QuickLogic Corporation (QUIK) Q2 2015 Earnings Report, Transcript and Summary

Ladies and gentlemen, good afternoon. At this time I’d like to welcome everyone to the QuickLogic Corporation's Second Quarter 2015 Earnings Results Conference Call. During the presentation all participants will be in a listen-only mode. A question-and-answer session will follow the company’s formal remarks. [Operator Instructions] Today's conference call is being recorded. With us today from the company are Andrew Pease, the President and Chief Executive Officer; Sue Cheung, Principal Accounting Officer, and Brian Faith, Vice President of Worldwide Sales and Marketing. At this time, I’d like to turn the call over to Andrew Pease, President and Chief Executive Officer. Please go ahead, sir.

Thank you, and good afternoon. The conference call is being webcast and a portion of it will be accompanied by a slide presentation. You can access the slides by going to the Events Section at ir.quicklogic.com. As was noted in our April 30, 8-K filing, our former CFO Ralph Marimon left QuickLogic to accept a similar position with Aviat Networks. This was a very good opportunity for Ralph and we wish him well. After careful consideration we decided to delay appointing a new CFO. Instead, we will invest in bolstering our customer facing efforts by splitting the roles of sales and marketing and hiring a new VP of Sales. As VP of Marketing, Brian Faith will focus on closing the strategic opportunities he is been driving, expand on our marketing efforts around the EOS platform and lead our newly formed investor relations counsel. Brian, will also be responsible for business development, including expanding our growing risk of ecosystem partners. While our longer term plan is to add a CFO, in the interim we had promoted our Corporate Controller Sue Cheung, the Principal Accounting Officer reporting directly to me. Sue joined QuickLogic in 2007 and was promoted to corporate controller in 2008. As controller, Sue drives our accounting and financial budgeting functions and maintains our Sarbanes-Oxley and SEC reporting compliance. Sue also PhD in business administration, a masters degree in accounting and is a certified public accountant. With that, please welcome Sue to her first quarterly conference call.

Thank you, Andy. And good afternoon. I am excited to participate in this call. Before we get started, I'll take a moment to read our Safe Harbor Statement. During this call we'll make statements and refer to presentation slides that are forward-looking. These forward-looking statements and slides involve risks and uncertainties, including but not limited to stated expectations relating to revenue from our new and mature products, statements pertaining to our design activity and our ability to convert new design opportunities into production shipments, market acceptance of our customers' products, our expected results in our financial expectations for revenue, gross margin, operating expenses, profitability and cash. QuickLogic's future results could differ materially from the results described in these forward-looking statements and slides. We refer you to the risk factors listed in our Annual Report on Form 10-K, quarterly reports on Form 10-Q, and the prior press releases, for a description of these and other risk factors. QuickLogic assumes no obligation to update any such forward-looking statements. For the second quarter of 2015, total revenue was $5 million which was at a low end of our guidance range. New product revenue totaled approximately $3 million and was impacted by lower than accepted shipments to Samsung. Mature product revenue totaled approximately $2 million. Samsung accounted for 41% of total revenue during the second quarter, as compared to the 39% during the first quarter. Our non-GAAP gross for the second quarter of 2015 was 44% and was above the midpoint of our guidance. The higher gross margin was driven by a more favorable mix than we anticipated. Non-GAAP operating expenses for the second quarter totaled $5.7 million, which was favorable to our guidance. This is primarily due to the timing of the engineering [ph] related expenses and a reduction in administration cost. On a non-GAAP basis, the total for other income expense and taxes was a charge of $69,000. This resulted in a non-GAAP loss of approximately $3.6 million or $0.06 per share. We ended the quarter with approximately $26.4 million in cash. Cash declined by approximately $1.8 million, which is better than our guidance due to timing of working capital commitments. Our Q2 GAAP net loss was $4.3 million or $0.08 per share. Our GAAP results include stock-based compensation charges of approximately $491,000 and restructuring charges of $169,000. Please do see today's press release for a detailed reconciliation of our GAAP to non-GAAP results. During the second quarter, we completed an operational realignment initiated earlier in the year. This resulted in a reduction of 9 employees or 9% of our company's global workforce. Pursuant to this plan, we will incur approximately $300,000 in total severance related cost. We recorded $169,000 in restructuring liability in Q2, and the remaining amount will be exclude during the second half of 2015. Out total annual cost to savings was approximately $1.2 million with saving split about a 50-50 between cost of sales and operating expense. We will benefit modestly from the cost of savings during the second half of 2015 and anticipate that full benefit beginning in Q1, 2106. Now I'll turn it over to Andy who will update you on the status of our strategic efforts.

Thank you, Sue. Our engagement design win activity continue to grow, in line with our expectations we received purchase orders for our S2 from five customers last quarter. However, one order came in late in the quarter and that pushed the shipment into early July. Since our April conference call customer engagement have increased by more than 20% and we are currently schedule to support eight unique wearable design wins with production shipments of our S2 platform this quarter. However, volume in wearable market remains modest and based on our current customer forecast we think the growth in S2 shipments will be offset by an anticipated decline in smart productivity shipments in Q3. Last quarter we formerly announced our decision to expand our business model to include licensing our SenseMe algorithm library. As noted during our April conference call, we believe that establishing SenseMe license contracts would enable us to secure commitments for a QuickLogic silicon with customers that initiate with SenseMe. As we turned out, that is exactly what happened with one of our first engagements. This customer is a well recognized European company that provides a suite of applications products and services that track and manage health and fitness data. We have already received the additional production orders of our S2 platform for shipment this quarter. In addition, we have ongoing SenseMe engagements with vary large OEMs that all have high brand name recognition. We expect to close one or more of these opportunities this year. Tomorrow, we will be issuing two press releases. The first is to introduce our new revolutionary EOS sensor processing platform, previously referred to as ArcticLink 4 S3. In the second, we will announce our partnership with Sensory, the leading supplier of voice recognition technology. Brian Faith has spent the last two weeks briefing the technical press and market research analyst on the EOS platform. He will now share in a bridge version of that briefing ahead of tomorrow’s press release. A PDF version of this PowerPoint presentation will be posted on our IR web page on Thursday.

Thank you, Andy. And thank you all for joining us this afternoon. Tomorrows EOS press release will be quite bit longer and more detailed than our typical press releases. We want our customers, investors and editors to better understand why we believe that EOS platform is a truly revolutionary design approach that supports the need for high computing capabilities at an ultra low power consumption level that can not be achieved with traditional MCUR architectures. EOS was designed specifically to address the smartphone market where it will be used as a companion to the applications processor and as a true system-on-chip or SoC for wearable and IoT applications. According to IHS iSuppli [ph] these markets are expected to grow to over 2 billion units by 2019. The vast majority of the sensor processing applications deployed today require minimal processing power. This means the processing can be done in a typical MCU running at a very low duty cycle and power consumption. The challenge these designers face today is they can deliver the processor in terms of applications like those shown on the right with the current design approach without increasing power consumption far beyond what they say is a tolerable limit. The industry standard measure for computing is MIPS. This represents how many millions of instructions are being processed per second. On slide four, you'll see a chart proximate MIPS [ph] across the horizontal access and power consumption on the vertical access. The color coating on this chart shows the approximate power consumption levels that smartphone designers find acceptable, unacceptable and in a shaded yellow band negotiable. As you can see, a typical flask based MSU using an ARM Cortex-M4 Core moves into the red area fairly quickly. That means to enable the advanced applications that consumers want, smartphone designers will need to take a fundamentally different design approach. EOS is different, and we believe marks the dawn [ph] of micro power sensor processing. EOS represents the unique purpose built multi core architecture that is optimized for processing sensor data. And from day one software engineers will be able to implement their design using a programming environment similar to what they have historically used for MCUs. Slide six shows a high level block diagram of the EOS multi core architecture. We design the EOS platform to run the majority of the always on real time processing in purpose built hardware and then occasionally use the industry standard ARM Cortex-M4 general purpose processor for other task. As compared to previous generations, we have hardened our sensor manager and our pattern pending flexible fusion engine in the EOS platform. This radically improves our computing capability, reduces the required silicon area and further lowers power consumption. As you can see in the dark green block on the right, we also maintain the embedded ultra low power in system reprogrammable FPGA. This provides a unique way to deliver hardware differentiation that is not found in any of the MCU sensors hubs in the market today. This graph is similar to the one we shared with you during our April conference call. The primary difference is through design optimizations, we are now able to target even higher performance with our FFE. The flash based Cortex-M4 MCUs running at maximum processing capacity take more than 3.5 times the power of the EOS S3. The EOS S3 also has 70% more processing capacity. This combination of processing capacity and ultra low power enables smartphone designers to deploy the advance algorithm driven application consumers want. Smartphone and wearable device manufacturers are rapidly moving towards applications driven by voice recognition. Sensory is the leading supplier of this technology with over 1 billion handsets in the market using it’s truly hands free product. The challenge today is smartphone and wearable device manufacturers need to reduce the power consumption of voice recognition applications. EOS addresses this problem by implementing Sensory's low power sound detector block in hardware, thereby lowering power consumption by 80%. This next slide illustrates a typical smartphone system architecture and shows how the EOS S3 platform can be used a companion to the application processor. In this design implementation EOS handles the always on real time sensor processing, as well as always listening voice recognition applications. This minimizes the need to wake the application processor resulting in lower system level power consumption. This slide illustrates the EOS S3 in a wearable or IoT architecture using a Real Time Operating System or RTOS. Since there is no need for an application processor in an RTOS system EOS is used as the host, sensor and voice processor. This means wearable and IoT designers using an RTOS will be able to minimize chip count, cost and power consumption by using EOS as a system on a chip or SoC. We could talk for hours about the EOS S3, but I think Tom Hackenberg from iSuppli sums it up very distinctly in this quote, power efficiency sensor hubs such as QuickLogic EOS platform will be the enabling hardware that allows device designers to quickly and easily incorporate multiple advanced features without increasing power drain. Thank you for your patience in going to a high level briefing on the EOS S3. For those of you with more detailed questions we will have a longer presentation available on our website at www.quicklogic.com/EOS.

Thank you, Brian. As you might guess we're enthusiastic about the EOS platform and I think for good reason. I am pleased with the reaction from the technical editors and research analyst Brian has briefed during the last two weeks. As I noted last quarter, we initiated an EOS effort engagement earlier in the year with the top five smartphone customer. This out for customer remained deeply engaged. We've been very selective in committing resources to these intense engagements focusing our efforts on the ones that will deliver meaningful feedback and have high ROI potential. With the experience we've gained from the first half engagement, we're in the process of evaluating a second half engagement with a well recognized smartphone company. We will continue to enlarge our engagement funnel as we move towards releasing EOS samples later this quarter. While our focus today is on our sensor processing systems and software solutions, we continue to win new display bridge and smart productivity designs. During the coming weeks you'll see press releases covering two recent display bridge wins with Lenovo available products. While we don’t anticipate these will drive significant near term volume, we're excited to be involved with a market leader like Lenovo. I want to take a few moments to provide you with more color on the realignment program we announced in our press release today. Sue has already provided you with the data you need to model the cost and savings, but that’s only part of the story. Our goal is simple, reduce overhead and increase the percentage of customer facing and technical employees driving our sensor processing initiative. We achieved that goal. I'd like to turn the call over to Sue, who will provide our Q3 guidance and then I'll return for my closing remarks and Q&A.

For the third quarter of 2015, we’re forecasting total revenue of approximately $5 million plus or minus 10%. The $5 million in total revenue is expected to be comprised of approximately $3 million of new product revenue and $2 million of mature product revenue. New product revenue reflects a continued shipments of our display solutions into the tablet segment are expected to ramp of S2 shipments, while partially offset by a decline in smart connectivity CSSP revenue. As in prior quarters, our actual results may vary significantly due to schedule variations from our customers which are beyond our control. Schedule changes and projected production start dates could push or pull shipments between Q3 and Q4 and impact our actual results significantly. On a non-GAAP basis, we expect the gross margin to be approximately 41% plus or minus 3%. We anticipated a decline in gross margin as we [ph] expected to shift in our product mix. We are currently forecasting non-GAAP operating expenses to be $5.7 6 million plus or minus $300,000. Non-GAAP R&D expenses are forecasted to be approximately $3.4 million. The increase in engineering expenses is primarily due to costs associated with the release of our new EOS platform. Our non-GAAP SG&A expenses are forecasted to be approximately $2.3 million. Our other income, expenses and taxes will be a charge of up to $60,000. At the midpoint of our guidance, our non-GAAP loss is expected to be approximately $3.89million or $0.07 per share. Our stock-based compensation expense during the third quarter is expected to be approximately $500,000. During Q3, we expected to grew approximately $70,000 in restructuring charges as was the case last quarter, our non-GAAP result were now reflect this charges or charges associated with the stock based compensation. We expected to use approximately $3 million to $3.5 million in cash, the forecasted cash usage is primarily driven by inventory purchases of certain new product and expenses related to new chip development. Let me now turn the call back to Andy, for his closing remarks.

Again, thank you for joining us. Our ArcticLink 3 S2 platform has been well received by a wearable device manufacturers. This is evidence by the fact we are forecasting production shipments for a unique design this quarter and growing number of engagements that we believe will continue to deliver new design wins going forward. While this is impressive, the aggregate volume of the wearable devices remains relatively low and that continues to way on our near term revenue outlook. Our SenseMe algorithm initiative has been a critical component in our engagements. All of our designs that are schedule to move into production, include our SenseMe algorithms and we expect it will continue to benefit our sales effort for the S2 and EOS platforms going forward. We continue to make good progress with our EOS out with customer and with the EOS platforms to be formerly introduced tomorrow, we anticipate our engagement activity will accelerate. We believe EOS is the right solution for the high volume smartphone industry and that enables the next generation applications customers want. With that, we'll turn the call back to the operator and open the floor for your questions.

[Operator Instructions] Our first question comes from the line of Krishna Shankar with ROTH Capital. Your line is now open.

Yes. Congratulations on the EOS platform introduction. Andy and Brian, I wanted to get a sense for these eight new engagements that you have, I guess you are starting to ship modest volumes to these variable customers? I think in the last quarter you had mentioned Telepathy in Japan and also Foxconn, can you give us some sense for the new customers for the variables and what the volumes opportunity maybe over the next several quarters for these variables which is the S2 platform?

So Krishna, I'll take the question about the types of products and then I think Andy will address the upcoming quarters. Basically these are all wearable devices, risk one variables with these new projects. And previously we had talked about wearables that were running a high level operating system like Android, but what we're seeing now is some of these engagements moving to smaller contractors and more real time operating system based. So I am actually pretty excited to see that we're getting beyond just the standard Android wearables in this case.

Yes. So in terms of the volumes, right now the visibility as you might expect is somewhat limited. One thing I will say as we alluded to this European customer and we hope to be able to announce this customer later this quarter. I think by getting into the more name brand companies that will give us an on trade to actually hitting from leaders in this industry. And once we get into leaders in this industry I would hope that the revenue potential for each one of these opportunities will pick up. But for right now, like I said it’s a relatively modest and I think Brian second [indiscernible] in the chart iSuppl kind of confirms that central hubs in the wearable market is a very thin market.

Okay. And then, so you said you had eight qualified engagements, are you shipping sort of limited volumes to all of them or where do you stand with respect to the other unannounced partners in that eight?

Right. So of the five – so of the eight, five we have actually shipped already, so remember we said we shipped five in Q2 and one of them the order came in so late in the quarter that it really shipped in July. So it’s certainly shipped now, but I don’t think we can count that as a Q2 shipment. The others we expect to get purchase orders during the quarter making it a total of eight that we will ship what they are calling production volume. And we're trying to be careful not to include pre-production in this and this is will be products that will be announced.

Okay. And then I know you just give – forecast one quarter at a time, but would you expect a good sequential growth in Q4, just given these new customers ramping products and perhaps some positive seasonality in the tablet, display Beijing [ph] market in Q4?

Right. Yes, I think, yes, we typically only forecast one quarter out and what you really asking for is can I get more color beyond that and I think I owe it to the investment community to try and be as open as I can without obviously going to MDAs or anything else. I personally believe that this Q2, Q3 time period is really going to be the bottom for us, both in new and total revenue. I believe that the S2 will continue to be shipping and increase numbers and I am hopeful that as we get these name brand people under our belt that the volume should be able to increase from that. In terms of smart connectivity, I also believe the smart connectivity revenue should stabilize also in this quarter and that we should see the bottom in this quarter and that should also increase. I am happy to believe that the display revenue business should increase into 2016 and with the sampling of EOS occurring at the end of this quarter then we should start seeing production wins to occur in the first half of 2016. Of course, timing of these things vary and all the comments I think I made really are independent of any political or economic situations that could occur in the world. But I am trying to give you my best view of our business and how I believe it will layer in, in the next year.

So production wins for EOS also with Alfa customer you talked about last quarter, you would expect that to potentially materialize in the first half of 2016…

Yes.

That into second top five customers that you announced today?

Right, right. Yes, so if you think about it, this Alfa customer that – this EOS Alfa customer has actually been working with us for probably a couple of months and that we have a emulation platform, actually emulating to chip, because they obviously don’t have working silicon which will be provided to them this quarter. So once they have working silicon then we go through the normal design process and I think most people on this call understand that smartphone design processes can take anyway from six to nine months.

Great. Thank you.

Next question?

Thanks, Krishna.

Our next question comes from the line of Gary Mobley with Benchmark. Your line is now open.

Hi, Andy. Hi, Brian. Welcome to the call. I had a question about EOS, and how it differentiates from the S2 from a customer perspective and from an end market perspective, correct me if I am wrong. But is it transformed for the company from the perspective that it allows you to address the smartphone market more ably versus what you had in the S2 product portfolio which was for the most part confined to wearable devices type design wins?

Yes. I think that you hit the nail on the head Gary. When we first came out with the S2, we believe that the market would need to have always on context awareness and that the MCUs could not do that as these applications got more complicated. It turned out that the MCUs could handle that with very low duty cycles, in other words, were mostly off as opposed to on and also you're dealing with a phone that had a much bigger battery. So that’s – and we talked about this at the beginning of this year that the S2 was really a very well suited for the wearable market, especially the non-Android wearable market. We also said as we were trying to tell people that the S3 what you were calling the ArcticLink 4 S3 probably a year ago, that that was always being targeted for flagships smartphones. And I think you can see from the architecture – the brief architectural, the description that Brian gave you, that this was every bit of what MCU guys were doing in MSOP. We call it a multi core because it has three hard cores and we can also put a fourth hard core in a programmable logic. And so the possibilities and the capabilities of this product are really amazing. And frankly, the real technical savvy, technical press people that have heard about this are really amazed that an FPGA company has come up with this type of programmable, really SoC. I think this is a true, first true SoC that QuickLogic has ever done and that’s why I am very excited about it.

Okay. Could you give us an update on the longevity and the health of your video bridge design win with Samsung?

I'll let Brian take a stab at that.

Yes. So I'll speak in general terms because due to non-disclosure agreements, I can't be specific about Samsung in this business or the roadmap. But I will say that in general when we look at all of our customers that were selling the bridges into, the display bridges, we do see that growing well into 2016. We continue to get new designs as Andy motioned, the designs, we do have we keep getting forecast that we saw before. And so we're optimistic about its going to well into 2016.

Okay. I see in you balance sheet you have a line item, deferred revenue of about 150,000, is that indicative of the upper end license payment for the algorithms and is there any ongoing royalty component to it and if not could you maybe talk about how you can transform that seemingly very small license payment into something more meaningful revenue contributor, whether it be in the form of royalties or actual parts?

Yes. So, well, I am going to let Sue take a stab at that.

We have a very little software revenue thing in the Q2, but I like to say that, we have – our software revenue recognition policy that we have a three main component. First, that we have fixed range of maintenance, the support portion which we recognized over the term of the contract. And we – the major part of it is license fee we recognized in the quarter that we invoiced to customer. The third part is the royalty revenue, that we recognized the quarter after customer ship their product.

Yes. We spent quite a bit of time with our auditors structuring a software licensing policy that would be obviously confirming and that's why we divided up into these three buckets.

Okay. Great. That’s helpful. Last question from me, it relates to the cost cutting initiative. The handful of employees that were laid off, was that sort of across the board, administrative, squeezing so to speak or is it specific to a project that was not going to generate sufficient ROI?

Yes. That’s good question. So of the nine employees we – almost the seven of them were actually what we would call in the SG&A category, mostly in operations with a fuel in finance. And there was two people that we would call technical or they were going to replace one of them down here and that we closed our Canadian operations. We were down to two people in Canada and the cost – and the complexicity of maintaining a separate operation in Canada didn’t make any sense, especially when we have most of our engineering its either in India or in Sunnyvale.

Okay. All right. Thank you, guys.

[Operator Instructions] Our next question comes from the line of Rick Neaton with Rivershore Investment Research. Your line is now open.

Thank you. Hello, Andy and Brian and Sue.

Hi, Rick.

Hi. I'd like to go back to some of the color you provided to Krishna, when you were looking beyond the third quarter. Two conference calls ago, Ralph suggested that next year would be the likely breakeven year. Does that still the…

Yes.

Right now?

Yes. It is Rick. As a matter of fact, we've done a first rollup of next year. I had the organization do that ahead of one we normally do it. And it does showed that we will be breakeven by the end of next year. Given all of the forecast and so on and so forth.

Okay. And that would be breakeven in quarters by the end of the year, not for the entire year?

That’s right, it would be a break – on a quarterly basis it would breakeven by the end of the year.

Okay. What is your breakeven point?

Well, so right now we see obviously it depends on what gross margin we're getting and it also depends on the timing of the expenses that we have for new chip development, because as you know we have somewhat of a variable chip development model. But given those things, with the restructuring we did, we're down to about $11 million, $11 million to $12 million per quarter, based on the gross margin of 50 points, which by the way…

Okay. So if you…

I am sorry?

I was just going to say so, if you can get back to where you were in 1Q, '14 that would be breakeven versus the small…

Yes, absolutely. Yes, absolutely.

Okay. And you were going to add to your answer?

Yes, now if lost…

Okay. Your cash situation is it enough to reach that breakeven point in the second half of next year?

Yes. We believe that our current liquidity with both our cash and our line of credit will also put us to reach that point. Of course, if the ramp is of new product shipments that exceeds expectations we may need to reach out for some more working capital. But of course, I think that be a great problem to have. But the way it looks right now, we think that we're in okay shape for cash, we're heading this quarter $26 million.

Okay. And looking – I am little confused by your comments on smart connectivity. Can you explain how you – on one hand are growing smart connectivity design wins, but the revenue is not growing?

That’s a great question. And I will definitely hand over to Brian.

Yes. I'll take that one. So first of all I think you may know, that there is been some fundamental shifts in the demand for PHS handsets in Japan due to some carrier acquisitions going on over there. So that’s definitely adversely affected some demand for our connectivity solutions going into those products. That’s been offset recently by purchases of certain new products by customers that tend to take single shipments every few quarters and we've had those the last couple of quarters and we see that that’s going to stabilize, as Andy said in his other comments, so.

Yes. That explains some of the imaginations that’s going on there in connectivity?

And Rick you may recall that maybe a couple years ago as we were going through our design activity before we got into the sensor market, the PHS market was pretty prominent. In our earnings call release as we talked about various design activity. So those designs have been shipping for a while now and now they tend to be bottoming out, as Brian said, mostly because of a shipping carrier and the focus of PHS market in Japan.

Okay. Appreciate that color. One other subject, concerns your SenseMe algorithm library. Going forward are you looking at a lot of licensing activity independent of your silicon going forward? In general is that part of the color you were giving to Krishna?

Yes. I think that was the part of the color we were trying to give. It’s definitely a key aspect of our engagement model now with customers. They like the fact that they have options where they can have world class algorithms in their own systems or in our devices at lower power. It really comes down to a timing question with the customer, they maybe out of point in their roadmap, where they are willing to spin hardware to adopt these algorithms and our silicon or they maybe at a point where they can't change hardware. But they really still want to have access to the high quality algorithms that we have. So in the latter case that’s where we'll start to see a pick in the SenseMe licensing and in the former case that’s where we'll be having the more vertically oriented solution that includes our software.

How quickly can say a smartphone OEM add to SenseMe library to an existing piece of hardware if it just wants to license your software?

It really depends on the OEM that we're talking about and how familiar they are with the inner workings of the sensor framework and Android. If they are very familiar with that and they have that framework built up and that’s their on framework and its very straight forward, its not a matter of weeks, in fact they could get that up and running with the help of our technical team. If its somebody that is looking to completely outsource everything to do with sensors, including the framework, then that’s going to be more like months, as opposed to weeks.

Okay. So, a OEM with product launch late this year or early next year could conceivably decide the license SenseMe but not use a silicon to their next model, is that what you're saying?

That is conceivably yes.

Right.

Okay. One last question is more of a financial accounting question. Is there an issue with developing vendors specific objective, rather than for recognizing your SenseMe revenue if it starts to grow?

Yes. We realized that problem, we discussed with our auditors. So our option actually we pulled that into our software license agreement as well. We've fixed standard of range for our PCS which is support and maintenance support portion. So we'll be able to [indiscernible] this amount from a license revenue to be able to recognize that a net license revenue in a quarter were avoid. So…

Do you anticipate breaking that out on our top line at some point?

Yes.

Okay. Thanks and thanks for allowing me the time for questions.

No problem, Rick.

No problem.

Our next question comes from the line of Robert West with Oak Grove Associates. Your line is now open.

Hello, Andy. Do you hear me?

I can hear you loud and clear Bob.

Okay. Great. Thank you. Thank you for taking the call. I wanted to start on the S3 if I could, you indicated that it should sample sometime in the next 60 days? I was looking to see if I could get a little more color on that, like has it taped that yet?

Absolutely. And what we committed to customers, as well as the press that we've been briefing is September 25.

Okay. Very good. So it has taped out then?

Absolutely.

Yes. Clearly.

Okay. Great. So will you have that in house for some period of time before it goes to customers or will it go from here directly to the customer or from the staff to the customer?

In the case of these, early take up spot, we always bring silicon back in house. We have all the systems and the engineers here ready to do all the verification that they've been preparing for. I'll actually will remind you that Andy talked about the emulation system that we've been giving out to this top tier guy already for working with functionality of the silicon, you can imagine that all of the verifications which are actually build up around that emulation system and so when the silicon actually comes back here all of the infrastructure will be set up to do a very quick verification, so that we can get the samples out to the customer.

Right. Okay. That’s sounds really good. I am pleased to hear that. Let me come back to the Alfa program, our S3 early access, I guess this EOS really access – excuse me. Clearly this program was I presume was now in primarily a smartphone OEMs and it sounds like that you have one customer and that its going to be hard for that customer to get safeguard [ph] six to nine months lead time, its going to be end of first half before revenue – US revenue, is that the way to look at that?

Yes. So I think with rewards guys I think you can certainly go with that timeframe, once we have the silicon out with the general population I can tell you that there are a lot of people that have looked at our S2 and said that the S2 does not have sufficient compute technology. They like – and they do know about the S3. So with the Alfa customer I think it is safe to say that they will follow along those lines for sure.

Okay. As relates to the presentation Brian that you gave, and I wanted to ask you if you could give me a little more color on the QuickLogic sense free, truly hand free program and partnership and describe that just a little more details if you don’t mind?

Sure. So one thing I'll mention is that the silicon level I talked about the low power sound detector block, that’s a sensory piece of IP that we have developed in our device with their permission by licensing it. That’s just the silicon level. If you look at the entire solution, what is that capability give customers? So basically what it does, as it allows people to do voice recognition for things like okay, Google call Bob West, that entire phase matching it, what I just said commit and deeply embedded at very lower power in our device without waking up the apps processor. The result is that people can have more voice recognition, enable the applications in their products from phones to wearables, knowing that the high net silicon is actually a very reputable voice recognition company and sensory. So it’s an ecosystem partner primarily, customers will continue to license that from them, knowing that it can run in very low power optimized hardware from QuickLogic.

Has that been licensed by Sensory and – or any other customer?

Yes. The voice recognition software calls really hands free, they've actually I think I had a footprint that we said over a 1 billion smartphones today have already shipped with it. So they definitely licensed that already for phones and watches, I believe in Moto 360 watch uses that for their okay Google what's step count, what's the temperature today type functionality and also some of the larger, very large smartphone OEMs also have existing licenses.

How is that implemented, is that implemented in a unique part or it’s in the software of the SoC?

Its all based in software and I think that’s one of the duties of the EOS platform is that now we're taking some of these elements that have already been running out in production where the environments and now we're optimizing those for even lower power consumption which frees up more MIPS of computational capacity to do other algorithms that these OEMs are wanting to do.

Okay. Very good. That sounds like really and usually good program and high demand program potentially.

I can tell you that’s one of the most exciting element of the platform for myself personally and also to the interactions of the press that I've been briefing.

Okay. Lets talk about one more thing, so readiness to – from maybe a slide, I don’t know which one, I couldn’t them very well, the numbers on, but anyway. The readiness to roll this out is pretty complicated, chip it seems to me, to roll this out and be ready to go, as I compare with the S2. I recall the S2 came out, but the development tools weren’t there, and lot of stuff that had to be done and took a long time and that – what didn’t help revenue ramp in it. So how is the US different?

Yes, that was sort of a journey back in time that evolved. I remember when we first launched the S2, I think we had proprietary tools or proprietary instructions that we had algorithms that from a third party and the developments as from that we have our demo [ph] systems actually had to be carried in large box and plugged into lawn and if we go now to what we have, I think you can step back and to see the maturity of the development tools that we have available now. We have the software tools for the EOS field have direct plugged into a clips IDs which is the standard tool that software programmers use. We have our C Compilers [ph] they can take standard C and compile it down into our SSE. And the reference designs even recently not just leading for the S3, now attached to your wrist and can go for hours evaluating the algorithms that we have. So the maturity of the set that we give to customers is so far beyond what we started with and that’s why we wanted to drive and emphasis to that during that slide presentation.

Well, as a follow on to that, does that suggest that that’s right in now or when will those tools be upgraded for the year as be ready?

So when we sample the silicon on September 25 that includes more than the silicon, that includes algorithms running on the EOS S3 platform, it include software tools that we can enable our customers with and it will include the first reference design that falls into the more phone factors category. So all of those are what we call ready for EOS. We don’t just talk about customers, we need to talk about the entire stack up for the customer.

What about your wearables and changes need to be made there for this new architecture or this EOS architecture when will they be ready?

We haven’t put a date off for the wearable aspect of that yet, we're going to get the smartphone out first because we know that the smartphone is going to have the longer lead times to get to market with all the carrier qualifications. But the wearable one is following very close behind and we don’t think it is going to kind of hold any of the engagements we already have out there with our wearable OEMs.

Okay. Well, that’s fair. Thanks for that help. Now I guess one other question, I think a quarter two back you first mentioned having a safe compiler for S2, and well that compiler - is that compiler available, is that what you were saying, is that compiler is available for the EOS as well?

Yes. The compiler basically takes C, and it compiles it down to the instructions set that we use for our flexible fusion engine and the early prototype of that was available a couple of quarters ago, that’s also been maturing and the final product is ready with the EOS S3 launch. But that can also be used for S2. It’s basically taking C down to the flexible fusion engine and in respects it’s independent of the actual platform.

Is it reasonable to take a way that you point, that your tool sets are really very near ready to go with the EOS and should be even more ready at a point that EOS goes to production or qualified?

Yes, that’s an accurate statement. In fact, again to deliver the emulation environment to the lead, also engagement we have to had those tools in place to support that. So in fact the tools were ready a couple months ago.

Right. I want to turn, Andy I want to turn my question if I can to wearables for minute, or maybe Brian.

Yes.

The – it was reported in the press last summer, or earlier in the summer and spring that there is been cooling off of the wearable euphoria and of course with the Apple iwatch launched it caused some push out or shrinkage - it caused the same like and push out of OEMs interest and when they launched. Can you add a little color to what you've already said about that, does this look like its – was eight wearable shipping this quarter, I have four last quarter and the fifth one in early July. Does that look that’s beginning to unfold a bit or is it going to continue to be, I know you say you don’t have the visibility, but when could we see all of sudden wearables hopeful or getting serious and ramping the launch of this?

I'll start with and then Brian will probably chime in. but I think when you talk about wearables, you need to split it into two markets because it really is two markets. On one end you have the high end smart watches like the Apple iwatch or the Motto 360 that really is Android where these are $300 and $400 pieces of equipment and they are kind of niche certainly all of the obvious like to have them. And actually we would be a companion in that brand. The other type of wearable is the fitness wearable and frankly we see an increase in that market. And there is a lot of reasons why we think it will be increased not the least of which is geared towards healthcare and fitness and certainly with rise in cost of healthcare there is going to be a lot of more attention put on that for each individual. Brian, do you want to add anything to that.

Yes. I'll just add that, through a lot of the press briefings I've had recently we can see that there is a lot of interest behind wearables that are not just smartphones on your wrist, there are more purpose still wearables that address certain demographics by aging populations in certain countries or children or those types of things that has very specific use cases that these general watches aren’t going embed. Moreover, I think a lot of people they get frustrated when watches last a day like a smartphone and you have to plug it in. We see there is a lot of interest and demand coming for watches that last three days, five days, seven days where you can really wear it all day, get analysis of your body during the day, including your sleep and start giving you recommendations on how to improve your life. Not just simple notification that you receive a text message or an email. And I think those are the ones that are going to be interesting for us moving forward, not just in terms of volumes but also just how it align so well with our value proposition.

Yes, Bob, I can send you a couple of analyst reports that one says that they believe that the wearable market is gone beyond the obvious phase.

Okay. So clearly I wondered I you had some – of course also some shrinkage in your engagement, but a 20% increase so that has continued to build, is that the right takeaway?

Yes, it is right takeaway. We're not seeing any…

Okay. I wanted to ask you a little more color if I could on the major Chinese ODM that has an open platform a smart watch for kids, is this program shipping now?

Are you referring to our previous design win that we talked about?

Yes.

Yes, Jumpy. In fact, two of my kids have Jumpy.

They do. So is that going to be a broad release or is it going to be channel on radar while be in the US, do you have a feel for that?

I know that you can buy it if you are in the US, I did. And you can definitely buy it in other countries in Asia. I don’t know the extent of their rollout plan. I haven’t had that conversation with them. But I do know that they are shipping that and they are also looking at what their next generation maybe.

Okay. Very good. That’s encourage act, to some about that kind of – I think interesting.

Yes. And you're going to watch.

Okay. Thanks for that. I want to come to algorithm quality, historically and with as you should, you've provided the quality and accuracy of your market leading barometer. What about the other dozen of algorithms that you have such as, I just have a number of areas, how do they stack up in quality and accuracy and compared to the barometer?

I would say they are fairly similar to the accuracies of the barometer, it certainly probably don’t need to be as accurate as a barometer because, whether or not you know, in your car within one second or three seconds probably doesn’t really impact the user experience. But we do pride ourselves in maintaining a very strict key performance indicator target quality algorithms. I will say Bob now that you're asking this question, I think the more important thing with our algorithms is that we are disciplined-guiding them for the lowest power and to only use the excel barometer in these systems. If we can start minimizing the number of sensors required by the OEM to get a good accuracy those are win from a batter life in front of you. And so its not just about getting 99% versus 95% its kind of get in that range and kind of extend your batter life few more hours. That’s actually the important aspect and that’s what we're doing.

Okay. Good, I represent it to single side. So here is the next question on algorithms, are you to a point that there is willingness by licensee to adopt quick SenseMe branding, will we see a SenseMe inside or conceptually and in the future do you think?

That would be my hope and that’s kind of the wholly growth for this licensing from a PR point of view. In the interim what we're doing is trying to make sure that we have agreements with customers to do press releases because that’s really the first step in establishing brand.

Okay.

If we can get to the point where at SenseMe inside at all, I'll definitely view it ecstatic.

Okay. Okay, great. Thanks. Another question on licensing, the licensing program, can you give some color on how many engagements you have for licensing are you creating an engagement form like you did the S2 and will do the S3, coming out of the OEM…

Yes. I mean, we tracking agents the same way Bob, we treat them with the same level of seriousness and obviously workings done a little bit different because its software versus hardware. I don’t think we're ready to actually say exactly how many, but I think Andy did mention that there is multiple and it’s prepared to mark. So multiple in our mind is more than three.

Okay. Good. One more question on the algorithm area, as you – whether it’s a license or put it out as part of a S2 or an EOS device, will you have an ability to upgrade those over time and to – if and when there will be some issue arise that needs to be fixed, be able to fix it once its on a customers risk and their pockets with smartphone?

Absolutely. All of the devices that we have Bob for the sensor processing are reprogrammable they are non-volt [ph] so where you can't change the code. So in fact we give the customer stay when we do bring the systems we can send over here to them or through email and algorithm updates for them to try to on a device. So it’s built into part of the process but we're expecting that in the future they may want to new algorithms, they may want updates and we have provisions to support that.

Okay. Okay, I've got really just one more and I want to come back to and talk about like Ken, and that’s EOS pricing, and how to think about the revenue generation potential of that product and fairly to date the wearables price has been disappointing. But as you move toward the smartphone with EOS it seems like the volume, predictable volume there is much more – much more predictable and I was going back and looking at Android market top nine there I guess, then if you exclude the Samsung the top eight, and each of – on an average they are shipping about 12 million units a quarter as I averaged across all eight Android that people below the Samsung level? That suggest that an order on there could be – of their leadership falling – flagship smartphone could be maybe 3 to 5 million units a quarter, would that be reasonable or not?

I think it was the strong brand behind that in fraction it could be in that range. If it’s more of geographic oriented phone then it would probably a little less than that. But generally speaking smartphones are not built in the OEM things that can ship a million or more units.

Okay.

Our next question comes from the line of [indiscernible] Your line is now open.

Hi, Andy, Sue and Brian. This is Dave.

Hi, Dave.

Hi, guys. Thanks for that detail on the EOS and I look forward hearing more about that tomorrow. I wanted to ask a little bit about you mentioned that there is two categories or kind of werables or dividing into two categories, which is something that we've kind of heard from different sources for some time and I am wondering if there is a – I know this is also an emerging area. But is there – have seen a virtual reality, am I mistaken in thinking that virtual reality is going to require a lot of sensors and are there some functions beyond voice activation or step counting or kind of these fitness applications that might require sensor hubs either in a smartphone or in a dedicated VR device and can you talk for that or am I mistaken about that?

Yes, I think in general anything that you want to do with a battery and if you want to have really precise control of movement, those are very good candidates for adding sensor hubs. And so if you look at a VR type system even its line powered to like your PC or laptop or something like that, if it’s going to have precise or need precise information for movement to give you that user experience, then using a sensor hub or sensor processor is probably a good idea.

Great. Thanks. And would you say that they are – I don’t know if you have knowledge of capability that would go beyond what an M4 could reasonably do?

Yes, I think – I'll go back to one of the slides that I presented, most of the M4s that are used in these types of environment [indiscernible] around a 100 mps or so and with the COS S3 we're getting a 280 mps. So there is a lot of other processing headroom available to add more algorithms to the platform.

Great. Okay. Yes, I am just curious can you say if you had any specific queries in the VR department for the sensor capability?

I'd say we've had discussion with certain customers regarding that type of application, but it hasn’t gone through a series and a point where we thought it was important to put into the prepared remarks.

Got it. Thanks. Okay, well I appreciate that. And looking forward to hearing more with the press releases. Thanks a lot and best wishes as you get through the Q2, Q3 bottom that you mentioned.

Thank you.

Thank you.

And I am showing no further questions on the phone lines at this time. I'd like to turn the call back to Andy Pease for closing remarks.

Well, I want to thank you all for you continued support and I look forward to reporting our strategic progress at our next earnings calls which is schedule for Wednesday, October 28, 2015. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This conclude's the program. And you may now disconnect. Everyone have a great day.