9 million. This compares with revenue of approximately 2.2 million in both the first quarter of 2021 and second quarter of 2020. Within our Q2 revenue, sales of new products were approximately 1.3 million. This compares with about 1.1 million last quarter and 820,000 in the second quarter of 2020. Our mature product revenue was approximately 1.6 million compared with 1.2 million last quarter and 1.4 million in the second quarter of last year. In the second quarter, we had two customers who each accounted for 10% or more of our revenue. Non-GAAP gross margin in Q2 was 51.5% compared with 52.7% in the prior quarter and 47.1% in the same quarter of 2020. The decrease in margin was due primarily to a write-down of raw materials of 156,000, which impacted the gross margin by approximately 5%. This write-down This write-down, our Q2 gross margin would have been approximately 56% at the midpoint of our guidance. We continue to believe gross margin will get into the mid-60% range by the end of the year. I will discuss our gross margin outlook in a few minutes. Non-GAAP operating expenses for Q2 were approximately 3.3%. This compares with 3.5% in Q1 and 3.2 million, sorry, million in second quarter of last year. Within our Q2 operating expenses, R&D was 1.6 million and SG&A was 1.7 million. This compares with R&D and SG&A of 1.7 million and 1.8 million respectively last quarter, and 1.7 million and 1.4 million respectively in the second quarter of last year. The net total of other income expenses and taxes in Q2 was a charge of $50,000. compared with a credit of $1 million in Q1 and a credit of $99,000 in the second quarter of last year. As a reminder, the credit in Q1 was related to the forgiveness of the PPP loan. Non-GAAP net loss was $1.9 million or a loss of $0.16 per share based on 11.5 million shares. This compares with the net loss of $1.3 million or $0.12 per share last quarter and a net loss of 22.2 million or 26 cents per share in the second quarter of last year. The total cash at the end of Q2 was 19 million, compared with 20.9 million at the end of last quarter. The cash balances also include the 15 million draw from the revolving line of credit. Now moving to our guidance for the third quarter of fiscal 2021, which will end on October 3rd, 2021. The revenue guidance for Q3 is 3.8 million, plus or minus 15%. This midpoint would represent a sequential increase of approximately 30%. We believe total revenue in Q3 will be comprised of approximately 2.8 million for new products and 1.0 million for mature product revenue. Of note, this new product revenue guidance would represent the highest quarterly revenue since Q3 of 2015. In addition, when combining the midpoint of this range with the results from our first two quarters, we remain on track to increase fiscal 2021 revenue by around 50% over the prior fiscal year. Based on the expected revenue mix, non-GAAP gross margin for the quarter will be approximately 66% plus or minus 5%. The increase over the prior quarter is attributable to increases in IP-related revenue as well as product mix. Our non-GAAP operating expenses will remain approximately $3.3 million plus or minus $300,000. At the midpoint of the Q2 range, we expect R&D expenses to be approximately $1.7 million and SG&A expenses to be approximately $1.6 million. We continue to believe operating expenses will remain in this range through the remainder of the year. interest expense, other income and taxes, we currently forecast our non-GAAP net loss to be approximately $730,000, or a net loss of $0.06 per share, based on roughly 11.5 million shares outstanding. Most of the difference between our GAAP and non-GAAP results is our stock-based compensation expense. We expect stock-based comp to be in the range of $800,000 for the next few quarters. For the balance sheet in Q3, we expect cash usage to significantly improve and be in the range of 500,000 to 700,000. With that, let me now turn the call back over to Brian for his closing remarks.

Thank you, Anthony. And one point of clarification I'd like to make is without the Q2 write-down, the gross margin in Q2 would have been approximately 56% at the midpoint of guidance, just to clarify. And now moving to my closing remarks. Before we move on to the Q&A, I want to reiterate that I am very excited about where we are as a company. We have the right suite of products and capabilities that are being used by a broad range of current and new customers. We've made a lot of strides in enabling the broader ecosystem with well-known firms such as Silicon Labs, Microchip, STMicro, and NXP. We continue to advance several multimillion-dollar opportunities forward, many more than we did even a year ago. The trends are clearly in our favor as the proliferation of machine learning and AI is driving the transformation of edge computing. QuickLogic has a strong product portfolio to address this transformation from our EFPG IP licensing, from our device business, or from the sensible AI software platform that sits on top and runs on anybody's processor. Most importantly, our financial performance is improving. As Anthony discussed in the revenue guidance for Q3, The midpoint of $3.8 million would be the highest revenue quarter since Q3 of 2015, with corresponding improvement to the bottom line. The transformation of QuickLogic continues, and we believe the best is yet to come in the very near future. That completes our prepared remarks. Operator, I would now like to open the call for questions.

Ladies and gentlemen, we will now have our question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may also press star two if you would like to remove your question from the queue. One moment, please, while we now poll for questions. Our first question comes from Suji De Silva with Roth Capital. Please proceed with your question.

Hi, Brian. Hi, Anthony. Congratulations on the new product growth and the guidance. Good auspicious start to the second half of the year. A couple of qualifications, first of all. The gross margin, I just want to be clear, I heard it right. Is the guidance 56% or 66%? I couldn't hear it quite.

66%, right?

Oh, 56%. I just want to be clear there. Thank you. And then 2Q1, the cash burn. 2Q21, what was the cash burn?

Go ahead, Anthony. Q2 cash burn.

The Q2 cash burn was, let me, give me a second. Sure. Yeah, so the Q2 cash burn was basically 1.94. 1.9 million.

Okay, great. Okay, great. Brian, the new product growth you're guiding for in 3Q21, obviously very impressive. What are maybe the one or two largest drivers there of that sequential growth, just to help us understand?

So the sequential growth drivers are related to upside in smartphone. We do have IP-related revenues as a big component of that coming in the quarter sequentially, and then some strength in the military business that falls into new products. So those are the three large drivers of that sequentially.

Okay. And then the... Brian, specifically the EFPGA, you cited one customer, I guess, in 2Q21. So is there revenue from that customer that flows through into 3Q, or is that new additional EFPGA wins in 3Q21 that are kind of building on top of it?

It's actually both, Suji. I like to say we're not in Kansas anymore. We had some in Q2, but definitely some of that is leading into Q3 from that customer as we have some customizations of that on top. But the big driver is going to be a new opportunity coming into Q3. And we've just got an influx of EFPGA opportunities specifically. Even before the call today, I was on two new calls with customers that wanted to talk about it, that had heard that we were doing things and wanted to start talking about doing a deal. So very different times. And a lot of the upside and interest we're seeing right now is on the EFPGA side specifically. And more importantly, because we are doing it with open source.

A couple last questions and I'll jump out of the queue here. The EFPGA wins. Can you talk about what end markets those are in? Is it DARPA military or is it broader than that? Any color there would be helpful.

It's broader than that. So some of the near-term revenue is related to audio processors and IoT broad market applications. We do have several in the funnel right now that are related to mill arrow defense that were initially brought to us through this whole DARPA toolbox initiative. Those generally take a little bit longer to close, I guess unsurprisingly, but the nearest term revenue is from more audio processing and IoT general purpose processors.

Okay. And then one last housekeeping question. The year, the mix of geographic European revenue grew significantly in the quarter versus two key versus one key. What was the, what's the, what's the driver there? The shift there. Thanks.

Well, I think Miller Defense is coming on strong, which has historically been Europe and U.S. for us. Asia-Pac for us with the smartphones is the big driver in Japan. But the state side and the European side is Miller Defense. And then some of the audio processors specifically is a European company.

Okay. Thanks for handing all the questions. Congrats.

I'm sorry, Brian. Sorry, just one other thing. The gross margin for... For Q3, just in case the audio broke up, is 66%, 6-6. That's what I was trying to get, 6-6.

Okay, great. Thank you, guys.

I picked up when I said that, and my apologies.

Thank you. Our next question comes from Sam Peterman with Craig Hallam. Please proceed with your question.

Hi, guys. Thanks for taking my question. I guess first one, Just on modeling, you talked about mature product. I think you said at the midpoint that'd be about a million next quarter. Just doing the math, if that's going to be flat versus 2020, that implies a pretty big fourth quarter. Is that primarily just timing of lead times and inventory, which looks like it's a little low right now? Or is there kind of demand drivers in there that should be aware of heading into F-22? Thanks.

Yeah, so historically, Sam, Q3 is generally a light quarter on the mature side for us. If you look back several years, a lot of that is because a heavy percentage of customers in that bucket for us are European, and a lot of them tend to take longer holidays during Q3. So that's one of the reasons why Q3, even at a million, is going to look light compared to previous quarters. We do expect that's going to be up next quarter, meaning Q4 this year. compared to Q3 as well as some other domestic demand on the mature side to get it back to that sort of on par with last year. And by the way, just on that note, just sort of anecdotally, we are starting to see some things come back online on the mature side from previous quarters. So it does seem like people are getting back into normal operating mode and building and consuming more products. So I think we'll see some uplift on that in Q4 on the mature side specifically.

Okay, great. That's really helpful. Second question just on the DARPA initiative. You know, I'm curious, are you seeing any response from your competitors in terms of, I guess, responding to your open source push, right? I think you guys are the only one in there doing EFTGAs that are open source. Do you see anyone else kind of starting to think about approaching the market that way? Or do you think it'll stay the way it is for a long time or for a while with just you guys really bringing open source FPGAs to that initiative?

In the near term, at least I haven't heard of any of our competitors jumping into the fray on this on the open source side. I've talked about it a lot in the past on these calls and in podcast interviews I've done. I think there's a fear. among companies to do that. And we were one of them for a long time before we got comfortable with how we could build a viable business around this. So I think that's going to keep people out of it for a little while longer, at least. On the other hand, when people join the fray and come into the open source side, then I think everybody can take comfort in saying, yeah, this is going to be much more mainstream and not as niche as maybe we thought. So that's a good thing, especially because, you know, open source collectively gets better for everybody. when more developers jump on board. But in the near term, I just don't see anybody doing that yet.

Okay. Thanks for that. I think just one more for me. I think you said the pipeline of strategic partners that you talked about was accelerating. I believe last quarter you talked about that pipeline, you know, kind of getting RFPs, RFQs in the tens of millions range total, I think, you know, you're seeing an acceleration that are you, you know, is that in a similar range of these are totaling, you know, tens of millions of dollars across those RFPs, RFQs. And then are you, are you also seeing an acceleration in, um, those RFPs, RFQs transitioning to, you know, customer orders? Um, and if you could talk a little bit about what you're seeing is driving, uh, driving that, that'd be great.

Yeah, so I'll start with the bottom line impact first. I mean, part of the sequential increase for our guidance of this quarter is driven from some of those advancing into the win stage, which is giving us the revenue impact this quarter. And I think next quarter and the quarter after that from the near-term opportunities that we've closed. Generally speaking, we're getting more million-dollar-type opportunities coming in, many of which that we already had are advanced. to the next stage in the engagement process. And then why, I guess the question is why is that, which is your last question. I think there's a confluence of events happening here. The supply chain shortages where people are getting absolutely cut off or they have to put two-year POs in place with suppliers, they don't like that. A lot of these companies have the scale to do their own chip design. And so why would they do that? They're looking at maybe they should do their own chips and take more control of their supply chain. And if they're buying FPGAs from Xilinx and Intel and Lattice, then, you know, if they're going to integrate and do their own chips, then why not get that programmable logic onto that same device? And that's where we come in with the IP licensing side. And so I think that's a big component of this is just the taking control of their own destiny and building their own chips and vertically integrating. That's one. The second is I think it's pretty well documented and understood that FPGA is a very good technology for implementing machine learning and AI. And there's a big push around the world to make things more intelligent. And how do you accelerate that? Or how do you deal with lower power? FPGA is a great technology for that. And so if you combine sort of this technical need with a business need, I think a lot of that is driving some very near-term demand to us as far as FPGA and eFPGAs go. Like I said, even this morning, I was on two different customer calls, new calls for people interested in this. And they're just, they're not happy with the status quo. They want to do something different. They have the means to do their own chips. but they need the IP, and that's where we come in.

Okay, that's great. Thanks, Brian. I think that's it for me. Thanks, Jim.

Thank you. As a reminder to our audience, if you'd like to ask a question, please press star 1 on your telephone keypad. Our next question comes from Rick Neaton with Rivershore Investment Research. Please proceed with your question.

Thank you. Hello, Brian and Anthony. Thanks for better news this evening. First off, I'd like to ask about the gross margin. Is the decision to write down the raw materials in Q2, is that a factor in the explosion of your gross margin to 66% in Q3? further benefits in future quarters from that?

Let me explain the way these things work, Rick. So periodically, we have to evaluate our inventory against future demand. And if we don't see opportunities or orders for the future demand, then we take reserves. And then, of course, if we've taken a reserve, then yes, in the future when we do sell it, we'll get the gross margin benefit at that point. But the gross margin that Anthony guided to for this quarter is independent of those reserves that we took last quarter so it's it's not an artificial inflation it's a real gross margin number because we have a higher component of higher margin product revenue and ip related revenue in the quarter which again i think this is evidence of this model that we've been talking about that as we can transform the company to have a higher degree of software in ip sales and licensing and royalties we are going to see that gross margin uplift into the mid and hopefully high 60s in the future not from artificially you know, taking reserves against products and selling them in the future, but actual real product gross margins.

In your new product guidance for Q3, how relevant is Sensible's progress and partnerships in that number?

It's relevant but not material enough that we need to break it out as a separate number yet.

Okay. When you talked about issues in packaging, most companies are seeing various supply chain issues with their customers or the end users of their customers, maybe accounting for 4% or 5% softness in their revenue. possibility included in your 3.8 million midpoint for Q3? First off, is that 4, 5, 6% number relevant to you since you differentiated your product demand from other typical OEMs? And then secondly, is that a fair number to, if that is a fair number, is that built in to the 15% plus or minus.

Sorry, Rick, I'm not following the 5% you're talking about. Can you elaborate a little bit more?

Okay. Some companies, I'll try again. Some companies are saying that their revenue, they could have shipped 5% more revenue in quarters, but due to supply chain constraints, their shipments are constrained. um what i wanted to know was first is that a relevant number for quick logic and secondly if so is it built into your guidance with the plus or minus 15 percent so it's not relevant the point i was trying to convey in the prepared remarks is that we acknowledge that there are challenges in the supply chain specifically on the packaging side

but we are not constrained in our revenue this quarter because of that. We've worked with our supply chain partners. In fact, we've brought up second sources in certain cases where things were like absolutely constrained and we couldn't get enough product to fulfill future pre-os or forecast. So we brought on second suppliers, second sources so that we could fulfill that demand and forecast. So the current quarter is not capacity constrained and there's no 5% softness as a result of that. I can't speak to what other companies are saying to you, but that's not the case for us.

Okay. And longer term, are you confident in your supply chain should your demand keep expanding the way it has been this year for new product?

Yeah, I think so. And, in fact, the evidence I would use is that we already have gone through a situation where we didn't have enough supply on a specific package substrate for some of the demand that we're seeing this year. And we went out and we got a pin-compatible second source for that so we can continue to fulfill the demand. So I think we have a very good relationship with the supply chain. We work with the leading companies in the world in that sense, TSMC, Global Foundries, Amcor. They have lots of capacity that they're allocating. We've got a good relationship. And you know what they're really asking companies for is for forecasts. And if you give them a forecast and you're hitting the forecast, they're going to give you the capacity. And we're doing that. And like I said, if they're constrained in certain areas, we work with them to qualify a second source for that component. So I don't see us having an issue with that. But we'll see. Like I said in the prepared remarks, we're going to continue to monitor this as it evolves.

Okay. So the supply chain is an opportunity for the supply chain problems for others is creating opportunity for you. And at least, uh, in the near future, you don't see any issues constraining you. That's, is that how I should take your remarks?

Yeah. And in fact, I'm smiling right now because there are in fact, uh, some FPGAs, some low density FPGAs that, uh, It's very difficult to get from competitors right now through common distribution sources like DigiKey and Mouser. And that's one of the reasons why those distributors, I won't say names, but people that have reached out to us to add our product to their distribution channels so that they actually do have parts that they have able to sell within weeks as opposed to quarters because of lead time. And so that's like in the prepared remarks, I talked about DigiKey and Mouser. So you're going to see QuickLogic devices on DigiKey. very soon, which is another very large worldwide stocking distributor, partly because of these supply chain issues. People want low density FPGAs, they can't get them. They have to wait until February of next year. That's crazy. We have things in stock and we can handle that. So we're going to start pushing, I think, a little bit more into that territory as a result. So yeah, I do think there's an opportunity there because we've navigated and managed that challenge on the supply chain side.

Okay. Okay. Thanks for that extra color on that issue. And thanks a lot, Brian. Appreciate it.

No problem. Thank you, Rick.

Thank you. Our next question comes from Martin Yang with Oppenheimer. Please proceed with your question. Mr. Yang, you may proceed with your question.

Thank you. Thank you for taking my question, Brian and Anthony. My first question is on your assumptions behind the annual guidance. You're expecting revenue to be up by 50% year-over-year. Is the potential income from the strategic initiative, which you haven't really identified a target timeline for the funding part of that annual guidance?

The specific strategic initiative that I mentioned in February and updated on on today's call is not part of the financial outlook for this year. For Q3 and for Q4 this year, it is all based on other opportunities that we have closed or darn near closed to the point where I felt comfortable to include in that guidance for Q3 and outlook for Q4, not that other strategic one. But that one came in that is upside.

And on the Digi-Key distribution agreement, is it right to understand right now it's sensible toolkit only and that you will add the devices and the dev kit later?

That is correct. And it's not just a lot later, it's imminent.

Can you maybe help us frame the potential revenue impact of signing on another major distribution partner how big of a boost that potentially can be for your revenues?

Yeah, I mean, I think this year could be tens to hundreds of thousands of dollars through those because those are basically in that timeframe, you're talking about customers that are looking for immediate product to start prototyping either a new design or perhaps they're not able to ship their product because they were designed with other things that are not available. And so they need to switch components to something else, which means a new printed circuit board. So given we have a handful of months left in the year, we're talking about a small amount of revenue impact this year. Looking forward, though, we're talking about tapping into the broad swath of the market in terms of design engineers. And from day one, when we launched this whole new open source initiative and serving the masses, people were asking, hey, You need to be in a big distributor like DigiKey. You need to make it easy for me to get my credit card out and buy a device. Same with Mouser. You need to get on Mouser. So I think we've done that now. It's what the engineering community likes and prefers. Our own engineers, in fact, prefer that, buying stuff off of Mouser and DigiKey. So I think it's just removing another hurdle or speed bump for people to start prototyping with the technology this year and then, of course, getting into higher volumes next year.

Got it. The final question from me is on Sensible. Can you give an update on what do you consider the pipeline, how that pipeline of potential subscribers or paying users has changed since last quarter?

I would say that we have grown the community users for sure since we launched the community edition. We also launched a new price tier that's more of a project-based price tier because There were folks that were uneasy to sign up to the $10,000 SaaS from free to 10,000 a quarter. They wanted something more in the range of several thousand dollars that they could go through the whole full cycle before they commit to the sort of the longer term five digit SaaS fee. And we've seen some uptake on that version. There are some very large customers that have come in now. We're talking very substantial customers, very well-known names. that have come in and we have signed agreements with them that actually couples the sort of project-based, the SaaS-based with a little bit of a services side from us because a lot of people, they intuitively know that AI can help and they want to use it, but they don't quite have the data science expertise to actually build something yet. And so we're seeing some ask on their part to bundle in a little bit more of the services side to sort of teach them how to use AI effectively. And so we're seeing some of that progress happen in this quarter also that I think is going to be a good sign for future quarters. Really gets people more comfortable and removes that speed bump, that hurdle, to get them on board the platform. You know, sometimes we forget that AI is still, you know, we've been reading about it for years, right? But I think there's a big difference between us reading about it and people actually that are not data scientists trying to implement something with AI. And so we recognize that and we're trying to sort of adapt our go-to-market strategy to help serve the big customers that do have, you know, the money to invest in it, they just don't know how to use it. So we're trying to get them through that cycle.

Yeah, understood. Thanks. Yeah. Anything else, Martin? Okay.

Ladies and gentlemen, we have reached the end of our allotted time. I would now like to turn the floor back to Brian Faith for any closing remarks.

In closing, I want to thank you for participating in today's call and continued support. We look forward to speaking with you again when we participate in upcoming investor events and again when we report our third quarter results in November. Have a great day.

Ladies and gentlemen, this concludes today's webcast. You may now disconnect your lines at this time. Thank you for your participation and have a great day.