Ladies and gentlemen, good afternoon. At this time, I'd like to welcome everyone to QuickLogic Corporation's third quarter fiscal year 2019 earnings results conference call. As a reminder, today's call is being recorded for replay purposes through November 13th, 2019. I would now like to turn the conference over to Mr. Jim Fanucchi of Darrow Associates. Mr. Fanucchi, please go ahead.
Thank you, operator, and thanks to all of you for joining us. Our speakers today are Brian Faith, President and Chief Executive Officer, and Dr. Sue Cheung, Chief Financial Officer. As a reminder, some of the comments QuickLogic makes today are forward-looking statements that involve risks and uncertainties, including, but not limited to, stated expectations relating to revenue from new and mature products, statements pertaining to QuickLogic's future stock performance, design activity, and its ability to convert new design opportunities into production shipments, timing and market acceptance of its customers' products, schedule changes and projected production start dates that could impact the timing of shipments, the company's future evaluation systems, broadening our ecosystem partners, expected results and financial expectations for revenue, gross margin, operating expenses, profitability, and cash. These statements should be considered in conjunction with the cautionary warnings that appear in QuickLogic's SEC filings.
For additional information, please refer to the company's SEC filings posted on its website and the SEC's website. Investors are cautioned that all forward-looking statements in this call involve risks and uncertainties and that future events may differ materially from the statements made. For more details of the risks, uncertainties, and assumptions, please refer to those discussed under the heading Risk Factors in the most recent annual report on Form 10-K, most recent quarterly report on Form 10-Q, recent Forms 8-K, and other documents we periodically file with the SEC. These forward-looking statements are made as of today, the day of this conference call, and management undertakes no obligation to revise or publicly release any revisions of the forward-looking statements in light of any new information or future events. In today's call, we will be reporting non-GAAP financial measures.
These non-GAAP measures should not be considered as a substitute for or superior to financials prepared in accordance with GAAP. You may refer to the earnings release we issued today for a detailed reconciliation of our GAAP to non-GAAP results and other financial statements. We have also posted an updated financial table on our IR webpage that provides current and historical non-GAAP data. Please note, QuickLogic uses its website, the company blog, corporate Twitter account, Facebook page, and LinkedIn page as channels of distribution of information about its products, its planned financial and other announcements, its attendance at upcoming investor and industry conferences, and other matters. Such information may be deemed material information, and QuickLogic may use these channels to comply with its disclosure obligations under Regulation FD.
A copy of the prepared remarks made on today's call will be posted on QuickLogic's IR webpage shortly after the conclusion of today's earnings call. With that, I would now like to turn the call over to Brian.
Thank you, Jim. Good afternoon, everyone, and thank you all for joining our Q3 fiscal 2019 financial results conference call. I would like to start off today's call updating you on our near-term outlook, including some significant new developments, and then discuss the pathway we will follow with the goal of achieving profitability early next year. Later, Sue will review our financial results. As I mentioned in our call on August 6th, there were several factors outside our control that caused us to reset our revenue expectations for both the third quarter and all of fiscal 2019. While some of these factors have been rectified, there are still some items taking longer to complete than our customers initially expected. These items will have an impact on our fourth quarter outlook.
In a continued dialogue with our customers, it has recently become clear that some of the programs we believed would come back in Q4 are not going to materialize this quarter. As a result of these evolving conditions, we are taking a conservative approach to our outlook. Currently, our fiscal 2019 guidance is for total revenue of $10.4 million, ±$300,000. This translates to annual sales approximately $3 million lower than the previous outlook. In addition, while we expect Q4 gross profit margin to be approximately 60%, for the full year of 2019, we will see gross margin in the high 50s, slightly lower than the range we thought in August. While we generally don't give financial outlook more than one quarter at a time, I want to offer the following.
We currently believe that we should see a healthy increase in revenue in Q1, accompanied by a stronger gross profit margin, as our revenue mix should include a higher percentage of SaaS and eFPGA IP sales. When combined with continued cost controls, we should be close to non-GAAP operating income break even at the end of Q1 2020, and we anticipate being break even or profitable in Q2 2020. As Sue will discuss later, while we will use some cash in Q4, we expect the burn to be minimal in Q1 and close to neutral in Q2. We are obviously disappointed with these near-term conditions. There have been several positive developments that we believe will serve as revenue and gross margin drivers starting at the beginning of fiscal 2020. I'd now like to expand on some of the items influencing the fourth quarter.
There are four specific areas that comprise the majority of the approximately $3 million delta between our current expectations and the previously forecasted revenue. First, our EOS S3 hearable business continues to be impacted by changes in how customers are developing products that meet Amazon's AVS specification. Most recently, Amazon has released their own proprietary voice software. This has influenced some of our customers to wait for the integration of that Amazon software onto EOS S3 prior to bringing their products to market. This factor, combined with Amazon releasing their own TWS headphones for this holiday season, has resulted in $1.1 million in lower revenue. To be clear, this is not a lost opportunity. Rather, it is just a push-out into fiscal 2020 due to the delayed development schedules of our customers.
One of our larger expected eFPGA licenses has pushed out to next year, impacting current quarter revenue by approximately $750,000. I'll offer additional color on our eFPGA business later in my prepared remarks. Within our mature product revenue, while our business with the US Navy is solid and budgets have been confirmed, some of the other military business we expected in Q4 has also been pushed into the first half of 2020. This will negatively impact fourth quarter revenue by approximately $400,000. Several of the SensiML QuickAI customers we expected to convert to full SensiML SaaS subscriptions have taken longer to get through their evaluation period, thereby shifting revenue from these two areas to 2020. This resulted in lower than expected Q4 revenue by about $500,000. These four factors account for nearly $2.8 million of the $3 million delta.
While each of these areas are below our recent expectations, we are confident the issues are short-term. We expect a portion of this revenue to be realized starting in Q1. I now want to offer some additional color on each area and discuss why we are confident the revenue ramp is imminent. Starting with our mature product segment, the push-out of shipments to the U.S. military customers that impacted our revenue over the second half of fiscal 2019 is being resolved. While we expect to see some of the military orders starting to come back this quarter, it will not be at the pace we anticipated when we spoke back in August. We expect to see the balance of the delayed military orders come back in Q2 2020.
Moving to our EOS S3 related products, the ongoing trade conflict with China has caused several of our customers to delay their new product introductions. As I mentioned in our last call, a specific Chinese consumer electronics manufacturer pushed out the introduction schedule for one of our largest 2019 design wins that we were originally told would happen for the 2019 holiday shopping season. We still believe this project will be deployed for the 2020 product introduction cycle. The silver lining with this issue is that we have successfully leveraged this always-on technology for a voice-enabled remote control with a well-known and fast-growing streaming and smart TV provider. They recently gave us a firmer launch date of Q2 2020. The reason I say the date is firmer is that the timing is not dependent on any TV manufacturer bringing it to market.
This new design is completely in the hands of the consumer platform provider. The potential could be into the hundreds of thousands of dollars per quarter. In the hearables market, we have a clear path forward for Amazon AVS or Alexa Voice Service compliant hearable designs. We have successfully concluded a large suite of tests and believe that we have two viable solutions for customers that pass both certification and qualification testing. With these hurdles behind us and the revised schedules we have received from our customers, I believe revenue generated by hearable designs will ramp more significantly in Q1 2020. Separately, we recently established a partnership with Atmosic, which is rapidly developing traction for its new ultra-low power Bluetooth Low Energy solution.
Leveraging this and our new partnership with Retune DSP, we have already won a new design with a large consumer electronics OEM for a second voice-enabled TV remote control. The release schedule for this design has shifted to Q2 2020. The customer expects to ship several hundred thousand units next year. In addition, we are engaged with this customer on a second design that is significantly higher volume potential that is scheduled to launch in 2020. In addition, our largest ODM customer was the only third-party company that we are aware of that was showing truly wireless stereo or TWS AirPod-like headphones in Amazon's booth at the September IFA conference in Berlin. This customer has started several engagements now with OEMs who are interested in white labeling this product as their own AVS compatible TWS headphones.
Our partner is still targeting to be complete with their AVS dev kit and AVS ODM design on the Amazon web pages during this quarter. We believe inclusion on Amazon's AVS websites will lead to several new OEM engagements that will result in volume shipments from QuickLogic in the first half of 2020. On another positive note, I'm very pleased to confirm our Japanese smartphone customer is integrating our technology across a broader range of their products. Their first phone with EOS S3 inside was on carrier shelves in August. We have now shipped pre-production orders of EOS S3 for three additional phones that they expect to launch before year-end, bringing our total number of models to four. Since we are meeting this OEM's stringent power requirements, we hope to expand the number of models that include an EOS S3.
In June, we announced a new integrated alarm system, or IAS, reference design from Infineon that targets home, commercial, and industrial IoT applications. Several well-known consumer-focused companies continue to evaluate the IAS reference design for integration into their products. While it is too early to predict specific launch dates by end customers, we do believe we will generate revenue from this starting in the middle of 2020. On top of this, a large module manufacturer has already designed a new low-cost module based on the Infineon IAS that OEMs can easily integrate into finished IoT designs. This module is scheduled for introduction in early 2020. Now, I'd like to cover several positive updates on our eFPGA business.
As I mentioned in the last call, in Q2, we finalized a license agreement with a prime military contractor that has been commissioned by the DoD to evaluate and recommend embedded FPGA solutions and suppliers. As an update, they continue to progress with their evaluation of our test chip, as well as our eFPGA core through their design flow. As I have noted before, military contractors already represent a large market for discrete FPGAs, and the Department of Defense is taking steps now that will make it easier for its contractors to incorporate embedded FPGA in ASIC designs. We believe we are well-positioned to address this trend for certain ASICs that will use FDSOI manufacturing processes. As further evidence of this emerging trend, we are now more deeply engaged with a separate military contractor for our 22 nanometer FDSOI eFPGA.
We are targeting an evaluation agreement for the first part of fiscal 2020 that could lead to a full license in the second half of the year. Last quarter, I had told you we expected to finalize testing of the ETH Zurich parallel ultra-low power IC that includes our eFPGA IP. After a longer than anticipated delay, the test chip is up and running now in our labs. I want to highlight that this test chip has led to a new engagement that we will touch on shortly. In September, we announced that Nations Technologies selected our eFPGA to power its next generation low-power IoT SoC. While this agreement generates only modest revenue in the near term, it enables us and the customer to fast track SoC license agreements that we believe will generate considerably more revenue starting in the second half of 2020.
Our eFPGA strategy continues to evolve, and we believe the promise it holds for our future is significant. I have often discussed the need for a more scalable go-to-market strategy, and we believe that comes through tapping into the reach of more platform companies. By platform companies, we mean well-known mega cap-sized companies or ones that have a strategy around connecting a massive number of users with services. These massive users in fragmented markets drive sufficiently large volumes that create a served available market large enough for our SoC business to coexist with other SoC players where we can license our eFPGA. Last year, we signed an evaluation license with C-SKY, who was acquired by Alibaba to be their SoC company moving forward. C-SKY was subsequently renamed to Pingtouge, and now is driving all the semiconductor development for Alibaba. Ultimately, Alibaba wants more devices connected to their services.
As such, they are creating an ecosystem similar to what SiFive is doing, creating SoC templates such that semiconductor companies and system OEMs can bring derivative products to market quickly and cost effectively. I am pleased to announce we were selected by Pingtouge to join their IP ecosystem alliance, and that we are the only eFPGA company included in their recently announced template SoC, code-named Swordless. This IoT SoC template is targeted for tape-out in 2020. Barring any worsening of trade tensions with China, we believe that it will drive significant eFPGA adoption moving forward. Pingtouge will use the license we had previously agreed to under our MTLA for this Swordless test chip, and then any future users of the template for their own SoC will generate an IP license and royalties upon unit shipment.
We are very optimistic about the potential of this initiative with Alibaba for our eFPGA business. Another exciting initiative for us related to our more scalable go-to-market strategy for eFPGA has now expanded in the last month to be of much broader scope than originally anticipated. This one is also with a well-known mega cap-sized global company. What started as an eFPGA discussion has broadened significantly. I am very excited to announce that we have signed an agreement with this company to jointly develop and bring to market an IoT development platform that is based on the EOS S3 as the host processor. To enable the broadest served available market, we will launch this platform with open-source tooling support for both the Arm MCU and the eFPGA core in EOS S3. We are now jointly engaged with a third-party company who has a track record of delivering open-source tools.
We also have a commitment from this mega cap company to launch thousands of low-cost development kits into the market, our largest deployment ever, by 2 orders of magnitude. We are targeting to launch these before the end of Q1 2020. Moreover, we believe multiple AI software solutions will be ported to this platform, including SensiML. We believe this initiative will be a catalyst for each of our business units. First, it could drive an EOS S3 user base 2 orders of magnitude larger than what we have today. Second, it should drive significantly more exposure for SensiML and subsequent SaaS subscriptions. Lastly, we believe it will drive a more meaningful eFPGA IP license agreement with the same company I alluded to earlier.
One of our assumptions from our previous earnings call was that the above IP license would be executed in Q4 and drive a near seven-digit license fee in the quarter. While the pushout of this IP license to next year is disappointing, I firmly believe the resulting agreement we have negotiated with this company is a substantially higher aggregate value to QuickLogic, which will commence in the current quarter. We look forward to updating progress on this initiative during our next call. I'll conclude with some additional comments on our QuickAI and SensiML business. SensiML continues to gain momentum as more companies explore how AI can be integrated into their suite of products. As this macro trend accelerates and more dollars are invested in this area, we are dedicating more resources to the SensiML team and technology. The funnel for SensiML continues to expand, including additional Global Fortune 500 companies.
SensiML closed Q3 with a total of 26 customers, seven of which are Global Fortune 500 companies. This total is up from 12 customers in Q2 and three in Q1. Currently, the majority of them are still using the low-cost evaluation version of the product, not yet on the full SaaS product that generates significantly higher revenue. We anticipate increasing that total during Q4 from our initiatives with our distribution partners as well as with MCU partnerships, such as our most recent one with STMicro. We currently expect SensiML will end the year with approximately 40 customers, most of which serve the industrial markets. These types of customers tend to have much longer evaluation and decision-making periods. As a result, we have seen that the conversion time from evaluation to full SaaS license is taking longer than we had anticipated.
Therefore, our objective of cash flow and non-GAAP profitability for the SensiML business unit is more likely to be achieved in mid-2020. The good news is that industrial customers tend to have a much longer and more predictable revenue stream, which should offset the seasonality of our consumer-oriented business. In order to accelerate scalable growth, we have recently hired a director of software sales with experience in AI software and SaaS business models. I've covered a lot of ground in these opening remarks. The bottom line is that while there is short-term lumpiness in our business, I am confident that we have the levers in place to deliver revenue growth and improved overall financial performance in 2020. I would now like to turn the call over to Sue for a discussion of our recent financial performance and full Q4 outlook. Sue?
Thank you, Brian. Good afternoon, and thanks to everyone for joining us. For the third quarter of fiscal 2019, total revenue was $2.2 million. This compares with the revenue of $3.5 million in third quarter last year. The decline from Q3 last year, which was our highest revenue quarter since the fourth quarter of fiscal 2015, was mainly due to lower shipments of our mature and Display Bridge products. Within our Q3 revenue, sales of new products were $1 million. This compares with $1.5 million in the third quarter last year. While we did have higher revenue from other new product sales, they did not make up for the significant decline in Display Bridge sales. Our mature product revenue was $1.1 million, a decrease compared with $2 million in Q3 last year. The change was due to lower shipments to customers in the military and aerospace sectors.
In third quarter of 2019, we had four customers, each accounting for 10% or greater of sales. Non-GAAP gross margin in Q3 was 48.9%, compared with 50.5% in the same quarter last year. The flat gross margin profile comes despite a nearly 40% lower revenue than Q3 last year, showing the strength of our diversified product and customer mix. Non-GAAP operating expenses for Q3 2019 were approximately $4.5 million, which was the same as Q3 last year. As a reminder, our OpEx from Q3 last year was prior to the expenses associated with the SensiML acquisition that closed earlier this year. Within our Q3 2019 OpEx, R&D expenses were $2.6 million, and SG&A expenses were $1.9 million. This compares with R&D and SG&A both at $2.2 million in Q3 2018.
The approximately $300,000 decline in SG&A from the same quarter last year resulted from a combination of items, including lower consulting expenses and a reduced cost resulting from our facility move earlier this year. The net total for other income expense and taxes in Q3 was a $78,000 charge, compared with an expense of $33,000 in third quarter last year. Non-GAAP net loss in Q3 was $3.5 million, or $0.03 per share. This compares with a net loss of $2.7 million, or $0.03 per share in the third quarter last year. Finally, the total cash at the end of Q3 was $24.8 million, compared with $28.2 million at the end of last quarter. Our cash balance at the end of the third quarter also includes the $15 million draw from the revolving line of credit.
Moving to our forecast for the fourth quarter of 2019, which will end on December 29th. Our revenue guidance for the fourth quarter is $3 million, ±10%. We believe that total revenue will be comprised of approximately $1.3 million of new product revenue and $1.7 million of mature product revenue. With our guidance for higher revenue, which includes additional SaaS sales and a corresponding better absorption of manufacturing overhead, we currently believe our non-GAAP growth margin will improve to approximately 60%, ±3%. We're forecasting total non-GAAP operating expenses will decline to approximately $4.2 million, ±$300,000. Within operating expenses, we expect our R&D to be approximately $2.5 million and SG&A to be approximately $1.7 million.
This continued improvement in our OpEx is being driven by ongoing cost controls, the lower cost of our new facility in San Jose, and the roll-off of the one-time moving expenses we discussed last quarter. After interest expense, other income and taxes at the midpoint of this range, we currently forecast our non-GAAP net loss will be approximately $2.4 million, or $0.02 per share, based on about 116 million shares outstanding. Most of the difference between our GAAP to non-GAAP results is our stock-based compensation expense, which we expect to be approximately $760,000. We expect this expense will remain in the mid-$700,000 range for the foreseeable future. In Q4, we expect a lower cash usage in the range of $2.8 million-$3.2 million. As Brian mentioned earlier, we should be close to a non-GAAP operating income break even at the end of Q1.
This, in turn, should translate into minimal cash usage for the first quarter next year, and a cash flow break even in Q2 of 2020. With that, let me now turn the call back over to Brian for his closing remarks.
Thank you, Sue. Before concluding my remarks, I'd like to take a moment to discuss the preliminary proxy filing we made on October 7th, asking for shareholder approval to execute a reverse split of our common stock if this is needed to remain listed on the Nasdaq Capital Market. As I discussed in the blog post that accompanied the filing, there are steps we must take to maintain our compliance for trading on the Nasdaq Capital Market if our stock does not close with at least a $1 bid price for 10 consecutive days prior to January 13th, 2020. The board has not made a final decision on whether it will execute a reverse split nor determine the final split ratio. The special meeting is simply to have shareholder approval should it need to use the reverse split path to remain in compliance with Nasdaq.
In closing, while we are disappointed to not have achieved our fiscal 2019 financial goals that we discussed during the year, I am convinced that the design wins with recognizable OEMs, new ecosystem partnerships, and product introductions addressing new growth markets creates a clear pathway to delivering improved financial performance in fiscal 2020. During this ramp to profitability, I believe we have the balance sheet to support our financial objectives. I am again reiterating that we currently do not expect the need to raise further cash via an offering. While it is too early to discuss a detailed outlook for fiscal year 2020, the commitments we have received from customers and mix of business we currently expect gives us greater confidence that we will not only significantly increase revenue, but again, deliver a solid increase in our annual non-GAAP gross profit margin for the fourth straight year.
Before opening the call for Q&A, I want to let everyone know QuickLogic will be participating in some upcoming investor events. A few of the highlights include the Craig-Hallum Alpha Select Conference in New York on November 12th, the LD Micro Conference in Los Angeles on December 11th, and the Consumer Electronics Show in Las Vegas, January 7th through the 10th. All the events we plan to attend will be available on the events section of our website. That completes our prepared remarks. Operator, I would now like to open the call for questions.
Thank you, sir. Ladies and gentlemen, if you have a question, please press star one on your telephone keypad. If you're using a speakerphone, please make sure your mute button is turned off to allow your signal to reach our equipment. Again, it's star one if you have a question. Our first question will come from Suji Desilva, Roth Capital.
Hi, Brian. Hi, Sue. Just to get some understanding of the revenues, how much Display Bridge is left as a run rate?
It's de minimis now, as of this quarter.
Okay.
Yeah.
Okay, great. That's where I wanted. The large consumer company you've talked about the last few quarters, I think all the way from last CES. I don't know if I heard an update about that customer on the call or whether it was in some other comments. If you could kind of remind us what was happening with that customer, that'd be helpful.
Yeah. The consumer electronics company that we talked about for January, when they had the product demonstrated at CES, that for the first OEM deployment, was hit with these trade issues with China, specifically tariffs that were going to be applied to that end product coming into the U.S. on this last wave of tariffs. What I said on the previous call was that they were not going to launch that this year, and they were going to push it to next year. What I reiterated on the call this time was that we were still expecting that to be a shipment in 2020 product life cycle. That's on that specific one.
What we also gave more clarity on this call was that that design led to a remote control design for a content and streaming company, and they are doing a remote control that is completely under their own control, and we are the plan of record in there. That's the design win for us, and that we expect that will actually have a launch date of Q2 of 2020. Again, we said it's firm because they have control of their own destiny. They're not doing this as a design that a TV manufacturer has to ultimately sign off on.
Okay, that's helpful. On the headset market, having looked at the Amazon AVS headsets last year at CES and then hearing that there's near-term challenges for the China customers, coupled with Amazon putting out their own, can you just kind of wrap that whole dynamic into what's made it harder for you to see your customers ramp?
Yeah. Obviously, some of this was complicated with the trade tensions and what could be shipped into the U.S. without getting hit by tariffs. I would say the more recent challenge has just been that Amazon put out their own voice recognition software, which we alluded to on the call here. Because that software is free, customers are wanting to integrate free software from Amazon as the voice recognition, as opposed to paying another company for the voice recognition. That's pushed out the actual launch cycle for some of these guys as a result of that. As it relates to Amazon specifically with the TWS, I think it's actually somewhat disappointing we're not in the first product wave from them, but it's not a lost opportunity for us. I think in many ways, this actually makes the market more real for people.
You can imagine that a lot of OEMs that we're talking to now that are working with the ODM that we are in, could be using that as a white label product for the foreseeable future, meaning that when you go to your consumer electronics store, you're not going to just see Apple AirPods and Amazon TWS. You're going to see a whole host of people that are very similar in form factor and hopefully white labeling the products that we're in.
Okay, good. Two last topics for questions. First of all, on Japan, on the smartphone customer you have there, what were your expectations for units at the end of 2019? Are you where you expect to be or ahead or behind that? If so, what's the delta versus what you expected a few quarters ago?
From a few quarters ago, I think even on the last call, we said that we were below expectations for the year by a few hundred thousand units for that customer, which translates into a little more than a few hundred thousand dollars. We were expecting that we would be in around four phones shipping this year, and we are going to hit from a phone launch point of view, I think we're going to hit that based on what we just said on this call. Just the unit shipment in dollars will be a little bit below what we had expected earlier in the year. It's worth noting also, since you brought up that customer, remember we have this MoU that covers two years' worth of phones.
I am expecting that we're going to be in this next wave of phones next year based on the same customer, where they're taking the current design and then iterating that, leveraging all of the software work that they've put into our EOS chip. Remember, they've spent almost two years porting their own software into EOS, and they want to maximize that R&D investment on their part as well.
Got it. The last question, eFPGA, meta FPGA, what's a good expectation or kind of way to frame what the 2020 revenue opportunity is for that? Any royalties in that, Brian?
No, I would not factor in any royalties. I think the royalty flywheel starts in 2021 at this point. If you look at a lot of the designs that we have now that I talked about on the call, they're typically mid-2020 tape-outs. That's going to result in a 2021 royalty flywheel. As far as the licensing revenue goes for next year, I don't think we're at a point to nail down a specific number, but I definitely think it's going to be in the $couple of million-ish type range based on, again, these current customers that we've talked about, and then getting that larger IP deal in place with this mega-cap company that I mentioned on the call for the first time today.
Okay. All right. Thanks for answering the question, Brian. Thanks.
Thanks, Suji.
Great. Thanks.
Once again, ladies and gentlemen, it is star one if you have a question. Next, we'll hear from Richard Shannon, Craig-Hallum.
Well, hi, Brian and Sue. Thanks for taking my questions as well.
Hi, Richard.
Lots of things to ask about. I heard some of my topics covered here, but maybe just ask a simple question here. I think for 10% customers, you mentioned there were four of them. Any of the opportunities that you've discussed here, have you seen some ramps in newer products amongst those four customers you know are 10%ers?
Yeah. There are at least one of them is in this new product, Richard.
Okay. Is one of them the Japanese Sony?
Yes.
Okay. That's kind of what I guessed. Let's see here. Let's jump over to SensiML. Sounds like you're making some good progress, maybe not as fast as you'd hope, but certainly addressing the industrial market here, certainly understandable that the evaluations take some time. I guess, Brian, maybe if I could kind of check off the bad case scenario here about evaluations taking longer. Are you seeing any customers doing evaluations and dropping off in any manner? Are you still seeing them engaged, it's just taking a little bit longer?
It's largely it's them taking longer. I think a lot of cases, what we've found is that customers are trying to use some of their own hardware to gather data and use the SensiML cloud, and inevitably, they introduce error into their systems in the way they test, which is why we're trying to influence people to use our hardware development kits instead of their own systems for that level of testing to kind of get through this evaluation phase much faster. We've also come out with a new launch of software actually recently. We didn't give airtime to it on the call today, we've come out with a new version on the website that's supposed to make it easier and faster to get through this evaluation phase. No, I have the funnel in front of me.
I don't see anybody that was falling off from an eval point of view. They're still ongoing and just exercising that before they commit to the level of SaaS that we would like them to.
Okay. You said you just hired a new person here for the SensiML business. I can't remember if it was a sales or engineering point of view, but is there experience of how long these evaluations take consistent with their experience in the past before coming to QuickLogic?
I haven't asked that question of this individual yet. I'm intending to. He actually just started last week. Yeah, it's a sales director that's going to be under the SensiML organization, really driving forward closing more of these deals, with really a focus. One of the nice piece of background of this individual is that they have experience selling SaaS and selling AI software. I think the ramp time will be short. They're going to be handed over these thousands of leads that we have now generated from these different webinars and distribution programs that we have, and I think we're going to start to see an increase in the closure rate and a decrease in the amount of time it takes to get to that point from that experience.
Okay. Fair enough then. A couple quick questions for Sue on the numbers here. I think if I caught your comments right, you're expecting an improvement in the first quarter approaching break even, then getting there in the second quarter. If you could detail what minimum level of sales you think it'll take to get to break even.
We're thinking now at a total revenue level of approximately $6 million, or ±10%, and with the gross margin at about low 60% level.
Okay. While I probably can't do the math quick enough in my head, but does that imply OpEx at kind of a similar level that you're guiding to for the fourth quarter?
Yes.
Okay.
Pretty much stable as what I guided for Q4, that level.
Okay. I think that is all my questions here. You gave us a lot of information to absorb here, and I'll do some more of that and talk to you offline, but thank you very much.
Sure. Thanks.
Our next question today comes from Martin Yang, Oppenheimer.
Hi, Brian. Hi, Sue. My question first is on the 1Q expectations. Is the $750K license agreement expected to be pushed out into 1Q 2020, or do you expect that to be realized later than 1Q 2020?
At this point, we're modeling it being spread out through the year, not all lumped in Q1.
Got it. When you mentioned the mega-cap customers that can increase your S3 platform, are they intended to focus only on industrial IoT, or is that a mixture of consumer, industrial, and other verticals?
It's actually a mixture. It is not just industrial. It's definitely, I would say, more on the consumer side than the industrial, in fact. I think the development that we're doing with them will lend itself very well to people that would like to use it in an industrial type application.
Have you discussed more specific end devices that those platforms are targeted to?
No, I haven't. In fact, this is the first time I've ever spoken publicly about this whole engagement that's been going on for a while. I think the sure way to say is that the majority of people on this call use products like it every day.
Understood. Last question from me. In the hearable space, Amazon changing software is driving some of the delays. Are you seeing other drivers? For instance, your partnership with Iroha, are you seeing any new developments from them?
Well, I don't know if you're talking about new partnership opportunities or new competitive situations. Which one are you asking about?
I was referring to, are you engaged with, for instance, the equivalent chip designers similar to Iroha to deepen your penetration in the hearable space?
Oh, yeah. In fact, given how long we spent on the prepared remarks already, those types of details fell off the table, I think, on the call, but I can iterate them here in Q&A. Yeah, in the last quarter, we announced several new partnerships. I think one was with Iroha. We're working with Bestechnic, which is a Chinese Bluetooth company, Atmosic, which we did give some airtime to on the call. All of these are folks that have some level of penetration into these application spaces already, and we're kind of getting on the bandwagon with them as far as bringing a whole solution to those same customers. Yeah, these partnerships are definitely helping. In some cases, they're bringing us to decision-makers that we aren't already calling on. In other cases, it's the reverse, where we're bringing them in to different people.
It's really important actually, because in the consumer space in particular, customers like to start from a known good verified starting point. They don't like to do a lot of development on the fly. By us pre-verifying these solutions with these big semiconductor companies, it sort of validates what we're doing, and it accelerates the customer development cycle.
Got it. Thank you. That's it from me.
Thanks, Martin.
Next up is Rick Neaton, Rivershore Investment Research.
Hi, Brian. Hi, Sue.
Hello, Rick.
Hey. I'd like some reclarification about Infineon. Last call, you mentioned that you expected some production late in Q4 of this year of a module or a product coming from that reference design. Is that one of the push-outs, or is that still on track?
We are expecting to ship some from us to them to build out some of these systems. I think the bigger launch from them will actually be pushed out a little bit from what we thought last time, and some of that's just due to the qualification of all of their AI software that they're running on the EOS S3. We do have.
Okay
in our forecast to ship to that design in this quarter.
Okay. I didn't hear you mention anything about the feature smartphone that your Japanese customer had scheduled to release in Q2 of next year. Is that still on track?
Absolutely. It's on track.
Okay. In speaking about your expectations for Q1, is this guidance, or should it be viewed as something short of guidance?
Well, I'm not going to change our policy, which is to give guidance for current quarter. I would say it's a very well-thought-out outlook and the drivers that it's going to take to get to that point of the operating income and the balance sheet.
Sue, we should model $4.2 million of non-GAAP operating expenses for Q1 of next year? Is that what you're saying?
I would model a bit lower than that. 4.2 is my midpoint. I would model that at the lower end of that midpoint, that range, to get us to breakeven point.
I was trying to reconcile your ±$6 million with a 60% gross margin, leaves about a $600,000 delta between breakeven and your $4.2 million.
Right.
Okay.
That could capture at the Q1 or Q2 point of the gross margin improvement or the OpEx level adjustment. That's where we said getting close to breakeven, and to Q2 next year, then we're comfortable saying breakeven.
Are you seeing non-GAAP OpEx at about $4 million a quarter then in each of the two quarters in the first half of next year?
That's our goal, to achieve that level of OpEx spending.
Okay. That's not a forecast yet. That's a goal.
That's true, and we're pretty comfortable saying that as well.
Okay. Brian, at the last conference call, you said you expected 50 to 100 SensiML customers by year-end, and now you've scaled that back to 40. What's the reason for the big difference in your expectations?
Really boils down to two things, Rick. One is that, as I alluded to in the call, we did think that people would get through this evaluation phase at SensiML much faster than what they've shown. Some of those have actually caused us to go back and come out with this more reduced, fixed version of the eval software that we just launched. That's one thing that we're doing to try to accelerate that. The second is that I did mention in the call also that we are officially a partner of STMicro. SensiML has their software running on the STMicro MCU. We had a very prominent kiosk at the ST Developers Conference in Santa Clara, we being SensiML. Our vision there was that they would also be pulling in more of these opportunities that would convert to SaaS licenses sooner than what they have.
I think I maybe overestimated how fast a large European company would move, and I was on the wrong side of that estimate. I think we're rescaling this to 40 for the year. I still think foundationally and fundamentally being part of ST's ecosystem partner program and them actually getting trained up on the solution now and becoming a sales arm for SensiML, I think in the end is going to accelerate this once they get more comfortable. The last thing I'll say is just having a semiconductor company sell software, it's challenging people's DNA at some point.
We hired this new salesperson for SensiML because we want to just break through that wall, and I think having somebody that's got experience selling AI and selling SaaS and getting these thousands leads, they're going to be able to convert that at a much faster rate. In retrospect, I wish we'd hired a salesperson dedicated for this sooner, but we're trying to be very mindful of OpEx and cash if we went on that path. Hopefully, that answers your question.
Yeah, it does. Thank you, Brian. As an investor, how should that person be viewing the confidence in your outlook for Q1 2020, given all the changes that have happened in the past two conference calls?
Yeah, I was thinking about that before the call, and I think this is where we need to step back and look at the forest for a second and just realize that now we really have so many different items as wins with big customers that we didn't have a year ago that was so well-diversified. I think if we look at those different milestones and these different partnerships that we've put in place and these deals now that I talked about that we've signed, it certainly gives me and our management team, I hope that it gives investors that same sense of confidence that I have, because it's just a much more diversified set of customers.
The firm commitments, think about last year, we still hadn't shipped a phone yet with the Japanese smartphone guy, and now we're going to exit this year with four phones launched. I think the evidence is there now that this really is on the cusp.
Okay.
You know what? I'll add one other thing to that, Rick, just sorry for interrupting you. This whole deal with this mega cap company, again, I haven't talked about this deal before except today. This is a big company putting money and resources behind this initiative for thousands of kits out into the market with this software. You could argue that's a big company, but they're going to have their reputation attached to this as well, and they chose EOS S3 as the host processor. I think there's something there that we can all take from that. Also, that's another reason why we're gaining the confidence that the tide has turned now, and Q1 will be that quarter.
Okay. Thanks, Brian.
Thanks, Rick.
Thanks, Rick.
Everyone, that's all the time we have for questions today. I'd like to hand things back to Brian Faith for any additional or closing remarks.
Yeah. 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 fourth quarter results in early February next year. Thank you and goodbye.
Ladies and gentlemen, that does conclude today's conference. Thank you all for your participation. You may now disconnect.