Ladies and gentlemen, good afternoon. At this time, I'd like to welcome everyone to QuickLogic Corporation's second quarter 2016 earnings results conference call. During the presentation, all participants will be in a listen-only mode. A question and answer session will follow the company's formal remarks. To ask a question, press the star key followed by the digit one on your touch-tone phone. I will repeat these instructions after management completes their prepared remarks. Today's conference call is being recorded. With us today from the company are Brian Faith, President and Chief Executive Officer, and Sue Cheung, Principal Accounting Officer. Before we begin our call with QuickLogic's executives, I will read a short safe harbor statement.
Some of the comments QuickLogic makes today are forward-looking statements that involve risks and uncertainties included, but not limited to, stating 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, market acceptance of its customers' products, expected results, and financial expectations for revenue, gross margin, operating expenses, profitability, and cash. I'd like to remind you that these statements must be considered in conjunction with the cautionary warnings that appear in QuickLogic's SEC filings. Investors are cautioned that all forward-looking statements in this call involve risk and uncertainty, and that future events may differ materially from the statements made. For additional information, please refer to the company's Securities and Exchange Commission filings, which are posted on its website or available from.
This conference call is open to all and is being webcast live. We will start today's call with a review of the second quarter financial results by QuickLogic's Principal Accounting Officer, Sue Cheung. Its CEO and President, Brian Faith, will discuss the company's strategic initiatives in the quarter. Sue will provide financial guidance for the third quarter before Brian's closing remarks. At this time, I would like to turn the call over to Sue Cheung, Principal Accounting Officer. Please go ahead, madam.
Thank you, operator. Good afternoon, and thank you to everyone for joining us today. For the second quarter of 2016, total revenue was $2.7 million, which was at the low end of our guidance range. Our new product revenue was approximately $1.2 million, and the mature product revenue was approximately $1.5 million. Samsung accounted for 31% of the total revenue during the second quarter, compared to 35% during the previous quarter. During the second quarter, we took an inventory reserve of $203,000. This was primarily driven by the write-off of our first generation PolarPro 3 inventory. Even though this was a non-cash expense, we usually do not adjust for inventory reserves in our non-GAAP presentation. As a result, this reserve lowered our GAAP and non-GAAP gross margin by about 8%, resulting in a reported non-GAAP gross margin of 30%.
Excluding the inventory write-off, our non-GAAP gross margin would be 38%, which was within our guidance range. Non-GAAP operating expenses for Q2 totaled $5.6 million, which was favorable to our guidance. The lower non-GAAP operating expenses were primarily due to our efficient use of resources and the lower than expected engineer-related expenses. On a non-GAAP basis, the total for other income expense and the taxes was a charge of $76,000. This resulted in a non-GAAP loss of approximately $4.8 million or $0.07 per share, which was better than our guidance. We ended the second quarter with approximately $19 million in cash, which was favorable to our guidance. Cash usage during the second quarter was $4.3 million, which reflects the operating loss and the changes in working capital requirements that were partially offset by borrowing $1 million against our existing line of credit with Silicon Valley Bank.
Our Q2 GAAP net loss was approximately $5.6 million or $0.08 per share, which was within our guidance range. Our GAAP results include stock-based compensation charges of $439,000 and a non-cash write-off of $312,000 for first generation sensor hub mask set. Both our GAAP and non-GAAP results included the previously mentioned inventory reserve charge. For detailed reconciliation of our GAAP and non-GAAP results and other financial statements, please see the press release we issued today. We have also posted an updated financial table on our IR webpage that provides current and historical non-GAAP data. Last week, we implemented strategic realignment measures that resulted in a reduction of eight employees. We expect to incur a one-time severance charge of approximately $170,000 in the third quarter of 2016 associated with this reduction.
Later this quarter, we also plan to implement cost reduction measures associated with off-site services. On a non-GAAP basis, we estimate the quarterly savings from this initiative will be between $500,000 and $800,000 beginning with Q4 2016. In addition to notably lowering our quarterly cash usage, and given the same assumptions we've shared in past conference calls, we expect those costly savings will lower the revenue level required to achieve cash flow breakeven by $1 million to $1.6 million. With that, I'll turn the call over to Brian, who will update you on the progress of our strategic initiatives.
Thank you, Sue. Sorry, folks. Technical difficulty with my microphone. I'm going to start. Thank you, Sue, and thank you all for joining our quarterly conference call. As I'm sure you are aware, following the announcement of Andy's retirement, I took over as CEO on June 24th. Andy will continue to work with us as an active member of the board of directors. While his condition is defined as early stage 1, his neurologist emphasized to Andy that the best therapy for slowing the progression of Parkinson's disease is to reduce stress and increase physical activity. This retirement optimizes both. We wish Andy the best as he embarks on a well-deserved retirement. Since this is my first conference call as CEO, I'll take extra time to provide you with some background, a fresh baseline of our strategic initiatives, and my outlook for the future.
During the past 20 years at QuickLogic, I've held a variety of positions in engineering, product line management, marketing, and sales. Since I had P&L responsibility as a product line manager, I spent a considerable amount of time being mentored by our then CFO. With this background, I'm very familiar with the operational structure of the company, all of the companies that are affiliated with our ecosystem, and all of our major investors. Most importantly, I am intimately familiar with our target markets and have longstanding relationships with our key customers. Needless to say, I learned many lessons during the past 20 years. Most importantly, I learned what works and what doesn't work.
With those lessons in mind, I believe what we are doing now is working, and I believe that during the coming year, we will generate the results to not only prove it is working very well, but also to demonstrate that we have a durable business model capable of delivering long-term growth and profitability. While QuickLogic has executed successful business models in the past, none of them proved to be durable. The reason is that those models competed against the persistent cadence of semiconductor integration that is commonly described by Moore's Law. As a result, the value propositions of our past business models were eventually integrated into higher functioning chips by our competitors. Said another way, we were operating on the wrong side of Moore's Law, and that doesn't work.
With our sensor processing solution business model, we are the integrator, and that means for the first time since I've been at QuickLogic, we are on the right side of Moore's Law. In addition to this, I believe we have the best solution in the market today and are at the front end of what will prove to be a very significant growth opportunity for QuickLogic. New product development by top-tier customers in our targeted markets is rapidly trending towards immersive user experiences that substantially increase the demands placed on sensor processors. With these trends, customers are focusing more on the power consumed by the sensor processing solutions. I believe we're extremely well positioned to capitalize on these trends, and my goal is to capture as much of this emerging market as possible.
While my confidence in realizing this goal is bolstered by the fact we've received from many of the leaders in our targeted markets, it remains difficult to predict the timing and shape of the production ramp for the products that will incorporate our solutions. Let's take a minute now to baseline our activity and some recent developments. First, let's start with the strategy behind the strategic realignment initiative Sue briefly covered. With the EOS S3 now qualified for production, our hardware design engineering requirements are much lower than they were a quarter ago. Due to this, we reduced our hardware design engineering staff in Sunnyvale last week. This provides us with the opportunity to expand our software engineering capabilities and reduce costs at the same time. Going forward, our biggest challenge is keeping pace with the engagements we have with top-tier OEMs in our targeted markets.
Once a customer engagement is established, it quickly becomes very software intensive. The trend we are seeing tells us this intensity will increase as OEMs implement features that require sophisticated sensor fusion of voice and sensor data. These trends increase the demand and duty cycle for the sensor processing system, and that benefits us. However, to realize that benefit, we need to increase the number of software engineers we have available to support customer engagements. To accomplish this and enable 24/7 support for our customers, we are increasing our software engineering staff in India. As we forecasted in our last quarter earnings conference call, we shipped a modest quantity of our production-qualified EOS S3 to a tier 1 smartphone customer last quarter to support its pre-production of a new wearable device.
During the Q&A session of the last conference call, we stated that while this customer told us its new wearable device is designed to be a high-volume product, the marketing team had not decided how it would stage the launch, or if it would couple it with the launch of other products. While these decisions are still not firm, the indications are the new wearable device will launch during the three-month window that concludes with Mobile World Congress in February of 2017. The good news is the customer is extremely pleased with the design of our EOS S3 sensor processing solution and is timing its introduction to maximize the value potential and media coverage for the product. Moreover, we have continued to broaden our engagement activity with this customer on other potentially high-volume sensor processing applications.
Unfortunately, the anticipated launch schedule means the significant revenue ramp we were anticipating in Q4 will likely be pushed out by one quarter. During the last six weeks, I've spent a considerable amount of time auditing our operational structure and our strategic customer engagements. This includes visits to our field sales offices and customer locations in South Korea, China, and India. With data gathered from these efforts and the support of our executive team, we have prioritized our engagements and defined the resources we need to optimize our success. While this process led me to temper our outlook for the second half of 2016, it also increased my confidence in our longer-term growth potential. This optimism is based on the fact that 14 out of the top 15 smartphone OEMs in the world today have expressed interest in evaluating our EOS S3 sensor processing solution.
That being said, not all of these OEMs have a product they are ready to target for development at this time. To optimize our return on investment, we have refined our active engagement focus to include opportunities where the OEM has a target product with high volume potential that can benefit from the unique advantages of our sensor processing solutions. With this filter in place, we removed several engagements from our active list and replaced them with a similar number of new engagements that meet those criteria. Most of the engagements that we suspended were engagements where the OEM either removed a product from its development pipeline or had not yet assigned a specific product to the engagement. In all of these cases, the OEMs remain interested in our sensor processing solutions and have stated they will welcome re-engaging with us when they can identify a high-volume target product.
As a result of these adjustments, we now have a more qualified set of active engagements with nearly half of them being with top-tier smartphone OEMs that have very significant volume potential. At this juncture, we believe there will be several new devices launched during the second half of 2016 by top-tier OEMs that use our sensor processing solutions. Among these is the design we have mentioned in the past with a top-tier semiconductor company that we now expect will enter production in very late Q4. We are currently working with one of these top-tier OEMs on a press release that announces our sensor processing platform and algorithms have been designed into a highly sophisticated VR camera, but we are not anticipating this will be a high-volume product.
It is designed to set new standards for VR video recording, which makes it a great showpiece for the capabilities of our solution. We are also working with a top-tier smartphone company on a press release that will announce the use of our display bridge in a new smartphone accessory. In addition to these press releases that we plan to announce this month or next, we believe we will get permission from other customers to issue additional design win press releases later this year. While we are on the subject of press releases, I would like to take a moment to highlight the recent press release issued by our ecosystem partner, Sensory. Sensory is the clear leader in voice triggering and recognition software, and its technology is used pervasively by the leaders in the smartphone, wearable, and IoT markets.
In its press release, Sensory announced partnerships with us and two other companies. Of the three, QuickLogic is the only company that offers a hardware-integrated version of Sensory's technology in a sensor hub or MCU. We view this as a very significant competitive advantage that plays favorably to the design trends we're seeing in the market today. New designs from top-tier OEMs expand the use of always-on voice applications such as OK Google to improve the user interface and enable new immersive user experiences. The main challenge they face is to accomplish these goals while still maximizing battery life. Our EOS S3 integrated hardware solution supports these applications while reducing power consumption by approximately 50% relative to the traditional MCU solutions being used in the market today.
Going forward, the best route to further optimize our unique silicon platform and leverage our engineering resources is by partnering with leading software companies such as Sensory. With that in mind, we are in the process of establishing a partnership with an Asian software company whose smartphone solutions are used by many of the top-tier Chinese OEMs. Once this initiative is completed, I believe our design engagements in China will accelerate significantly. While I believe we have the best sensor processing hardware platform in the market today, the strategic steps we are taking now will bolster that strength with software solutions that enhance its value. We believe these steps will not only help us expand our value proposition, but also better leverage our investments in engineering and customer support.
At the bottom line, I firmly believe that with the engagement activity we have today, the strategic steps we've taken during the last 6 weeks, and plan to expand on during the second half of 2016, we will accelerate our ability to finalize design wins, and with that, drive our revenue growth in 2017. I'll now turn the call over to Sue for our third quarter guidance and rejoin for my closing remarks.
Thank you, Brian. For the third quarter of 2016, we're forecasting total revenue of approximately $2.8 million, plus or minus 10%. The $2.8 million in total revenue is expected to be comprised of approximately $1.4 million of new product revenue and $1.4 million of mature product revenue. As in prior quarters, our actual results will vary significantly due to things that are beyond our control, such as schedule variations from our customers, schedule changes, and the projected production start dates to push or pull shipments between Q3 and Q4 2016 and impact our actual results significantly. On a non-GAAP basis, we expect the gross margin to be approximately 38%, plus or minus 3%. Gross margin is driven primarily by the mix of customers and the products shipped during the quarter and the continued unfavorable absorption of operational overhead.
We are forecasting non-GAAP operating expenses at $5.3 million, plus or minus $300,000. The expected decrease in OpEx is a result of the cost reduction measures we discussed earlier. Non-GAAP R&D expenses are forecasted to be approximately $3 million, and our non-GAAP SG&A expenses are forecasted to be approximately $2.3 million. Our other income expense and the taxes will be a charge of up to $60,000. At the midpoint of our guidance, our non-GAAP loss is expected to be approximately $4.1 million or $0.06 per share. Our stock-based compensation expense for the third quarter is expected to be approximately $400,000. As mentioned before, during Q3, we expect to incur a one-time severance charge of approximately $170,000. As was the case in prior quarters, our non-GAAP results will not reflect this charge or charges associated with stock-based compensation.
Including the favorable impact of an additional $1 million of borrowing from our bank line of credit, we expect the net Q3 cash usage to be approximately $2.2 million-$2.7 million. The forecasted cash usage is primarily due to our working capital needs and the payments associated with our new product development costs. With that, let me now turn the call back over to Brian for his closing remarks.
Thank you, Sue. The feedback we've received from literally every top-tier customer we've shown the EOS S3 to tells us it is the right part at the right time and that it is priced correctly for the market. We are engaged today with many of these top-tier customers on specific programs. While the aggregate number of engagements has held fairly constant, the quality and potential of our engagements has improved significantly. Approximately half of our engagements are targeting specific new smartphone designs with top-tier and virtually all of those engagements have multimillion-unit annual volume potential. After auditing every aspect of our business, we have implemented a strategic realignment that will significantly lower our fixed costs, and at the same time, provide us with the software engineering resources we need to accelerate our ability to win new designs.
With this progress, I'm more confident than ever that we will grow our revenue very significantly in 2017 and end the year as a profitable enterprise. Operator, I'd now like to open the call for questions.
Thank you. Ladies and gentlemen, at this time, if you have a question, please press star, then the 1 key on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Our first question comes the line of Suji Desilva with Roth Capital. Your line is now open.
Hi, Brian. Hi, Sue. Brian, best of luck in the new role there. With the OpEx and the movement you have there, the puts and takes, the restructuring, and the need for software investment, how should we think about the run rate from the guidance going forward? Is there more room for that to go down, or will it be stable? Just some color there would help.
Hi, Suji. This is Brian. I think the way to model right now is based on what Sue gave in the guidance, which is roughly $500,000-$800,000 less than what we have been doing on a quarterly basis. That, as she said, will lower the break-even level on the revenue side because of the lower OpEx. I would model with what she had for Q4 as our 2017.
Got it. Great. Thanks for that. The customer pushing out to the Barcelona timeframe for the launch. Can you give us the rationale on the customers, the thought, the thinking process there to help us understand the reasoning for the push-out?
Due to NDAs, I can't really get into detail, and I think that some of the product management decisions that our customers make are definitely behind closed doors that we're not involved in. The best that I can say right now is that I know that they're trying to maximize the impact of the launch of that product, and so they're trying to time it around certain industry events that would maximize the exposure. I'll leave it at that.
Just to be clear, it was not a technical challenge with the EOS product or anything along those lines?
Oh, no, absolutely. There's no technical challenge with EOS. As we said in the prepared remarks, the customer's really happy with our solution and what they're seeing so far, so nothing to do with this project.
Just to clarify that. The customer pipeline rationalization, I'm just curious there, with the refocusing on the large ticket opportunities, how many potential customers and models could theoretically ramp a volume sometime in the second half of 2016, given the rationalization you've done on the pipeline?
Previous to what we've been doing, I'm not going to give detailed numbers on the actual pipeline and the movement there. What I will say is that the number has remained fairly constant to what we've talked about previously as far as when it ramped in 2017. I mentioned that we're engaged with 14 at the top. They're all getting good feedback on the EOS S3. This is really a matter of project timing, when they can actually assign resources, look at the platform, and then find a product that they'd actually design it into. I think on previous calls, we actually talked about the development cycle of some of these smartphone OEMs, and it tends to vary. What we've said previously is it varies between six months and 15 months, and then there's very specific windows of opportunity where they're going to launch a product.
Lengthening this cycle to some extent is actually good for us because we're playing such an integral role in these systems, and it enables OEMs to develop new user experiences and applications. I'll also say it's really critical that we win these first designs with these OEMs because once we win that first design, it gets really sticky. They're writing software, they're writing algorithms, putting them onto the platform. That stickiness factor hopefully will snowball, so that if we win designs in the first half of 2017, it's actually going to lead to sort of a multiplicative effect in the second half of 2017. I can give you that first. We see a lot of potential for based on the feedback we received so far.
Okay. Brian, just the last few questions. On the EOS S3, the platform is flexible enough to enable a lot of different features. I'm wondering if you could kind of give us a sense of what the one or two key hot features that smartphone customers are going to compete on in the second half and into 2017 that you enable out of the many features you could possibly enable.
Sure. Keep in mind, the overriding value here is battery life. We're at least 50% lower power than competing microcontroller-based solutions. Firstly, we care about customers who care about power. There's a great fit there. Once you dig a little further into the details and you look at EOS S3, there's a few areas that are highly differentiated. The first, and this relates back to the Sensory discussion we had earlier, we have a highly optimized voice subsystem, some of which is based on IP from Sensory. This notion of this immersive experience where you can speak to your device and tell it to do things as opposed to using your hands, that's huge and that's getting a lot of traction right now. That's an area that we see as highly differentiated for EOS S3. The second is actually our proprietary core, the Flexible Fusion Engine.
What we're doing with that is we're allowing people to do always-on sensor processing on the motion sensor side in much lower power than a microcontroller-based solution. The third area of differentiation that we've talked a lot about in the past is our heritage. It's that low-power programmable logic that allows people to do integration of other components into the single chip. Actually, some of these engagements that we have talked about on this call and previous calls are taking advantage of that programmable logic. If you think about the mobile consumer space, cost is always a factor. The fact that we can integrate these multiple devices into one is huge from a bill of materials point of view. Those are the three main drivers. Just think the overriding factor here is this more immersive, always-on user experience that lengthens your battery life.
Great. One last question from me. Can you update us on the China smartphone customers and give us a thumbnail of where that customer base stands relative to the opportunity for you? Thanks.
Sure. I would lump all of this into this category of all these OEMs that have given us positive feedback. I've been there myself multiple times. In fact, Bob Schoenfeld, our vp of sales, he isn't on the call today because he's in Asia, headed into China to talk to these customers. Where we are, we're at various stages of engagement. Some people are doing what we call technical solutions, where they're actually measuring power consumption and validating our claims. Other people are a little bit further along in that process. Again, I'll go back to the typical smartphone development cycle we talked about. It typically ranges 6-15 months. In China, that does tend to go faster once they finish that eval and they find an actual specific program to intercept.
We're at varying areas of that in China, a lot of those ones in China are what we're thinking will drive the growth in 2017 for us, specifically because of the value proposition resonates there, and they can get to market very quickly when they make decisions on products.
Great. Appreciate the detail, Brian. Thanks.
Thanks, Suji.
Our next question comes the line of Gary Mobley with The Benchmark Company. Your line is now open
Good afternoon. Thanks for taking my question. Sue, I want to start with a question for you. Could you refresh our memory as to what the new break-even will be on a non-GAAP basis in quarterly revenue?
Yes, Gary. The new break-even will be around $10 million to $11 million of revenue. This is to boost the reduction measures that I implemented this quarter that reduced our burn rate by about $1 million to $1.6 million per quarter.
Okay. Brian, did you say that it's your goal or perhaps anticipation that you'll hit that break-even number by Q4 2017?
Yes. Gary, I'll answer this. Obviously, I'm a conservative guy, yes, I said we'd end the year as a profitable enterprise. If the ramp happens sooner with these smartphone OEMs, that could happen sooner in 2017. For the purpose of today's call, yes, it's the end of the year.
Okay. If I go back, I think you mentioned that you have some solid sales prospects with some Japanese OEMs moving to the PolarPro 3. I'm assuming since there was a $200,000 inventory reserve for PolarPro 3, perhaps those opportunities might have slipped. Am I assessing that right?
It's actually slightly different. The reason why we took the reserve on the first generation, ArcticLink 3 S1, and the associated partner in programmable logic, PolarPro 3, those are the first generations of those. If you remember, we actually fairly quickly came out with second generations, the ArcticLink 3 S2 and PolarPro 3E. Because those are more cost-effective and lower power than the first generations, all of the sales efforts are really promoting those second generations and not the first generation. Because of that, we decided it was prudent to take the reserve on the inventory and write off the fixed asset or the mask. I want to remind that we have done these inventory reserves in the past, and we still seem to find places to sell these devices. When we do go through and we sell them, they will be at 100% margin.
Again, from a financially prudent point of view, we thought it made sense to do the write-off of the inventory and the fixed asset at this time for the first generation.
All right. Could you give us an update on the prospects for video bridge sales, perhaps even any sort of specifics with Samsung in how you see that business shaping up and continuing with what has been your largest customer?
Yes. Again, due to NDA, I'm not going to get into specifics on Samsung. We'll report on actuals when we actually end the quarter, we tell about the percentage breakouts for them. Just from a general point of view, we actually continue to see demand for those display bridge solutions. In fact, I got an email today on another design opportunity, not with Samsung, but with other people. We continue to see opportunities coming in for this. I'm confident we're going to see display bridge revenue well into 2017, maybe beyond that. I don't see a material revenue increase in the near term. I definitely see it continuing well into 2017 and maybe beyond that.
Got you. All right. That's it for me. Thank you.
Thanks.
Our next question comes from the line of Rick Neaton with Rivershore Investment Research. Your line is now open.
Thank you. Hi, Brian.
Hi, Rick.
CEO.
Thank you.
I'd like to follow up on some things that were discussed in the last conference call. There was some discussion by Sue about an inventory build timeline, and I'm wondering if you can provide some color on forecasting inventory for third quarter and even fourth quarter.
Hi, Rick. This is Sue. I can answer. I took this question down. For inventory build, we modeled out to ramp up in Q4 this year. Q3 will be consistent with the prior quarter. For Q4, given the uncertainty in production schedule of the tier 1 smartphone OEM wearable project, we have already taken steps to build the inventory to support our ramp towards the end of the year. We believe the ramping demand will more likely in earlier next year, when we have a capacity to support it if that happens earlier in Q4.
Okay. Brian, based on that inventory forecast and your statement that you are a conservative person, are you entirely ruling out a chance at a smartphone in the fourth quarter, or are you just being a little more conservative? Can you provide a little bit more color here?
Sure. I'm definitely not ruling out that there could be a smartphone going to market in the fourth quarter. I'm just trying to be more conservative as we're giving our revenue outlook for the balance of the year. Of course, you know we're only providing guidance for Q3. There's a lot of things going on with these customer opportunities right now, and really, I think what we've been trying to convey on this call is it's really a timing thing. Once we get better visibility on that, I think we'll be able to speak with more concrete detail. It's definitely not off the table to have a smartphone go to production in Q4 this year. We just see that the ramp Where you're layering in several of these at the same time, that would be something that builds into 2017.
Are you saying that the description of very significant basically could possibly be pushed out another quarter into the first quarter of next year?
Yes.
In other words, at the last conference call, Andy talked about confidence of a very significant revenue ramp in the second half of this year. You talked about maybe due to your important customer's production schedule and marketing plans, there's a possibility that this very significant ramp would fall in 4Q 2016 and 1Q 2017 instead of 3Q 2016 and 4Q 2016. Is that the color you're trying to convey to us?
Yeah. Let me actually provide a little bit more color on that. The primary factor behind the changes in our second half outlook is really due to that tier 1 smartphone OEM using our EOS S3 in a new wearable product. We know that they've delayed it, and they're trying to determine when they're actually going to launch it between December and February at Mobile Congress. That has a big impact on what we had previously said would be significant growth in the second half of this year, simply because we don't know exactly how they're going to go to market with that and when it will start to ship in volume production. As Sue mentioned on the inventory side, we are building some inventory to support that if they do decide to launch it in Q4, we would enjoy, obviously, the revenue from that.
I'm trying to provide a more conservative view of the second half at this point, given that visibility. That being said, there's also several things that lead me to take a bit more of a conservative outlook in the first half of 2017, also, I think, optimistic view for the second half of 2017. Really, the short story here is I see that we have these improving value of our engagements. I tried to convey that in the prepared remarks about the shift in the funnel and what's actually in there and what was suspended. I just don't know how quickly those are going to go to production and how successful the first guys to market with our solution will be. A lot of it's dependent on them, or how quickly the demand for their products will ramp.
There's a lot of variables we're trying to play with, again, due to my conservative nature, I'm trying to paint what I view as a conservative picture to you as investors.
In following up on your statements about how you have reconfigured the design funnel or engagement funnel, have you lost any engagements due to S3?
No, we haven't lost any engagements. We've seen some suspension of engagements, I would say. All of the OEMs that we've talked to think it's a fantastic device. They love the power. They love the features and integration. It's really more of a timing thing. I will say that there were a couple of smaller opportunities that we purposely moved to the suspended area, where OEMs were asking us to do things that the management team felt would be more of a one-off development and not really worthy of the type of volume that would be commensurate with that development. We purposely decided to move it off, making a decision that opportunistic revenue is not as important as really making sure that we focus on these bigger ones that can move the needle for us, and more in the smartphone space.
That's why in the prepared remarks, we talked about this sort of shift where it's a much more high-quality funnel at this point as a result of those decisions.
When you concluded your prepared remarks and said that you have high confidence that you will end next year as a profitable company, are you talking about the quarter or the entire year?
As a quarter.
Okay. Thanks, Brian. Congratulations, and thanks for the clarifications here.
No problem. Thanks for your questions, Rick.
At this time, I'm showing no further questions. I would like to turn the call back over to Brian Faith for any closing remarks.
Okay. Well, we thank you for your continued support, I look forward to reporting our strategic progress on the next earnings call, which is scheduled for Wednesday, November 2nd, 2016. Thank you and goodbye.
Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may all disconnect. Everyone have a wonderful day.