Ladies and gentlemen, good afternoon. At this time, I'd like to welcome everyone to QuickLogic Corporation's First Quarter Fiscal Year 2019 Earnings Results Conference Call. As a reminder, today's call is being recorded for replay purposes through May 15, 2019. I would now like to turn the conference over to Mr. Jim Fanucchi of Darrow Associates. Mr. Fanucchi, please go ahead.

Thank you, operator and thanks to all of you for joining us. On the call today are Brian Faith, President and Chief Executive Officer and Dr. Sue Cheung, Chief Financial Officer. As a reminder, some of the comments QuickLogic makes today are forward-looking statements that involve risks and uncertainties, including but not limited to stated expectations relating to revenue from new and mature products, statements pertaining to QuickLogic's future stock performance, design activity and its ability to convert new design opportunities into production shipments, timing and market acceptance of its customers' products, schedule changes and projected production start dates that could impact the timing of shipments, the company's future evaluation systems, broadening our ecosystem partners, expected results and our 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 website and the SEC's website. 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 assumptions, please refer to those discussed under the heading Risk Factors in most recent annual report on Form 10-K, most recent quarterly report on Form 10-Q, recent Form 8-K and other documents we periodically file with the SEC. These forward-looking statements are made as of today, the day of this conference call and management undertakes no obligation to revise or publicly release any revisions to the forward-looking statements in light of any new information or future events. In today's call, we will be reporting non-GAAP financial measures. These non-GAAP measures should not be considered as a substitute for or superior to financials prepared in accordance with GAAP. You may refer to the earnings release we issued today for a detailed reconciliation of our GAAP to non-GAAP results and other financial statements. We've also posted an updated financial table on our IR webpage that provides current and historical non-GAAP data. Please note QuickLogic uses its website, the company blog, corporate Twitter account, Facebook page and LinkedIn page as channels of distribution of information about its products, its planned financial or other announcements, its attendance at upcoming investor and industry conferences and other matters. Such information may be deemed as material information and QuickLogic may use these channels to comply with its disclosure obligations under Regulation FD. A supplemental presentation management may reference on today's call is posted at QuickLogic's IR portion of its website and also available through today's webcast. And now I would like to turn the call over to Brian.

Thank you, Jim, and thank you all for joining our Q1 2019 conference call. I'm sure most of you have read the April 25 press release from SiFive, announcing a strategic partnership with QuickLogic and the introduction of the industry's first SoC Templates. The Freedom Aware family of SoC Templates represents a disruptive approach to SoC design and significantly extends our software and IP business model. I will provide you with more background and color later in my prepared remarks, but let's first review Q1 and our outlook. We benefited from an unexpected upside in mature products in Q1. Based on customer forecasts, we now believe mature product revenue will be approximately $9 million for full year 2019 and account for roughly 45% of total revenue. New product revenue for Q1 was below our expectations due to lower-than-anticipated sales of EOS S3 to support hearable design wins and embedded FPGA license agreement that was pushed to second quarter and a decrease in combined sales of display bridge and connectivity solutions, driven by new hearable designs moving into production, we expect our new product revenue will rebound in Q2. Let's start with an update on our embedded FPGA IP business. ETH received test samples of its new Arnold PULP IC that includes its RISC-V processor and our embedded FPGA. We are on schedule to complete the internal testing this quarter. We released our new applications programming interface, or API, in the first entry in our hardware accelerator library. These are being evaluated now by our lead partner for these initiatives. We anticipate booking an embedded FPGA license agreement during Q2 with a prime military contractor that has been commissioned by the DoD to evaluate and recommend embedded FPGA solutions and suppliers. Military contractors already represent a large market for discrete FPGAs…

Thank you, Brian. Good afternoon and thanks to everyone for joining us today. For the first quarter of 2019, total revenue was $3.2 million, an increase of 16% compared with revenue of $2.8 million in the same quarter a year ago. Of the $3.2 million in Q1 revenue, sales of new products were $700,000. This compares with $1.3 million in the first quarter a year ago. This decline was due to significantly lower sales of display bridge and connectivity products that were not fully offset by increased EOS S3, Quick AI and SaaS subscription revenue. Our mature product revenue was $2.5 million, up from $1.5 million in the same quarter a year ago. The increase in mature product revenue was driven by stronger demand from our military, aerospace and defense customers. In the first quarter we had two customers each accounting for 10% or greater of sales. Although this is the same number as the first quarter last year, the customers in each period are different, which reflects our continued success in diversifying our customer base. Gross margin in the first quarter was 62.8%, an increase of approximately 11 percentage points from 51.5% in Q1 last year. This was driven by increased revenue from mature products, EOS S3, QuickAI and SaaS subscription revenue, and a significant decrease in sales of low margin display bridge and the connectivity products. Based on our current outlook, we believe continued strong mature product sales, along with increasing revenue from IP, Software and SaaS subscriptions, will lead to our quarterly gross margin staying in the mid-60% range through at least the remainder of the year. Operating expenses for Q1 were approximately $4.8 million, compared with $4.9 million in Q1 last year. Within our Q1'19 OpEx, our R&D expenses were $2.6 million and SG&A expenses were…

Thank you, Sue. We are very encouraged by the progress we've made this year. With this progress, we believe our full year 2019 revenue will be approximately $20 million. We also believe that with this trajectory we will be cash flow breakeven and profitable by the close of Q1 2020 on a non-GAAP basis. Current customer forecasts project mature product sales will be about 45% of total revenue. We believe revenue from connectivity and display bridge sales will be a little over 5% of the total and that the balance will be fairly equally split between EOS S3 and a combination of eFPGA IP, Software inclusive of SensiML SaaS, and our AI platforms. Based on our outlook for higher revenue from mature products, IP and software, we believe our full-year 2019 non-GAAP gross profit margin will be about 64%. This target is 13 percentage points higher than the 51% margin we reported last year and underscores the ongoing transformation of our business model and the dramatic improvement of our value proposition since 2016 when our gross profit margin was only 35%. Over the last two years, much of our progress has been masked by the attrition of nonstrategic low-margin business. That attrition will continue in 2019, but with traction established in our strategic initiatives, I believe our financial progress will become more obvious. With a solid and growing design base spread across an increasing number of customers, and a much clearer view of our near-term growth in sight, we are in the process of recruiting a VP of Sales to build on this momentum. During the coming months, we expect our design win activity and the number of designs we are supporting with production shipments will accelerate. To the extent our customer NDAs will allow, we plan to publicly update investors on this progress. These include designs we've won in hearable devices, smartphones, consumer electronics, consumer goods and in Industrial IoT driven by our end-to-end AI solutions. You can subscribe to receive notification of these anticipated press releases and blog posts on the QuickLogic website. Operator, I would now like to open the call for questions.

[Operator Instructions]. The first question will come from Suji DeSilva, ROTH Capital.

Congratulations on the progress here and the higher gross margin. So understanding part of that for this year is the mature products being much stronger than a typical year in the past. When the - if and when the mature revenues normalize to prior historical levels, what is the gross margin normalized levels, say maybe 2020 if that is what transpires closer to?

This is Sue. I think by that time when mature product levels down then our software revenue, SaaS subscription revenue and IP license revenue will ramp up by then. So we expect our higher gross margin continues.

Okay. So sustainable because of that mix shift, is what you say?

Yes.

Okay. Good. And then the second question, you guided 2019 pretty well here with mature and new products. Where do you expect the bulk of the second half new product ramp to come from? I know you said it’s about evenly split. But if you can give us any notion of which one or two kind of things you have most confidence in supporting the new product ramp in the second half that will be helpful.

Yes. So equally spread on the new side with EOS S3 and I think we have the line of sight now on those multiple smartphones more than we thought in previous calls, driving a lot of that and the hearables finally getting unclogged due to the fact that we have these people announcing other similar products from the big platform guys. And then we see a lot of momentum building around the SensiML subscriptions, coupled with QuickAI HDKs. Those are probably the most obvious ones for us. We do have the embedded FPGA IP licenses there as well. But as we know those are big orders and they tend to come and go in different quarters. On a sustainable basis, these are the ones we see contributing more so in this year.

Okay. Maybe drilling into that maybe one quick down, the Japan smartphone win you have in the 5 models. Can you talk about what a rough sort of unit run rate for those type of models are, roughly so we can get a sense on if that's supporting the U.S. revenue?

Yes. So for their typical smartphone, it's about 0.5 million units a year and our ASPs obviously vary, of course, but we've talked in the past about modeling about $1 plus or minus for smartphones, it could be higher in some cases, versus feature phone, which we talked about on this call. We have not been into feature phone before, but I understand this customer it could be as many as 2 million to 4 million units for a feature phone per year.

Got it. That's very helpful. And then last question really as SensiML and AI and software and SaaS model plays out, Brian, how should - or Sue, how should we think about the revenue model for that maybe 12 months out, a year out? What does the composition of that revenue look like between software and IP licensing and SaaS?

So I think in the next year, we're going to see more of that from the SensiML side because that's something where people can buy immediately and start subscribing to the quarterly SaaS by virtue of SensiML being in the market already and us having HDKs. IP licensing is a longer sales cycle to convince the customer to license IP for chip development. And so, again in the near term I think it's going to be driven from the SensiML side more and there is going to be more users. Like just last quarter, we talked about I think 3 for SensiML. This quarter it's like 10 to 16 and we expect that to continue ramping quarter-on-quarter as more people get connected to the SaaS platform. Now in the next year, that's when I think we will really start to see the wheel turning on what's driving from the SiFive engagement because once that company goes public and other people start using that template that will start driving more incremental IP sales for us and then also be a pivot point for people to license the SaaS platform as well. But Suji I just want to come back to one thing on the other components of the near-term revenue for EOS S3 for this year, I did forget to mention the big consumer electronics win that we showed off at CES this year. So I would be remiss and making sure I went back and cover that. That's also going to be a driver for this year.

And that starts in 3Q '19 or --?

Correct.

Okay, great. And then the number of subscriptions 3 going to 10 to 16. Is it fair to say that approaches triple digits towards the end of '19 or is that too aggressive sort of a path of ramp-up here?

That's absolutely my internal target, let's see if we can hit that. If I can even get it to half of that I think we will be well on pace to meet the financial goals we outlined for SensiML this year.

It's very helpful bracketing that.

[Operator Instructions]. Next we will go to Richard Shannon, Craig-Hallum.

Brian, Sue thank you for taking my questions. I'd like to probably congratulate you on the partnership with SiFive, looks very interesting, look forward to watching that develop throughout this year and next. Brian, to be honest a lot of the audio of my line here was poor. So I missed some of your comments. So if I'm off-based on what I heard I apologize. I guess let's talk first about the SiFive relationship or maybe you can help us understand the engagement model and how this ramps up [your shortage] [ph] required from QuickLogic to make that a reality?

Yes. I also can hear some of the audio quality issue there, Richard. So let me try to answer what I think you asked. So let me give a little bit more color about this whole SiFive engagement. So basically, we've done the strategic announcement with SiFive. We are co-developing this template called Freedom Aware templates. Once that is made available to people on their website, other folks, other companies can take that template and make their own semi-custom SoC. Every time that takes place there is an opportunity for that customer to select the QuickLogic subsystem to be a component of that SoC that's being developed. And when that happens, we'll be getting IP license and potential royalty revenue streams from that. There is also the opportunity for us to provide software and access to the SaaS tool from SensiML. So you can imagine anybody that uses this template becomes somebody that could be a SaaS subscriber as well as somebody that can generate more opportunities for SaaS subscriptions and then royalties there of the SensiML products shipping in volume. So there's a lot of different revenue paths for us once this is actually out in 2020. In the near term, as I spoke about the early adopter program, we are expecting to get commitments on this financially from some of these customers that have skin in the game and to get early access. Again how that shows up as revenue is to be determined, but we are expecting some of that will be coming in from customers for the SiFive engagement.

Okay, that's helpful perspective. Thanks for that. Another follow up on SensiML, the previous questioners talked about [the plans] [ph] you had a goal of getting to triple digits. What's the - what's kind of the obstacle to growing that faster? Just kind of a push marketing model or a pull model and any things you can do to help accelerate or expand your funnel and pipeline there?

Great question. So SensiML was a standalone company. I think a lot of it was organic. You can see on the street, trying to get the message out and get people signed on, especially people that have transferred over to SensiML from their Intel days before they spin out of Intel. We've been putting a really big marketing plan in place now to make a strong push into the market, which then includes some seminars that we're going to be having with third-party companies like FogHorn to really talk about the benefits of machine learning at the edge. And we've also reinvigorated our sales channel and our distribution network to be stocking some of these hardware development kits, so that it's very low friction from the point somebody is interested in something with respect to SensiML to buying and getting something up running on their desk. And that's primarily done with Future Electronics and Avnet and some of the folks that we have in Asia. Future actually is doing a whole series of AI seminars in Europe of which we're going to be prominently shared throughout the summer and we expecting that's going to create quite a bit of pull for the technology as well. So, yes, we're moving from sort of a small scale marketing strategy to really going big, now that we have all of these pieces in place for a SensiML tying into the HDK and what they already have running with other processor companies.

Bodes well. Brian, you've given us some fairly detailed financial targets for this year. And I guess the start-off for investors has been - it seems like you had some great engagements in the - they seem to get pushed out or re-reconfigured or redesign to some degree. Sounds like you have a lot more confidence in the designs that you're working with today. Wonder if you could help us understand is this a function of the type of customers you're working with or this is kind of like a couple of turns through the product design cycle and now they feel like they're important or are these platform wins? Can you help us out kind of tie those things together for us please?

Yes. It's a great question and it's actually a variety of reasons why, not just one. A, I think firstly our platform itself is much more mature in the sense of the device and all of the software needed to turn it over to somebody else and let them start writing their software and applications on our chip. When we first started on this venture it was really us flying engineers around to the very few customers we could afford to do that with. Having a mature platform is we can turn it over and you really start to open the served available market and that's why we're able to get different types of customers engaged here. Another aspect of this is that there's other third-party companies now that are reporting more of their software to our platform. That in turn creates another sales force for us because they obviously want to sell more of their software out to the market. And so we're seeing opportunities come in from there that we didn't have previously. And just getting I guess more of the distribution channel into the mix now and having them take the message out further. It's an extension of our sales force and so we're seeing just many, many more opportunities coming in than we had in the past. Now the confidence level in those actually going to production, A, if you're getting more times at that you only have a higher percentage rate of getting a hit and I see us [replacing more beds] [ph] in these different customers. That's increasing my confidence because it's not solely dependent on one or two guys to go to production. And then we're just seeing, - we're seeing these demos from these companies now. They're very mature. It's for products that are not necessarily new categories of product, they're adding features to existing products. So you can imagine why that's just a natural extension for their product line to go to market with. So, yes, all those factors together are what makes that happen.

Okay. That's great. I think I may go back and listen to transcript so I can get all of the - all of your comments, Brian. So I will jump out of line.

Our next question comes from Rick Neaton, Rivershore Investment Research.

Congratulations on moving the strategy forward. In listening to your gross margin forecast and guidance, you're beginning to sound like an analog company. Is that the strategy you're pursuing Brian or something like that?

Yes, I'd love to be getting the multiples of analog companies and software. And really I think as you start to look at how we're repositioning ourselves to the external world, especially with customers and partners, it's really with a high degree of influence on software, AI platforms and IP and that's exciting. In the market there is lot of demand for it and we want to be a part of that. So, yes, absolutely we want to be getting more in the analog area of the financial results.

And mentioning AI, late last year you had a surge in QuickAI revenues. Is that pull forward still continuing into 2019? Or are there other factors at work here or broader market trends you're capturing?

It's all of it, but I would say a lot of what's happening now is that people are - they are seeing AI and these companies are wanting to figure out how they can incorporate that into their business process. And a lot of their customers that we are engaging with now they see this as a way of materially getting an ROI back. It's not just a voice feature, a consumer feature but it's a real ROI. And so we are seeing a lot of companies now coming out, wanting to speak with us about how they can incorporate that. And what we have to do is, we have to make it really, really easy and frictionless for them to do that evaluation when they're not familiar with something. And that's why this new HDK launch we have with SensiML makes that's so darn easy. And I think that's what's leading to a lot of these increase in opportunities and the big sort of surge up in number of people we think who will be subscribing to SaaS from SensiML in this quarter and subsequently through the year.

Speaking of which you mentioned that you expect, I think you said 10 to 16 new SensiML customers in Q2, and you mentioned that one customer alone is going - is buying 10 design kits for each of its 10 different divisions. Is that what you said?

Yes. I did and that sort of reinforces the point I just made. When these big companies want to see how can they incorporate AI into their business process, they want as many business units as possible to look at that. And so a big 50,000 person company or 200,000 person company buying one development kit doesn't make any sense, right, when they have all these different product lines. So I think that's a really strong message from that company that they are serious about AI and they are serious about thinking how they're going to make it work for them.

And everyone at this time there are no further questions. I'll hand the call back to Brian Faith for any additional or closing remarks.

Yes, we'll will be participating in several investor and industry events this quarter. A few of the highlights include the Oppenheimer 4th Annual Emerging Growth Conference in New York on May 14, the RISC-V Workshop in Zurich, Switzerland from June 12 to 14, the Silicon Summit in Santa Clara, California on June 18 where I will be presenting and participating on a panel, the Sensors Expo and Conference in San Jose on June 26th and 27th. All these events we plan to attend will be available on the Events Section of our website. Our next conference call is scheduled for Wednesday, August 7, at 2:30 PM Pacific Time. Thank you for your participation and continued support. Good bye.

Once again, everyone, that does conclude today's conference. We would like to thank you all for your participation. You may now disconnect.