Ladies and gentlemen, good afternoon. At this time, I’d like to welcome everyone to QuickLogic Corporation’s Fourth Quarter and Year 2016 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] I will repeat these instructions after management completes their prepared remarks. Today’s conference call is being recorded. With us today, from the company are Brian Faith, President and Chief Executive Officer; and Sue Cheung, Chief Financial Officer. Before we begin our call with QuickLogic’s executives, I will read a short Safe Harbor statement. 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, our future evaluation systems, broadening our ecosystem partners, expected results, and financial expectations for revenue, gross margin, operating expenses, profitability and cash. I’d like to remind you that these statements must be considered in conjunction with the cautionary warnings that appear in QuickLogic’s SEC filings. Investors are cautioned that all forward-looking statements in this call involve risks and uncertainty, and that future events may differ materially from the statements made. For additional information, please refer to the company’s Securities and Exchange Commission filings, which are posted on its website or available from the company without charge. This conference call is open to all and is being webcast live. We will start today’s call with the company’s strategic update from QuickLogic’s CEO, Brian Faith, then Sue Cheung, its CFO, will review fourth quarter and year 2016 financial results and provide financial guidance for the first quarter before Brian’s closing remarks. At this time, I would like to turn the call over to Brian Faith, President and CEO. Please go ahead sir.

Thank you, Victoria, and thank you all for joining our quarterly conference call. Joining us for the first time today is Senior Research Analyst Richard Shannon from Craig-Hallum Capital Group. Richard initiated coverage of QuickLogic last week. I’m very pleased with the significant progress we have made since our conference call last November. Given this progress and the momentum we are already developing this year, I believe we’re on track to realize the strategic objectives for 2017. Today, we will review our progress on the following initiatives. First, our new ArcticPro embedded FPGA Intellectual Property or IP licensing business model. Second, our core sensor processing solutions focused on enabling immersive user experiences in mobile application. And lastly, our display bridge and FPGA design activity. To better monetize our core investments in programmable logic technology, we launched our ArcticPro embedded FPGA IP licensing model last December. By integrating eFPGA technology, SoC and ASIC customers can enjoy increased flexibility, an ability to differentiate, as well as decrease the incremental R&D costs needed to develop new devices. This model enables new, high gross margin revenue streams from manufacturing licenses we establish with our strategic foundry partners and from user licenses we negotiate independently with semiconductor companies and OEMs that want to integrate our eFPGA technology in their SoC and ASIC designs. Manufacturing license agreements are established for a specific fabrication node and user licenses are negotiated for specific SoC and ASIC designs. This means we could establish multiple licenses with a single customer. Once new devices using our ArcticPro eFPGA technology move into production, we will also earn a per unit royalty from semiconductor companies and OEMs. While the royalty stream will take about 18 to 24 months from the time a design starts to when it moves into mass production once initiated,…

Thank you, Brian. Good afternoon and thanks to everyone for joining us today. Please note that, we are reporting our non-GAAP results. For a detailed reconciliation of our GAAP to non-GAAP results and other financial statements, please see the press release we issued today. We have also posted an updated financial table on our IR webpage that provides current and historical non-GAAP data. For the fourth quarter of 2016, total revenue was $2.9 million, reflecting the continuing shipments of our display bridge solutions. Our new product revenue was approximately $1.6 million and mature product revenue was approximately $1.3 million. Samsung accounted for 29% of total revenue during the fourth quarter compared to 39% during the previous quarter, reflecting our diversification to additional customers. Our Q4 gross margin was 33% compared to 34% in Q3. The variance is primarily due to customer mix and the product mix shipped during the quarter. As we broaden our customer base and grow new product revenue, we expect margins to trend higher. Operating expenses for Q4 were better than expected and totaled $4.6 million, an 8% decrease sequentially. This reflects savings from our cost cutting initiatives. The total for other income, expense and taxes was a charge of $106,000. This resulted in a net loss of approximately $3.7 million, or $0.05 per share. We ended the fourth quarter with approximately $14.9 million in cash. The net cash usage during the fourth quarter was $2.9 million, which was lower than we expected, reflecting both the cost savings from our strategic realignment efforts and the timing of working capital requirements. The timing is also reflected in inventory build-up and increase in accounts payable. The cash usage was partially offset by borrowing an additional $1 million against our existing line of credit. Let’s now turn to Q1 2017.…

Thank you, Sue. Overall, we’re very excited about 2017. We believe QuickLogic is positioned to drive substantial revenue growth and fortify the company for long-term shareholder value creation. In our sensor processing initiative, the enthusiastic reception at CES for our voice technology and the design activity we are seeing with OEMs across the Smartphone, Wearable and IoT segments underscores the opportunity in front of us. In our eFGPA IP licensing initiative, we are broadening our reach by adding another foundry to our list of manufacturing licensees and expect to generate additional licensing revenue from SoC or ASIC vendors during 2017. And finally, our display bridge and FPGA design activity remains strong. Thank you for joining us today. We will be participating in a number of industry events during the next few months. We will be presenting and we will be on a panel at the Wearable Technology Show in London in March. Dr. Tim Saxe, our CTO and SVP Engineering has been invited to give the keynote at the IoT Summit at the Santa Clara Convention Center on March 17th. And Sue and I will be at the 29th Annual ROTH Conference in Orange County in March, and the Craig-Hallum Conference in May. We hope to see you there or on the road in between. Operator, we’re ready to open the call for questions.

Thank you. [Operator Instructions] And we’re taking our first question from Suji Desilva with ROTH Capital. Your line is now open.

Hi Brian. Hi, Sue, and Sue congratulations on the promotion there. So EOS S – for the EOS S3 wearable program, can you talk about the lead times of your shipments into the ramp and then would there be an initial build effort and then a subsequent pause as the initial product launch occurs?

Yes, I’ll take that question, Suji. So the lead time that we typically give to customers is in the eight week range. But usually what happens is when they’re launching a new product, it turns on within that eight weekly time. And so that’s one of the reasons why we want to make sure we’re building inventory ahead of the ramp. Once we get into more of a steady state mode, then customers typically abide by the lead time requirements of roughly eight weeks.

Okay. Great that’s helpful. And then switching to the gross margin here, a nice pump up in the guidance, is the Embedded FPGA impact there? Is that a sustainable impact going through the rest of the year or will that ebb and flow with the licensing revenue there?

So Suji, so we expect our license revenue will be bumpy at the beginning. On queue to pace of that we cut half several licenses in a given quarter, then we’d start generating consistent revenue quarter-over-quarter. So now it’s along, we include a portion of the licensing revenue in Q1 guidance.

Okay. And then lastly, on the wearable engaging app with an app company, is that – is something like a Snapchat glasses, the kind of the category of products we should be thinking about there? And how aggressive are companies you’re talking to thinking about device opportunity? Just to understand how big could – that category can be for you?

I won’t go into the specifics of the actual product type or form factor, it is the wearable device so it’s that type of very high level category versus the wearable device put out by an app company. We are seeing more and more of these companies jump into that now, because it’s another way of connecting to us as individuals giving us a different user experience, giving us a different method to search or order product and at the end of the day understand more about us. And we do definitely see that as a trend.

Okay. Terrific, thanks guys, I’ll jump back in the queue, nice job on the results guiding.

Thanks Suji.

Thank you.

And our next question comes from the line of Gary Mobley with The Benchmark Group. Your line is now open.

Hi Brian, Hi Sue, congratulations on the promotion to you and I’m sure you’ve been doing many of the CFO roles for some time now, but nevertheless it’s good to get the title upgrade. Brian, going back to an earlier comment that you made, did you make some comment about projection of or an estimation of some growth of about 50% I’m not sure what that was specific to, was it specific to EOS related revenue or maybe you can clarify there?

Sure. So I’ll start saying what we’ve put into our investor presentations as our target model is year-on-year revenue increase of 50% for the coming years. And so it starts from that. Now let’s fast forward to this next year 2017. We’re referring specifically to 2017, we see that we have the opportunities, we have the funnel, we have the right products to have a revenue opportunity this year that does grow total company revenue 50% year-on-year from last year.

Okay. All right, and I know this eFPGA strategy has been new or untouched in the marketplace. If I’m not mistaken, there might be three other guys doing this Acronis, Menta and Flex Logic. Maybe if you can just give us an overview of how you differentiate? Is the differentiation be a process node? And then as well, I guess one of the main motivations for Intel to make the Altera acquisition is to have either [indiscernible] programmer logic for data center solution or maybe at the Board level. And I’m just wondering if this would be a fit for basically the non-Intel camp to come and license with you and accomplish essentially the same thing?

You know there’s a few questions in that question Gary, let me -- just one by one. So firstly, what is the competitive landscape? I think that’s what you’re going to. There are three other companies right now as you mentioned that are doing the embedded FPGA IP licensing. How are we different? Let’s say the biggest difference here is that we’ve been in this business 30 years. We’ve been shipping to thousands of customers, millions of units across multiple foundries. And I challenge anybody to come close to that and come to us as you mentioned. The big thing in FPGA is the software and that software allows people to take their designs and make sure that it works at the right power at the right performance at the right density in the programmable logic. That’s what we’ve been shipping for 30 years. So again I think we have a substantial technology lead in that area and software is really what makes the silicon thing. If you get to the question about the acquisition of Intel, sorry Altera by Intel, yes there’s been a lot of talk about what they plan to use that programmable logic for. I think a lot of it is for their own use, either in the data center or a little bit further out. Our programmable logic today is very, very optimized for cost, size, and power as evidenced by what we’ve been focusing on with our sensor processing. So the logical first step for us is to go and license people that do care about power. That being said, if you look at some of the presentations we’ve put out publicly, there is a vector on our roadmap for embedded FPGA that tackles performance. And you can see that that in the couple year horizon from now and that’s, I think that’s going to happen. And once that’s available then yes you could actually use a QuickLogic FPGA or Embedded FPGA more on those data center type applications or more performance oriented applications.

Okay. I’m trying to think about the most sensitive way to ask this question. It’s been well documented that one of the Tier 1 smartphone OEMs has postponed the usual timing of their next generation flagship phone for various reasons and well documented reasons, but is that the reason for maybe the push out by a few months of this EOS S3 win for this tracker tied to this Tier 1 OEM. And do you still view the opportunity annually potentially somewhere between $2 million and $4 million a year?

Like, well phrased question Gary. So the reason for the push out from where we thought we could have been into December of last year was really this customer going through with a fine tooth comb, the user experience that they want people to have with this watch. This watch is not going to be like the other ones that have been shipped in the market. So they wanted to pay particular attention to all those details with regards to the sensors and user experience and most importantly the battery life, which is what we’re enabling them to achieve longer. I mean I think those are really the primary reasons for any kind of shift to the later part is when we thought this would go to production.

Okay. Thank you. I’ll just hop in the queue Thanks again.

Thanks Gary.

Okay.

[Operator Instructions] And our next question comes from the line of Richard Shannon. Your line is now open. From Craig Hallum.

Thanks Brian and Sue. Brian, thank you for the welcome to my first conference call with you and Sue also congratulations on your promotion. I guess I’ll start with question on your S3 product. You’ve talked about a wide range of engagements with most of the top OEMs worldwide. You also talked about some wearable designs with a specific one that might be pushed out away across the new apps company that you’ve got to design with. But I think you kind of sketch out for us how you see the rollout of revenues for this product from phone applications versus wearables and others this year or maybe exiting this year or however you like to frame the question. But kind of interested to see the kind of the split of your revenue contribution from those markets, please?

Sure, no problem. So let’s start with the end of the year and then work our way back. So by the end of the year our models show that we’d actually be roughly at 50-50 split between revenues generated from smartphone wins and wearable wins, but IOT is just a little bit of a trickle there. If we work backwards from there, we’ve obviously been engaged longer with the Tier 1 smartphone company doing the wearable. So we think that that would actually be more of the revenue upfront, so wearables dominated. And we actually have several wearable wins. So I think we’ll start to see wearable revenue first and then transitioning more over to a 50-50 split going into the future simply, because smartphones are such higher volume we think that it’s actually going to become smartphone heavy in the future, but at the end of this year about 50-50.

Okay that’s helpful. Thanks for that Brian. Maybe a quick question on the display bridge market. One is – one, if you give us an update on what you’re seeing there in terms of the competitive dynamics? I think you have a competitor there who has had some financial difficulty maybe exiting that market, you’re seeing some increased engagements and requests for working with you based on that dynamic or if you give us an update that would be great, please.

Yes. So the largest competitor in the display bridge market definitely is going through some challenges right now, and we’ve seen just evidence of that with the design activity. Even dating back to the middle of last year, we were starting to see quite a bit more interest in our display bridges because of concern for the – with respect to the other competitor. And I think that we’re going to continue to see that moving forward. There’s always chances that lower cost options will commence out of all the Chinese semiconductor company. But I think we’ve got a really solid device. I think, we’ve also got solid track record of who’s been buying that device and that gives us credibility with, with these other customers that we’re winning. And by the way I kind of said in prepared remarks, we really do see a diversity in end markets now they’re winning a display bridge with. I think, we had a robot at CES. We’ve talked about tablets with Sanyo and this automotive application on this call. So it’s fairly diverse, which is good.

Okay. Brian, if you could remind us, how long does it take for – once you kind of get a design into go to production and kind of your average market for display bridge products?

Display bridge can actually move quite fast if it’s with a Chinese IDH/ODM. Typically, that go to mass production in four months or less if it’s a pretty well defined product like a tablet that it’s one of these more unique use cases or end products like the RoBoHoN with Sharp that went to probably more than a year from the start to the mass production date. And then how long the same production is really going to depend again on the end market. For an automotive application, it could be two to three years of shipping and production if it’s strictly a consumer type tablet that could be less than a year.

Okay, that’s helpful. One last question for me on embedded FPGA market, you provided a great level of detail in your prepared remarks and it seems like a very interesting markets. We’ve gotten some interesting conversations since our initiation that gives you even more confidence there a bit. Curious if you – if maybe you could lay out for us, Brian, to the extent possible where you’re seeing the interest here? It seems like there’s a broad set of applications booked in the type of device you can be embedded in as well as the end market applications. Anyway that you can note where you’re seeing more activity either by product or by end market that would be it no for us, because that would be great to hear as well, please?

No problem. So my response may actually seem very broad in generic, but it actually is true. So we’re getting a lot of these requests across multiple markets. The most obvious fit are microcontrollers that would be more broad-based. But they actually care about willpower and they want to address fragmented capability without doing so many tape outs, so many different variants has very well aligned with the value proposition of having a low power programmability. We have requests coming in from ASIC. ASIC companies are OEMs that are doing ASIC, those tend to be a little bit more on the performance track and a little bit more on the leading edge process nodes. Yes, so it’s actually, it stands quite a few different verticals. I guess, the good thing to think about from an investor point of view is that, we don’t have anybody wanting to license that that’s directly competing with us. So this really is a broadening of the market and monetization of our technology and not simply licensing a competitor in our core markets.

Okay. A quick follow-up to that Brian, you mentioned MCUs, which makes a lot of sense. My understanding is a lot of those products out in the market is, they are typically made on nodes higher than or less advanced than what you have announced so far, I think the highest you have is 65. Could we see the use – licensing of those up to 90 or even higher nanometers at some point, given some of those applications and then like you mentioned like MCUs?

Yes, I mean, if the business case is there, we can absolutely do that. Our Program Logic has worked all the way back to more than one micron. We obviously see that for embedded FPGA, but it’s definitely scalable to go back to those nodes. I think as far as if you look at microcontrollers, they tend to follow their flash availability embedded flash. And today embedded flash is available at 90, or 65, or 55, it’s coming online at 40. And so that actually overlaps very well with where we have most of our embedded Program Logic today. And then, of course, the next node with the embedded non-volatile memory being – MRAM is going to be the 22FDX, and that’s I think one of the great reasons why we’re partnered with GLOBALFOUNDRIES for that. So I think if we’re sticking closely to the embedded flash, nodes are going to see a lot of activity in MCU area for us.

Got it. Okay, that makes sense. Great. That’s all the questions from me, guys. Thank you very much.

Thank you, Richard.

Thank you.

And our next question comes from the line Rick Neaton with Rivershore Investment Group. Your line is now open.

Thank you. Hi, Brian, and congratulations, Sue, on your formal designation as CFO. Brian given the long design cycles that you’ve experienced to-date with the EOS S3, why are you confident that you can hit your revenue target this year?

Good question, Rick. It actually falls under your couple of different reasons. So firstly, is the market available for us? And I think the answer to that is, yes, knowing it’s a higher volume consumer market. If you look at the momentum that we’ve been building, the reception we got in CES, I think the value proposition is resonating with the customers that we’ve been talking to and it’s actually been talking to since last year. The third reason is, as we look at what we’ve actually put in play now towards the end of last year with the ecosystem partners, with the reference design, those are making it much easier and faster for people to evaluate technology and move to the next phase which is the design in phase. And then once they’ve reached that that level, where they vetted the technology, it actually starts to move much faster with them. It’s turning traction and getting traction into momentum. And is – that’s especially true if you look at a single OEM, they don’t have to do a technology evaluation two or three times. They do it once, it’s proven. Now, they can start doing implementation or design into multiple products at the same time. We saw that happen in the past with display bridges, and I think we’re going to see a repeat of that in the future with our current solutions. So that’s [Multiple Speakers].

No, no. But – thank you. In your slides at the benchmark in Needham Conference, because you also had similar targets for future years in 2018 and beyond. Do you have any additional level of confidence that you will hit those similar targets similarly in those in the future years?

Yes, absolutely. So just everybody was referring to in our investor sites, we have a target operating model of greater than 50% growth. And I do believe that that’s possible. If you look at what would that mean from a market point of view? Firstly, does the market have enough volume for us to do? If you do 50% increase of our last year’s revenue five times, that’s not even a $100 million company. So absolutely, I think the market is there to do that. When you look at the ASPs that we’re talking about and you also couple that with the fact that we haven’t embedded FGPA licensing. The second thing is, once you start getting traction of these customers, again, actually momentum, people are developing multiple products at the same time different groups that starts getting a multiplicative effect. And so I absolutely think that that’s a sustainable model for the timeframe that we’re talking about. Now, we’re not talking to customers about what are they doing four years from now at the product level, because they’re not even there yet. They’re thinking about probably the next two years maximum. By the way, that’s one of the important reasons why I’m really proud that we’re part of the Google Boot Camp that just took place last week, that allows us to actually get a sense of what big players in the market are going to be putting out as requirements for software and software needs to run on our three platforms. So we can make sure that we’re making the right decisions from a software framework point of view, software and investment support, and ultimately chip development in the future to make sure that we can support those use cases.

Okay.

Does that answer your question?

Yes, it does much detail. Thank you. In your yesterday’s press release, there was a specific portion of it that stated that if a customer of that foundry initiated the process, or the design process now with eFPGA that 3Q 2017 tape-out target at this new foundry would be possible. Is that saying that there’s a chance that there could be initial royalty revenue at the end of 2018?

Yes. So that it’s possible definitely. There’s typically going to be 18 to 24 months between license and royalty depending on how fast that customer moves – that licensing moves to actually do a tape-out, bring the product back, verify and then starts shipping volume. It certainly is possible. It could be closer to the 12-month window, which is what you’re articulating. So in that press release, you’re trying to just make sure people know when they could actually start to tape-out even the new process, which is sort of calendar quarter this year.

Okay.

Yes. We definitely think there’s royalties could start to kick in, in 2018 at the back-end.

Okay. Can you explain how you and Sensory facilitate the deployment of Alexa since it already is pretty useful in its current form. What – since I didn’t get to Las Vegas, what was the demo that you used to approve your concept and how does that make Alexa and other voice applications better?

Yes, good question. So Sensory has voice recognition technology and they’re behind a lot of these triggers they’ve used, say like, Galaxy, okay Google. They also have the Alexa trigger, which is the Amazon’s products. And the nice thing about what Amazon is doing from an ecosystem point of view is, they’re actually enabling other peoples to build products, they have their Alexa trigger, which is why we thought all over CES from fans to refrigerators to cars. So what we demonstrated at CES was a home automation, example, where we had our EOS S3 on a very small board, running the Alexa trigger, and we actually hacked into the light in the hotel room. So when somebody came in, they could say, hey, Alexa, turn the light on and the light will come on, and say turn the light off, and it turns off. And so the reasons why we’re showing that demo is, yes, Alexa is out there today and it’s functional. But what if it could be battery powered and you could sprinkle around your house. You don’t have to go buy under $50 Amazon battery, $250 Amazon Achelous and turn the light of your house. If the trend is going to be more competing at the edge, it’s going to be sprinkling these things around with batteries not line powered, that’s the big difference of what we enable at EOS S3, not just a functionality from a voice point of view, it’s the ability to do that at batter powered applications is the big difference. The other thing I will mention is that, the typical Alexa trigger if you were to plug in your house like a light example. it goes up with the cloud to figure out what light you need to turn and off and there’s a lag. And if you’re walking through your house at night, you probably don’t want to have a lag, you want to have the light turn on into the room. And so what we’re doing is, we’re running Alexa deeply embedded on our device, you don’t have to go to the cloud, you can immediately do whatever you tell us to do like turn the light on or off. And so, the fundamental difference here that we’re enabling more real-time and we’re enabling it to be done in battery.

Okay, that makes sense. One last question, at the end of your prepared remarks in your very first conference call last August, you said that you were more confident than ever that you would grow your revenue very significantly in 2017. And you end 2017 as a profitable enterprise, is that still truly opportune target, and if so why, if not why not?

Well, yes, it is the target. And I think why, again, I think, we have the good funnel. I think we’ve moved several of these customers beyond kicking the tires and into design in. I think that if you look at the fact that we’re layering in the embedded FPGA, high gross margin revenue that lowers that break-even point to the more of those licenses we signed, the lower that break-even point gets. And if you combine all those things together then I think the recipe is there to accomplish that. So, yes, I’m not changing my comments from the very first call.

Okay. Thanks, Brian, and congrats on the encouraging information.

Thanks, Rick.

And I’m showing no further questions at this time. I would now like to turn the call back over to Mr. Brian Faith for further closing remarks.

Okay. Well, the first quarter earnings conference call is scheduled for Wednesday May 10. I want to thank everybody again for your participation today and we will talk to you on May 10. Thank you, and bye-bye.

Ladies and gentlemen thank you for participating in today’s conference. This does conclude the program. You may all disconnect. Everyone have a great day.