QUICKLOGIC CORP QUIK S W
June 25, 2014 - 6:06pm EST by
chewy
2014 2015
Price: 4.78 EPS NM NM
Shares Out. (in M): 59 P/E NM NM
Market Cap (in $M): 282 P/FCF NM NM
Net Debt (in $M): -36 EBIT 0 0
TEV ($): 246 TEV/EBIT NM NM
Borrow Cost: NA

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  • Small Cap
  • Semiconductor
  • Insider selling

Description

QuickLogic Corporation (“QUIK”) is a commoditized semiconductor company with a history of overly hyped “new products” that amount to nothing more than equity raises and future earnings disappointments.  Despite material insider selling and QUIK’s shares falling 20.3% on May 1st after QUIK guided Q2 2014 sales 37.5% below analyst estimates, QUIK’s share price has fully recovered on no material news.  QUIK is loss making and priced for perfection at 7.2x LTM sales, with short-term analyst estimates at or above management’s long-term profit guidance, helping limit downside.  With little hope of achieving sellside estimates and a fair value of $1.81/sh, 62.2% below the current price, we believe QUIK is a compelling short opportunity.

Background:

QUIK went public in 1999.  The company develops low power customizable semiconductor solutions that extend battery life and improve visual experience.  QUIK is a fabless semiconductor company that designs, markets and supports primarily, Customer Specific Standard Products (“CSSP”), and, secondarily, Field Programmable Gate Arrays (“FPGA”), associated design software and programming hardware.  In 2007, QUIK realized there was little growth left in its legacy FPGA business and began its transition to a new business model, which has largely consisted of several failed new products that have weighed heavily on QUIK’s profitability.

Historical Financials

2008

2009

2010

2011

2012

2013

New Products

$8.2

$4.9

$9.3

$5.3

$5.9

$18.2

Legacy Products

$23.8

$10.2

$16.9

$15.6

$9.0

$7.9

Total Sales

$31.9

$15.1

$26.2

$21.0

$14.9

$26.1

             

Annual Growth:

           

New Products

 

-39.7%

90.0%

-43.0%

11.2%

207.8%

Legacy Products

 

-57.3%

66.0%

-7.2%

-42.3%

-13.0%

Total Sales

 

-52.8%

73.8%

-20.0%

-28.7%

74.5%

             

Gross Margin

58.2%

51.6%

63.7%

62.8%

50.3%

35.7%

             

EBIT

($7.8)

($9.7)

($0.9)

($7.5)

($12.2)

($11.8)

 

A little more detail on each of QUIK’s segments:

Legacy Products – This is solely comprised of an old FPGA product QUIK developed pre-2006 that is largely sold into avionic and medical products.  These chips are shipped to a customer blank and then programmed using a QUIK programming tool at the customer site before the chip is placed into the end product.  There is a lot of competition in the space and QUIK stopped focusing on this market years ago, but given the long life of certain customer products they still receive follow on orders.  Management fully expects these sales to go to zero over the next few years.  Gross margins are +50% on legacy products simply because management does not invest one penny into selling, marketing (no sales staff are allowed to even focus on this product), or R&D.  Legacy products are lumpy and can artificially boost gross margins in a good quarter, but that usually normalizes the next quarter.

New Products – QUIK has a track record of rolling out new products every 12-18 months that management expects will lead to immediate customer wins, but often leads only to missed expectations and worthless inventory.  We’ve heard that new products have never really taken off because QUIK products have historically ranked at the bottom of user rankings in the industry.  For these reasons, analysts have likened QUIK to a publicly traded “re-start up” company that always seems to need to “re-start.”  Today, QUIK’s main new products are:

  • Display Bridges – Display bridge sales are ~86% of QUIK’s LTM new products revenue because of a large order from Samsung in 2013 to provide display bridges for two of Samsung’s tablets.  Samsung needed a temporary “bridge” for its displays while it waited for a superior technology, MIPI, to become economical for use in larger tablets.  The transition to MIPI is happening now and QUIK management acknowledges that display bridge sales will slow down in the back half of 2014 and end by mid-2015 at the latest.  So the only successful new product QUIK has had in years will go to zero 12 months from now.  We likely witnessed the beginning of the end for display bridges in Q1 2014 given management’s guidance and commentary for Q2, and the fact that Samsung rolled out its new tablet without a display bridge.
  • Sensor Hubs – In late 2013 QUIK rolled out a new product line, sensor hubs, which help manage sensor related applications such as fitness, wellness, gaming, and indoor navigation in smart phones.  QUIK claims its low power sensor hubs allow these applications to be always on, context aware.  Given QUIK’s current valuation, the market is pricing in tremendous success from this product, despite:
                     - QUIK not having generated any sensor hub sales, production wins, or orders to-date;
                     - QUIK not having a working sensor hub product available early this year after claiming they did;
                     - Significant competition from much larger competitors with substantial OEM relationships (INVN, LSCC, etc.);
                     - QUIK’s own admissions that many of these competitors have a more complete working solution than QUIK currently does.

To summarize, ~66% of QUIK’s LTM sales come from display bridge products sold to Samsung that will go to zero by mid-2015, while ~23% of QUIK’s LTM sales from legacy products will go to zero over the next five years. The remaining new product sales are from niche products with limited markets that face significant competitors (XLNX, ALTR, etc.).  QUIK lists INVN as a sensor hub competitor, but when we spoke with management at INVN, it was the first they had heard of QUIK.  Sensor hubs are a key part of a smart phone – Samsung is not going to risk a key component with a rookie (note: Apple has its own sensor hubs).  So the only growth product currently being marketed by the company is their incomplete low-power sensor hub solutions, which have not generated sales to date and, at best, will win a small order from a 3rd tier Chinese smart phone maker.

A risk is that QUIK may announce design wins at some point in 2H 2014, but design wins are meaningless because less than 10% of design wins actually wind up going into production. 

High Expectations:

We believe sellside 2015E revenue expectations of $65.1 million are incredibly high for a company that has averaged annual sales of $24 million since 2007.  If 2014E sellside revenue of $37.5 million is achieved, it will decline in 2015 as ~66% of total sales will go to zero by mid-2015 and ~23% of sales will go to zero over the next 5 years.  We’ve asked analysts to bridge us to their 2015E revenue numbers by product, etc. but they can’t – they’re just playing with growth rates supported by unrealistic TAM estimates.  Our 2015 revenue estimate is $21.6 million, which includes $10.5 million of new product revenue, which is very generous given the likelihood that sensor hubs generate little to no revenue. 

Sellside also expects 2015E EBIT margins of 10.6%, which is also unrealistic.  The only high margin product QUIK sells is the legacy products that are going away and they’re only high margin due to complete lack of investment in R&D or marketing – not the case for QUIK’s new products which are already at significantly lower margins.  This is because new products are geared towards specific large OEMS that have negotiating leverage (you can see Samsung squeezing QUIK margins in 2013) vs. legacy products with hundreds of customers.  Additionally, management has stated their long-term target is 10% EBIT margins, but that they won’t get there by 2015 as they believe their sensor hub product is a “value offering.”  Finally, if/when QUIK sensor hubs are sold the initial chips will be very high cost according to management reducing the likelihood QUIK EBIT margins are anywhere near 10.6% next year – especially for a company that hasn’t generated positive EBIT in the last 8 years.

Therefore, we believe 2015 revenue will be missed by ~67% and that profit expectations are wildly optimistic.  The two analysts that cover QUIK have continued to defend the stock with aggressive expectations regarding sensor hubs.  They helped QUIK raise $23.1 million in November 2013 at $2.90/sh.  They know that QUIK will need to raise equity again (given QUIK’s continued losses, we don’t disagree) and they want their cut of fees.

Fair Value: 

We bridge to fair value using a peer EV/sales multiple and our 2015E revenue of $21.6 million:

2015E Revenue                                   $21.6

Peer Multiple                                        3.3x

Enterprise Value                                $70.6

Net Cash                                                $35.8   Note: conservative given QUIK continues to lose $

Equity Value                                       $106.4

FD Shares Outstanding                      58.9

Fair Value per Share                         $1.81

Summary:

The dramatic outperformance of QUIK’s stock over the last year will abruptly come to an end in the next 12-18 months as the majority of QUIK’s sales fall to zero and the remaining legacy sales slowly fade away.  Sellside expectations are far too optimistic and the market is pricing in significant sensor hub orders despite QUIK having zero orders to date, far larger competitors with more complete offerings, and a management team with a history of failed execution. 

I do not hold a position of employment, directorship, or consultancy with the issuer.
Neither I nor others I advise hold a material investment in the issuer's securities.

Catalyst

The dramatic outperformance of QUIK’s stock over the last year will abruptly come to an end in the next 12-18 months as the majority of QUIK’s sales fall to zero and the remaining legacy sales slowly fade away.  Sellside expectations are far too optimistic and the market is pricing in significant sensor hub orders despite QUIK having zero orders to date, far larger competitors with more complete offerings, and a management team with a history of failed execution.
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    Description

    QuickLogic Corporation (“QUIK”) is a commoditized semiconductor company with a history of overly hyped “new products” that amount to nothing more than equity raises and future earnings disappointments.  Despite material insider selling and QUIK’s shares falling 20.3% on May 1st after QUIK guided Q2 2014 sales 37.5% below analyst estimates, QUIK’s share price has fully recovered on no material news.  QUIK is loss making and priced for perfection at 7.2x LTM sales, with short-term analyst estimates at or above management’s long-term profit guidance, helping limit downside.  With little hope of achieving sellside estimates and a fair value of $1.81/sh, 62.2% below the current price, we believe QUIK is a compelling short opportunity.

    Background:

    QUIK went public in 1999.  The company develops low power customizable semiconductor solutions that extend battery life and improve visual experience.  QUIK is a fabless semiconductor company that designs, markets and supports primarily, Customer Specific Standard Products (“CSSP”), and, secondarily, Field Programmable Gate Arrays (“FPGA”), associated design software and programming hardware.  In 2007, QUIK realized there was little growth left in its legacy FPGA business and began its transition to a new business model, which has largely consisted of several failed new products that have weighed heavily on QUIK’s profitability.

    Historical Financials

    2008

    2009

    2010

    2011

    2012

    2013

    New Products

    $8.2

    $4.9

    $9.3

    $5.3

    $5.9

    $18.2

    Legacy Products

    $23.8

    $10.2

    $16.9

    $15.6

    $9.0

    $7.9

    Total Sales

    $31.9

    $15.1

    $26.2

    $21.0

    $14.9

    $26.1

                 

    Annual Growth:

               

    New Products

     

    -39.7%

    90.0%

    -43.0%

    11.2%

    207.8%

    Legacy Products

     

    -57.3%

    66.0%

    -7.2%

    -42.3%

    -13.0%

    Total Sales

     

    -52.8%

    73.8%

    -20.0%

    -28.7%

    74.5%

                 

    Gross Margin

    58.2%

    51.6%

    63.7%

    62.8%

    50.3%

    35.7%

                 

    EBIT

    ($7.8)

    ($9.7)

    ($0.9)

    ($7.5)

    ($12.2)

    ($11.8)

     

    A little more detail on each of QUIK’s segments:

    Legacy Products – This is solely comprised of an old FPGA product QUIK developed pre-2006 that is largely sold into avionic and medical products.  These chips are shipped to a customer blank and then programmed using a QUIK programming tool at the customer site before the chip is placed into the end product.  There is a lot of competition in the space and QUIK stopped focusing on this market years ago, but given the long life of certain customer products they still receive follow on orders.  Management fully expects these sales to go to zero over the next few years.  Gross margins are +50% on legacy products simply because management does not invest one penny into selling, marketing (no sales staff are allowed to even focus on this product), or R&D.  Legacy products are lumpy and can artificially boost gross margins in a good quarter, but that usually normalizes the next quarter.

    New Products – QUIK has a track record of rolling out new products every 12-18 months that management expects will lead to immediate customer wins, but often leads only to missed expectations and worthless inventory.  We’ve heard that new products have never really taken off because QUIK products have historically ranked at the bottom of user rankings in the industry.  For these reasons, analysts have likened QUIK to a publicly traded “re-start up” company that always seems to need to “re-start.”  Today, QUIK’s main new products are:

    • Display Bridges – Display bridge sales are ~86% of QUIK’s LTM new products revenue because of a large order from Samsung in 2013 to provide display bridges for two of Samsung’s tablets.  Samsung needed a temporary “bridge” for its displays while it waited for a superior technology, MIPI, to become economical for use in larger tablets.  The transition to MIPI is happening now and QUIK management acknowledges that display bridge sales will slow down in the back half of 2014 and end by mid-2015 at the latest.  So the only successful new product QUIK has had in years will go to zero 12 months from now.  We likely witnessed the beginning of the end for display bridges in Q1 2014 given management’s guidance and commentary for Q2, and the fact that Samsung rolled out its new tablet without a display bridge.
    • Sensor Hubs – In late 2013 QUIK rolled out a new product line, sensor hubs, which help manage sensor related applications such as fitness, wellness, gaming, and indoor navigation in smart phones.  QUIK claims its low power sensor hubs allow these applications to be always on, context aware.  Given QUIK’s current valuation, the market is pricing in tremendous success from this product, despite:
                         - QUIK not having generated any sensor hub sales, production wins, or orders to-date;
                         - QUIK not having a working sensor hub product available early this year after claiming they did;
                         - Significant competition from much larger competitors with substantial OEM relationships (INVN, LSCC, etc.);
                         - QUIK’s own admissions that many of these competitors have a more complete working solution than QUIK currently does.

    To summarize, ~66% of QUIK’s LTM sales come from display bridge products sold to Samsung that will go to zero by mid-2015, while ~23% of QUIK’s LTM sales from legacy products will go to zero over the next five years. The remaining new product sales are from niche products with limited markets that face significant competitors (XLNX, ALTR, etc.).  QUIK lists INVN as a sensor hub competitor, but when we spoke with management at INVN, it was the first they had heard of QUIK.  Sensor hubs are a key part of a smart phone – Samsung is not going to risk a key component with a rookie (note: Apple has its own sensor hubs).  So the only growth product currently being marketed by the company is their incomplete low-power sensor hub solutions, which have not generated sales to date and, at best, will win a small order from a 3rd tier Chinese smart phone maker.

    A risk is that QUIK may announce design wins at some point in 2H 2014, but design wins are meaningless because less than 10% of design wins actually wind up going into production. 

    High Expectations:

    We believe sellside 2015E revenue expectations of $65.1 million are incredibly high for a company that has averaged annual sales of $24 million since 2007.  If 2014E sellside revenue of $37.5 million is achieved, it will decline in 2015 as ~66% of total sales will go to zero by mid-2015 and ~23% of sales will go to zero over the next 5 years.  We’ve asked analysts to bridge us to their 2015E revenue numbers by product, etc. but they can’t – they’re just playing with growth rates supported by unrealistic TAM estimates.  Our 2015 revenue estimate is $21.6 million, which includes $10.5 million of new product revenue, which is very generous given the likelihood that sensor hubs generate little to no revenue. 

    Sellside also expects 2015E EBIT margins of 10.6%, which is also unrealistic.  The only high margin product QUIK sells is the legacy products that are going away and they’re only high margin due to complete lack of investment in R&D or marketing – not the case for QUIK’s new products which are already at significantly lower margins.  This is because new products are geared towards specific large OEMS that have negotiating leverage (you can see Samsung squeezing QUIK margins in 2013) vs. legacy products with hundreds of customers.  Additionally, management has stated their long-term target is 10% EBIT margins, but that they won’t get there by 2015 as they believe their sensor hub product is a “value offering.”  Finally, if/when QUIK sensor hubs are sold the initial chips will be very high cost according to management reducing the likelihood QUIK EBIT margins are anywhere near 10.6% next year – especially for a company that hasn’t generated positive EBIT in the last 8 years.

    Therefore, we believe 2015 revenue will be missed by ~67% and that profit expectations are wildly optimistic.  The two analysts that cover QUIK have continued to defend the stock with aggressive expectations regarding sensor hubs.  They helped QUIK raise $23.1 million in November 2013 at $2.90/sh.  They know that QUIK will need to raise equity again (given QUIK’s continued losses, we don’t disagree) and they want their cut of fees.

    Fair Value: 

    We bridge to fair value using a peer EV/sales multiple and our 2015E revenue of $21.6 million:

    2015E Revenue                                   $21.6

    Peer Multiple                                        3.3x

    Enterprise Value                                $70.6

    Net Cash                                                $35.8   Note: conservative given QUIK continues to lose $

    Equity Value                                       $106.4

    FD Shares Outstanding                      58.9

    Fair Value per Share                         $1.81

    Summary:

    The dramatic outperformance of QUIK’s stock over the last year will abruptly come to an end in the next 12-18 months as the majority of QUIK’s sales fall to zero and the remaining legacy sales slowly fade away.  Sellside expectations are far too optimistic and the market is pricing in significant sensor hub orders despite QUIK having zero orders to date, far larger competitors with more complete offerings, and a management team with a history of failed execution. 

    I do not hold a position of employment, directorship, or consultancy with the issuer.
    Neither I nor others I advise hold a material investment in the issuer's securities.

    Catalyst

    The dramatic outperformance of QUIK’s stock over the last year will abruptly come to an end in the next 12-18 months as the majority of QUIK’s sales fall to zero and the remaining legacy sales slowly fade away.  Sellside expectations are far too optimistic and the market is pricing in significant sensor hub orders despite QUIK having zero orders to date, far larger competitors with more complete offerings, and a management team with a history of failed execution.
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