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Earnings call: QuickLogic projects 15% growth despite Q2 challenges

Published 2024-08-14, 04:20 p/m
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QuickLogic Corporation (NASDAQ:QUIK), a notable player in the field of Field-Programmable Gate Arrays (FPGAs), has reported its Q2 fiscal 2024 earnings with mixed results. Despite a 41% year-over-year increase in revenue, the company faced a 31% sequential decline from Q1. The company has adjusted its full-year growth projection to 15%, citing scheduling push-outs, although no contracts were lost to competitors. QuickLogic remains optimistic, expecting a sharp revenue rebound in Q4 and accelerated growth thereafter. The company is actively expanding its product lines and partnerships, targeting various sectors including defense, industrial, and consumer electronics.

Key Takeaways

  • QuickLogic reported a second-quarter revenue of $4.1 million, a 41% increase year-over-year but a 31% decrease from the previous quarter.
  • Full-year growth projections have been lowered to 15% due to scheduling push-outs, not due to losing contracts or company delays.
  • Revenue is expected to rebound sharply in Q4, with accelerated growth anticipated moving forward.
  • The company is expanding its FPGA Chiplet product line and has announced significant partnerships and distribution agreements.
  • SensiML, a subsidiary of QuickLogic, is set to achieve record revenue in 2024 with its new Open-Source strategy.

Company Outlook

  • QuickLogic plans to be cash-flow positive with double-digit earnings for fiscal 2024.
  • The company expects to further accelerate growth and profitability in late 2025, particularly from storefront and chiplet opportunities.
  • A four-year compound annual growth rate (CAGR) of 30% demonstrates the company's promising long-term success.

Bearish Highlights

  • Revenue pushouts were experienced due to funding delays from customers in the aerospace, defense, and industrial sectors.
  • The company’s Q2 revenue saw a significant decline compared to Q1 of the same fiscal year.

Bullish Highlights

  • QuickLogic has not lost any contracts to competitors and the scheduling push-outs were not caused by the company's own delays.
  • The company's unique position in integrating open-source components into their eFPGA IP and leveraging open-source technology in their eFPGA user tools sets them apart in the market.
  • The Australis eFPGA IP Generator is expected to enhance the company's ability to quickly create customer-specific Hard IP.

Misses

  • The company's Q2 revenue fell short of Q1 figures, indicating a short-term setback.

Q&A Highlights

  • Brian Faith discussed the company's increasing win rate and confidence in meeting the goal of winning 10 IP contracts for the year.
  • Elias Nader confirmed that operating expenses (OpEx) are expected to remain flat throughout the year, indicating controlled spending.

QuickLogic's strategic partnerships, such as with Intel (NASDAQ:INTC) Foundry, BAE Systems (LON:BAES), CTG, and distribution agreements with Spur Microwave and Astute Electronics, are set to bolster the company's market position. The company's ongoing efforts to improve its software tool suite, Aurora, and the expansion of its product line, particularly the FPGA Chiplet with a UCIe interface, demonstrate its commitment to innovation and customer needs. QuickLogic's collaboration with YorChip on the development of an FPGA Chiplet, expected to release in the second half of 2025, and the proposals worth over $40 million signify potential future growth. With a strong pipeline of proposals and a focus on sectors like the Defense Industrial Base, QuickLogic aims to capitalize on its three decades of FPGA expertise and storefront services to drive more IP business and revenue opportunities.

InvestingPro Insights

QuickLogic Corporation (QUIK) has shown a notable increase in revenue growth over the last twelve months, with a significant 42.27% increase as of Q1 2024. This aligns with the company's optimistic outlook and expectations of a sharp revenue rebound in Q4, as mentioned in their earnings report. The revenue growth is even more impressive when looking at the quarterly figure, which stands at 45.34%.

However, the company's stock price has experienced volatility, as indicated by the recent 8.9% return over the last week, but a more concerning 18.65% decline over the last month. This volatility is also reflected in the high Price / Book multiple of 6.12, which suggests that the stock is trading at a premium compared to its book value. Investors may want to consider these price fluctuations when evaluating the company's stock for investment.

In terms of profitability, one of the InvestingPro Tips for QuickLogic is that analysts predict the company will be profitable this year. This is supported by the company's positive net income over the last twelve months and the expectation of net income growth this year. The company's commitment to expanding its product lines and partnerships could be a driving force behind this anticipated profitability.

For those looking for more insights and analysis, InvestingPro offers additional tips on QuickLogic, providing investors with deeper information to make informed decisions. Currently, there are 13 additional tips listed on InvestingPro for QuickLogic, which can be accessed at https://www.investing.com/pro/QUIK.

InvestingPro Data:

  • Market Cap (Adjusted): 118.57M USD
  • P/E Ratio (Adjusted) for the last twelve months as of Q1 2024: 126.93
  • Revenue Growth for the last twelve months as of Q1 2024: 42.27%

Full transcript - QuickLogic Corporation (QUIK) Q2 2024:

Operator: Ladies and gentlemen, good afternoon. At this time, I would like to welcome everyone to QuickLogic Corporation's Second Quarter Fiscal 2024 Earnings Results Conference Call. As a reminder, today's call is being recorded for replay purposes through August 20, 2024. I would now like to turn the conference over to Ms. Alison Ziegler of Darrow Associates. Ms. Ziegler, please go ahead.

Alison Ziegler: Thank you, operator, and thanks to all of you for joining us. Our speakers today are Brian Faith, President and Chief Executive Officer; and Elias Nader, Senior Vice President, and 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, including the expected timing of such revenue; statements regarding our future profitability and cash flows; statements regarding the timing, milestones and payments related to QuickLogic’s government contracts; statements pertaining to QuickLogic's future 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 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 the 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 (NASDAQ:META) 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 on 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.

Brian Faith: Thank you, Alison. Good afternoon everyone and thank you all for joining our second quarter 2024 conference call. We have made tremendous progress during the first seven months of 2024. Unfortunately, that progress is overshadowed by some scheduling push-outs that cause us to lower our full-year growth projection to 15%. As Elias will cover in detail, we anticipate revenue in Q3 will be up slightly from Q2 followed by a very sharp rebound in Q4 to realize our revised full-year growth projection. I will step you through the status of our major contracts, but first I want to make a few things absolutely clear. We did not lose any of the contracts to competitors that we expected would contribute to the 30% growth. And none of the push outs were due to delays caused by QuickLogic. We are performing on or ahead of schedule on all contracts and pending proposals. We also have deliverables scheduled to support the majority of the implied revenue outlook for Q4. Only one of the push-outs involves a significant contract that we’ve discussed in our quarterly conference calls. I will cover that to the extent I can as I update you on the status of major contracts. The balance of the push-outs are smaller deals that we believe will generate revenue beginning in early 2025. I say beginning in 2025 because most of the IP contracts have the potential to generate revenue for years beyond the IP deliverables phase. As I’ve noted in past calls, the IP deliverables phase, which has driven high growth and record profit margins, is actually the foundation for our larger business model. We expect IP revenue will rebound sharply in Q4 of this year and that demand, from an expanding base of customers, will accelerate revenue growth going forward. In addition, we believe revenue from our next phase, which includes Storefront and Chiplet, will layer on beginning in late 2025. Let’s take a few minutes now to update the status of some of our major contracts and accomplishments. On July 8th, we announced the award of the third tranche of the Strategic Radiation Hardened FPGA government contract that was initiated in August 2022. The value of this tranche is $5.26 million, and as we forecasted in our last two conference calls, it has a funding rate similar to tranche one. The higher than anticipated cash usage during Q2 is mostly attributable to the timing of our Strategic Radiation Hardened contract. As Elias will cover, the payments received in Q3 that we anticipated in Q2 will benefit Q3 cash flow. Tranche three funds the continued development of Strategic Radiation Hardened FPGA technology to support identified and future DoD strategic and space system requirements. The total potential for this contract, including future options, is $72 million. If these options are exercised, we expect the funding rate will increase significantly in 2025. Beyond building on the success of our large government contract, we are very well positioned to significantly expand our eFPGA Hard IP business across many new customers and market sectors, as well as the number of fabrication nodes supported by our IP in 2024 and beyond. With the award of Tranche Three, we moved $5.26 million from our sales funnel to booked business, and more than replaced it with new opportunities. The result is a net increase to $189 million. Within this, there are numerous outstanding proposals including three new RFPs with major customers totaling approximately $8 million that we have submitted during the last month alone. Given its two-year outlook, the funnel is also beginning to capture specific Storefront and Chiplet opportunities that we believe will begin to materialize late in 2025. On June 18th we announced that we joined the Intel Foundry's Accelerator IP and US Military, Aerospace, and Government Alliances. This marks a significant milestone in the company's strategic growth plan. Driven by customer demand and to capitalize on the already considerable interest from companies targeting the Intel 18A technology for new designs, we have initiated development of our Hard IP. We believe this will position QuickLogic as a leading source for eFPGA Hard IP optimized for Intel 18A. Combined with the unique ability of our Australis eFPGA Hard IP Generator to quickly develop customer-defined Hard IP cores, we will be well-positioned to win contracts and accelerate the schedule of our deliverables. On May 28th we announced that QuickLogic received the BAE Systems Partner 2 Win Supplier of the Year award in the category of FAST Labs Technology Innovation Partner of The Year. During our last conference call, I announced that we booked our second contract that will be fabricated using a nanometer process. The first contract is with a Defense Industrial Base customer and will be fabricated on GlobalFoundries (NASDAQ:GFS) 12nanometer process known as 12LP. We are on schedule to complete our deliverables on two cores and recognize revenue during the second half of 2024. The second contract is with a large international company that I’m sure you would recognize. This design is for a new ultra-low-power SoC that is targeting a variety of commercial and industrial IoT applications. This design will be fabricated by TSMC on its 12 nanometer process. Within the SoC, our eFPGA technology is used for AI acceleration, which is a necessary function in most AI applications. We believe this will prove to be a rapidly growing application that is often better served by eFPGA technology than a processor running the acceleration algorithms in software. We are on schedule to complete our deliverables for this core and recognize revenue during the second half of 2024. We are also working closely with this customer on a new design proposal. In November 2022, I shared that we taped out a new device for a customer that incorporates our eFPGA Hard IP. Due to strict confidentiality requirements, I can't share more details on the specific design win beyond a brief update. In line with what I covered during our last conference call, the customer is continuing to work through certain aspects of the design. Last quarter I stated that we anticipated resuming our efforts on this design during the second half of 2024. However, due to a delay with one of the customer’s subcontractors, the completion of our deliverables and revenue recognition have been pushed out to 2025. The program is still a solid go and could represent tens of millions of dollars in potential Storefront revenue starting in a couple of years. Last September, we announced a leading technology company chose our eFPGA Hard IP for a design that will be fabricated using GlobalFoundries 22FDX platform. Again, due to strict confidentiality requirements, I cannot go into more detail on the design, but I can share that we have delivered our IP to the customer that is now awaiting the availability of a multi project wafer shuttle at GlobalFoundries to move forward. Last November, we announced a global semiconductor leader chose our eFPGA Hard IP for a design that will be fabricated on UMC’s 22 nanometer process. We have completed the delivery of our IP. Tape out was also completed on schedule and the customer expects delivery of its first chips during Q3. In total, we are on contract to deliver our eFPGA Hard IP on six different foundry/process technology combinations, including two that will be fabricated using 12 nanometer technology. In addition to these, we believe we are on track to be a leading company to offer eFPGA Hard IP for Intel 18A. In advance of this, we have submitted the first two of what we believe will be many proposals to customers targeting new designs for Intel 18A. This is up 3x from a year ago with minimal growth in the associated R&D costs. This demonstrates that the market demand for eFPGA Hard IP is accelerating and that the automation from our proprietary Australis IP Generator enables us to address this demand in a scalable way. We expect this trend to continue with our leverage becoming even more evident as we increase our 18A engagements. In addition to these awarded contracts, we have a number of large contract proposals pending; some of which have a value in the mid-seven-figures. These include major DIB proposals and a pending new proposal with a large semiconductor company. Some of these proposals could end up as Storefront designs. In addition to these, we have several Chiplet opportunities in our funnel including potential deals with our partner, YorChip. We are awaiting feedback from customers on two previously discussed proposals that have a combined value of over $40 million; one is in conjunction with YorChip. We’re very excited about our partnership with YorChip and the pending release of our first jointly developed FPGA Chiplet integrating QuickLogic IP in second half 2025. Going forward, this FPGA Chiplet product line will be expanded to include devices ranging from 40,000 LUTs to over one million LUTs. These Chiplets will include a UCIe interface, which is supported by industry leaders including AMD (NASDAQ:AMD), Arm, Google (NASDAQ:GOOGL) Cloud, Intel, Meta, Microsoft (NASDAQ:MSFT), Qualcomm (NASDAQ:QCOM), Samsung (KS:005930) and TSMC. We believe this will enable the rapid adoption of our FPGA Chiplet solutions across a very wide variety of applications. In line with our earlier forecasts, shipments of EOS S3 to our lead smartphone customer increased during the first half of 2024. Q3 will be a seasonally low quarter with volume rebounding in Q4. With new designs ramping, we expect shipments will continue through 2025. Consistent with our prior outlook, we are forecasting a modest increase in display bridge shipments and we now believe mature product revenue will also be up modestly year-over-year. During July, we announced two new distribution agreements; one with Spur Microwave to cover markets across India and the second with Astute Electronics, which covers Europe, Israel, Turkey, Australia and New Zealand. The primary reason for the expansion of our distribution partners is to address the sharp increase in interest we are seeing in international markets. With eFPGA Hard IP established for several of the most popular fabrication processes and our sophisticated software tools, we can address this rapidly growing international demand very efficiently through distribution. On August 7th, we announced our partnership with CTG. CTG will fulfill a role that extends beyond traditional distribution and enable us to significantly expand our scope of coverage within the Defense Industrial Base without increasing our operating expenses. There are literally hundreds of potential programs within the DIB that could benefit from our IP technology and soon from device solutions like Storefront and Chiplet. CTG’s close collaboration with the DIB gives them deep knowledge of the programs and key decision makers. Their established programs ensure long term inventory support, often spanning through customer-lifecycles that can extend decades. Their support will give us significant leverage by introducing us to programs that could be beyond our direct reach and pre-qualifying opportunities before we invest resources. Aurora is our comprehensive software Tool Suite comprised of Open Source and proprietary components that is used by our customers for eFPGA design. It provides seamless integration from customer RTL to eFPGA or FPGA Bitstream. With the release of Aurora 2.7 last June, we have continued our cadence of continuous improvements. In the 2.7 update, we further improved user interface and experience and improved timing performance by 20%. Aurora 2.8 is in the works and scheduled for release during Q3 and 2.9 is scheduled for Q4. Between these and other improvements we have scheduled for 2024, we will provide additional improvements in flow automation, increase IP core speed by approximately 50% and reduce die area for a given size eFPGA core. For our customers, this means easier use, better performance, shorter development cycles and lower development costs. For QuickLogic, it means we can address designs that require faster speeds and more cost sensitive applications. Turning to SensiML. Leveraging the four years of experience and success monetizing an Open-Source business model at QuickLogic, SensiML announced its own Open-Source strategy in a press release on May 14th. SensiML’s Piccolo AI is the first complete, open-source AutoML solution for the development of edge AI/ML applications. Piccolo AI empowers companies to rapidly develop applications including audio recognition, keyword spotting, predictive maintenance, gesture recognition and anomaly detection regardless of their expertise in data science. On July 25th, SensiML launched a new Generative AI feature that enables developers to rapidly build ML training datasets for custom voice recognition, voice command and speaker identification applications. These models are specifically optimized to run autonomously and efficiently on low-power microcontrollers. SensiML is collaborating with two top-tier microcontroller companies to enable its AI/ML development tools on their edge platforms and planned AI accelerator SoCs. With these significant advances and engagements, SensiML is already on track to report all-time record revenue in 2024. With that, let me now turn the call over to Elias for a review of the financial results, and I will rejoin for our closing remarks. Elias, please go ahead.

Elias Nader: Thank you, Brian and good afternoon, everyone. Our second quarter revenue rose 41% from the second quarter of 2023 to $4.1 million, but was down 31% compared to Q1 and was at the lower end of our guidance. The primary reasons for this were the timing of certain contracts and lower Connectivity revenue, which is also why new product revenue was below our outlook. New product revenue in Q2 was $3.1 million, up 37% from Q2 last year, but down 37% compared to Q1. Mature product revenue was $1.1 million, up 56% from Q2 last year and essentially flat with Q1. Non-GAAP gross margin in Q2 was 53.1% compared with 44.2% in Q2 last year and 70.3% in Q1, and below our outlook for the quarter. The primary reasons our non-GAAP gross profit margin was below our outlook include lower than expected IP revenue and a higher allocation of what we modeled as R&D expenses to COGS. Our Non-GAAP operating expenses in Q2 were approximately $2.9 million. This compares with non-GAAP operating expenses of $2.9 million in the second quarter last year and $2.5 million in the first quarter. Operating expenses were below our outlook because a larger portion of R&D than we expected was attributed to COGS. It will be an ongoing challenge to correctly project how much of our R&D investments will be allocated to operating expenses and how much will be allocated to COGS. However, at the operating line on our income statement, the two will balance out. Non-GAAP net loss was $0.7 million, or $0.05 cents per share. This compares to a non-GAAP net loss of $1.7 million, or $0.12 per share, in last year’s second quarter, and non-GAAP net income of $1.7 million, or $0.11 per diluted share, in the first quarter of fiscal 2024. For the second quarter, one customer accounted for 10% or more of our revenue. At the close of Q2, total cash was $23.3 million compared with $24.6 million at year end 2023 and $27.4 million at the close of Q1. These figures include our $20 million credit facility. The higher than anticipated cash usage during Q2 is mostly attributable to the timing of our Strategic Radiation Hardened contract. In total, our accounts payable decreased by $3.44 million, which was primarily a large non-recurring payment. Our receivable accounts, which includes contract assets, increased by a net of $537,000. Combined, this $4 million change in the balances of our accounts was the primary reason for the reduction in our cash balance in Q2. As I will cover in a moment, payments received in Q3 that we anticipated in Q2 will benefit Q3 cash flow. Now moving to our guidance for the third quarter of fiscal 2024, which will end on September 30, 2024. Revenue guidance for Q3 2024 is approximately $4.2 million, plus or minus 10%. Third quarter revenue is expected to be comprised of approximately $3.5 million in new products and $0.7 million in mature products. Our lower than anticipated Q3 revenue guidance is attributable to the majority of the second half IP revenue recognition being scheduled now for Q4 and in some cases, pushed into 2025. With these changes, we have lowered our full-year outlook to 15% growth. I realize this implies very large sequential growth in Q4 2024, but as Brian noted, the majority of the deliverables needed to realize this implied revenue growth are on the books and in process. Based on the anticipated Q3 revenue mix, non-GAAP gross margin for the third quarter is expected to be approximately 55%, plus or minus 5 percentage points. Our non-GAAP operating expenses are expected to be approximately $3.0 million, plus or minus 10 %. Please note that given the nature of our industry, we may occasionally need to reclassify certain expenses to COGS or capitalize certain costs. The reclassifications are primarily related to labor and tooling for our revenue contracts with customers. Such capitalization may reduce OPEX and alter the timing for recognizing the corresponding expenses in COGS. This may cause variability in our gross margins and operating results. Bearing these factors in mind and based on our current full-year revenue outlook, we believe our full-year 2024 non-GAAP gross profit margin will be in the upper 60% range. After interest, other income and taxes, we currently forecast that our Q3 non-GAAP net loss will be approximately $0.6 million to $1.6 million, or $0.02 to $0.09 per share, based on roughly 14.7 million shares. The difference between our GAAP and non-GAAP results is related to non-cash, stock-based compensation expenses. In Q3, we expect this compensation will be approximately $800,000, similar to Q2. As a reminder, there will be movement in our stock-based compensation during the year and it may vary each quarter based on the timing of grants to employees. At the midpoint of our outlook for Q3, we expect cash usage to be approximately zero to $500,000. Please note, we are investing in developing eFPGA Hard IP for certain strategic fabrication processes in advance of contracts. This includes the development for Intel 18A. We believe this provides us with strategic advantages in winning contracts, some of which are pending, and will shorten the time it takes us to recognize revenue if contracts for these processes are awarded. Based on our current full-year outlook, we believe we will be cash-flow positive and report double-digit earnings for fiscal 2024. Thank you very much. With that, let me now turn the call back over to Brian for his closing remarks.

Brian Faith: Thank you, Elias. I would like to take a moment to summarize what we have accomplished so far, where we are today and where I believe we are going. We were the first and are still the only company to integrate Open-Source components into our eFPGA IP and to fully leverage Open-Source technology in our eFPGA User Tools. We are also the only eFPGA IP company that has over three decades of experience in delivering discrete FPGAs and integrated devices that include embedded or eFPGA. These devices continue to win new designs. While these merchant silicon solutions are not the thrust of our business model, our unique experience in managing everything from fabrication to finished goods enables us to leverage existing resources to provide storefront services for our customers. This capability drives more IP business and opens unique opportunities for revenue and profit. The foundation of our business model is the eFPGA IP. We leverage this foundation with software tools to create process-specific and customer-specific eFPGA Hard IP much more quickly than our competition. With our proprietary and Open-Source software tools, we will have process- specific eFPGA Hard IP for six different fabrication processes by the end of 2024. In addition to these, we believe we are on schedule to be a leading provider of eFPGA Hard IP for Intel 18A. With our proprietary Australis eFPGA IP Generator, we can quickly leverage our process-specific Hard IP to create customer-specific Hard IP. We are the only eFPGA IP company that leverages this customer-specific Hard IP strategy. Australis also enables us to port our eFPGA Hard IP to new process technologies in about half the time it takes our competition. This IP business model has driven significant growth during the last four years. With proposals now addressing a much wider and more diverse customer base, we expect this growth will accelerate and continue to scale very favorably relative to our operating costs. In addition to the anticipated growth of our eFPGA IP foundation, we believe revenues from Storefront and Chiplet will begin layering on in late 2025 and accelerate our rate of growth and profitability. In short, the more our foundation of IP customers grows, the more leverage we have above it. All in all, the things that are most important for our long-term success are going extremely well and even with a lower growth outlook for 2024, our four-year CAGR is 30%. We believe we are well positioned to maintain or exceed that rate of growth during the coming years. With that, I will turn the call over for questions.

Operator: [Operator Instructions] Our first question comes from Rick Neaton with Rivershore Investment Research. Please go ahead.

Rick Neaton: Hi, Brian. Hello, Elias.

Elias Nader: Hello, Rick.

Rick Neaton: So you have about $3 million of revenue being pushed into next year because of pushouts not under your control at certain customers. Is that what you're telling us?

Brian Faith: That is correct.

Rick Neaton: Okay. You called out your situation or your status at the new Intel 18A node that's supposed to enter mass production late next year. Are you going to be the first eFPGA company to offer Hard eFPGA IP on that node?

Brian Faith: That is our target, and yes, I believe we will be.

Rick Neaton: In terms of storefront revenue now, you talk about the deals in the sales funnel that have grown to $189 million. What percentage of that are potential storefront deals?

Brian Faith: I don't have that percentage right in front of me, Rick, but I would say that of that total funnel, more than half of that are related to storefront deals. When I say that, remember the way we look at our funnel is a two-year funnel. So the funnel value that we're talking about in these calls would be just representative of the development of those designs. The actual storefront revenue is significantly higher and it falls sort of starting at the end of next year but really contributing outside of that two-year window. So the funnel value of the storefront devices themselves outside that tier would be significantly higher, perhaps even an order of magnitude higher.

Rick Neaton: One other question. You talked about, I think you used the number $40 million in terms of chiplet potential deals. Is that entire number reflected in the $189 million?

Brian Faith: No, it's not. And those are -- firstly, those are for two specific chiplet proposals that we've put forth. Not all of that is in that $189 million funnel, because at least one of those is a three-year development project, and so the third year is outside of that $189 million. It's not inside the two-year window yet. And I think hopefully that gives you some sense that there's -- as we march through time, as things come inside that two-year window, you start to see an acceleration factor of that funnel value going up.

Rick Neaton: One final question on the Strategic Rad Hard deal. You've been in a development phase in these first three tranches. Conceptually, how is this deal going to change after the third tranche when you talk about all of the possible future revenues that are possible if other tranches are awarded to a QuickLogic. How does this particular deal change in terms of concept? Are you talking about something moving into production at that point or some other type of development?

Brian Faith: Great question. So what we've always talked about, and when we talk about the contract and it's $72 million over four years that they execute other options, that's just for the development of the chip. And what I'm allowed to say publicly is that contemplate having two chips being taken out, manufactured and tested, a test chip and a final chip. And that's across that roughly four years and roughly $72 million. After that, our goal is to become the storefront supplier of that resulting device, that final chip, to the defense industrial base for strategic and space applications. And none of that storefront device revenue or storefront potential is actually part of the $72 million that we talked about. $72 million is just the development contract. I think I've shared in several forums that my view of the market potential for that device once it's done is probably on the order of several hundred million dollars, if not even more than that. And that's because there are several programs that are public programs, the programs that are going through redesigns and new developments at the direction of our government that I think would have very good use for what we're designing with this chip. They're essentially driving the specs for what we're designing. And so that would be this next wave of storefront after the device is designed. And it would be who of us, obviously, if we're engaged with potential end users of this device before that is finished being completed, so that the transition from development to program insertion is smooth and we don't miss a beat in doing so. And I can guarantee you that we are absolutely looking at that so that we can ensure that that happens.

Rick Neaton: Okay. In the original four-year timeframe for that program, you're about halfway through it now. So, if this goes as expected, you're expecting revenues to accelerate in ‘25 and ‘26 from this program significantly above what they have been. Is that a correct assumption?

Brian Faith: Yeah, it is. And I think that follows what would normally happen in any chip design cycle. You have your initial design work. When you start manufacturing things, that's when the cost starts increasing and we haven't talked about tipping out a test chip yet for this program. So you can imagine when that starts happening, we start doing some really detailed testing and cycles of learning on that chip for the final chip that the cost will increase and therefore the revenue will also increase. So yes, it is a fair assumption that that will happen.

Rick Neaton: Okay. Thanks, Brian. Thanks for providing that information. And I'll step out of the queue right now.

Brian Faith: Thanks, Rick. Thank you.

Operator: And the next question comes from Richard Shannon with Craig-Hallum. Please go ahead.

Richard Shannon: Well, hi, Brian, Elias, how are you guys doing?

Brian Faith: Hello, Richard. How are you?

Elias Nader: Good.

Richard Shannon: Not too bad. Not too bad. Thanks. I'm going to follow up on the first question here just talking about the pushouts for the year. A lot of detail in your prepared remarks, Brian. I probably missed some things here, but I think you mentioned in response to the last question here, largely from IP deals and I think connectivity. And did I catch it correctly that there's largely two IP deals that were part of that? And then in the connectivity space, what exactly does that mean? Is that revenue you expect to improve or is this a lower level of revenues expected going forward?

Brian Faith: So let me address the connectivity one first. The connectivity are essentially some of the FPGA technologies that we've been selling for some time. They're devices. The primary markets that we sell it to are industrial and aerospace and defense. And there were definitely some push-outs from Q2 from our forecast that we used on the last call for guidance for Q2 to what actually transpired with some of those customers looking for their funding vehicles, especially on the defense side, to make those orders happen and take product this year. So we've moved some of that out to the second half based on that feedback, but that was definitely a downside hit to the Q2 revenue number. For the IP deals, there were a smattering of smaller deals, as I mentioned in the preparatory marks, that were the reasons for the lower revenue, some of which we think are going to push into 2025 now. The biggest one that was something we'd already talked about previously was the 2022 November takeout customer and them pushing some of the needs of what they need from us into 2025 because of a subcontractor to them and some delays that that subcontractor is having that sort of slowdown that’s impact everything from the programmatic perspective, which ultimately means the revenue that we had assumed in 2024 second half will be pushing out to 2025 for that specific project.

Richard Shannon: Okay, that's helpful. And just to follow up on this, it sounds like the November 2022 customers’ unique in some manner to the other deals. Is there a consistency or consistent reason for these? Are they kind of program specific?

Brian Faith: In some cases, they love it. They have the [vocals] (ph) from us. They just need to lock up the funding that they need in place in order to move forward. Because obviously, Hard IP is not something on the order of a USB cord. It's quite a bit more valuable than that. In other cases, they're just shifting their project schedules for resource reasons into 2025. And if they're shifting program needs, then they're not going to need the IP this year. That'll get pushed out to next year. So it largely falls into those two buckets. And as far as market sector goes, if you're interested in that, it's primarily aerospace and defense and some industrial as far as the markets go that basically comprise most of those opportunities.

Richard Shannon: Okay. I'm probably not going to specify too much, but it would be safe to say that kind of an equal contribution in terms of the difference in the guidance here? 30% to 15%, is it roughly half and half in dollar terms or is it leaning one way or the other?

Brian Faith: It's probably close enough to half-half, so let's go with that.

Richard Shannon: Okay, fair enough then. Let's see here. I guess maybe looking farther out here, made an interesting comment a couple times here about acceleration as we get into the latter half of, or kind of late next year related to the chiplets and storefront. Maybe if you can maybe provide a little bit more detail here and how many opportunities are contributing to this sort of inflection?

Brian Faith: I'd say about 25% of our IP-based opportunities now are coming in and actually asking us to quote not just the IP but the development of the device and because of our intimate knowledge in any manufacturing tests, FPGA devices, also the storefront responsibility. You probably heard in my prepared remarks my mentioning of just in the last month alone, $8 million in deals coming in. Some of those are development of what I'll call custom FPGAs, not just IP and also the storefront responsibility for that. And again that $8 million number I used, that's just the development again, that's not the actual storefront revenue. But we're seeing a really increased clip in how people are looking at doing these things. Maybe not just -- they don't want to do the whole SoC design if it's primarily FPGA, work with a company that knows how to do that and do the device development around the storefront. So we've definitely seen an increase in the percentage of designs that are coming through that are more storefront oriented. And the great thing about our development and our business model is, A, from a business perspective, we can handle that because we have an operations team in supply chain management. And, B, the whole notion of Australis is that we can do customer-specific iterations of our IP. And so we're seeing a lot of interest now coming in for that which I also think is related to the fact that the more IP process -- the more IPs we have on different process technologies, the sort of accelerating factor you have because now you already have IP ready on those process nodes. So when customers come in and they want to do a chip at 22FDX or [indiscernible] or TSMC12 or whatever it may be, we have good coverage of that. So we can respond really quickly and I think with good value in providing a vote for that sort of full turnkey device and storefront as well.

Richard Shannon: Okay, very interesting comments there, Brian. I'll look at those a little later and probably get back to you on that, some good stuff there. Maybe my last question, kind of big picture. One of the questions I get somewhat consistently from investors is, I always like to see announcements of deals here. You had a couple nice ones in the first quarter this year. Other than the Strategic Rad Hard, I'm not sure there's a lot last quarter. So maybe if you can help people have a perspective here of how many proposals you've got in the funnel and how do we think about how many they get across the finish line and even thinking about a win rate here to think about the number of contracts you might be able to announce in the second half of the year?

Brian Faith: Again I'll answer the last one first there that I don't have the exact number in front of me on the win rate, but I can tell you with certainty that the win rate is increasing. As we're refining how we present our IP, to my earlier point, the more time, the more process technologies we already have support for, it speeds up and lowers the cost of development of IP that it becomes customer specific off those existing nodes. And so as a result of that, the hit rate also is increasing. And I think we're getting smarter about how we target and pick the customers to do deep dives with on this custom eFPGA approach. We're getting, I think, much better at doing that. I think in addition to that, just in general, if you rewind now to the beginning of the year, we have talked about, yeah, we'd like to have, you know, 10 IP contracts won this year. We can do 10. We're going to be in a good spot to hitting our revenue goals. And you're right, in the beginning of year, rapid fire right in the beginning, we got the third tranche of the government contract, but we're still in the process of closing the ones that would get us much closer to that 10 goal for the year. So I would say just from people listening to the call and reading the transcript, still keep your eye on these upcoming wins that we hope they're going to be locking in and announcing those so that you get some sense that we are increasing the hit rate, especially for ones of notable magnitude in terms of dollars. And again, I'll remind everybody, this is also why we're investing in doing our EFPGA at foundries like Intel for 18A because we want to be ready to respond really quickly when somebody comes in with an IP request that we've already got that fundamental work done on that foundry and that process node so we can quickly move to customer specific and IP delivery and therefore revenue recognition. So, I think we've got a lot of things lined up for the deliverables with that, weighing on a couple contracts to win that we can then announce so everybody can see that, teeing up, being able to deliver those by the end of the year for that strong Q4 that we are predicting. So I'll still say, going back to your first question, Richard, there, the goal is still 10 for the year. Obviously, we're not there yet, but I think we have enough of these in the funnel that should have some decision points between now and early fall that we'll be able to close the gap that we have today to that 10. And part of that is just companies that are taking vacations right now, coming back from those vacations and making these big decisions. Part of that is the fact that I think some of these are government funded proposals and everybody knows the government fiscal year ends September 30th and then sort of opens up new rounds of funding for projects that are starting in the first week of April or it's not April, it's in October. So that should probably be another timeframe that's sort of going to loosen up the reins on some of these proposals and therefore the funding for them accordingly. Does that help?

Richard Shannon: That does. Very fulsome commentary, Brian. I will jump off the line. Thanks a lot guys.

Brian Faith: Great, thanks for your time, Richard.

Operator: And the next question comes from Martin Yang with Oppenheimer. Please go ahead.

Martin Yang: Hi, good afternoon. Thank you for taking my question. My First question is on CTG and its impact, potential impact on your sales funnel. It looks like CTG is more than just a distributor, maybe is doing some fulfillment functions. Can you give us more details on what CTG actually do to help you with IT licensing business? And should we expect the funnel size increase to accelerate with the CTG partnership?

Brian Faith: So the short answer to your last question is yes, we should expect that. They're going to help accelerate that. More importantly, I think they're going to help us accelerate qualified opportunities to the funnel because they're going to be doing a lot of pre-qualification work before we even assign our own resources to that. CTG is involved in both demand fulfillment and demand creation. And one part of their business actually puts them in a very strong position with the Defense Industrial Base, and that is sourcing technically obsolete devices. As a matter of fact, we work with CTG to stock some mature devices that we wanted to obsolete before. And by doing this, we didn't have to force customers to buy lifetime supply through an end of life announcement. So it was really a smooth transition from us to optimize what we're supporting directly with our resources. It also gives customers in the Defense Industrial Base that sort of assurance that these parts are going to be available for the lifetime of their program. And so with that as sort of a backbone reputation, I would say, and this is my opinion, but I think the Defense Industrial Base feels secure working with CTG on new designs. They know they're going to maintain sourcing devices through the life cycle of the design. So if I was them and I'm looking to do my own SoC or buy a custom device from a storefront, knowing that they have that stocking plan and that assurance plan and that they're fully focused on Defense Industrial Base needs, I think they're a great partner for this. They're going to maintain that sourcing all the way through and that's absolutely critical when you're talking about these programs [of record] (ph) that literally run decades. They've got a great reputation and so I think they're going to again, do sort of dual for us, demand fulfillment and demand creation on both storefront and IP.

Martin Yang: Thank you. A question on margin profiles. So for the year, can you remind us, how should we think about the cadence for different OpEx items? Is there any, is it pretty even between 3Q and 4Q?

Elias Nader: You're asking about the gross margin, right?

Martin Yang: OpEx, sorry, not gross margin, OpEx.

Elias Nader: OpEx, okay. Well, I mean, it's simple. It's more, like for example, this quarter, we had, like in Q2, we had a specific payment going out to vendors that kind of just happened. And it wasn’t -- we were counting on it, but it just all came together and was -- it kind of resulted in more cash usage, but still, OpEx was about $2.9 million, same like last time, only $400,000 in addition. We think it's going to be flat. I think even if we hire two or more people, It's still going to be flat quarter after quarter, so I'm counting on it being flat through the end of the year.

Martin Yang: Got it. Thank you, Elias. That's it for me.

Operator: This concludes our question-and-answer session. I would like to turn the conference back to Brian Faith for any closing remarks.

Brian Faith: Thanks, David, and thanks again for joining us today everybody. Hopefully we will connect with some of you at one of our upcoming investor events including the Oppenheimer Technology, Internet & Communications Conference this Wednesday, August 14th; Needham Virtual Semiconductor & SemiCap next week or at the HC Wainwright Global Investment Conference in early September. Thank you again for your participation and have a great day.

Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.

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