QuickLogic Corporation (QUIK) Q4 2017 Earnings Report, Transcript and Summary

Ladies and gentlemen, good afternoon. At this time, I would like to welcome everyone to QuickLogic Fourth Quarter and Fiscal Year 2017 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’ll repeat these instructions after management completes their prepared remarks. Today's conference call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to the Company's Investor Relations representative, Ms. Moriah Shilton of LHA. Ms. Shilton, please go ahead.

Thank you, Andrew. Welcome everyone, and thank you for joining us today for QuickLogic's Fourth Quarter and Fiscal Year 2017 Results Conference Call. With us today are Brian Faith, President and Chief Executive Officer, and Sue Cheung, Chief Financial Officer. Before we begin, 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; schedule changes in projected projections per date that could impact the timing of shipments; the Company's future evaluation systems; broadening its ecosystem partners, expected results and financial expectations for revenue, gross margin, operating expenses, profitability and cash. These statements should be considered in conjunction with the cautionary warnings that appear in QuickLogic's SEC filings. For additional information, please refer to the Company's SEC filings posted on its Web site and the SEC’s Web site. Investors are cautioned that all forward-looking statements in this call involve risks and uncertainties, and that future events may differ materially from the statements made. For more details of the risks, uncertainties and assumption, please refer to those discussed under heading Risk Factors in the Annual Report on Form 10-K for the fiscal year ended January 1, 2017, the Company filed with the SEC on March 9, 2017. These forward-looking statements are made as of today, the day of the conference call, and management undertakes no obligation to revise or publicly release any revisions of forward-looking statements in light of any new information or future events. Please note, QuickLogic uses its Web site, the Company blog QuickLogic HotSpot, corporate Twitter account, Facebook page and LinkedIn page, as channels of distribution of information about its products, its planned financial and other announcements, its attendance at upcoming investor and industry conferences, and other matters. Such information may be deemed material information, and QuickLogic may use these channels to comply with its disclosure obligations under Regulation FD. This call is open to all and is being webcast live. A supplemental presentation management will reference on today’s call is posted at QuickLogic’s IR portion of its Web site and also available through today's webcast. We will start today's call with the Company's strategic update from QuickLogic’s CEO, Brian Faith. And then CFO, Sue Cheung will provide financial results and guidance. Brian will deliver closing remarks and open the call for questions. At this time, it is my pleasure to turn the call over to Brian Faith, President and CEO. Please go ahead, Brian.

Thank you, Moriah. And thank you all for joining our Q4 and fiscal 2017 conference call. I am very pleased with tangible progress we showcased in our CES suites last month and the favorable reception we received from the many customers and ecosystem partners that we met with during the show. The nine products we displayed at CES represent just the selection of the design wins that we expect will contribute to our growth this year. We shipped EOS S3 to a number of customers during Q4 2017 to support initial production and prototype builds. We expect these and other EOS S3 designs will begin moving into production late this quarter, and that the number of designs and volume will ramp beginning in Q2. I believe this trend will continue to build momentum during the second half of 2018, and that we are well positioned to realize our growth and profitability objectives. Before we get deeper into the progress we made with our sensor processing and embedded FPGA IP licensing initiatives, let’s take a minute to review 2017 and our outlook for 2018. In Q4 2017, display bridge revenue from our lead customer was down over $540,000 from Q4 2016. This was slightly more than I expected and was attributable to the customer’s end product mix shifting to larger form factor tablets that have never required a discrete display bridge. To be clear, the decline in display bridge revenue with this customer was not due to us losing any designs. Offsetting this decline in Q4 2017 were increased shipments of mature products and EOS S3, as well as shipments of new higher margin display bridge designs to other customers. While these offsets drove only a modest increase in revenue, the more favorable mix resulted in 57% increase in non-GAAP gross profit dollars relative to Q4 2016. Last quarter, our lead display bridge customer was forecasting a significant rebound in demand for Q1 2018. However, the customer has since lowered its Q1 forecast by approximately $500,000. As a result, even with a notable uptick in revenue from EOS S3 and the possibility of an ArcticPro embedded FPGA IP license agreement, we are currently forecasting sequentially flat revenue for Q1. Sue will provide more detail on 2017 results and our Q1 2018 outlook later during this call. Looking beyond Q1, we believe our baseline revenue from mature, display bridge and our existing base of connectivity business will be approximately $2.5 million per quarter during 2018. This equates to about $10 million in annual revenue from these three product categories. In addition to this baseline, I believe we are well-positioned to report at least $8 million in combined revenue from Sensor Processing Solutions and embedded FPGA IP to realize our objective of greater than 50% revenue growth in 2018. Let’s start now with an update on our embedded FPGA business. During Q4, we completed our test chip tape-out for GlobalFoundries’ 22 nanometer FD-SOI process, which is also referred to as 22FDX, and we are on track to finalize qualification during Q1. We believe this will mark the first qualification of FPGA technology running on an FD-SOI process. We have ongoing engagements with potential IP customers that are targeting this process for new designs that I believe will close later this year. We also have ongoing engagements for new designs targeting our already qualified 40 nanometer processes at GlobalFoundries and SMIC that I believe will also close during 2018. In December, we announced our collaboration with Mentor, a Siemens business and a world leader in synthesis software tools for semiconductor design. Through this collaborative effort, Mentor has optimized its synthesis tools to support our ArcticPro embedded FPGA architecture and work in conjunction with our updated Aurora evaluation and development tool suite. We will distribute this new version of Mentor Precision Synthesis as part of our Aurora tool suite. The combination of the two tool sets will deliver a seamless development environment, supporting a complete IP evaluation and design flow, from RTL to programming bit-stream, for the embedded FPGA portion of a customer’s design. Put more simply, the combined tool suites enable our targeted customers to evaluate and implement our ArcticPro embedded FPGA technology with much higher efficiency and with less hands-on support from our engineering staff. More importantly, it has enabled us to accelerate the evaluation process with a number of leading semiconductor companies and OEMs that are considering ArcticPro embedded FPGA technology for new SoC and ASIC designs. Moving forward, we expect to announce license agreements with leading semiconductor companies and OEMs throughout 2018. Now, turning to Sensor Processing with an initial focus on wearable, hearable and IoT design activity. Our wearable design win with the tier one smartphone OEM that I’ve discussed in previous calls continues to move forward, and field testing has been expanded to include some of the OEM’s targeted customers. While we do not have a production schedule commitment, I remain optimistic that it will begin during the first half of 2018. With this same OEM, we also made progress on the consumer wearable engagement, as well as the ongoing evaluation for a new hearable design, which we hope to advance to an engagement before the end of Q1. Both of these products are scheduled for mid-2018 introductions, and as consumer devices, I think the customer will hold fairly true to that schedule. Since only a few of our investors were able to visit our suites at CES, we’ve prepared slides so you can see a few of the nine EOS S3 voice-enabled SoC products that we displayed in our suites. The first two slides show new products from Cleer, a U.S. based OEM that has a strong presence in China and is rapidly building brand recognition for its award winning high-performance audio products. The first slide shows the new Cleer EDGE Voice, which won an innovation award at CES last month. The Cleer EDGE Voice uses our EOS S3 to enable always on/always-listening capability, recognition of the Alexa trigger word and its intelligent power management to optimize battery life; an EOS S3 feature that is leveraged in virtually all of our design wins. Cleer is currently working with Amazon to gain co-branding approval for Alexa Voice Services in advance of Amazon releasing its formal specification for hearable devices. This approval process is a gating item for all of our hearable design wins that support Amazon Alexa Voice Services. The second slide shows the newest generation of the Cleer Stage battery powered Bluetooth speaker. The first generation of this speaker received a Best of Show award at the annual Consumer Electronics Weekly show in New York last June. In the new generation, Cleer added our EOS S3 SoC to enable always-on/always-listening support for Amazon Alexa Voice services, which Amazon has already approved for co-branding. We shipped a modest quantity of the EOS S3 to Cleer’s manufacturing partner during Q4 2017 to support prototype builds of its Stage portable speaker and EDGE Voice hearable and we anticipate shipping initial production quantities either late this quarter or in Q2. Based on the forecasts we’ve received, we expect production volume to ramp during the second half of 2018. The third slide shows the new voice-enabled hearable design that GGEC is manufacturing for Tencent. While Tencent is best known for its WeChat app, which boasts nearly a billion monthly users, it is actually a very large and highly diversified tech company with a market capitalization similar to Facebook. The hearable device shown in this slide was designed to support Tencent’s voice enabled AI assistant that it introduced in China last April. We shipped a modest quantity of the EOS S3 to GGEC to support its prototype build during Q4 2017, and we anticipate shipping initial production quantities either late this quarter or in Q2. We believe that Tencent is evaluating several market strategies for this design and we hope to have a clearer picture of the production ramp schedule by the end of this quarter. In the fourth slide, you’ll see a picture of several other new products incorporating EOS S3 that we displayed at CES You will find a list of online products displayed at CES inserted in the conference call, prepared remarks that will be posted on our IR Web page following this live call. Please note, these represent only some of the EOS S3 design wins that our customers forecast will enter production during the first half of 2018. A point I want to emphasize here is that all of our hearable designs that support Alexa are awaiting Amazon approval for co-branding. While Amazon is a form of specification for what it calls far-field devices like smart speakers, it has not released its specification for hearable devices yet. And that means each product has to move through the approval process individually and at an unpredictable pace. This is one of the several variables we are facing today as we try to provide an accurate near-term outlook. In an effort to be proactive to anticipated questions, I’ll provide a quick update on several of the design winds that we discussed in past calls that were not shown in our CES suites. The Janyun smartwatch that we introduced in a press release last year is undergoing final industrial design. Due to this, we have the printed circuit boards in-house that will be used in the design, but not the physical smartwatch. We shipped prototype volume to Janyun during Q4 and expect its smartwatch will move into initial production during the first half of 2018. We shipped a fairly significant volume of EOS S3 in Q4 to support initial production for the wearable design win with the large app company I’ve mentioned in past calls. We expect mass production for this product to ramp beginning in late Q1 or early Q2. In our last conference call, I mentioned a design win with a European company that has developed a wearable targeting B2B health and fitness applications. This design uses virtually all of the EOS S3 resources to support host processing, sensor processing and its embedded FPGA as a display driver. We expect this wearable will move into initial production during Q2. We also have a design win for a wearable device with a European fitness company that I’ve mentioned in past calls. This wearable is currently scheduled to move into initial production during second half of 2018. Beyond these design wins, we have numerous hearable, wearable and IoT engagements in various stages. These include the engagement I’ve mentioned in past calls with a Tier One IoT company as well as engagements with other large OEMs. However, due to the highly restrictive NDAs, there is not much I can say today about these engagements beyond the fact some are very significant, and that we are making progress towards converting them to design wins. There are a number of interesting threads that are common across many of our recent design wins. Of these, I’m going to take a few minutes to highlight three. First, we are winning a large number of hearable designs. This is not unexpected. As I highlighted last year, forecasts such as the one I cited from the 2016 report from WiFore that predicted a surge in the hearable device market that its author thinks will build momentum going forward. Second, always-on/always-listening is becoming a check box requirement for new hearable, IoT and most wearable products. We are also seeing customers retrofit existing product designs to add always-on/always-listening voice enabled features. We saw this in both of our design wins with Cleer. This underscores the broader trend that we cited in the past that voice is the interface of choice, or as WiFore predicted, the rise of The Internet of Voice. Third is the increasing frequency of our EOS S3 being paired with a high-end audio Bluetooth SoC like the Qualcomm CSR8670 and 8675. We are used in conjunction with these or similar SoCs in many of our hearable and even in some of our IoT design wins. These include both of our designs with Cleer and our design with GGEC for Tencent. The primary driver for pairing EOS S3 with these Bluetooth SoCs is that our unique architecture and intelligent power management enables us to reduce the device power consumption for always-on/always-listening by approximately 90%. This is a big deal in all battery powered devices that want to deliver always-on/always-listening features in conjunction with high-quality audio, and an enabling factor for devices with tiny batteries like we see in hearables. Last quarter, we updated our EOS S3 Reference Design Platform to support a direct interface to Bluetooth SoCs from Qualcomm, Vimicro and Airoha Technology. With this, customers can fast-track the integration of EOS S3 to enable always-on/always-listening voice capability and leverage our intelligent power management technology to minimize power consumption across a variety of hearable and IoT use cases. This has proven to be a very effective tool, not only for winning new product designs, but also for winning designs from customers that want to add always-on/always-listening voice capability to existing hearable and IoT devices that are already in mass production. One of the huge benefits of EOS S3 architecture is its inherent flexibility enables us to add features and functions to support new use cases and customer design objectives without the need to modify our silicon design. This also provides us with a compelling case study that we can leverage with companies that are evaluating our embedded FPGA IP with the goal of extending their roadmap for their new IC designs. A new solution we will add later this quarter leverages our dual microphone inputs by adding beam forming technology and advanced noise cancellation. The goal here is to enhance user experiences in noisy environments. An example of this would be cancelling wind noise to enable accurate voice commands while driving a car with the window down. We are also on schedule to introduce a new low voltage version of EOS later this quarter that will be called EOS S3LV. With this, we will lower our power consumption for always-on/always-listening use cases by as much as 30% and extend our already significant competitive advantage over other MCU based solutions. In looking toward the future, we are already talking with several companies that have developed unique neural net processor architectures that could eventually deliver AI in battery powered edge devices. In these cases, the companies see our EOS S3 platform as working hand in hand with their solutions and our embedded FPGA as a potentially enabling technology. Moving now to sensor processing applications in smartphones and tablets. During the last year, we have been working closely with a major Japanese Smartphone OEM that is targeting EOS S3 for new models scheduled to launch in 2018. We shipped prototype units to this OEM during Q4 for a concept smartphone that it intends to showcase at Mobile World Congress in Barcelona later this quarter. If the OEM’s lead Japanese carrier mandates certain features enabled by EOS S3, the OEM will introduce a high-volume flagship smartphone with that carrier during Q2 2018 that is based on the EOS S3 concept design. We have continued to move forward with other smartphone engagements. While I believe we are well positioned for success with these engagements, and more broadly in the smartphone market, there are still too many variables in the equation to forecast when any of these engagements might become design wins and move into production. While we’ve won many display bridge designs in tablets during the last several years, we won our first EOS S3 tablet design this quarter. I’m pretty excited about this design, but for now all I can share is it is a voice-enabled tablet aimed at the educational market and that it is scheduled for mass production mid-year 2018 We continue to win display bridge and FPGA designs in a variety of markets. With this, and the forecast from our second largest display bridge customer that shows solid demand through at least 2019, we believe our combined revenue from display bridge, legacy FPGA devices and mature products will average approximately $2.5 million per quarter during 2018. Now, I will turn the call to Sue and return for my closing remarks before we open for Q&A.

Thank you, Brian. Good afternoon, and thanks to everyone for joining us today. Please note we are reporting our non-GAAP results here. You may refer to the press release we issued today for a detailed reconciliation of our GAAP to non-GAAP results and other financial statements. We’ve also posted an updated financial table on our IR web page that provides current and historical non-GAAP data. For Q4 2017, total revenue was $3 million within our guidance range. Our new product revenue was $1 million and the mature product revenue was $2 million. The primary reason new product revenue was below our forecast was lower than anticipated demand from Samsung for our ArcticLink III VX Display Bridge. Fourth quarter 2017 mature product revenue was above our forecast due to higher than anticipated demand from one of our large customers in the defense, security and aerospace industry. Samsung accounted for 10% of total revenue during the fourth quarter compared to 24% during the previous quarter, as we continue to diversify our customer base. Our Q4 2017 gross margin was 52%, above our forecasted range due to higher than anticipated sales of mature products, which carry a higher gross margin and a more favorable mix of new product sales. Operating expenses for Q4 totaled $4.6 million, which was within our forecasted range. R&D expenses were $2.3 million and SG&A expenses were $2.3 million. The net total for other income, expense and taxes in Q4 2017 was a credit of $65,000, which was due to a one-time year-end tax adjustment. This resulted in a net loss of approximately $3 million or $0.04 per share, essentially at the midpoint of our forecasted EPS range. We ended fourth quarter with approximately $16.5 million in cash. The net cash usage during the fourth quarter was $2.5 million, which was lower than expected, reflecting the timing of working capital requirements. The timing is specifically reflected in decreased accounts receivable. I’ll now discuss the full year 2017 results. For the year 2017, total revenue was $12.1 million, up 6% compared to $11.4 million in 2016. Our new product revenue was $5.8 million, and mature product revenue was $6.3 million. During 2017, we successfully continued to diversify our customer base. For the full year 2017, revenue from Samsung decreased by $1.5 million, or 39% compared to 2016. As a result, Samsung represented 19% of total revenue in 2017, down from 33% in 2016. New product revenue from other customers grew by 95% to $3.5 million in 2017. This was primarily driven by eFPGA IP license revenue, sales of EOS S3, and new Display Bridge designs. These increases, which were primarily driven by strategic new product sales and diversification of our customer base, enabled us to grow total new product revenue by 4% in 2017 as compared to 2016. Mature product revenue increased 9% year over year. Non-GAAP gross margin dollars increased by $1.7 million or 43% for 2017 as compared to 2016. This increase was primarily driven by eFPGA IP license revenue and higher mature product revenue. With a full year of our operational realignment in place, non-GAAP operating expenses decreased by $2.7 million or 13% in 2017. When combined with the increase in non-GAAP gross profit, this resulted in $4.4 million or 26% decrease in our non-GAAP operating loss in 2017 when compared to 2016. Turning to the first quarter 2018 outlook. Our revenue guidance for Q1 is approximately $3 million, plus or minus 10%. Total revenue is expected to be comprised of approximately $1.3 million of new product revenue and $1.7 million of mature product revenue. On a non-GAAP basis, we expect the gross margin to be approximately 45% plus or minus 3%. The sequential decrease in gross margin is expected to be driven mostly by the product mix. We’re currently forecasting non-GAAP operating expenses at approximately $4.7 million, plus or minus $300,000. We expect our non-GAAP R&D expenses to be approximately $2.4 million and non-GAAP SG&A expenses to be approximately $2.3 million. We expect our other income, expense and taxes will be a charge of approximately $60,000. At the midpoint of our forecast, our non-GAAP loss is expected to be approximately $3.4 million, or $0.04 per share. As was the case in prior quarters, the main difference between our GAAP to non-GAAP results is our stock-based compensation expense, which we expect to be approximately $450,000 for the first quarter. In Q1, we expect to use between $3.5 million and $4 million in cash. The forecasted cash usage is expected to be driven by working capital needs, capital expenditure associated with our eFPGA development efforts, an expansion of EOS S3 voice related software, and the annual payroll tax reset at beginning of the year. The new Tax Act signed into law late last year introduced a broad range of tax reform measures that significantly change the federal income tax laws and are generally effective in tax years beginning after December 31, 2017. We’ve evaluated the impact of certain provisions under ASC 740 and we do not expect this change to affect us materially in 2018 due to the full valuation allowance provided against our deferred tax assets. You can find more disclosures on the income tax footnote in our 2017 10-K. With that, let me now turn the call back over to Brian for his closing remarks.

Thank you, Sue. 2017 marked an inflection point for QuickLogic, and CES provided us an opportunity to illustrate the momentum we have going into 2018 with a display showing some of the new customer products that are enabled with our EOS S3 SoC. With ArcticPro eFPGA IP licenses established with two fabrication partners and a third fab running our technology in production, we are very well positioned to finalize IP agreements with major semiconductor companies and OEMs for new SoC and ASIC designs. We currently have meaningful engagement activity targeting 40 nanometer processes at GlobalFoundries at SMIC, as well as numerous engagements targeting our soon to be released 22 nanometer FD-SOI eFPGA IP at GlobalFoundries. As I look forward to 2018, I do so with a very high level of confidence. QuickLogic has never been positioned as well as it is today for sustainable growth, and I think we will clearly illustrate that as we move through the year. I'd like to open the call for Q&A.

[Operator Instructions] And our first question comes from the line of Gary Mobley with Benchmark. Your line is now open.

If I can ask you a question about eFPGA. Just to be clear, were there any NREs received in the fourth quarter, and do you expect any additional NREs associated with your bond relationships. Are we in the wait and see mode in the next revenue catalyst being users of those that have eFPGA and SoC designs?

Yes, I think in Q4 we talked about not planning another foundry reporting agreement for laggard process, and we were going to focus on the sales and marketing efforts on the ones that we had reported and then moving forward. So we’d know we didn’t find any in Q4. Our focus with all of our foundry partners now is on go-to-market now that we have qualified processes with the ones we have in the test ship moving through GlobalFoundries’ 22FDX so we anticipate the revenue events will come from actual semiconductor companies or OEMs.

And appreciate the commentary about the revenue tail for the Display Bridge products being $2.5 million per quarter for the balance of the year. What about some of the legacy products, which have been running maybe as much as $2 million a quarter, if not mistaken, there has been a whole lot of plowback into business. And just curious about the sustainability of that revenue source?

So just for clarity, the $2.5 million a quarter that we talked about is including the Display Bridge, the mature products and the connectivity FPGA solutions, so it’s not just Display Bridge. We do see that continuing at that pace for at least 2018, and it's going to go I'm sure well beyond that, we just don’t know at what rate at this point in time, but that's a good margin business for us it's a stable business and we see that moving forward. We do have new designs on FPGA. In our new FPGAs, we have new designs on the Display Bridge as that come into picture as we go through the year. But most of these sales and marketing efforts that we have with the company in a whole are focused on the EOS S3 and the embedded FPGA.

And our next question comes from the line of Richard Shannon with Craig-Hallum.

Maybe ask you about the revenue guidance and some of the commentary regarding design wins. Brain just to make sure and I think I know the answer, but just want to make sure. You mentioned a number designs that you thought could start to ramp either late this quarter or early next. And did I catch your commentary right that you’re not expecting any of those or assuming any of those inward first quarter guidance. Is that correct?

No, we are assuming semi EOS S3 in first quarter guidance. How much of that comes from the Alexa enabled ones, is going to be dependent on the call process that Amazon pushes out for people that have to get certified before they market it, as such. But there are other EOS design wins that we have started shipping small quantities during Q4 that we do have forecast for Q1 that are not Alexa enabled, but they are going to be revenue drivers for EOS S3 in this quarter.

Just want to add that, Richard, that helped the revenue from EOS S3 in Q1, helps to offset the downfall from Display Bridge from Samsung.

Brian, following on your commentary again about design wins, the once you listed you said were just a sample of or subset of all the designs out there. Were to you intent to describe all the designs at a late stage where you're getting some sense of forecast and shipment dates and production volumes from these guys or other ones out there exist that you haven't mentioned yet.

If you look our funnel graphically, it going to look like upside down pyramid, which is typical in any sales funnel. So there is actually a lot of activity in the early stages and we go through the qualification process with these guys. And as they get in that middle phase where they’re done evaluating and they’re ready to start committing to TCBs that where we start to get a better sense of what they’re forecasting for their own products. So we are getting a better sense now, I would say, for the middle year. We’re getting a good idea for the backend of the year. But just in general, I would say that, we have probably until April or May where everything is got to be locked in for the year from a designing point of view, and that’s where we’ll really start to have a better sense of what the numbers will be based on their forecast. But for this early in the year, I think we have some fairly good visibility with the current designs.

Brian, also in your prepared remarks you talked about -- I thought may be alluded to competitive design win rates that I'm not sure. But maybe if you could discuss at what rate are you wining designs out there if anyone to quantify or qualify that in anyway just get a sense of relative competitiveness out there.

I would qualify it in this way. If a customer wants that always on voice, we’ll probably have the conversation with that customer. And voice right now is so pervasive in the market that there is a lot of room for everybody that has a voice chip to gain market share. I don’t think we’re at the point at where we’re getting squeezed because the market is fixed in size and we have a very competitive situation. So due to that and the fact that our power is so low and compelling and the fact that we have a lot of these readymade solutions now all the way up to the Alexa Cloud with Qualcomm, and with Vimicro and with [Aroha]. Our hit rate is pretty high. I would say its well over 75% when we start to engage with the customer. If you look at some of the other use cases, there may be some more competitive situations. If you're looking at like for example, just the micro controller, there is a lot of people that just have micro controllers. Our focus so is to identifying areas where it really plays to our significant value proposition, which is power for voice, the integration of FPGA and then always on motion sensing. So the way we describe it also is that if somebody has their value for two of those four functions that integrate in S3, we’ve got a really good hit rate. And those four functions just so everybody is on the call, the low power micro controller EON core, the flexible fusion engine that’s now patented and great for always-on light weight processing, the embedded FPGA, which is totally unique to QuickLogic in this space and the always on voice optimization in our platform. So if you value two of those, we’re in a great spot. If you value one, you get a little competitive but we're still wining, especially if that one at voice.

Sue, maybe a couple of quick questions for you, and I'll jump out of line here. For the fourth quarter, you had big gross margins 51%, and you're guiding to 45%. How should we think about the trend as we go through the year as we grow the 50% year-on-year getting all the products ramping together here, obviously with embedded FPGA we can see some inflection there. But just wondered how we should think about that and then the trajectory in OpEx you think we should start forecast, going forward.

Richard, so think about in terms of gross margin. I think what we should model is -- I want to model from 45% to 50% at least for the first half. Second half, I expect much higher, because we expect IP license revenue will kick-in in the second half that can pick us up 60% or so. So that’s in terms of gross margin, or you saying in terms of OpEx, OpEx wise, pretty stable. Now Q1 normally in the beginning of the year is a high that usually is. But I would model it about 4.6% to 4.8% per quarter.

Thank you. And our next question comes from the line of Suji Desilva with Roth Capital. Your line is now open.

So the EOS S3 wins, congratulations on the progress here. Can you give us a sense of what an average unit run rate might be for some of these wins? I know it's going to be all over the map, and remind us the ASP range, so we can get a sense of how much of your customer wins could entail for you in their life time, or for a year?

So I would say the lowest volume that we heard with these customers is just very high five digits, and that's the lowest been. Most of them normally are in the six-figure, I'd say mid-six figure. And depending on some of these like as they're subsidized by people, then they can start to see the million unit number, at least that's what they're telling us for these initial wins that we’ve talked about. For ASPs, so the answer there is it depends for these specific ones, I would model probably around $1.50 or so. It's going to depend if we’re including software or not and the volumes or not, we have ASPs well over $2 in some cases and we have some that are below $1. But I think for your modeling purposes, I'd peg it at $1.5.

And then for the Tier 1 here, I know that's coming around in the first half of '18. You also mentioned a second product and engagement there and the wearable and then the hearable, being the second engagement. It sounds like you're going to be mostly going to be engaging with them in the first quarter, and it would come to market perhaps in the second quarter. I am wondering how that quick turnaround is going to happen, where you still don't know that you'll be in it but it could turn the market fairly shortly thereafter?

So to be clear, we've been engaged with this customer for a while. When we say turn into an engagement, we're talking about where they’re actually doing a board that would use our devices. So it gets to be more serious in terms of engineering commitment. So we're giving ourselves a little buffer on how long it's going to take us this quarter to deliver what they've been asking us to deliver for them to evaluate. And because this is an existing form factor product for them and they already have a launch plan in place, it would just be a matter of including this in that final form factor. So I think the range is right for the time frame given that it's already a product they’ve done in the past.

And then lastly on the Edge AI product, you kind of teased a little bit here. What would be the timing in your mind of customers adopting this just to get a time frame? And is there a lead customer you’re working with on the AI portion of your product offerings at this point? Thanks.

So for competitive reasons, I don’t want to go to clear into what we’re re doing in that area right now. So definitely stay tuned for more detail. But this also plays into what we talked about publicly in the past about expanding our ecosystem partners to help us diversify markets and gain more value preposition for our technology. We do see clear use cases for FPGA in these types of architectures. And to be clear for everybody on the phone, AI means a lot of things to a lot of different people. Our focus is on how we could enable more of this to be deployed at the Edge or battery-powered devices so it’s not in the datacenter. And there is -- I think that's an underserved market right now and I think that there’s an opportunity there to use what we've already developed in terms of our open software framework and our S3 today to get into these markets. And again stay tuned, but I don’t want to spill too many of the beans on this call, but we’ll do that when we can.

And our next question comes from the line of Rick Neaton. Your line is now open.

My first question is getting back to the Tier 1 smartphone OEM. The third design win that you have there or second design win, the third engagement is the initial wearable you talked about. And to clarify something you said that it's now the field testing has now been expanded to its target customers. Does that mean something different than what they were field testing at it before? Is this not a consumer wearable?

So because I think we have this customer and I have asked them if I can expand more about this engagement publicly, and they said no. I think to be fairly brief in my comments. So I can’t say a direct answer to your question, Rick, as far as the end markets go. But what I can say is that they definitely have exposed this product now to a different set of people to do testing than they have in the last time that we've talked publicly about this product.

So it’s beyond several hundred individuals that we're testing as of November.

Yes, that's correct.

And turning then to the region of Europe. You have discussed two different design wins there one is a B2B design win that is being targeted for initial production in the second quarter. And now you've disclosed a second design win with the European fitness company, targeted for the second half of 2018. And is that the correct clarification or understanding of what you said?

Yes, I think that's what I said.

Talking about then your non-Samsung Display Bridge and connectivity revenue. Is that going to remain fairly stable between fourth quarter of last year and first quarter of this year? In other words, you said that last quarter Samsung was came in about, you said about 500,000 less and then this quarter -- because it was 10%. And then this quarter you’re saying that the forecast is 500,000 lower. And that plays into your flat guidance. The other display -- you have other customers for Display Bridge and connectivity revenue other than that large customer. So I wanted to get a sense of how that revenue is fairing quarter-to-quarter?

Rick, it’s pretty stable. We expect that -- is little bit more than Q4 but not much more. So again, that’s opposite of what comes from the EOS S3 sales for our new product family.

And so then rest of our your new product revenue category, and your forecast then is made up of S3 and any possible license revenues. Is that correct?

Correct. So just again it’s clear on -- so our revenue product revenue category include EOS S3 eFPGA IP license revenue, Display Bridge promotions and connectivity. Those are our new product revenues. The rest are the mature product revenues.

And one last question for Brian. Last year you sounded, at this time, you sounded confident that you were going to hit your 50% CAGR target in 2017. But it seems that last year was depended on two or three large deals. Why are you even more confident this year that you will get at least the $8 million of new product revenue to put on top of your $10 million base and hit your CAGR target this year?

So I think it goes down to a few points that I'm happy to make. Firstly, you're right. Coming into last year, we had a less diversification in the funnel, and it was fairly heavily depended on a few deals moving through into mass production. As I look at the funnel today and I have it right here, it’s a lot more diverse. And it is not depended on a single customer to go to production, and it’s not depended in terms of percentage of business by anyone guy. I think every single one of these opportunities and customers and engagements are less than 10% of the total. So having diversification is great, because you never know what's going to happen to the end customer. If you look at the product readiness, we are so much further along now than we were a year ago in terms of having a stable open platform, and all of this voice technology ported on through it and working with Alexa, things that we weren’t even to close to having in some point with hearables last year. And now we have a very mature solution that anybody that came to our suite this year could see. And then on the eFPGA side, the fact that we hit our tape out goal for 22FDX and its in fab and we’re going to have to qualify it into the quarter, we're seeing a lot of interest in that process move, it’s global because it’s a very unique note for the characteristics that brings for a lot of low power applications, and low powers are sweet spot with our embedded FPGA. And just talking to these customers gives me a sense of real optimism that there is something there. So for all those reasons, that’s what’s given me the optimism. Hopefully, it’s coming through with my voice on the phone. If you were to sit here across the table before me, you would definitely see it. But hopefully, you can feel it because it's there and it's real.

Well, thanks Brian. You couldn’t slide that funnel into the slides. Thanks Brian, that’s all I have for now. Thanks for taking my questions.

Ladies and gentlemen, that concludes our question-and-answer session for today. So with that, I would like to turn the call back over to CEO, Mr. Brian Faith for closing remarks.

Thanks everyone for joining our call today. We will be participating at the following events; The 30th Annual ROTH Conference at Dana Point, California, March 12th and 13th; The Design and Reuse, IP-SoC Days in Santa Clara, California on April 5th; our CTO and SVP Engineering, Dr. Tim Saxe, will be presenting on eFPGA for AI and IoT Applications. Our next conference call is scheduled for Wednesday, May 9th at 2:30 PM Pacific. Thank you for your continued support, and good bye.

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