Ladies and gentlemen, good afternoon. At this time, I'd like to welcome everyone to QuickLogic Corporation's Third Quarter Fiscal Year 2020 Earnings Results Conference Call. As a reminder, today's call is being recorded for replay purposes through November 11, 2020. 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. Our speakers today are Brian Faith, President and Chief Executive Officer, and Dr. Sue Cheung, Chief Financial Officer. Following current social distancing practices, management is doing this call from different locations today. 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 the number of our ecosystem partners; and expected results and financial expectations for revenue, gross margin, operating expenses, profitability and cash. Actual results or trends may differ materially from those discussed today. For more detailed discussions of the risks, uncertainties and assumptions that could result in those differences, please refer to the risk factors discussed in QuickLogic's most recently filed periodic reports with the SEC. QuickLogic assumes no obligation to update any forward-looking statements or information, which speak as of their respective dates of any new information or future events. In today's call we will be reporting non-GAAP financial measures. You may refer to the earnings release we issued today for a detailed reconciliation of our GAAP to non-GAAP results and other financial statements. We have also posted an updated financial table on our IR web page that provides current and historical non-GAAP data. Please note, QuickLogic uses its website, the company blog, corporate Twitter account, Facebook page, and LinkedIn page as channels of distribution of information about its business. Such information may be deemed material information, and QuickLogic may use these channels to comply with its disclosure obligations under Regulation FD. A copy of the prepared remarks made on today's call will be posted at QuickLogic's IR web page shortly after the conclusion of today's earnings call. I would now like to turn the call over to Brian.

Thank you, Jim. Good afternoon, everyone, and thank you all for joining our third quarter fiscal 2020 financial results conference call. I want to kick-off today's call by again thanking the QuickLogic team for their continued resiliency as we work through the COVID-19 restrictions. In the face of both personal and business challenges, their focus on innovation and serving our customers despite the barriers presented by this pandemic has been extraordinary. As we continue to chart our new course for the company, the team is going above and beyond to ensure the future success of QuickLogic. The third quarter marked another step in our ongoing transformation that started more than a year ago. We have been evolving our focus from being primarily a product company serving only large customers in the consumer markets to a platform company serving a much broader set of markets and more diverse set of customers. These include consumer, IoT, industrial and the military space. I remain confident we will see this change deliver improved financial results in fiscal 2021. Our third quarter revenue reflected the continued headwinds associated with the broad impact from the COVID-19 pandemic that we discussed in our last call. However, a favorable product mix, and continued decline in our operating expenses from the proactive changes taken earlier this year, resulted in higher gross margin and much better than forecasted bottom line performance. The good news is that we currently see Q3 as the revenue low point and expect sequential improvement with a better trajectory into 2021. Sue will offer our full outlook later in the call. I want to now shift the discussion to some of the initiatives we announced in the last couple of months and provide additional context around their importance to our strategy. You will remember that in…

Thank you, Brian. Good afternoon and thanks to everyone for joining us. For the third quarter of fiscal 2020, revenue was $1.8 million. This compares with revenue of $2.2 million in both the second quarter of 2020 and the third quarter of 2019. Q3 revenue reflected the broad impact in the civilian aerospace market from the global pandemic. Within our Q3 revenue, sales of new products were $639,000. This compares with $820,000 in Q2 and $1 million in the third quarter of 2019. Our mature product revenue was $1.1 million, compared with $1.4 million last quarter and $1.1 million of Q3 2019. In the third quarter, we had four customers who each accounted for 10% or greater of our sales. Non-GAAP gross margin in Q3 improved to 53.9%, compared with 47.1% in the prior quarter and 48.9% in the same quarter of 2019. The improvement in gross margin compared with the two other periods was mainly due to the restructuring and continued cost control effort. Non-GAAP operating expenses for Q3 were approximately $2.6 million, representing an improvement from $3.2 million in Q2 and $4.5 million in the third quarter of last year. The lower operating expenses in Q3 were primarily due to two factors: 1, updates to estimated non-recurring restructuring charges and asset write-offs, and 2, greater than expected on-going capitalization of SaaS software development costs related to milestones achieved in the quarter. Even when factoring out these non-recurring adjustments, our operating expenses in Q3 were still about $1.5 million lower than the same period last year. We believe operating expenses will remain in the low $3 million range for the foreseeable future. Within our Q3 operating expenses, R&D and SG&A were both approximately $1.3 million. This compares with R&D and SG&A of $1.7 million and $1.4 million in Q2…

Thank you, Sue. As we look back on what we have accomplished to transition QuickLogic - particularly in the context of the COVID-19 pandemic - I could not be prouder of what our team has achieved. We have re-aligned the company, not just in terms of having the right resources to execute on the open source initiative, but also significantly reducing our cost structure, making profitability before the end of 2021 much more attainable. With what we have in place, and the opportunities that are opening up for new business, it is clear we have made tremendous progress on the continued evolution of QuickLogic. In closing, I would again like to thank our many stakeholders for their continued support during these extraordinary and challenging times. That completes our prepared remarks. Hector, I would now like to open the call for questions.

[Operator Instructions]. Your first question comes from the line of Suji Desilva with ROTH.

First question, Brian, on the smartphones, you said 10 models by the end of the year. Are those all sourced from a single customer? Or have you now branched out? And for the 5G phones, is there any higher content opportunity for you?

We haven't disclosed if it's 1 or more customers, but if it was another one, we probably would announce it, so you could assume it's probably with the same guy. And what was the question on 5G?

Is there any higher content opportunity as you go to 5G phones?

In the current model, no. It's more or less one of the current combinations. And we do actually sell different variants of functionality to them already, but it's not materially different from what we've already been selling to them.

Okay. And then switching over, Brian, to the QORC, Q-O-R-C product initiative. Can you talk about the revenue model there? And the timing of contribution for you? Perhaps the percent of the revenue it can contribute to calendar '21? So if you talk about being a big driver in getting to profitability at the end of the year, how big can it get for you in '21?

Yes. I think the impact to next year can't be understated actually. So if we just think about the revenue contribution from now until the end of next year, in this current quarter, and in fact, this whole second half, it's all about dev kits, getting hopefully that $1,000 - or 1,000 dev kits out, which should be thousands of dollars in terms of dev kits. What we're looking at for next year is some percentage of those dev kits are going to turn into actual product designs with S3 that go to volume. I think we're modeling somewhere in the few million-dollar range for those transitioning over to real production wins and shipments next year. That's on the device side. On the IP licensing side, there are certain things related to the open source initiative that we have not enumerated in detail yet that should trigger IP licenses next year, driven from the fact that we are supporting a fully open source tool chain, layering throughout next year, probably starting from the Q2 onwards time frame. And then the other thing that can start this year is SensiML. So SensiML runs natively on QuickFeather, the dev kit that we talked about, all in open source. We've already started to ship dev kits with the bundle of SensiML this year that we're hoping to transition to the SaaS licenses for subscription. And we anticipate that growing throughout next year as well, not just on normal dev kit sales, but we have some very specific initiatives planned that we haven't talked publicly about yet that should really get a good pop in terms of awareness of the dev kit. And SensiML, again, the idea there is to start with the free version of SensiML on the QuickFeather dev kit. And then once they get the value of the tool, the use cases, transition them over to a more expensive SaaS version, somewhere in the few to $20,000 a quarter range. And then I think your last question was how - the impact to next year in total from QORC?

Right. To help you get profitable. Yes.

So without giving a specific number, I'd say, it's several million dollars' worth that we have a fairly good line of sight.

Okay. And then just one last follow-up on QORC. The 400 dev kits going to 1,000. I'm just trying to understand, is there a portion of those that are internal to Google? Or are they third-party guys who're building Google Android-based devices? And also geographically, is it U.S. Europe centric? Or are you getting Asia penetration with these as well? I guess Antmicro also, that would help.

Yes. I'd say that for the most part, the dev kits sales are to North America. We do have our distribution network that is stocking and selling them in Asia and in Europe, but for the most part, the uptake has been domestically here in the U.S. As far as the end customers that it goes to, without saying specific names, there are dev kits, lots of them, in fact, going into a very large compute-oriented customer, spreading around there for different projects. That will hopefully be a revenue driver for us for next year, but not totally dependent on that. We are - one of the points I tried to make in the beginning is that this new strategy is really about diversifying where we take the products in terms of marketing customers. And I think this is a good example of fitting that. It's, in fact, getting into many different IoT customers, industrial customers and consumer customers.

[Operator Instructions]. Your next question comes from the line of Martin Yang with Oppenheimer.

My first question is about the reports on foundry capacity constraints in the semi supply chain. So are you affected by the capacity constraints and - in the third quarter? And do you foresee yourself getting - seeing the constraints in the next 6 months?

That's a good question. So the only capacity constraints we really saw on the supply chain side was earlier in the year when COVID first hit and places were getting shut down, Martin. We got through that. And I think, fortunately, we do try to have a buffer stock, both in terms of wafers and packaged goods, and we're using that now. I don't foresee the need to do anything different in that area. And we are looking with matching our lead times we set with our customers with the lead times from the fabs and assembly houses. So I don't foresee an issue. And I think part of that is because we have really good relationships with the supply chain. The other part is that we pretty carefully manage to make sure that we do have wafer inventory on hand. Where we have had to start new wafers, we haven't had any issues. So perhaps the ones that are constrained are ones - are on process nodes that we're not on.

Got it. And so to follow-up on that, can you talk or maybe remind us the cyclical lead time for your mature and new products?

So the lead time that we give to customers is typically in the 8-week range. Sometimes, if we have forecasting customers to go out further, and we decide to do a buffer stock, we can take that to a lesser number. But typically, it's about 8 weeks.

Got it. Last question for me. So looking at our 4Q guidance, can you maybe walk us through the bigger drivers that will help us to reach the higher end or things that could push us towards lower end of the range?

Sure. So for context, at this point in time, we have more shipped and booked orders for this quarter than we did all of last quarter. So that's just the frame to view this through, okay? On top of that, now how do we get to the guidance? So mature is a big driver this quarter, obviously, with MilAero, they typically have larger orders. And we see, for the most part, those are laying in nicely. We do see the EOS S3 for the smartphone. As I mentioned earlier, we're seeing shipping into more smartphones in this quarter, and so that's the driver for that. So we need to keep that going in this quarter. And then also this quarter, we start to see a little bit higher pop in terms of the SensiML SaaS software as well as revenue associated with the IP eFPGA initiative coming into play. Not quite to the point where we'd have to start breaking it up separately, but enough that it is meaningfully contributing to that midpoint. Outside of those main drivers, there's just the ongoing business that we have at smaller levels, but I think I captured the big ones there for you.

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

Maybe a couple of follow-ups on some of the prior questions here. Maybe let's delve into the phone customer here and the new wins here. Any sense of aggregate volumes from these wins versus the ones you've been in? And how does this help you think about like forecast out in the future? Do you see this going more than a couple of quarters? Or can this fill up most of next year?

First of all, I'll answer your last one first. We see this going well through next year. We're getting visibility now into their phone roadmap throughout next year and the phone models we would intercept with our devices. So feeling really good about next year being larger in terms of revenue than this year was with that same customer for us, especially as the attach rate starts to go up. As far as the individual phone volumes, I think this customer is looking at both how can you do fairly good volume phones for the Japanese market and then how can they also address niches as well. So the more niche phones are going to be like 100,000 units, probably each, the bigger volume ones are closer to 1 million. So in aggregate, how do you weight that average, probably it's several hundred thousand units a phone, I would guess, in that area. If you average everything out.

Okay. That is helpful. Let's see here. In the fourth quarter, you're looking for a big step on mature product here, and it sounds like you're calling out MilAero. How do we think about that revenue stream as you go past this quarter? How sustainable is it. Obviously, MilAero, as you see with QuickLogic and other companies is going to be lumpy. So how do we think about sustainability of revenues at this level?

So I think we're no different than other companies in the sense that there are - there is lumpiness in the orders. One quarter, it's here. In the next quarter, it's not. Fortunately, we have probably around 5 or 6 different military programs that we're in that are pretty sizable. And so they're not all lumpy in the same quarter, which is good. So that's why we were saying earlier, I think, for next year, 2021, the mature business, which MilAero is part of, it's probably about flat for this year. If you look at it from an annual point of view. There probably is a little lumpiness like in Q3 of next year. Q3 is typically a soft quarter on the mature side because some of our MilAero business is in Europe. They take longer vacations. They don't buy as much product in that quarter. But outside of that, it's fairly steady. This quarter is a little bit of an anomaly because last quarter was a little lighter than we thought. And there's a little bit extra purchasing in this fiscal year because of a very specific military program, they're trying to stock up on. But outside of that, it's fairly normal for us.

Okay. That's helpful for perspective. In one of the earlier questions regarding QORC, you said you had several million dollars' worth of business that you have good line of sight on. Can you help us understand what you mean by good line of sight? You have good understanding of product development and introduction cycles and other things that helps you make that comment. Can you give us a little more color there, please?

Yes. Without giving away too much, the line of sight I was referring to is we're in the process of negotiating different contracts that show that there's that value there to be had, both in terms of the IP software side as well as the device side. So we're going through that, but that's - we're engaged deeply with those people, and we're at the contract level, and I - that's why I said that I see line of sight.

Okay. That's fair enough. Maybe 1 last question for me, Brian, on SensiML. You said you're seeing a higher pop from SensiML in this quarter. Again, does that sustain? And maybe if you can help characterize kind of the underlying level of SaaS license as you have? And your thoughts on how you grow that? How fast it can grow?

Yes. I think in our investor deck, we talked about dozens users. That's continuing to grow. We have some initiatives that we actually are, I think, going to supercharge that growth pretty soon here that we're launching with partners, 1 of which I think is STMicro, a couple of other ones that we haven't talked about yet that I think are going to give access to a really broad set of users in a very short period of time. So we're hopeful that those will transition first into the lower cost here, which is only a few hundred dollars a quarter, but that is a fairly limited functionality version of the tool. As they get accustomed to it, we plan to upsell them into the higher capability version of this asset. So the ones that are on the SaaS already, they're continuing to use it. We're in the midst of negotiating a few larger deals right now for this quarter, expanding use cases like consumer wearables, where they're looking at creating different types of gestures or contextual classifiers to IoT on more of a predictive maintenance-type application. So I think that those are going to continue well into next year. And I am hopeful that we're actually going to start increasing the slope of the on-ramping to higher cost tiers because of these initiatives with partners. And I also can't understate the importance that we have now, where we have the integrated workflow with Google's TensorFlow Lite. Google's TensorFlow Lite is a very well used in the data science community tool for creating neural net. And the fact that we can now plug into that flow, I think, gives us access to a host of people that we didn't have access to before from a customer point of view. And so we're going to be benefiting from that shortly. Just in terms of onboarding the [indiscernible]. So a lot of groundwork was late actually in Q3 for SensiML that I think is going to bear some fruit starting in this quarter, but really accelerating from Q1 as we get these initiatives out more broadly.

Okay. That's helpful. Just one last question for me, probably for Sue here. In the breakeven last quarter, I think you called out breakeven roughly $5 million to $6 million per quarter. I haven't heard anything that would tell me different, but just want to confirm with you that you still view that as an appropriate breakeven level for the quarter?

Yes. Richard, thanks for the question. A breakeven point, it does lower to $mid-5 million revenue from before $6 million to $8 million. So it is - it can be even lower than $5 million, running - can be even lower to 4.5 million if we have our gross margin increase to mid-60s level with more of the IP license revenue and the SaaS revenue come in, that carries very high margin with our OpEx at a level close to $3 million per quarter. Easily could even achieve a breakeven at $4.5 million revenue level.

Your next question comes from the line of Rick Neaton with Rivershore.

With your Samsung collaboration, how are the costs paid in this? You once announced an eFPGA license with another foundry, SMIC, and they paid you some fees. So I'm wondering how the cost of this collaboration was covered. Did you cover it? Did they cover it? Was it joint?

We covered it, Rick, which is all part of the OpEx that we've been reporting for the better part of the year. That's on the Silicon side. The other key element of our FPGA initiative, eFPGA, QORC, all of that is the open source software tools. And I want to emphasize this point here for everybody: by us moving into the open source software domain, we are leveraging a lot of the R&D that we have because we're using a lot of the product of other folks' R&D to create these open source software tools. We're simply adapting them and then including our proprietary mix into that so that they can target our tools. So because we did that, we were actually able to do this whole development at a much lower OpEx than had we had to do everything from a proprietary point of view ourself. But the short answer to your question is we did the Silicon porting cost by ourself. We did not do that with Samsung. Like they didn't share the cost, if that's the question.

Right. And any licenses that you would sell-off of this collaboration, would that be direct with their customers?

Yes. It would be directly with the customers. So basically, we had this big launch last week at their developer conference. And so we got in touch with certain folks that are inbound just by attending. We've had other folks that have been interested since we did the press release. We would do direct license deals with them, with those customers. The wafers would run in Samsung Foundry, and then we would get royalties directly from the customers as well, which is a typical operating model of these foundries. If you're not a standard cell IP provider, which is somebody like a Cadence or a Synopsys, typically, this is the type of arrangement you have with IP providers and foundries.

Okay. With a plus or minus 15% on your Q4 guidance, that works out to around a $400,000 opportunity there. Where is that opportunity located? To get to $3.1 million?

To get to $3.1 million?

Yes.

Well, like I said earlier, when 1 of the other guys was asking about the QORC initiatives into next year. Those are the things that we're talking about that could hit in the quarter as well for that, that have not baked into the midpoint. But that could certainly get us to the high end of needs if those come in.

During your last conference call, you spoke about the possibility of an eFPGA or an ArcticPro 3 license in the fourth quarter of this year. Is that what you were talking about as something in Q1 or Q2 of next year?

Yes. The 1 large that I'm thinking about would be in the first half of next year at some point.

The hearable kit that you're submitting to AVS for approval for use of AVS services, is that being submitted in QuickLogic's name or under one of your customers?

It's a dev kit, so it's under our name because, ultimately, we would be the one that is associated with it on the Amazon web page. And just for clarity, it has been submitted, past tense. It was submitted yesterday into their lab's engines and for certification testing.

Okay. In the past, you had been talking about a customer submitting a designer kit, dev kit. So this is a change in that. Could something else be submitted using the S3?

It's not a change, it's just part of the story, Rick. So we do have another customer that is awaiting for that to finish before they can make sure that, that software they use is good enough for them to put their own product in. It's the difference between an ODM dev kit and an OEM like a semiconductor company's dev kit. And in the past, I've talked about both, and that's still the plan, but we'll be the first to go through the gauntlet of the testing.

You said you had good line of sight into some of your customers even for next year. How does that line of sight look for the first half of next year?

Well, better than the second half, obviously, because it's nearer term.

Right. So most of the opportunities you're talking about converting, are they first half opportunities?

Yes. And that is my focus actually, first half. I want to start the year strong.

Okay. Do you have any bookings for - right now for first quarter shipments?

We do have bookings already, yes, both for mature and for smartphone customer.

And are they above what your third quarter bookings were?

I don't think I'm going to go that far in the call, Rick, but it was bookings.

Okay. One last question. How is your SensiML conversion rate going at present? Earlier in the year, you spoke about a number of opportunities where licenses were shipped at a smaller trial fees, and you were hopeful of converting a number of those into full license - full-service license arrangements. Is that what you're talking about in Q4?

Some of those are converting the existing funnel over to the higher-tier SaaS. Some of those are pretty immaterial in nature to the enterprise SaaS level. I'm not satisfied yet with our conversion rate, and I think that we can and will do better. And we've gone through a pretty deep analysis on what we can do actually to start improving that. And we're in the process of implementing that now, in fact. So some of the new marketing initiatives, you'll undoubtedly see come out from us a bit later this quarter, will be towards contributing to that. So it's going okay, but I think we can and will do better.

Ladies and gentlemen, we have reached the end of the question-and-answer session, and I would like to turn the call back to Mr. Brian Faith for closing remarks.

Yes. So I'd like to thank everybody for joining us on the call today. Our next call, I believe, is scheduled for February, and we'll be putting releases out in the exact time. Again, thank you for your support, and talk to you later. Thank you. Bye-bye.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.