Business context and reporting period
QuickLogic Corporation is a fabless semiconductor company developing low-power programmable solutions, including customer-specific standard products (CSSPs), FPGAs, software and related products for mobile, consumer and industrial markets. This unaudited Form 10-Q covers the three and six months ended July 3, 2011; comparisons are to the periods ended July 4, 2010.
Financial performance and position
| Metric | Q2 2011 | Q2 2010 | First half 2011 | First half 2010 |
|---|---|---|---|---|
| Revenue | $5.737m | $6.479m | $11.284m | $11.908m |
| Gross profit / margin | $3.771m / 65.7% | $3.926m / 60.6% | $7.379m / 65.4% | $7.239m / 60.8% |
| Operating income (loss) | $(2.084)m | $(0.125)m | $(2.886)m | $(1.207)m |
| Net income (loss) | $(2.060)m | $(0.215)m | $(2.938)m | $(0.358)m |
| EPS, diluted | $(0.05) | $(0.01) | $(0.07) | $(0.01) |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $(1.455)m | $(1.602)m |
At July 3, 2011, cash and cash equivalents were $21.439m, versus $21.956m at January 2, 2011. Current assets were $30.103m and current liabilities $3.616m. The company held TowerJazz shares valued at $0.767m. Debt and capital lease obligations totaled $0.207m, all current; no revolving-line borrowings were outstanding. A $6.0m revolving credit facility was available through June 2012, subject to covenants. The company reported covenant compliance.
Six-month investing cash outflow was $0.501m, primarily capital expenditures; financing provided $1.439m, mainly employee share issuances. Total assets were $32.455m and stockholders’ equity $28.752m at quarter-end.
Material changes versus the prior comparable period
- Q2 revenue fell 11%; first-half revenue fell 5%. New-product revenue declined 48% in Q2 and 45% for the first half. Management attributed the weakness to excess channel inventory among broadband data-card and mobile-enterprise customers; first-half results also reflected reduced secure-data-card demand following customer design changes.
- Mature-product revenue rose 9% in Q2 and 18% in the first half, supported by pASIC 3 demand and end-of-life Eclipse purchases. Mature products represented 79% of first-half revenue, up from 63%.
- Gross margin improved to 65.7% in Q2 and 65.4% for the first half, but gross profit declined in Q2 with lower revenue and higher unabsorbed overhead. First-half gross profit increased modestly, mainly from higher shipments of mature products, which management said carry higher margins than new products.
- Operating expenses increased 45% in Q2 and 22% for the first half. R&D rose substantially, chiefly due to third-party chip-design costs and purchased IP, as well as restored employee compensation after temporary salary reductions ended. Operating losses widened.
- The first-half 2010 comparison included a $0.993m gain on sale of TowerJazz shares; there was no comparable gain in 2011. The company also recorded $0.879m of stock-based compensation in first-half 2011.
Outlook, risks and contingencies
Management stated that existing cash resources were expected to fund operations, capital expenditures and working capital for at least the next 12 months. Capital expenditures of approximately $1.2m were projected for the remainder of fiscal 2011. No specific revenue or earnings guidance was provided.
- Growth depends on converting CSSP design opportunities into revenue and on market acceptance of new products. CSSPs generally have lower margins than FPGA products; high-volume consumer opportunities may increase revenue while reducing gross margin percentage.
- Risks include semiconductor-industry cyclicality, customer product life-cycle changes, channel inventory, possible product obsolescence and inventory write-downs, and dependence on limited-source manufacturers and suppliers. Wafer-purchase commitments were $1.377m; other purchase commitments were $3.463m.
- Revenue and receivables were concentrated: Distributor A represented 44% of Q2 revenue and 48% of receivables at quarter-end; Distributor D represented 16% of Q2 revenue and 22% of receivables. One customer accounted for 21% of Q2 revenue.
- The company did not hedge foreign-currency exposure. Management estimated that a 10% currency movement would change first-half operating expenses by approximately $166,000. A 10% interest-rate move was expected to have an immaterial effect.
- U.S. deferred tax assets were subject to a full valuation allowance because realization was uncertain. The pending IPO securities litigation had a proposed global settlement funded by insurers, with no expected company financial liability; objectors had appealed and no hearing date was set.
- Management said disclosure controls were effective as of July 3, 2011 and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether new-product channel inventory clears and CSSP design opportunities convert into sustained revenue.
- Whether mature-product demand and end-of-life purchases can offset continued weakness in new products.
- R&D spending, operating losses and cash usage relative to the company’s stated 12-month liquidity outlook and planned capital expenditures.
- Inventory quality, wafer and other purchase commitments, supplier capacity, and the effect of any additional obsolescence reserves.
- Customer and distributor concentration, credit exposure, and compliance with the revolving-credit covenants.
- Outcome of the IPO litigation appeals and any change in the insurer-funded settlement or the company’s potential exposure.