QUICKLOGIC CORP QUIK S
January 07, 2011 - 2:20am EST by
sunny118
2011 2012
Price: 6.65 EPS $0.01 $0.04
Shares Out. (in M): 36 P/E 665.0x 166.0x
Market Cap (in $M): 241 P/FCF NM NM
Net Debt (in $M): -18 EBIT -1 1
TEV ($): 223 TEV/EBIT NM NM
Borrow Cost: NA

Sign up for free guest access to view investment idea with a 45 days delay.

Description

Today QuickLogic Corporation ("QUIK") spiked 13.4% to an intraday high of $7.20/sh after benzinga.com published news that Skype had purchased QUIK.  However, Skype had actually purchased QIK, a company unrelated to QUIK.  See the news link below:

http://www.benzinga.com/news/11/01/758890/correction-skype-acquires-qik-not-quicklogic-quik?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+benzinga+%28Benzinga+News+Feed%29#ixzz1AHlgb0uC

Despite posting this corrected news with more than an hour remaining in the trading day, QUIK finished up 4.7%.  This news story confirms that Skype purchased QIK, not QUIK:

http://ces.cnet.com/8301-32254_1-20027612-283.html

To triple check our work, we spoke with QUIK management today and they confirmed that they're not currently in sale discussions and there is no truth to any rumors of Skype being interested in QUIK.

Additionally, after market QUIK released disappointing Q4 revenue guidance as new product sales of $2.4mm were short of expectations of $2.8mm.  New sales were also short of expectations last quarter.  And in a sign that there is no near-term sales pickup, the VP of Worldwide Sales resigned on Monday.  Recently, President Andy Pease told us that QUIK is a "risky company right now."  We couldn't agree more and that's why we believe QUIK is a compelling short opportunity.  Short interest is 5.3% and it's easy to borrow.  Fair value is $2.71/sh, 59% below the current share price and approximately where the stock was this time last year.

Strategy - This is the 3rd strategy that QUIK has had since going public - the past two strategies were not successful.  Starting in 2007, the company attempted to sell chips into the mobile market, but had little success and recently began targeting smart phones and tablets highlighting that QUIK chips use less power (example: saving 30% of power on backlit tablet screens to extend battery life).  However, this is a competitive market and commoditized product - as shown below new product sales over the past 12 quarters have gained little traction.  QUIK's most recent strategy of providing chips for smart phones and tablets is off to a very rocky start:

1.       Per QUIK President Andy Pease, there is zero customer overlap between QUIK's legacy products and its new products raising the bar significantly when trying to win customers in a very competitive market.

 

2.       On Monday of this week, Frank Ellis, QUIK's VP of Worldwide Sales, resigned from the company to "pursue new professional opportunities and challenges."  This seems to bode poorly for near-term new product revenue.

 

3.       QUIK has missed its sales expectations for new products in the last two quarters.  Today QUIK pre-announced sales that fell short of analyst estimates and internal guidance for $2.8mm in new products sales (new sales came in at $2.4mm).  This is a signal that the new product launch is not going well.

As highlighted in the table below, legacy products are still the highest portion of sales despite QUIK de-emphasizing legacy products earlier in 2010 by transitioning all sales and marketing professionals over to new products.  QUIK has made an all or nothing bet on growth in its new products that are lower margin than the legacy products.  Per President Andy Pease, QUIK is targeting a 50% gross margin when/if new products ramp.  He told us that QUIK is making a push to new products because the company believes that's where it will find growth.
 
 
Sales Mix Q1 '08 Q2 '08 Q3 '08 Q4 '08 Q1 '09 Q2 '09 Q3 '09 Q4 '09 Q1 '10 Q2 '10 Q3 '10 Q4 '10
New Products $2,646 $2,535 $1,433 $1,538 $683 $815 $1,366 $2,054 $2,063 $2,268 $2,787 $2,400
Legacy Products $8,377 $6,208 $4,797 $4,376 $3,869 $2,096 $1,966 $2,225 $3,366 $4,211 $4,546 $4,700
Total Sales $11,023 $8,743 $6,230 $5,914 $4,552 $2,911 $3,332 $4,279 $5,429 $6,479 $7,333 $7,100


























% of Sales Q1 '08 Q2 '08 Q3 '08 Q4 '08 Q1 '09 Q2 '09 Q3 '09 Q4 '09 Q1 '10 Q2 '10 Q3 '10 Q4 '10
New Products 24% 29% 23% 26% 15% 28% 41% 48% 38% 35% 38% 34%
Legacy Products 76% 71% 77% 74% 85% 72% 59% 52% 62% 65% 62% 66%
Total Sales 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%













Gross Margin 52% 37% 55% 51% 60% 45% 30% 50% 61% 61% 64% 64%

Weak Demand Environment - QUIK commented on its Q3 earnings call that there was inventory rebalancing at the customer level that caused uncertainty and hurt sales.  While management was hopeful this quarter would be different, they noted in today's press release that "the impact of our customers' inventory rebalancing on new product revenue was greater than expected."

Valuation - QUIK has not generated positive EBITDA since 2005 and has cumulatively lost $40.5mm in EBITDA over the last ten years, trades at 9.5x LTM revenue, 6.4x 2011E revenue, 166.3x 2011E GAAP EPS, and 9.9x book value.  The market is pricing in significant success for QUIK's new products:


EV/Sales
P/E - GAAP
P/BV
Comps: LTM 2011E
LTM 2011E
LTM Avg
CY 3.2x 2.8x
49.8x 30.6x
4.4x
ALTR 5.4x 4.5x
17.2x 15.1x
5.9x
XLNX 3.2x 3.1x
14.0x 13.8x
3.9x
Average 3.9x 3.5x
27.0x 19.8x
4.7x









QUIK Fair Value $3.04 $3.84
NA $0.79
$3.16 $2.71
Vs Current -54.3% -42.2%

-88.1%
-52.5% -59.3%









QUIK Valuation 9.5x 6.4x
NA 166.3x
9.9x

 Historical EBITDA:

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Total
$8.8 ($17.0) ($11.4) ($0.8) $0.2 $6.3 ($7.1) ($8.7) ($3.1) ($7.7) ($40.5)
 

Company 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, CSSPs (Customer Specific Standard Products), and, secondarily, FPGAs (Field Programmable Gate Arrays), associated design software and programming hardware.  QUIK has de-emphasized its legacy products in order to focus on its new product offerings, which have been slow to ramp.

A friend that is a long-time tech investor summarized QUIK: "They are in a very competitive market and will be at the mercy of their partners.  They have no direct contact with the OEMS ... which is also a problem and makes their product opportunistic at best."  It seems that the company agrees as the 10Q states - "QUIK markets CSSPs to OEMs, or ODMs, that offer differentiated mobile products.  The market for differentiated mobile devices is highly competitive and dynamic, with short end market product life cycles and rapid obsolescence of existing products."

Risks:

Lottery ticket - There is potential that QUIK wins a large contract for smart phones or tablets.  As the last two quarters were weak and the VP of Worldwide Sales resigned this week, this risk seems very low in the near-term.  Moreover, given the high valuation this seems priced in.

Negative pre-announcement - Stock will likely open down tomorrow on the back of weak results.  If one types "SURP" into Bloomberg, you'll see that QUIK has a history of weak results - in 8 of the past 12 quarters the stock has traded down on earnings; 3 times the drop was 15% or greater.

Deferred tax asset - At year-end 2009, QUIK's deferred tax asset was $55.4mm.  If QUIK becomes profitable, they won't pay taxes for quite some time, but they're not anticipating this as the company has taken a valuation allowance of $55.3mm

Summary:

QUIK's stock had a spectacular run of 228% in the past 12 months capped by today's move because of an erroneously attributed takeout.  Following 4 years of negative EBITDA, 2010 EBITDA will be <$1mm (our estimate is $0.3mm) and it's difficult to get excited about 2011 given the lack of new product revenue growth as QUIK is having little success gaining smart phones and tablets customers.  The near-term chance of a large contract win is very low following two quarters of new product revenue misses and the recent resignation of the VP of Worldwide Sales.  In Q12010, QUIK's stock price averaged $2.40/sh, which is close to our fair value estimate of $2.71/sh.

 

Catalyst

 
    sort by    
      Back to top