Ladies and gentlemen, good afternoon. At this time, I'd like to welcome everyone to QuickLogic Corporation's 2nd quarter fiscal year 2020 Earnings Results Conference Call. As a reminder, today's call is being recorded for replay purposes through August 12, 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 today. Our speakers are Brian Faith, President and Chief Executive Officer and Doctor. Sue Chung, Chief Financial Officer. In line with social distancing practices, management is doing this call from remote locations today. As a reminder, some of the comments QuickLogic 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, And if 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 recent filed periodic reports with the SEC. QuickLogic assumes no obligation to update any forward looking statements or information which speak 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 webpage that provides current and historical non GAAP data. Please note, QuickLogic uses 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 webpage shortly after the conclusion of today's earnings call. Would now like to turn the call over to Brian.
Thank you, Jim. Good afternoon, everyone, and thank you all for joining our second quarter fiscal 2020 financial results conference call. I would like to start by recognizing the tireless efforts of our talented QuickLogic team as we rapidly adapted and responded in a new working environment during this COVID-nineteen pandemic period. This has been a challenging period for our team, both personally and professionally, and I appreciate their commitment. With that as a starting point, there were 3 key events that were announced in the second quarter that will have positive implications on our business in the future.
First, on June 16th, we announced the QuickLogic Open Reconfigurable computing or Cork initiative. This project, which was developed in collaboration with Google and amp micro, broadens access to our EOS S3 SOC our FPGA technology and EFPGA IP for all embedded systems developers. We are the 1st programmable logic vendor to actively embrace a fully open source suite of development tools for its FPGA devices and EFPGA technology. Cork is an important milestone for us. Many industry observers have commented in recent years that the programmable logic industry is at a transition point.
While it remains multibillion dollars in size, the growth is expected to be at a moderate pace of around 7% per year over the coming 5 years. However, the open source risk 5 IP software and tools market is predicted to grow at a nearly 7x market rate. Given the changing landscape, we are aggressively redeploying our resources to make open source the primary foundation of our business going forward. The second significant event is the announcement that SensiML is collaborating with the consortium of companies, universities and health organizations to help predict whether people are showing symptoms care and other public facilities access to multi sensor pre diagnostic screening mechanisms to help slow the spread of the disease. The consortium includes asymmetric return capital, linear ASICs, Skywater Technology, Upward Health and others.
We recently executed our first SaaS agreement associated with this initiative, expect the initial product launch before the 2020 food season starts, and to realize a more meaningful financial impact in Q4 of this year. The 3rd significant event was the completion of our oversubscribed secondary which in total raised net proceeds of approximately $8,100,000. We felt it was prudent to raise money at this time to make sure we had the financial strength to support our open source product plans and growth initiatives. It was definitely a busy second quarter, but one I believe will over time be viewed as a pivotal moment in the transformation of QuickLogic. With those important items as a primer, I want to spend some additional time on the open source initiative and then review other items from the quarter.
The QuickLogic Open Reconfigurable computing initiative, I have spoken about at a high level in recent months is expected to be a catalyst for QuickLogic's future growth. This initiative developed by QuickLogic in collaboration with Google and App Micro Ron has access for embedded systems developers to use our FPGA technology and EFPGIP. For some background, the open source harbor movement has established a solid foothold after multiple attempts yielded only limited success even for processors. Excuse me for one moment. Apologies for that.
With demand for more customized hardware and a growing field of startups looking for to build accelerators and solutions highly tailored for AI ML algorithms. Interest in open source hardware has been rising. In fact, there are now a growing number of new developers with software backgrounds gravitating towards open source FPG development tools including design teams at some of the largest companies in the electronics industry. We are already seeing traction with the Cork initiative. You may remember in recent earnings calls, I alluded to the initiative being co developed with the mega cap company.
For disclosure reasons, we were not able mention Google by name until the June news release. What started at the conversation with a Google open source dictionary transformed into an entire open source initiative for Quipash Once we decided to move all in into open source, we knew we needed our efforts to address much more than just FPGA tools. This was the thought process that led to the Cork initiative. Our website contains additional background material if you're interested in learning more. The rate of adoption is ramping quickly.
In early July, quick feather was launched with crowd supply one of the leading online companies to launch and fulfill demand for innovative open source hardware development kits. In just one month, we have already risked doors to more than 100 kits and expect this pace to accelerate as we expand our network of channel partners to ship more quick further debt kits into the market. Based on this better than expected interest and following the roadmap we have in place, I am confident we will achieve our goal to get at least 1000 of these death kits into the market by opportunities for too early for me to quantify the near term revenue impact this year. However, we are executing on a go to market plan using multiple channels and could see few to several $1,000,000 in potential EOS S3 revenue and multiple EFPGA IP licenses next year directly related to the Cork initiative. To further demonstrate the breadth of opportunities our Quirk initiative can lead to, our team recently engaged with a product team that is developing a new range home computing devices for their 2021 holiday launch.
While it is very early to discuss any potential long term relationship, This should be geared as a sign of early market acceptance of the Cork initiative. Other parts of our business are starting to settle after a challenging few months the COVID-nineteen pandemic took hold. Starting with our SensiML COVID-nineteen initiative, the previously announced consortium currently readying a health monitoring solution and includes a low cost body worn temperature sensor and smartphone based app to combines a variety of biometric data and the for screening of public venues, safe reopening of workplaces, and healthcare access access. In addition to the COVID-nineteen application, SensiML has completed 2 major developments since our last conference call. First, the integration with STMicro's new sensor title box development kit is now complete.
This will result in an of the co marketing and co selling activities with 1 of the largest MCU companies in the world. 2nd, SensiML is really an update to its SensiML Analytics Toolkit that adds support for Google's open source machine learning framework called TensorFlow Life for microcontrollers. Together, SensiML and TensorFlow Life or TFL complement each other by offering powerful TFL Neural Network algorithm execution along with an established AI tool. The openness flexibility and performance enabled by this effort is important and valued by our MCU partners and IoT device customers and will be a key enabler for our SaaS related revenue growth in the coming quarters. With an improving SensiML hit rate, greater partner outreach and Google TFL integration in place, our focus remains on driving towards scalable growth.
In our new product segment, supply chain delays in the challenges imposed by customer hardware teams working remotely had a significant impact on this part of our business. We are seeing improvement in the global supply chain but that is somewhat counterbalanced by the fact that due to the disruptions earlier this year, several product launches that were expected in the Q2, Q3 timeframe have been moved to later this year or calendar 2021. This includes several voice enabled consumer products. Within our smartphone business, Kia Thera had a very strong quarter due to a combination of increased end market demand and their decision to build inventory from all suppliers to mitigate potential supply chain issues. This greater than expected surge increased our test costs in the quarter.
Which negatively impacted our gross margin performance current models ahead of new phone launches anticipated later this year. We are nearing completion of our next smartphone design I remain confident we could see as many as 6 phones using our technology, up from 3 at the beginning of the year. In the hearables market, we are on track to achieve formal Amazon ABS certification enter the market before the end of the year and ship several $100,000 of EOS S3 within 2020. In our EFPGA IP business, we are delivering our final netlist this week to one of our early engagements for a takeout of their test chip. If all goes well with their chip manufacturing and validation, we could see a full EFPGA IT license between Q4 2020 and Q1 twenty twenty one.
Last quarter, I discussed how COVID related delays directly impacted program with a well known and fast growing streaming and smart TV provider to get a voice activated remote control to market. We were able to realign our effort with a low power digital microphone company and are targeting to launch a new reference design later this quarter. While the volumes will be smaller than the prior program, The introduction of this reference design is another reminder that the trend for greater adoption of hands free remote controls is accelerating. Within our mature segment, COVID-nineteen continues to have a significant impact on this part of our business. Ongoing manufacturing shutdown and the reduction in consumer air travel has caused a dramatic drop in the civilian aerospace market.
Based on customer forecast received in the last 2 weeks, we expect to see mature revenue dip again in the third quarter to a level similar to what we saw in 2020 mature product revenue forecast by another $2,000,000 from our expectations discussed in the May conference call. To summarize, In spite of the many COVID-nineteen related headwinds we have faced this year, I want to emphasize that I am as optimistic as ever about our future. Fiscal 2020 has been more challenging than anyone could have imagined back when we held our February conference call. However, the positive signs we are already starting to see with our open source initiative and SensiML initiatives with Google, coupled with what our customers believe will be improving conditions by year end. Gives me confidence that we now have session of our recent financial performance and full Q3 outlook.
Sue?
Thank you, Brian. Good afternoon. And thanks to everyone for joining us. For the second quarter of fiscal 2020, revenue was 2,200,000 which was within the updated guidance range of $2,300,000 plus or minus 10% that was included in our falling on June 17. This compares with the revenue of $2,100,000 in the second quarter of 2019.
Within our Q2 revenue, sales of new products were $820,000. This compares with $711,000 in the second quarter of last year. Our mature product revenue was 1,400,000 which was the same as Huisha accounted for 10% or greater of our sales. Non GAAP gross margin in Q2 was 47.1% compared with 49 point than lower gross margin in the second quarter was mainly due to additional test costs to support a higher volume of a product shipped to our primary smartphone customer. Non GAAP operating expenses for Q2 were approximately 3,200,000 down more than 30% from 4,800,000 in the second quarter of last year.
Through continued streamlining of our operations. We believe operating expenses will trend lower through the remainder of fiscal 2020. Within our Q2 operating expenses, R and D was approximately $1,700,000 and SG and A was approximately $1,400,000 as compared with R and D and SG and A $2,700,000 $2,100,000 respectively in Q2 last year. The net total for other income expenses and taxes in Q2 was a charge of 84,000 compared with $101,000 in the second quarter last year. Non GAAP net loss in Q2 declined to $2,200,000 or $0.26 per share.
This compares with a net loss of a $3,800,000 or $0.54 per share in the second quarter of last year. The per share calculation for both periods reflects that 1414 reverse stock split that was cuted last December. This total cash at the end of Q2 was 26,400,000 compared with $19,000,000 at the end of last quarter. The Q2 cash balance includes the net proceeds from the Spark offering and the funding from the PPP loan. It does not include a approximately $461,000 in net proceeds from the exercise of the overallignment that closed in July.
Our cash balance also includes the $15,000,000 draw from the revolving line of credit. When factoring out all external funding that I just mentioned, our Q2 cash usage was $1,800,000. Now moving to our forecast for the third quarter of fiscal 2020 which will end on September 27. Our revenue guidance for the third quarter is $2,000,000 plus or minus 15 percent. As Brian discussed, given the evolving condition due to COVID-nineteen and its impact on our customers and suppliers.
We're widening the revenue range at this time. At the midpoint, we believe total revenue will be comprised of approximately 700,000 of new products and $1,300,000 of mature product. With a more diversified product mix, Non GAAP gross margin in the 3rd quarter will be approximately 55% plus or minus 5%. As a result of our continued cost control measures, we're forecasting non GAAP operating expenses will decline further and be approximately $3,100,000, plus or minus 300,000. We expect this to be a normalized level for the next few quarters.
At the midpoint of the Q3 range, R and D should be $1,800,000 and SG and A $1,300,000. After interest expense other income and taxes at the midpoint, recurring and forecast on non GAAP net loss will be approximately $2,100,000 or net loss of $0.19 per share based on approximately 11000000 shares outstanding. Most of the difference Between our GAAP and non GAAP results is our stock based compensation expense. We expect that stock based comp to be in the range of 700,000 we expect a cash usage to be in the range of $2,000,000 to $2,500,000, anticipated a higher cash usage is mostly due to the timing of working capital and the one time transaction costs associated with stock offering to be paid in as both revenue and gross margin improves. With that, let me now turn the call back over to Brian for his closing remarks.
Thank you, Sue. To add on to the guidance you gave for the third quarter, based on the current customer forecast, our annual outlook has declined another $3,000,000 for the reasons I have discussed in our mature product segment plus the inventory absorption for our smartphone customer and the push out of voice enabled hearables. With this change we now expect our full year 2020 revenue will be approximately flat with fiscal 2019. While we are disappointed with the near term outlook we currently expect our Q4 product mix will have a heavier emphasis on software and IP related sales. This should increase our Q4 gross margin back into the low to mid-sixty percent range, which in turn should boost our fiscal 2020 gross margin to the high 50s.
COVID has clearly disrupted the path to profitability I laid out at the beginning of the year. But based on the factors I've described, and with our significantly reduced operating expenses, our trajectory to profitability within 2021 looks promising. With the material progress in all of our new product lines, I am confident we have a path to achieve operating income breakeven by the end of the first half of twenty twenty. In closing I would like to thank all of our stakeholders for their ongoing support. These are extraordinary times for all of us and we are doing everything possible to maintain a safe work environment while also taking care of our customers who are facing their own challenges.
That completes our prepared remarks. Operator, I'd now like to open the
first question comes from the line of Richard Shannon with Craig Hallum. Please proceed with your question.
Hi, Brian, Sue. Thanks for taking my questions.
And
I guess first of all, congratulations on the Google and micro development. We look forward to seeing how that ramps out over time here. I guess my first question for you, Brian, is based on your prepared comments, you talked about a I'm going to probably butcher the language you use year, but you've engaged with the large design team with a product for a kind of a home computing device that they're targeting for next year. Maybe you can kind of talk to us more specifically about that or more generally about the engagements that you're seeing here with Cork. And what other opportunities you're seeing here and maybe the timeframe by which you would see that?
I can do that, Richard. Firstly, I can't go into too much detail on that product. The home computer 1 just because for competitive reasons, I don't want to comprehend too much. But basically that product wants some level of always on computing and that product team is a big believer that open source tools gives them the ability to innovate more freely and also to apply their own resources to improve things and use it as a realm. So That's sort of a common theme that we're seeing with a lot of these companies by virtue of this whole initiative.
We've had a lot of probably what people on the call have seen a social media activity from the open source development community. We did launch actually with crowd supply a development kit and we sold more than 100 and just over a month I think on that. And there's just a lot of momentum there. Where people are finally appreciating an existing company in Programmableogic is actually embracing and contributing to open source. Whereas everybody else is like I say, it gives them the stiff arm and the Heisman move because people may not sue people doing open our development, but we're actually openly contributing to it.
And I think there's a lot of large companies that are starting to build or define products around that. And what I've tried to allude to as well, Richard, in the opening remarks, is that this is not just for EOS S3. That's part of it, but there's this whole now movement around the embedded FPGA and the fact that we have the open source tool support for that as well. And that's already opened up new opportunities. That we're pursuing.
So I'm kind of like how we lay down on the blog. This is all about opening up to a new market that's not tapped yet. And just in this last two months, we're starting to see a lot of movement in that area.
My second question, looking at SensiML, it seems like there's a few avenues here for growth, customer additions It seems like Cork is certainly one of them. And maybe you can kind of give us some context about where what channels, and approaches you're seeing that you hope to are already seeing some acceleration here in Sensible Engagement. Know you said you've been impacted by COVID in terms of transitioning potential customers with a full license, but maybe you can give us a sense of at least kind of starting the pipeline and how that's been transitioning over the last quarter?
The theme that we're using within QuickLogic is everything has to have scale and we don't want to do custom work for people. And so the way that we can scale SensiML is to have more hardware companies, more semiconductor companies marketing and selling the upsell of SensiML on top of their products. That's why getting this STMicro port is so important for it to be done. Because now the STMicro Sales and the marketing team can be out pushing this to their Salesforce and to their customer base. We have the COVID initiative that we talked about last time with respect to the cough detection and classification.
That consortium of companies is moving forward. I think later this month, there's going to be a sample wearables out with the temperature sensor on that for the body temperature, layering in the app they're delivering on the smartphone side with the SensiML AI software. So that's another avenue that we're using to get broader exposure without having to do custom work for folks. And then lastly, this is where this new development kit strategy from us comes into play. So with With quick feather, we're selling it ourselves and through our own distribution channel.
We also have now engaged crowd supply, and they've gotten orders for this. And, what I alluded to in my prepared remarks was a roadmap for these types of products. We're not stopping in a quick feather. We're going to have several more of these types of development kits out in the wild all of which will have SensiML optimized and running on top. So, you'll probably start to see some type of promos for where we're selling boards and then there's an option to upgrade on top of that with SensiML.
And the benefit of doing it in that way is we just get these really large distributors or open source visionary folks outselling our products and then basically SensiML gets not free marketing, but they get a lot of attention in doing so. So those are the strategies that we're employing now to increase the top of the funnel for SensiML and also how well we qualify the opportunities coming through. And that's in addition to just the normal ongoing organic sales that we're doing with SensiML. Okay. It's probably actually worth mentioning that we got our first SaaS agreement, revenue signed, affiliated with the COVID-nineteen initiative.
So doing things like that where you come out to narrow application focus, I think it does resonate and it starts to bring in more qualified leads.
Okay. Brian, as an aside here in SensiML, I think it's been a couple of you've mentioned this, but how many fully paid licenses do you have for SensiML today?
I think we've talked about that. Somewhat recently it was in the few dozen folks that have paid for some level of this
Okay. That is helpful. My next question here is on the hearables market in ABS. What gives you the confidence you're going to see the certification happen? And to what degree does your progress and success here and hearables depend on EVs?
So I would say the success really does depend on because there's a set of wearables and curables that want to not use Alexa. They're going to be sold overseas or in China and they'll never touch the Alexa ecosystem. But for the the Western countries, Alexa is definitely something that people are wanting to integrate. So it is very important. What gives me confidence is the level of engagement we have directed with Amazon, ABS, team in the last quarter.
And also just seeing today. In fact, even though we're all working remote, I can see videos of what our our engineering folks are doing. I saw the working system in video today. So I know that that's going to be shortly getting into the Amazon labs for finishing up what we need to do there to get on their dev kit page. So that's what gives them the confidence seeing us believing.
Okay. Fair enough. And last question, I'll jump on the line here. Looks like the OpEx is a little bit lower here than I think what you talked about last quarter, which is good to see lowers the burden rate. Does this help us lower the breakeven point here?
And when would you speculate? Could we see that? Obviously, it seems like not going to happen in the fourth quarter, but this first quarter or soon thereafter a good timeframe to think about that, Brian?
Yes. In fact, we've been constantly looking at OpEx and opportunities to to reduce that. I think so this is very product mix driven at this point. I don't see us taking OpEx down further from where we are now. Like Sue mentioned in the prepared remarks, So now it's all a revenue and product mix game.
As we get more of these SensiML licenses and IP deals in place, that's going to drive that higher gross margin. And really, the OpEx now is at a point where the breakeven point on revenue could be like as low as $5,000,000 to $6,000,000 somewhere in that range. Which is substantially lower than it was. If you remember, just a year and a half ago, is almost pushing $10,000,000 still that needed to happen there. So, yeah, I guess if you're like folks to model it on the call, something like $5,500,000 mid size range at the current gross margins at this OpEx, get us to that breakeven point.
And, like I said in the prepared remarks, we're modeling it out to be a Q2 event next year. But again, sort of the product mix is going to drive that if we can get more IP deals in that, maybe that comes sooner. Thanks.
Our next question comes from the line of Suji Desilva with Roth Capital. Please proceed with your question.
Brian, hi, Sue. A quick financial question, just could you reiterate the gross margin guidance? I wasn't sure if I heard 55 or 65, I think it was 55, but I want to check.
Hi, Suji, and thanks for the question. The guidance for Q3 is 55% for gross margin and with plusminus5 percent. So we widened range. A bit. So basically between 50% to 60% gross margin.
Okay. Thank you for that. And then on the on some of the customer announced or product announcements. Maybe finally, we can start with the remote control program. You talked about aligning with the microphone vendor to help you get traction.
Is that something you've done Historically, was that new and why did that help in this instance? I'm curious about that comment.
Yeah. On the microphone side, we've never really partnered deeply with any microphone guy other than Infineon, which we did with the whole integrated alarm system. That's an ongoing activity with them and electronics. On the and that's really more on the industrial IoT side. On the consumer and mobile side, we never really did And so basically us and this microphone player were going after that same opportunity that ended up getting canceled after roughly the last call when I updated everybody.
So the CEO and I discussed how do we take this engineering work that we've put into this and actually roll this out to other folks. And so we're in the process of doing that. The benefit being that they know microphone technology really well. We know the processing do really well. And if we can go at these customers with these sort of canned reference solutions, it's going to have a higher likelihood success just because customers don't have to reinvent the wheel.
So we're in the process of doing that now. That's actually wrapping up from an engineering point of view. And I think imminently we'll be releasing that to the field and to customers that we're already engaged with.
Okay. So that could target multiple customers over time, certainly sounds like.
Absolutely. Multiple customers. And the whole value proposition to that by the way, Suji, is to think about these battery powered remote controls you have are in your house going always on, no touching battery life of anywhere between 4 6 months. Right. Okay.
And then, I think you touched on this from the Q and A and the prepared remarks, but I would imagine the open source tools are really one of the things that could kind of break open the flood gates for embedded FPGA fabric on a chip to people designing because I would think one of the biggest hurdles was if we put an FPGA fabric on our die, how we're going to tweak it and manipulate it, but this sounds like that could really make that happen. Is that overstating the opportunity here or is this was that really one of the things in your mind that maybe kept EFPGA from becoming a widely adopted?
Now you added that on CG. It's a huge opener for for embedded FPGA, large companies, they want to sort of own the old pool chain because when they sell a chip to their customer, they want to have one person just as a support flow. And so this basically allows them to take the open source tools integrated with their own and have that single package out to the customer. If you're talking about a smaller customer, they may not have that kind of resource available. They know that as a smaller customer, if the community is behind these open source tools and if folks like Google are pouring so much resource into it, they're going to get better over time.
In fact, they may even be better than proprietary tools in the near future. And so they love that story and the fact that these big companies are absolutely behind this open source initiative. So you hit it right on. This definitely opens up a lot of new doors.
Okay. And then lastly, what's a good run rate to assume for mature products after we have this sort of put take with the civil engineer civil aviation that's going on? What's a good run rate to think about there?
Yeah. So for like I said in the script remarks, this will take us back to Q3 of last year, the revenue level. I think Q3 to some extent has been soft historically just because Europe tends to not order so much during this period for vacation reasons, not because of the pandemic, obviously. I think moving forward, we're modeling somewhere higher than that, like around 1.5 or so. In certain quarters, it could be even higher than that, if we get some of these larger military deals coming in.
I do think it's going to recover. The Civil Aviation space part of that will probably be the longer part of it to recover. But we do have other military folks that moved out of Q2 this year throughout of Q3 this year for the obvious reasons because revenue is lower, but we do expect them to come back because they're subjected to the consumer and our travel industry ups and downs. Thank you.
Thank you. We have no further questions at this time. I'd like to turn the floor back over to Brian for closing comments.
Hi. Well, thank you for your participation in today's call and continued support. We look forward to speaking with you again when we report our fiscal third quarter results in November. Again, thank you very much and talk to you then. Bye bye.
This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.