QuickLogic: Progress In Progress – Seeking Alpha

On Wednesday, August 9, QuickLogic (NASDAQ:QUIK) reported uneventful F2Q2017 results, but forward guidance for 3Q 2017 was disappointing due to delays in new product ramps at some of its customers, in particular the continued delay by Samsung (OTC:SSNLF) on its Gear Fit Pro device. As such, contrary to guidance from 90 days ago, QuickLogic's management stated that it is not on track to achieve 50%+ revenue growth for full-year 2017 that was dependent upon a material new product revenue ramp starting in 3Q 2017 and accelerating into 4Q 2017. In addition to the further Samsung delay, anticipated smartphone business has been pushed back 1-2 quarters. Management is now saying a revenue ramp will likely start in 4Q 2017 and build from there as 2018 unfolds and that the company thinks it can achieve its margin model in full-year 2018, including 10% operating margin.

Management delivered a comprehensive post-earnings conference call that covered a lot of bases in terms of served markets, company-specific fundamentals, and comments about an increasing number of design engagements and actual design win activity. With that said, given how long the QuickLogic saga has lingered, I suspect most people will react by thinking - gosh, this is just another disappointment from this company with a bunch of mumbo-jumbo commentary. Same 'ole, same 'ole...

However, if investors pay close attention to what the management said and grasp, the fundamental building block nature of the commentary including breadth of market, product uniqueness, relative newness of the design environment, the value and contribution of ecosystem partners, an increasing engagement funnel, an increasing - albeit nascent - design win funnel, and the fact that certain customers (Samsung and the two new Chinese firms) are, or plan to broaden the use of EOS S3, plus building momentum for eFPGA, there is a potentially compelling story creeping out of the weeds. Green shoots one might say.

If the initial new product (EOS S3 and eFPGA) revenue ramp materializes in 4Q2017 as management is now guiding, and then accelerates in 1Q2018 and beyond, I think investors will likely look back and say wow, that mumbo-jumbo was pretty detailed and made sense. So then in future calls, people may be inclined to place more value on managements words and its credibility will grow. Most investors who have been following QuickLogic for a few years or more would probably argue that management credibility is low. So clearly the story is at a credibility inflection.

Also, assuming it materializes, once design-win momentum and revenue growth are both ramping, the stock will likely return to discounting more future growth potential "on the come" again versus the "show me" mode it is in now.

It is my belief that the current and relatively new management team (CEO Brian Faith and CFO Sue Cheung) as the Top Dogs anyway - is building the foundation for steady and sustainable revenue growth and is very conscious of and concerned about shareholder interests and being credible. With that said, while I am getting a bit impatient to see the money (i.e., revenue growth), I do think the initial material new product revenue ramp push back to Q4 2017 from Q3 2017 isnt QuickLogic managements fault. Its due to customer delays. Now the obvious response to that statement is if it had more customers, it would come out in the wash. That is true, but this is early days of the EOS S3 and eFPGA new product ramp. It is the plan that the customer base and product exposure will be more diverse in the future so certain delays and push-outs can be absorbed as revenue and earnings continue to ramp.

I have been focused on three themes of late:

1. Multiple End Markets - In my view, it is good that QuickLogic is targeting and actively cultivating multiple end markets, specifically wearables/hearables, eFPGA, smartphones, and IoT, as serving many customers with multiple products. This reduces the likelihood of a scenario where a small number of huge design wins increases the risk of round trip revenue if the company doesnt hold its socket positions from generation to generation, for example, with a large smartphone maker - although I would like to see some of that action. In the end, a larger base of customers with multiple products overlapping from a commercial perspective reduces customer concentration risk and should enhance the stock multiple. In particular, while the chances of a moon shot are diminished by not being able to generate discrete sensor processing business in high volume smartphones, being at the core of designs for a spread of products over four broad end markets increases the usable value of all facets of the EOS S3 device and drives more upside value pricing. In the Q2 2017 call, management indicated it is looking at better pricing and margins in the profile described above versus being a discrete sensor hub in smartphones for ultra low power but little else relative to the multiple blocks of functionality in the EOS device.

2. Broad Customer Base Support - A key challenge for the company in a broader and deeper served markets scenario, as described above versus a concentrated smartphone customer base, is the fact that QuickLogic will have to serve a larger number of small, medium and large customers from a human resources, sales, marketing and technical support perspective. However, management stated on its call that its open system approach where customers can easily use proprietary, QuickLogic provided, or third-party software with its EOS S3, combined with recently commercialized and substantially more functional design tools from the company, allows a multitude of customers to handle their own system design needs with minimal if any participation from QuickLogic personnel. This is good, and as more client design engineers get used to the design tools and implement their proprietary software into more and more products, it helps QuickLogic achieve stickiness with its customers, or stated otherwise, a potential sustained competitive advantage.

This is very similar to the programmable logic business models that companies like Xilinx (NASDAQ:XLNX) and Altera (NASDAQ:ALTR) were so successful with in the 1990s and 2000s and the analog business model companies like Maxim (NASDAQ:MXIM) and Linear Tech (NASDAQ:LLTC) employed. All four of those companies had stocks with above-average multiples relative to the average semiconductor stocks of the day. Additionally, the eFPGA high-margin licensing business should also be a higher-than-average stock multiple enhancer. So the key to success for QuickLogic to replicate this success, even if it is on a more modest level, is to penetrate as many customers and products as possible and get those customers hooked on the design environment and the versatility and uniqueness of the EOS and eFPGA functional blocks.

3. Multiple Products Per Customer (meaning, the need to expand the customer base and broaden the number of products and or product platforms QuickLogic serves at each customer). As I mentioned in my last article, the two Chinese ODMs (original device manufacturers) that designed EOS S3 into initial products in June plan to use them as the basis for product platforms and thus multiple end products or flavors of products. Also, QuickLogic stated on its 2Q 2017 call that the Tier One smartphone maker that is poised to ramp its first fitness wearable (which I believe to be Samsung with its soon-to-be-released Gear Fit Pro product) is designing two more wearables utilizing EOS S3 for a currently expected mid-2018 ramp, actually a hearable and a wearable. It would be nice if the wearable turns out to be the next generation Samsung smartwatch.

So to conclude on the above, while initial and significant new product EOS S3 and eFPGA revenue growth has been pushed to 4Q 2017 from 3Q 2017, there does appear to be material progress in progress brewing behind the scenes that could drive sustained revenue and earnings growth once a broader portfolio of design wins emerges and converts to production ramps.

A few words regarding the Samsung Gear Fit Pro, which should be one of the larger initial volume designs to enter production starting in 4Q 2017. QuickLogic's management stated on its call that it is now engaged with production people at Samsung, not just designers, so that is a clear indication a launch is getting closer. There was also some news about a week ago that the Gear Fit Pro just received Bluetooth certification from the Bluetooth Special Interests Group, which also implies an impending release. This is in addition to mid-July news that the Gear Fit Pro showed up at the FCC for approval. So the smoke signals are seemingly getting more frequent.

The story is that Samsung wants to take fitness wearables to the next level in terms of accuracy and battery life, as well as functionality and value I presume. As such, Samsung is taking its time to get this right, and much of the delay has been driven by a spring decision to change a major sensor on the device that drove the need for another round of human trials which should be wrapping up now. Hopefully the new sensor works according to plan. The EOS S3 was never in question as the core SOC in the product as a key sensor was changed. Also, wearables do not have a standard seasonal introduction cadence like the Galaxy and Note phones that are typically introduced in 1Q and 3Q, respectively.

QuickLogic has built up some inventory for Samsung in case it turns on fast intra quarter, perhaps even in the current 3Q 2017. However, given the need to back off 2017 revenue growth prospects, QuickLogics management is reluctant to suggest 3Q 2017 revenue from this product as it is not officially announced but did say it should contribute meaningfully in 4Q 2017. Ill be glad to see it finally happen and I am also glad to hear Samsung likes it enough to use it as a core device in two more upcoming products.

QUIK's share dropped $0.07 to $1.31 on Thursday, August 10th, the day after 2Q 2017 results, which was modest, and I think the market crush on North Korea-related tension was as more to blame than the QuickLogic-specific 2017 revenue guidance disappointment. Also playing into this theory is the fact that QUIK's shares were up modestly to flat for the first hour of trading. They didnt open with unusual pressure.

With that said, my best guess is the stock is in a $1.00-1.50 range as a place holder until we see up Q4 2017 revenue guidance - or not - with variables likely driving either end of the range being the macro market environment and any unexpected company-specific news flow.

I continue to believe this story is likely to play out and I also continue to believe it is going to be a slow burn higher until multiple customers in all four of the companys primary served markets begin to ramp simultaneously, which should catalyze a revenue growth acceleration point sometime in 2018. As such, I think the stock should be accumulated in the low to mid $1 range over the next 90 days, with no need for a panic buy, as QuickLogic typically has limited intra quarter news flow. Also keep in mind this stock should not be a major core position given its high-risk profile, but it does have the potential to deliver significant Alpha if the fundamental story unfolds.

I maintain my $4 stock price target. I originally set it as a 12-month target in November 2016 and it is highly unlikely that it will be achieved by November 2017. With that said, I believe it is very doable by late winter or spring 2018 assuming a revenue ramp actually begins in 4Q 2017 and builds momentum throughout the first half of 2018.

My target is predicated on the beginning of a material commercial ramp of the EOS S3 and eFPGA products, leading to improving visibility on revenue and positive earnings growth as 2018 unfolds as opposed to a specific P/E off of specific EPS potential one or two years out. I hope/plan to get more specific on that once an actual ramp starts. In reality, QuickLogic is a public startup or turnaround story and QUIK shares will likely represent a barometer of short- to medium-term fundamental success more than a going concern valuation perspective during the initial ramp phase.

The primary downside risks to the QuickLogic story and thus QUIK shares are a failure to execute broad-based new design win penetration with the companys flagship EOS S3 sensor processing device and to attract a broad array of eFPGA licensees.

Disclosure: I am/we are long QUIK.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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QuickLogic: Progress In Progress - Seeking Alpha