QuickLogic - Earnings Call - Q2 2016
August 3, 2016
Transcript
Speaker 0
Ladies and gentlemen, good afternoon. At this time, I'd like to welcome everyone to QuickLogic Corporation's Second Quarter twenty sixteen Earnings Results Conference Call. During the presentation, all participants will be in a listen only mode. A question and answer session will follow the company's formal remarks. Today's conference call is being recorded.
With us today from the company are Brian Faith, President and Chief Executive Officer and Sue Chung, Principal Accounting Officer. Before we begin our call with QuickLogic executives, I will read a short Safe Harbor statement. Some of the comments QuickLogic makes today are forward looking statements that involve risks and uncertainties, including but not limited to, stating 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, market acceptance of its customers' products, expected results and financial expectations for revenue, gross margin, operating expenses, profitability and cash. I'd like to remind you that these statements must be considered in conjunction with the cautionary warnings that appear in QuickLogic's SEC filings. Investors are cautioned that all forward looking statements in this call involve risks and uncertainties and that future events may differ materially from the statements made.
For additional information, please refer to the company's Securities and Exchange Commission's filings, which are posted on its website or available from the company's This conference call is open to all and is being webcast live. We will start today's call with a review of the second quarter financial results by QuickLogic's Principal Accounting Officer, Sue Cheung. Then its CEO and President, Brian Faith, will discuss the company's strategic initiatives in the quarter. Then Sue will provide financial guidance for the third quarter before Brian's closing remarks. At this time, I would like to turn the call over to Sue Chung, Principal Accounting Officer.
Please go ahead, madam.
Speaker 1
Thank you, operator. Good afternoon and thanks to everyone for joining us today. For the 2016, total revenue was $2,700,000 which was at the low end of our guidance range. Our new product revenue was approximately $1,200,000 and the mature product revenue was approximately $1,500,000 Samsung accounted for 31% of total revenue during the second quarter compared to 35% during the previous quarter. During the second quarter, we took an inventory reserve of $203,000 This was primarily driven by the write off of our first generation Polo Pro three inventory.
Even though this was a non cash expense, we usually do not adjust for inventory reserves in our non GAAP presentation. As a result, this reserve lowered our GAAP and non GAAP gross margin by about 8% resulting in a reported non GAAP gross margin of 30%. Excluding the inventory write off, our non GAAP gross margin will be 38% which was within our guidance range. Non GAAP operating expenses for Q2 totaled $5,600,000 which was favorable to our guidance. The lower non GAAP operating expenses were primarily due to our efficient use of resources and the lower than expected engineering related expenses.
On a non GAAP basis, the total for other income expense and the taxes was a charge of $76,000 This result in a non GAAP loss of approximately $4,800,000 or $07 per share, which was better than our guidance. We ended the second quarter with approximately $19,000,000 in cash, which was favorable to our guidance. Cash usage during the second quarter was $4,300,000 which reflects the operating loss and the changes in working capital requirement that were partially offset by borrowing $1,000,000 against our existing line of credit with Silicon Valley Bank. Our Q2 GAAP net loss was approximately $5,600,000 or $08 per share, which was within our guidance range. Our GAAP results include a stock based compensation charges of $439,000 and a non cash write off of $312,000 for first generation sensor hub and mask set.
Again, both our GAAP and non GAAP results included the previously mentioned inventory reserve charge. For detailed reconciliation of our GAAP and non GAAP results and other financial statements, please see the press release we issued today. We have also posted an updated financial table on our IR webpage that provides current and historical non GAAP data. Last week, we implemented strategic realignment measures that resulted in a reduction of eight employees. We expect to incur a one time severance charge of approximately $170,000 in the 2016 associated with this reduction.
Later this quarter, we also plan to implement the cost reduction measures associated with off-site services. On a non GAAP basis, we estimate the quarterly savings from this initiative will be between 500,000 and $800,000 beginning with Q4 twenty sixteen. In addition to notably lowering our quarterly cash usage and given the same assumptions we've shared in past conference calls. We expect those cost savings will lower the revenue level required to achieve cash flow breakeven by $1,000,000 to $1,600,000 With that, I'll turn the call over to Brian, who will update you on the progress of our strategic initiatives.
Speaker 2
Thank you, Sue. Sorry folks, technical difficulty with my microphone. I'm going to start. Thank you, Sue, and thank you all for joining our quarterly conference call. As I'm sure you are aware, following the announcement of Andy's retirement, I took over as CEO on June 24.
Andy will continue to work with us as an active member of the Board of Directors. While his condition is defined as early stage one, his neurologist emphasized to Andy that the best therapy for slowing the progression of Parkinson's disease is to reduce stress and increase physical activity. This retirement optimizes both. We wish Andy the best as he embarks on a well deserved retirement. Since this is my first conference call as CEO, I'll take extra time to provide you with some background, a fresh baseline of our strategic initiatives and my outlook for the future.
During the past twenty years at QuickLogic, I've held a variety of positions in engineering, product line management, marketing and sales. Since I had P and L responsibility as a product line manager, I spent a considerable amount of time being mentored by our then CFO. With this background, I'm very familiar with the operational structure of the company, all of the companies that are affiliated with our ecosystem and all of our major investors. Most importantly, I am intimately familiar with our target markets and have longstanding relationships with our key customers. Needless to say, I learned many lessons during the past twenty years.
Most importantly, I learned what works and what doesn't work. With those lessons in mind, I believe what we are doing now is working and I believe that during the coming year we will generate the results to not only prove it is working very well but also to demonstrate that we have a durable business model capable of delivering long term growth and profitability. While QuickLogic has executed successful business models in the past, none of them proved to be durable. The reason is that those models competed against the persistent cadence of semiconductor integration that is commonly described by Moore's Law. As a result, the value propositions of our past business models were eventually integrated into higher functioning chips by our competitors.
Said another way, we were operating on the wrong side of Moore's Law and that doesn't work. With our sensor processing solution business model, we are the integrator and that means for the first time since I've been at QuickLogic, we are on the right side of Moore's Law. In addition to this, I believe we have the best solution in the market today and are at the front end of what will prove to be a very significant growth opportunity for QuickLogic. New product development by top tier customers in our targeted markets is rapidly trending towards immersive user experiences that substantially increase the demands placed on sensor processors. With these trends, customers are focusing more on the power consumed by the sensor processing solutions.
I believe we're extremely well positioned to capitalize on these trends and my goal is to capture as much of this emerging market While my confidence in realizing this goal is bolstered by the fact we've received from many of the leaders in our targeted markets, it remains difficult to predict the timing and shape of the production ramp for the products that will incorporate our solutions. Let's take a minute now to baseline our activity and some recent developments. First, let's start with the strategy behind the strategic realignment initiatives Sue briefly covered. With the EOS S3 now qualified for production, our hardware design engineering requirements are much lower than they were a quarter ago. Due to this, we reduced our hardware design engineering staff in Sunnyvale last week.
This provides us with the opportunity to expand our software engineering capabilities and reduce costs at the same time. Going forward, our biggest challenge is keeping pace with the engagements we have with top tier OEMs in our targeted markets. Once a customer engagement is established, it quickly becomes very software intensive. The trend we are seeing tells us this intensity will increase as OEMs implement features that require sophisticated sensor fusion of voice and sensor data. These trends increase the demand and duty cycle for the sensor processing system and that benefits us.
However, to realize that benefit we need to increase the number of software engineers we have available to support customer engagements. To accomplish this and enable twenty four seven support for our customers, we are increasing our software engineering staff in India. As we forecasted in our last quarter earnings conference call, we shipped a modest quantity of our production qualified EOS S3 to a Tier one smartphone customer last quarter to support its preproduction of a new wearable device. During the Q and A session of the last conference call, we stated that while customer told us its new wearable device is designed to be a high volume product, the marketing team had not decided how it would stage the launch or if it would couple it with the launch of other products. While these decisions are still not firm, the indications are the new wearable device will launch during the three month window that concludes with Mobile World Congress in February 2017.
The good news is the customer is extremely pleased with the design of our EOS S3 sensor processing solution and is timing its introduction to maximize the value potential and media coverage for the product. Moreover, we have continued to broaden our engagement activity with customer on other potentially high volume sensor processing applications. Unfortunately, the anticipated launch schedule means the significant revenue ramp we were anticipating in Q4 will likely be pushed out by one quarter. During the last six weeks, I've spent a considerable amount of time auditing our operational structure and our strategic customer engagements. This includes visits to our field sales offices and customer locations in South Korea, China and India.
With data gathered from these efforts and the support of our executive team, we have prioritized our engagements and defined the resources we need to optimize our success. While this process led me to temper our outlook for the 2016, it also increased my confidence in our longer term growth potential. This optimism is based on the fact that 14 out of the top 15 smartphone OEMs in the world today have expressed interest in evaluating our EOS S3 sensor processing solution. That being said, not all of these OEMs have a product they are ready to target for development at this time. To optimize our return on investment, we have refined our active engagement focus to include opportunities where the OEM has a target product with high volume potential that can benefit from the unique advantages of our Sensor Processing solutions.
With this filter in place, we removed several engagements from our active list and replaced them with a similar number of new engagements that meet those criteria. Most of the engagements that we suspended were engagements where the OEM either removed a product from its development pipeline or had not yet assigned a specific product to the engagement. In all of these cases, the OEMs remain interested in our Sensor Processing solutions and have stated they will welcome reengaging with us when they can identify a high volume target product. As a result of these adjustments, we now have a more qualified set of active engagements with nearly half of them being with top tier smartphone OEMs that have very significant volume potential. At this juncture, we believe there will be several new devices launched during the 2016 by top tier OEMs that use our sensor processing solutions.
Among these is the design we have mentioned in the past with a top tier semiconductor company that we now expect will enter production in very late Q4. We are currently working with one of these top tier OEMs on a press release that announces our sensor processing platform and algorithms have been designed into a highly sophisticated VR camera. But we are not anticipating this will be a high volume product. It is designed to set new standards for VR video recording which makes it a great showpiece for the capabilities of our solution. We are also working with a top tier smartphone company on a press release that will announce the use of our DisplayBridge in a new smartphone accessory.
In addition to these press releases that we plan to announce this month or next, we believe we will get permission from other customers to issue additional design win press releases later this year. While we are on the subject of press releases, I would like to take a moment to highlight the recent press release issued by our ecosystem partner, Sensory. Sensory is the clear leader in voice triggering and recognition software and its technology is used pervasively by the leaders in the smartphone, wearable and IoT markets. In its press release, Sensory announced partnerships with us and two other companies. Of the three, QuickLogic is the only company that offers a hardware integrated version of Sensory's technology in a sensor hub or MCU.
We view this as a very significant competitive advantage that plays favorably to the design trends we're seeing in the market today. New designs from top tier OEMs expand the use of always on voice applications such as Okay Google to improve the user interface and enable new immersive user experiences. The main challenge they face is to accomplish these goals while still maximizing battery life. Our EOS S3 integrated hardware solution supports these applications while reducing power consumption by approximately 50% relative to the traditional MCU solutions being used in the market today. Going forward, the best route to further optimize our unique silicon platform and leverage our engineering resources is by partnering with leading software companies such as Sensory.
With that in mind, we are in the process of establishing a partnership with an Asian software company whose smartphone solutions are used by many of the top tier Chinese OEMs. Once this initiative is completed, I believe our design engagements in China will accelerate significantly. While I believe we have the best sensor processing hardware platform in the market today, the strategic steps we are taking now will bolster that strength with software solutions that enhance its value. We believe these steps will not only help us expand our value proposition but also better leverage our investments in engineering and customer support. At the bottom line, I firmly activity we have today, the strategic steps we've taken during the last six weeks and plan to expand on during the 2016, we will accelerate our ability to finalize design wins and with that drive our revenue growth in 2017.
I'll now turn the call over to Sue for our third quarter guidance and rejoin for my closing remarks.
Speaker 1
Thank you, Brian. For the 2016, we're forecasting total revenue of approximately $2,800,000 plus or minus 10%. The $2,800,000 in total revenue is expected to be comprised of approximately $1,400,000 of new product revenue and $1,400,000 of mature product revenue. As in prior quarters, our actual results vary significantly due to things that are beyond our control such as scheduled variations from our customers, scheduled changes and projected production start dates to push or pull shipments between Q3 and Q4 twenty sixteen and impact our actual results significantly. On a non GAAP basis, we expect the gross margin to be approximately 38% plus or minus three percent.
Gross margin is driven primarily by the mix of customers and the products shipped during the quarter and the continued unfavorable absorption of operational overhead. We are forecasting non GAAP operating expenses at $5,300,000 plus or minus $300,000 The expected decrease in OpEx is a result of the cost reduction measures we discussed earlier. Non GAAP R and D expenses are forecasted to be approximately $3,000,000 and our non GAAP SG and A expenses are forecasted to be approximately $2,300,000 Our other income expense and the taxes will be a charge of up to $60,000 At the midpoint of our guidance, our non GAAP loss is expected to be approximately $4,100,000 or $06 per share. Our stock based compensation expense for the third quarter is expected to be approximately $400,000 As mentioned before, during Q3, we expect to incur a one time severance charge of approximately $170,000 As was the case in prior quarters, our non GAAP results will not reflect this charge or charges associated with stock based compensation. Including the favorable impact of an additional $1,000,000 of borrowing from our bank line of credit, we expect the net Q3 cash usage to be approximately $2,200,000 to $2,700,000 The forecasted cash usage is primarily due to our working capital needs and the payments associated with our new product development costs.
With that, let me now turn the call back over to Brian for his closing remarks.
Speaker 2
Thank you, Sue. The feedback we've received from literally every top tier customer we've shown the EOS S3 to tells us it is the right part at the right time and that it is priced correctly for the market. We are engaged today with many of these top tier customers on specific programs. While the aggregate number of engagements has held fairly constant, the quality and potential of our engagements has improved significantly. Approximately half of our engagements are targeting specific new smartphone designs with top tier and virtually all of those engagements have multimillion unit annual volume potential.
After auditing every aspect of our business, we have implemented a strategic realignment that will significantly lower our fixed costs and at the same time provide us with the software engineering resources we need to accelerate our ability to win new designs. With this progress, I'm more confident than ever that we will grow our revenue very significantly in 2017 and end the year as a profitable enterprise. Operator, I'd now like to open the call for questions.
Speaker 0
Thank you. Our first question comes from the line of Suji Desilva with ROTH Capital. Your line is now open.
Speaker 3
Hi, Brian. Hi, Sue. Brian, best of luck in the new role there. So with the OpEx and the movement you have there, the puts and takes, the restructuring and the need for software investment, how should we think about the run rate from the guidance going forward? Is there more room for that to go down or will it be stable?
Just some color there would help.
Speaker 2
Suji. This is Brian. So I think the way to model right now is based on what you gave in the guidance, which is roughly 500,000 to $800,000 less than what we have been doing on a quarterly basis. And that, as she said, will lower the breakeven level on the revenue side because of the lower OpEx. So I would model with what she had for Q4 as our 2017.
Speaker 3
Got it. Great. Thanks for that. And then the customer pushing out to the Barcelona timeframe for the launch, can you give us the rationale on the customers that thought the thinking process there to help us understand the reasoning for the push out?
Speaker 2
Yes. So due to NDAs, can't really get into detail. And I think that some of the product management decisions that our customers make are definitely behind closed doors that we're not involved in. The best that I can say right now is that I know that they're trying to maximize the impact of the launch of that product and so they're trying to time it around certain, industry events that would maximize the exposure. So I'll leave it at that.
Speaker 3
Just to be clear, was that a technical challenge with the EOS product or anything along those lines?
Speaker 2
Oh no, absolutely. There's no technical challenge with EOS. As we said in the prepared remarks, the customer's really happy with our solution and what they're seeing so far. Nothing to Just do with this
Speaker 3
to clarify that. And then the pipeline, customer pipeline rationalization, I'm just curious there with the refocusing on the large ticket opportunities, how many potential customers and models could theoretically ramp a volume sometime in the second half of 'sixteen given the rationalization you've done on the pipeline?
Speaker 2
So I'm going to previous to what we've been doing, I'm not going to give detailed numbers on the actual pipeline and the movement there. But what I will say is that the number has remained fairly constant to what we've talked about previously as far as the ramp in 'seventeen. I mentioned that we're engaged with 14 at the top. They're all getting good feedback on EOS S3. This is really a matter of project timing when they can actually assign resources, look at the platform and then find a product that they've actually designed it into.
I think on previous calls we actually talked about the development cycle of some of these smartphone OEMs and it tends to vary. So what we said previously is it varies between six months and fifteen months and then there's very specific windows of opportunity where they're going to launch a product. Lengthening this cycle to some extent is actually good for us because we're playing such an integral role in these systems and it enables OEMs to develop new user experiences and applications. So you know, I'll also say it's really critical that we win these first designs with these OEMs because once we win that first design it gets really sticky. They're writing software.
They're writing algorithms. Putting them onto the platform. That stickiness factor hopefully will snowball so that if we win designs in the first half of 'seventeen, it's actually gonna lead to sort of a multiplicative effect in the second half of 'seventeen. So if I could get back first, we see a lot of potential based on the feedback we received so far.
Speaker 3
Okay. And then Brian, just the last few questions. On the OSS three, the platform is flexible enough to enable a lot of different features. I'm wondering if you could kind of us a sense of what the one or two key hot features that smartphone customers are going to compete on in the second half and into 2017 that you enable out of the many features you could possibly enable.
Speaker 2
Sure. So keep in mind the overriding value here is battery life. We're at least 50% lower power than competing microcontroller based solutions so first that we hear about customers who care about power, that's a great fit there. Once you dig a little further into the details and you look at EOS S3, there's a few areas that are highly differentiated. So the first, and this relates back to the sensory discussion we had earlier, we have a highly optimized voice subsystem, some of which is based on IP from sensory.
So this notion of this immersive experience where you can speak to your device and tell it to do things as opposed to seeing your hands, that's huge and that's getting a lot of traction right now. So that's an area that we see as highly differentiated for EOS S3. The second is actually our proprietary core, the flexible fusion engine. What we're doing with that is we're allowing people to do always on sensor processing on the motion sensor side much lower power than a microcontroller based solution. And then the third area of differentiation that we've talked a lot about in the past is our heritage.
It's that low power programmable logic that allows people to do integration of other components into the single chip. And actually some of these engagements that we have talked about on this call and previous calls are taking advantage of the programmable logic. And if you think about the mobile consumer space, cost is always a factor. The fact that we can integrate these multiple devices into one is huge from a bill of materials point of view. So those are the three main drivers.
And just think the overriding factor here is this more immersive, always on user experience that lengthens your battery life.
Speaker 3
Great. And one last question for me. Can you update us on the China smartphone customers and give us a thumbnail of where that customer base stands relative to the opportunity for you? Thanks.
Speaker 2
Sure. So I would lump all of those into this category of all these OEMs that have given us positive feedback. I've been there myself multiple times. In fact, Bob Schoenfeld, our VP of Sales, he isn't on the call today because he's in Asia headed into China to talk to these customers. Where we are, we're at various stages of engagement.
Some people are doing what we call technical positions where they're actually measuring power consumption and validating our claims. Other people are a little bit further along in that process. And again I'll go back to the typical smartphone development cycle we talked about. So it typically ranges six to fifteen months. In China that does tend to go faster once they finish that eval and they find an actual specific program to intercept.
So we're at varying areas of that in China but a lot of those ones in China are what we're thinking will drive the growth in 2017 for us. Specifically because of the value proposition resonates there and they can get to market very quickly when they make decisions on products.
Speaker 3
Great. Appreciate the detail, Brian. Thanks.
Speaker 2
Thanks, Suji.
Speaker 0
And our next question comes from the line of Gary Mobley with MedBenchmark. Your line is now open.
Speaker 4
Afternoon. Thanks for taking my question. Sue, I want to start with Could a question for you refresh our memory as to what the new breakeven will be on a non GAAP basis in quarterly revenue?
Speaker 1
Yes, Gary. The new breakeven will be around $10,000,000 to $11,000,000 of revenue. This is the cost reduction measures that we implemented this quarter that reduced our burn rate by about $1,000,000 to $1.6 per quarter.
Speaker 4
Okay. Brian, did you say that it's your goal or perhaps anticipation that
Speaker 3
you'll hit
Speaker 4
that breakeven number by Q4 'seventeen?
Speaker 2
Yes, I guess I'll answer this. I'm a conservative guy. So yes, I said we'd end the year as a profitable enterprise. If the ramp happens sooner with these smartphone OEMs, then that could happen sooner in 2017. But for the purpose of today's call, yes, it's the end of the year.
Speaker 4
Okay. If I go back, I think you mentioned that you have some solid sales prospects with some Japanese OEMs moving to the PolarPro three. I'm assuming since there was a $200,000 inventory reserve for PolarPro three, perhaps those opportunities might have slipped. Am I assessing that right?
Speaker 2
It's actually slightly different. So the reason why we took the reserve on the first generation Arctic Link three S1 and the associated partner in programmable logic PolarPro three, those are the first generations of those. If you remember we actually fairly quickly came out with second generations, the Arctic Link three S2 and PolarPro 3E. And because those are more cost effective and lower power than the first generations, all of the sales efforts are really primarily the second generations and not the first generation. So because of that we decided it was prudent to take the reserve on the inventory and run off the fixed asset or the mask.
But I want to remind that, you know, we have done these inventory reserves in the past and we still seem to find places to sell these devices. So when we do go through and we sell them it will be at 100% margin. But again from a financially prudent point of view we thought it made sense to do the write off of the inventory and the fixed asset at this time for the first generation.
Speaker 4
All right. Could you give us an update on the prospects for video bridge sales, perhaps even any sort of specifics with Samsung and how you see that business shaping up and continuing with what has been your largest customer?
Speaker 2
Yes. Again, due to NDA, I'm not going get into specifics on Samsung. We'll report on actuals when we actually end the quarter and we tell about the percentage breakouts for them. But just from a general point of view, we actually continue to see demand for display bridge solutions. In fact I got an email today on another design opportunity not Samsung but with other people.
So we continue to see opportunities coming in for this. So I'm confident we're going to see display bridge revenue well into 2017, maybe beyond that. But I don't see a material revenue increase in the near term. But I definitely see it continuing well into 2017 and maybe beyond that.
Speaker 4
Got you. All right. That's it for me. Thank you.
Speaker 2
Thanks.
Speaker 0
And our next question comes from the line of Rick Neaton with Reversure Investments. Your line is now open.
Speaker 5
Thank you. Hi, Brian and congratulations on becoming the CEO. Hi, Thank you. I'd like to follow-up on some things that were discussed in the last conference call. There was some discussion by Sue about an inventory build timeline.
And I'm wondering if you can provide some color on forecasting inventory for third quarter and even fourth quarter.
Speaker 1
Rick. This is Sue. I can answer. I'll take this question now. For inventory build, we modeled out to ramp up in Q4 this year.
So Q3 will be consistent with the prior quarter. So for Q4, given the uncertainty in production schedule of the Tier one smartphone OEM wearable project, we have already taken steps to build the inventory to support our ramp towards the end of the year. While we believe the ramping demand will more likely in earlier next year, we will have a capacity to support it if that happens earlier in Q4.
Speaker 5
Okay. So Brian, based on that inventory forecast and your statement that you are a conservative person, are you entirely ruling out a chance at a smartphone in the fourth quarter? Or are you just being a little more conservative? Can you provide a little bit more color here?
Speaker 2
Sure. And I'm definitely not ruling out that there could be a smartphone going to market in the fourth quarter. I'm just trying to be more conservative as we're giving our revenue outlook for the balance of the year. Of course, we're only providing guidance for Q3. There's a lot of things going on with these customer opportunities right now and really I think what we've been trying to convey on this call is it's really a timing thing.
And so once we get better visibility on that then I think we'll be able to speak with more concrete detail. But it's definitely not off the table to have a smartphone go to production in Q4 this year. We just see that the ramp where you're layering in several of these at the same time, that would be something that builds into 2017. So
Speaker 5
what are you saying that the description of very significant basically is being could possibly be pushed out another quarter into first quarter of next year. Other words, at the last conference call, Andy talked about him being about confidence of a very significant revenue ramp in the second half of this year. You talked about maybe due to your important customers' production schedule and marketing plans, there's a possibility that this very significant ramp would fall in 4Q 'sixteen and 1Q 'seventeen instead of 3Q 'sixteen and 4Q 'sixteen. Is that the color you're trying to convey to us?
Speaker 2
Yes. So let me actually provide a little bit more color on that. So the primary factor behind the changes in our second half outlook is really due to that Tier one smartphone OEM using our EOS S3 in a new wearable product. We know that they've delayed it and they're trying to determine when they're actually going to launch it between December and February at Mobile World Congress. And so that has a big impact on what we had previously said would be significant growth in the second half of this year simply because we don't know exactly how they're going to go to market with that and when it will start to ship in volume production.
As Sue mentioned on the inventory side, we are building some inventory to support that if they do decide to launch it in Q4 and we would enjoy obviously the revenue from that. So I'm trying to provide a more conservative view of the second half at this point given that visibility. That being said, there's also several things that we need to take a bit more of a conservative outlook in the first half of 'seventeen but also I think optimistic view for the second half of 'seventeen. And really the short story here is I see that we have these improving value of our engagements. I tried to convey that in the prepared remarks about the shift in the funnel and what's actually in there and what was suspended.
I just don't know how quickly those are going to go to production and how successful the first guys to market with our solution will be. A lot of it's dependent on them or how quickly the demand for their products will ramp. So there's a lot of variables we're trying to play with. And again, due to my conservative nature, I'm trying to paint what I view as a conservative picture to you as investors.
Speaker 5
Okay. And following up on your statements about how you have reconfigured the design funnel or engagement funnel, have you lost any engagements due to S3?
Speaker 2
No, we haven't lost any engagements. We've seen some suspension of engagements, I would say. All of the OEMs that we've talked to think it's a fantastic device. They love the power. They love the features and integration.
It's really more of a timing thing. I will say that there were a couple of smaller opportunities that we purposely moved to the suspended area where OEMs were asking us to do things that the management team felt would be more of a one off development and not really worthy of the type of volume that would be commensurate with that development. And so we purposely decided to move it off. Making a decision that opportunistic revenue is not as important as really making sure that we focus on these bigger ones that can move the needle for us and more in the smartphone space. That's why in the prepared remarks we talked about this sort of shift where it's a much more high quality funnel at this point as a result of those decisions.
Speaker 5
Okay. And when you say when you concluded your prepared remarks and said that you would end you have high confidence that you will end next year as a profitable company, are you talking about the quarter or the entire year?
Speaker 2
As a quarter.
Speaker 5
Okay. Thanks, Brian. Congratulations and thanks for the clarifications here.
Speaker 2
No problem. Thanks for your questions. At
Speaker 0
this time, I'm showing no further questions. I would like to turn the call back over to Brian Fait for any closing remarks.
Speaker 2
Okay. Well, we thank you for your continued support and I look forward to reporting our strategic progress on the next earnings call which is scheduled for Wednesday, 11/02/2016. Thank you and goodbye.
Speaker 0
Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may all disconnect. Everyone have a wonderful day.