Greetings. Welcome to QuickLogic Corp’s Third Quarter 2022 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Alison Ziegler, Investor Relations. Thank you. You may begin.

Thank you, and thanks to all of you for joining us. Our speakers today are Brian Faith, President and Chief Executive Officer; and Elias Nader, Senior Vice President and 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 production start dates that could impact the timing of shipments; the company's future evaluation systems; broadening the number of our ecosystem partners; and expected results and financial expectations for revenue, gross margin, operating expenses, profitability and cash. Actual results or trends may differ materially from those discussed today. For more detailed discussions of the risks, uncertainties and assumptions that could result in those differences, please refer to the risk factors discussed in QuickLogic’s most recently filed periodic reports with the SEC. QuickLogic assumes no obligation to update any forward-looking statements or information, which speak as of the respective dates of any new information or future events. In today’s call, we will be reporting non-GAAP financial measures. 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 web page 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 business. 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 at QuickLogic’s IR web page shortly after the conclusion of today’s earnings call. I would now like to turn the call over to Brian. Go ahead, Brian.

Thank you, Alison. Good afternoon, everyone, and thank you all for joining our third quarter of fiscal 2022 financial results conference call. Our third quarter revenue of $3.5 million was right inline with the midpoint of the expectations provided on our second quarter call. Included in this revenue is the first month associated with our new $6.9 million U.S. government contract for the development of a new strategic radiation hardened FPGA technology that we referenced on last quarter's conference call and officially announced on September 08th. The program is expected to be a significant contributor to this quarter's revenue. Given that this contract is by far our largest to-date, let me spend a little time reviewing what it means for QuickLogic. First, as you saw in the announcement, the base contract is worth $6.9 million, with deliverables due over the course of 12 months. QuickLogic will act as the prime contractor, a first for us, and we will collaborate with a team composed primarily of SkyWater Technologies, Everspin Technologies and Trusted Semiconductor Solutions. Upon successful performance of the base contract and at the discretion of U.S. government, the contract allows for options totaling approximately $72 million, which be realized over the span of four years. And while today the contract only contemplates the development of the chip, the desire and intention of QuickLogic is to become the storefront, selling the device once it has been completed. We believe the market size for radiation hardened programmable logic is several hundred million dollars annually, so becoming the storefront for such a device would substantially increase our served available market in the coming years. In previous calls, I have shared that one of our strengths is that, we can offer our customers more than just eFPGA IP. We have the capability to offer…

Thank you, Brian, and good afternoon, everyone. Our performance in Q3 was in line with our expectations with revenue of $3.5 million, reflecting the later than expected start date out of our large new $6.9 million contract for strategic radiation hardened FPGA technology. We reported a non-GAAP net loss of 0.9 million with a full quarter of contribution from this contract plus growth in other areas. We continue to believe we will get close to reporting breakeven of profitability on a non-GAAP basis again in Q4 2022. Let me now turn to the review of the results for the third quarter. Revenue in Q3 was $3.5 million. This compares with $4.5 million last quarter at $3.9 million in the third quarter of 2021. In addition to the delayed contract startup, we also saw softening of smartphone sales has anticipated. Within our Q3 revenue, sales of new products were approximately $2.3 million. This compares with $3.1 million last quarter and $2.8 million in a third quarter a year ago. Mature product revenue is approximately 1.2 million compared with $1.4 million last quarter and $1.1 million in Q3 last year. In Q3, we had five customers that each accounted for 10% or more of our revenue. Similar to the prior quarter, non-GAAP gross margin in Q3 was 49.8% compared with 58.6% in the prior quarter, and 72.8% in the same quarter of 2021. The pressure on gross margins in the quarter was due to the lower revenue as well as increased expenses in EFPG IP professional services, inclusive of non-recurring costs of specialized tooling associated with the customer tip out that Brian referred to and his prepared remarks. Now that our engineering team has completed that tape out, we anticipate returning to more normalized margins in Q4. Non-GAAP operating expenses in Q3…

Thank you, Elias. As our revenue growth resumes in Q4 of the current fiscal year and into 2023 on the strength of our U.S. Government strategic radiation hard and FPGA technology contract and the newly taped out customer design as well as a sales funnel exceeding $110 million. I'm even more confident QuickLogic is on the cusp of sustainable profitability. I would like to, again, thank all our key stakeholders, including investors, customer, suppliers, and most of all the QuickLogic and sensible teams for their continued support. That completes our prepared remarks. Operator, I would now like to open the call for questions.

[Operator Instructions] Our first question is from Suji Desilva with Roth Capital Partners.

A tough environment certainly. Brian, maybe I could start with you. On the chiplets you talked about, I know that's a little bit longer term, but are there particular end markets or verticals that the chiplets would be an appealing form factor for, or would it be broad based, the opportunity?

End market segment question, Suji?

Yes. Verticals and end market for chiplets.

I would say the two ones that we're looking at right now that we're getting some pull for, one is on the defense side and one is on the high performance computing side. Use cases are different between the two ultimately, but those are the two end markets that are the dominant ones in the funnel right now for chiplets.

And then digging into the moving parts of your guidance, I got the mature decline. The new products goes up. Now I'm wondering if the government contract of $6.9 million is linear on a per month per quarter basis, if that is the case, it would be a million incremental versus the one month 3Q. So I'm wondering does the rest of the growth there additionally FPGA licensing or are the display and consumer processor markets, are those recovering somewhat?

You're correct on the increase in the quarter on the government contract roughly. The other thing that's coming back, we see some other I would say, older FPGA business, but it's still in our new product bucket. It's not classified as mature, mature, obviously we're forecasting down sequentially, and then we are forecasting some other eFPGA IP related revenue in the quarter.

And then last question perhaps for Elias, as in your profitability, can you talk about the remaining cash burn implied and the guidance, and I guess that'll flip around to ‘23 at some point?

Yeah, even if I look into ‘23 Suji, the new wins are going to require us to definitely hire people. But when we started these the $6.9 million contract for example, we had to spend more money on certain POs right to get things going. So I think we're going to be around that $2.8 million to $3.2 million range when 2023 hits. So OpEx will be controlled, for sure.

If I could jump in here for a second -- go back. Hey, Suji, just to circle back to that previous question on the revenue jump up, there's also some revenue associated with that customer tape out and being able to provide some test chip devices to them in the quarter.

Our next question is from Richard Shannon with Craig Hall Capital Group.

I guess Brian, I wanted to ask first on the tape out you're referring to. I know you're going to talk about the customer application, but can you say whether this is the FPGA related and/or chip related and was it included in the funnel or the increase in the funnel you talked about relative to last quarter?

It's a discrete device not necessarily chiplet related. And the second question related to inclusion in the funnel, is that what you're asking?

Yes.

So the revenue that we're recognizing now for the IP and the design work, it's definitely part of the funnel. The end chip sales that I mentioned earlier, the tens of millions of dollars, that is not included in the funnel.

Okay. Perfect. That is helpful here. The question on gross margins, you're guiding to a number of, I forgot what we have your 52 plus or minus for this quarter and add 48. I'm assuming some element of this being lower than than a lot of the quarters seen in the last year and a half or so in the 60s or even 70s is because of the addition of professional services. And then eventually we're or I guess hopefully we'll see some chip sales as well. How do we think about the kind of long-term gross margin as we see a mix between all these different product lines with older ones, newer ones, and IP?

The goal of the company for sure, Richard has been to hit even close to 70%, 74%, the last few press -- last few earning calls. But lately what we are realizing is that most of these professional services win is pushing us to that range of about close to between 50% and 60%, right? So that's why when we guide for Q4, we are looking at 52%, mainly because of what we're seeing in terms of the professional services. Furthermore, if you look at Q3 by itself when we look at 49%, it's mainly because of the fact that definitely gross -- I mean, sales were very low, right, when it was 49.8 so very close to 50. So I think anything closer to 60 to me is where I want to land. So I don't see us around 40s, let's put it this way.

And just let me add on to that, in the very beginning of any of these initiatives, there is a services component that as customers start to take IP and integrate into their chips and becomes a royalty stream for us or we start selling devices as a storefront, those are definitely going to carry much higher gross margin. So I think the longer term margin model is still intact as we start turning some of these early service engagements into the royalty of the device shipments.

Okay, perfect. Maybe one or two last questions for me, Brian maybe if we could talk about the embedded FPGA funnel and pipeline here. Talked about it going up to roughly $10 million from last quarter, which is great to see. Obviously, the contract you signed in the last quarter seems to be somewhat large or fair amount larger than normal. Maybe if you can kind of talk about the median deal size that you're seeing or expecting in the near term or over the next year, something like that. Just to give us a sense here of whether this government contract is truly a much bigger deal size where we could see stuff more like that down the road?

Yes. I mean, the full scope of the government contract that we've talked about could be as high as 72. I don't think there's going to be a lot of opportunities in that range, but there are a handful. I think the normal size range for us is going to be more in like the low seven-digit range. So maybe like say, $1 million dollars plus or minus on the IP side. And then to the extent that we start doing other chip developments for people that will typically carry a price tag that's north of $5 million depending on the process node and the nuances of that. But, yes, straight IP deals is probably going to be right around $1 million plus or minus. Of which, there are many of those types of opportunities.

Our next question is from Martin Yang with Oppenheimer and Company. Please proceed.

Hi, good afternoon. Thank you for taking my question. My first question is a follow-up on the gross margin discussion. When you -- let's say, after we go through some engineering costs associated with the gross margin, do you expect the new component or new product gross margin overall to eventually converge with mature products, as you have more licensing -- higher margin licensing elements in the new product revenues.?

Yes, Martin. Go ahead, Brian.

Let me ask a clarification question, Martin. Are you asking sort of at what point do the service revenues drop down as a total percent of revenue, so they are not a drag on gross margin? Is that -- gross margins are more like the mature products?

Because my impression is that the new products overall still have margin gap versus mature products. Do you think that will eventually -- the two segment will converge in terms of gross margin?

Well, in fact, I think the long-term is that the new products for IP and software will actually exceed mature product revenue and mature product gross margins, because once we get to the point of doing the royalty on IP shipments, that's almost pure gross margin at that point. It just takes a while for that flywheel to get started to generate the significant royalty revenue. The other thing I'd say is that, some of these devices that we're doing like the U.S. government baseline, I mean the gross margins associated with that specific market segment are quite high. And so, once that -- hopefully we will be the storefront for that and when that does start taking place, then we will start to see some uplift on gross margins even beyond what our mature products were.

Got it. Yes, that's my intuition. So when you talk about some of the more royalty like revenue streams coming up, is that in two to three years' time when you start shipping devices or longer or shorter time?

Well, they have to be from device shipments where they're royalty bearing. We have talked in the past about the time between IP license to royalty start is probably like 18 months or so. So I think that is still true. So at some point next year, we should start to see some royalties for the earlier licenses that we did late last year or early this year. If you talk about SensiML for a second, then those royalties can start faster, because they're not being embedded into a chip like an IP license. It's software running on an existing microcontroller. So as people start to go to production with those AI models, then the royalty stream from those should start sooner.

[Operator Instructions] Our next question is from Rick Neaton with River Shore Investments.

In your last 10-Q, you broke down some color into your new product revenue between eFPGA IP hardware and SaaS. Can you give us that breakdown for Q3 and how you see it breaking down in Q4 in your guidance?

I don't think we're breaking it down to that level in the guidance, Rick. And I don't have it at the top of my head for the Q3 actuals, although, the service was particularly high in the quarter. Like Elias and I had mentioned related to some toolings cost for the customer tape out, but I don't recall the exact number. I don't know --

In terms of the sales funnel that you described at 110 million, can you give us a rough breakdown of that sales funnel between those three revenue categories that you itemized in your 10-Q in August?

Most of that is IP license and device revenue. There is some service, I don't recall the exact percentage, but it's the lesser of the three categories you just mentioned. And I just, by the way -- I'm not going to get in the habit of breaking out down to that level of granularity in the funnel on every call. That's just too much to track and put forth. But I think the bottom line is that the lion's share of that funnel is represented by IP licensing and device shipments, not services. To be very clear, we're not trying to become a services company. We're monetizing our services to generate IP licenses to get into the royalty stream and to do customer funded development for devices that we could be the storefront of, because that carries such a higher gross profit dollar component than even a royalty would be in the future. And I think that best positions, QuickLogic for delivering a lot of sustainable high value revenue potentially decades into the future, just to be clear.

You mentioned a couple of specific opportunities, in doing so you talked about royalties in the future. When can we expect royalty revenue to begin on those particular items you spoke about?

I do think we'll start to see some royalty in 2023 as some of the earlier licenses that we talked about last year, in fact have gone through some development with the customer. In fact, one of our customers just received some test chips back from one of those IP licenses. So, that means they're probably a couple quarters away from actually starting to take that in volume, but that's the point at which that we would start to see royalty. So some point next year.

When you gave your outlook -- general outlook target of 40% growth for next year, in looking at that are you -- in looking at how your business is developing, are you seeing any elements of seasonality in this business as it evolves or are you seeing in your forecasts, more and more stability in your revenue flows arising in ‘23 and beyond?

Well, I definitely see there's more stability coming from these contracts that are longer term in nature. That does provide us a lot more visibility. So it's revenue layering on revenue, not just one shot and done each quarter. I think the market that still has seasonality to it is the smartphone market. So as long as we are selling into that market, we will see a little bit of that. But like I said on the call, I think, that's going to start to become a lesser and lesser percentage, which is a good thing, right, to get more of these longer time in revenue, higher gross margin wins is actually a good thing. So, I don't really see a seasonality to it yet on these new wins very much.

There are no further questions. I would like to turn the conference back over to Brian for closing comments.

I'd like to thank everybody for participating in today's call and for your continued support. We look forward to speaking with many of you again when we participate in upcoming investor events in November and December, and when we report our fourth quarter and fiscal year 2022 results in February. Have a good day. Thank you.

Thank you. This does conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.