QuickLogic Corporation

Today's call is being recorded for replay purposes through November 24th, 2021. I would now like to turn the call 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. 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 recent 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 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 third quarter fiscal 2021 financial results conference call. Our Q3 results were among the best QuickLogic has ever reported. Revenue of $3.9 million was the highest we have generated in six years, and due to a higher mix of software and IP-related sales, non-GAAP gross margin was 73%, an all-time record for QuickLogic. We also made significant progress on our bottom line with a non-GAAP net loss under $400,000, the lowest since Q4 of 2010. And when we include our outlook for Q4, which Anthony will provide a bit later, our revenue for the second half of fiscal 2021 alone will be almost the same as we reported for all of fiscal 2020. These results further validate that our transformation to a platform company focused on enabling more edge, artificial intelligence is well underway. We are doing this by marrying our decades of expertise in programmable logic with the power, breadth, and continually expanding open source software and hardware ecosystems. I am very proud of the QuickLogic and Sensible teams for their amazing accomplishments and thank them for their dedication and efforts to get us to where we are today. Since we embarked on this new path forward nearly two years ago, our commitment to leveraging open source is fueling what I believe to be a once in a multi-decade opportunity to disrupt the mature FPGA market. QuickLogic has quickly established itself as one of the leaders in this fast-moving market. We are now at the tipping point for scaling this new approach more broadly, which is coinciding with accelerating market demand for embedded FPGA IP cores and FPGA devices that are supported by open source tools. With our powerful combination of leading edge products, growing customer and industry relationships, and an increasing network of distribution partners, I am even more confident that we are beginning of a long-term trajectory that will deliver higher revenue and earnings, which should ultimately lead to improved shareholder value. Now I want to move into some of the items that drove our third quarter results and developments that will serve as the building blocks for our future success. First, let's start with a significant development that strengthened our financial position. At the end of September, two of our longtime shareholders approached me about making a strategic investment in the company. These holders recognized the tremendous opportunities ahead. The transaction was done at no market discount, raising a little over $1 million. The funding should ensure we have the capital to execute on our near-term growth objectives. We also announced our largest eFPGA contract ever, a $2 million design win. Part of this revenue was captured in Q3, with the remainder expected in Q4. This was an intense and lengthy process. The customer performed an extensive evaluation of several programmable logic companies. Ultimately, they chose QuickLogic because of our proven track record in delivering high-quality programmable logic devices, eFPGA IP, and FPGA user tools combined with our strategic Quark open source initiatives. This is the first of what we believe will be several seven-digit opportunities, which makes us excited about the prospects for 2022 and beyond. Also in September, we formally announced the Astralis eFPGA IP generator, which is the opening to what I believe is a new era of mass FPGA and embedded FPGA customization. The Astralis tool is going to be a game changer. The Astralis tool generates eFPGA IP in a highly automated way, including the implementation of customer-specific variants. The tool is built with scale in mind with the ability to generate an eFPGA IP core for a new foundry and process node within a few months and derivatives to currently supported foundry and process node combinations within weeks or even days. To be clear, we will use the Australis tool to address multiple challenges and opportunities. Developers will be able to create eFPGA implementations for intellectual property protection, offloading and hardware acceleration of artificial intelligence or machine learning processes, or simply create a range of product variants for fragmented markets. Being able to do all of this quickly and with the flexibility to easily target the same node as the SOC means that these significant benefits come at a very low cost. We are already seeing the Astralis tool pay dividends. A few weeks ago, we announced our first customer success story, in which we used the Astralis tool to generate a customized eFPGA IP for UMC's 22 nanometer process. More importantly, this was a new foundry and process combination for us, and we were able to go from contract to IP delivery within only four months, substantially faster and with much less development costs than with our previous development methodology. The customer Motivations reflect many of the reasons we believe that using embedded FPGA technology for SOC applications is a smart technical and business decision. Being able to execute quickly and with the flexibility to easily target the same node as the SOC is using means that these significant benefits come with a very low cost and a very fast time to IP delivery. We are seeing an increase in RFPs and RFQs for our eFPGA IP, and this is exactly what the Australis tool enables. leading to better market penetration and financial results for us in the coming years. Those are some of the key announcements we made since our last call. Now I want to offer some comments about what we are seeing near term for our EFPGA business. We are currently working on several initiatives that have the potential to generate tens of millions of dollars in revenue over the next three years. Given the sensitivity of these programs and confidentiality restrictions we are bound to, We can't discuss companies or give granularity on applications. However, from a 50,000-foot level, let me cover the following. We recently signed a large, very near seven figures, ESPGA-related contract for a process technology we have not targeted before. We will be using the Australis tool to go from customer contract to IP delivery in less than two months, a record for us. We believe this will likely lead to a follow-on multi-million dollar contract in 2022 with additional opportunities in future years. These types of opportunities would simply not have been possible a couple of years ago. Now, through our eFPGA initiatives, growing presence with the open source FPGA Foundation, and an expanding toolbox of key products, we have the opportunity to bid on significant proposals and execute for revenue. Outside of our eFPGA business, we announced a strategic partnership with Rubidium Limited, a leader in voice recognition and always-on voice trigger software. We are providing Rubidium a complete voice recognition solution based on our very low-power EOS S3 voice and sensor platform, which they will combine with their own voice user interface software. This is very attractive for IoT Edge applications, particularly those that are battery-powered or lack cloud connectivity. Our Sensible business continues to gain traction. Recently, we announced that Sensible has teamed with OnSemi, one of the semiconductor industry giants, enabling the development and integration of AI-based algorithms into their manufacturing, robotics, or predictive maintenance applications without needing to have expertise in data science or AI. The OnSemi RSL10 sensor development kit, combined with the Sensible tools, has produced a compact but sophisticated platform that's perfectly suited for driving next-generation Industry 4.0 solutions. This is a major win for Sensible. We once again expanded our distribution channels, finding a worldwide distribution agreement with Digi-Key Electronics. Our ESS3 low-power microcontrollers and PolarPro3 low-power FPGAs, all supported by 100% open-source software, as well as our dev kits, are now available through that channel. This agreement is complementary to the agreement Sensible signed with DigiKey earlier this year. Our partnership with DigiKey is an important milestone in our global growth strategy and increasing our presence worldwide. Our smartphone-related sales came down a little as expected in the third quarter after a very strong Q2, and we expect them to come down a little further in Q4 as our smartphone customer prepares for their next smartphone launches. Despite that sequential drop for the year, we are proud to say that our smartphone revenue will be approximately 60% higher than the prior year. We ended the quarter in 10 phones, including multiple 5G models. A new smartphone was just launched yesterday that includes our EOS S3, and we believe our lead smartphone customer will continue to use EOS S3 through 2022 and into at least 2023 on multiple models. With respect to the supply chain issues that have been discussed by many companies, our lead times have increased for the final assembly and test productions. What used to be a six to eight week turnaround is now stretching to six months or more. We are countering some of the delays by leveraging our inventories of substrates and finished materials. However, this issue is not going away anytime soon, so we may need to build additional inventory ahead of customer shipments to minimize risk. Finally, in our mature product segment, revenue decline is expected. Ongoing supply chain issues impacting our mature customers particularly in the civilian aerospace market, in addition to the lingering effects of COVID-related business disruptions, continue to hold back revenue in this segment. Without good clarity, it is difficult for us to see how mature revenue will be much different in the first half of fiscal 2022 than it will be in the second half of fiscal 2021. I know I have covered a lot of topics that will be instrumental in our ongoing business and financial improvements. Simply put, 2021 is proving to be the most pivotal time in QuickLogic's long history. It has not been easy, and there may still be bumps in the road in the future. However, the financial results we are reporting today and the outlook we have for both near and long term are the proof points validating that our transition is succeeding. With that, I will turn the call over to Anthony.