QuickLogic Corporation — Q3 2011 Form 10-Q
Reporting period: Third quarter ended October 2, 2011; comparisons are with the quarter ended October 3, 2010. The filing also reports nine-month results. QuickLogic designs and markets low-power programmable semiconductor solutions, including customer-specific standard products (CSSPs), for mobile, consumer and industrial applications. Financial statements are unaudited.
Key financial results
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $5.34 million | $7.33 million | $16.62 million | $19.24 million |
| Gross profit / margin | $3.06 million / 57.2% | $4.70 million / 64.1% | $10.44 million / 62.8% | $11.94 million / 62.0% |
| Operating income (loss) | ($1.48 million) | $0.35 million | ($4.37 million) | ($0.86 million) |
| Net income (loss) | ($1.55 million) | $0.55 million | ($4.48 million) | $0.19 million |
| Operating cash flow | Not separately stated | Not separately stated | ($1.13 million) | ($0.56 million) |
- Q3 diluted loss per share was $0.04; nine-month diluted loss per share was $0.12.
- At October 2, 2011, cash and cash equivalents were $21.57 million, and the TowerJazz investment was valued at $0.43 million. The company had a $6.0 million revolving credit facility available, with no borrowings in Q3, and $37,000 outstanding on capital leases.
- Current assets were $28.50 million and current liabilities were $3.09 million. Total liabilities were $3.22 million; stockholders’ equity was $27.42 million.
- Cash declined $0.39 million over the first nine months. Investing cash outflow was $0.67 million, primarily capital expenditures; financing cash inflow was $1.41 million, including $1.78 million from employee equity-plan share issuance.
Material changes and drivers
- Revenue declined 27% year over year in Q3 and 14% for the first nine months. Q3 new-product revenue fell 56% to $1.22 million, while mature-product revenue fell 10% to $4.12 million. Nine-month new-product revenue fell 49%; mature-product revenue rose 7%.
- Management attributed new-product weakness to reduced demand following customer design changes and, for the nine-month period, excess channel inventory among broadband datacard and mobile enterprise customers. Mature-product weakness in Q3 was attributed mainly to semiconductor-market conditions and potentially lower demand; nine-month mature-product growth reflected pASIC 3 demand and Eclipse end-of-life purchases.
- Q3 gross margin fell to 57.2% from 64.1%, reflecting lower revenue, higher inventory reserves and unabsorbed overhead. Nine-month gross margin edged up to 62.8% from 62.0%, despite lower gross profit dollars.
- Q3 operating expenses rose 4% to $4.54 million: R&D increased 25% to $2.27 million, while SG&A declined 11% to $2.27 million. Nine-month operating expenses rose 16% to $14.80 million, principally from higher R&D spending on chip design, compensation, equipment and purchased IP.
- Nine-month 2010 results included a $0.99 million gain on the sale of TowerJazz shares; there was no comparable gain in 2011. Q3 2011 also included a $0.10 million equipment write-off within the R&D expense increase.
Outlook, risks and contingencies
- Management expected existing cash resources to fund operations, capital expenditures and working capital for at least the next 12 months. No specific revenue or earnings guidance was provided.
- Management’s growth strategy depends on CSSPs and new products, including ArcticLink and PolarPro platforms. It cautioned that high-volume consumer opportunities may increase revenue but lower gross margin due to price competition.
- Risks include customer and distributor concentration, semiconductor-industry cyclicality, product-life-cycle and inventory obsolescence exposure, and reliance on a limited number of suppliers and contract manufacturers. One distributor accounted for 50% of Q3 revenue and 43% of nine-month revenue; one customer accounted for 24% of Q3 revenue. Wafer commitments were $0.84 million, and other purchase commitments were $2.54 million.
- The company reported a history of losses and said it could not predict when it would return to profitability. It had a full valuation allowance against U.S. deferred tax assets. Revolver availability depended on covenant compliance; the company reported compliance at quarter-end.
- The IPO securities litigation settlement is expected to be funded fully by insurers, with no financial liability to QuickLogic; an appeal concerning an objector’s standing remained pending. The filing says no settlement amount was accrued because it was not reasonably estimable.
- QuickLogic does not hedge foreign-currency exposure. Management estimated that a 10% exchange-rate movement would have changed first-nine-month operating expenses by approximately $233,000.
Important facts for investors to verify
- Whether CSSP design opportunities convert into sustained revenue and offset falling or end-of-life mature-product sales.
- Whether customer and distributor concentration, including the largest distributor’s share of revenue, changes materially.
- Inventory levels, reserve charges, wafer and other purchase commitments, and gross-margin trends as demand and product cycles evolve.
- Cash burn, capital spending, access to the $6.0 million credit facility, and continued compliance with its covenants.
- Developments in the IPO litigation appeal and any changes to the company’s liquidity or profitability outlook.