Peraso Inc (PRSO) 2003 Q2 法說會逐字稿

Good afternoon ladies and gentlemen. We are now ready to begin the Second Quarter 2003 Earnings Conference Call for Monolithic System Technology. I would now like to turn the conference over to Beverly Twing of Shelton, the investor relations firm of record for MoSys. Please go ahead.

Thank you Irene. By now, everyone should have received our press release. However, if you haven't, it is available on the MoSys website at www.mosys.com. Before we begin the discussion of the second quarter results, I would like to acquaint you with our forward-looking statements. The discussion during this conference call will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which include without limitations, statements about the market for the MoSys 1T-SRAM technologies, benefits and performance expected from use of the 1T-SRAM technologies. License fees of 1T-SRAM technologies and their strategy development and production of products that use the licensed technology, licensees and royalties attributable to 1T-SRAM technologies and the company's anticipated or perspective financial performance. Any forward looking statements made during this call are subject to risk and uncertainties that could cause actual results to differ materially from those projected. Additional information concerning factors that could cause actual results to differ materially from any forward-looking statements made during this call are contained in the company's most recent annual report on form 10-K, filed with the Securities and Exchange Commission in particular to section titled "Risk Factors," in the Form 10-K and another reports that the company files from time to time with the Securities and Exchange Commission.

MoSys undertakes no obligation to publicly update any forward-looking statement for any reason except as required by law even if new information becomes available or other events occur in the future. Thank you for your attention. I would now like to turn the call over to Dr. Fu-Chieh Hsu, President and CEO of MoSys.

Good afternoon everyone and welcome to the MoSys second quarter earning conference call. With me today are Mark Voll, our CFO and Mark-Eric Jones, our VP and General Manager of Intellectual Property. We will begin the call with Mark Voll, who will give a brief overview of the financial results of the second quarter of the fiscal year 2003, as well as provide our business outlook for the third quarter. After which we will discuss business and technology highlights of the second quarter and we will have Mark-Eric Jones give a brief overview of our customers and market. Finally, we will conclude by answering any questions you may have. Now I would turn the call over to Mark Voll.

Good afternoon. Today, as you know, we reported our unaudited financial results for the second quarter ended June 30, 2003. Here is a summary of the results. Net revenue in the second quarter was approximately 4.5m, a decrease of 31% over the second quarter of last year. Total net revenue included licensing revenue of 2.2m, royalty revenue of 1.8m, and product revenue of 515,000. During the quarter, we also recorded a contract termination fee of 288,000 and this amount was categorized as other income. Licensing revenue in the second quarter was 2.2m compared to 2.6m in the second quarter of last year. Most notably for the quarter licensing revenue was recognized from 21 different chip development projects compared to 15 chip development projects in the second quarter of last year. Seven of the chip development projects were new this quarter. Royalty revenue in the second quarter of 1.8m compared to 3.3m in the second quarter of 2002. The decrease was mainly attributable to the reduction in GameCubes royalties, which were approximately 2.6m in the second quarter of last year. Different royalty revenue from 9 different licensees most having multiple [SSC's] in production. We recognized royalty revenue from reports provided by the licensee which are typically received in the quarter following that and which the licensee has sold for manufactured products containing our 1T-SRAM technologies.

During the quarter, we collected $1m in cash from [Connexin], with the termination of its October 2000 license agreement with us. This payment consisted of current and past two royalty payments totaling 713,000 and 288,000 of which we have accounted for as a termination fees. Our previously announced guidance for the second quarter had assumed that this entire payment would be revenue. Product revenue was 515,000 in the second quarter compared to 648,000 in the second quarter of last year. As we have stated in recent quarters, we continue to see weakness in the communications markets, where our standalone memory chips, and believe it is likely that we will continue to experience this weakness in product revenues for several more quarters.

Gross margin percentage in the second quarter was 86% of net revenue. Operating expenses including research and development were 3.9m for the quarter. Operating expenses were slightly higher than our guidance due to higher R&D expenses incurred on technology development projects during the quarter. Our second quarter operating expenses also included stock based compensation charges of 105,000. Other income for the quarter was 652,000, with 329,000 from interest income and 288,000 from the previously mentioned contract termination fee. Net income for the quarter was 500,000, representing 11% of total revenue or 2 cents fully diluted earnings per share compared to 2.7m or 9 cents per share in the same period last year. The diluted earnings per share for the quarter of 2 cents were in line with current published analyst estimates. Tax rate used to compute net income was 20%, equal to the provisional tax rate used for the second quarter of 2002. Second quarter fully diluted earnings per share were computed using 30,848,000m shares. Significant revenues from licensees in the quarter included SONY and [Connexin], representing 14% and 16% respectively.

In the second quarter, revenues from [GAIN-Q] represented less than 5% of our revenues. As far as our guidance for the third quarter this year, we expect our customers to remain conservative with our R&D budgets and expenditures in the near future. At this time, we believe that total revenues will increase ranging from 4.5-5m for the quarter. We expect that the increase will come primarily from an increase in licensing revenues. Visibility, however, still remains unclear and our overall perspective on our revenues remains on a contract-to-contract basis. We can report that our customers have indicated that they are seeing improvement in their business, and if this holds true, we should benefit from this improvement shortly.

We expect operating expenses will range from 3.6-3.8m in the third quarter, down from 3.9m incurred in the second quarter. We anticipate an effective tax rate of 20% in the third quarter. Net cash flow from operations in the second quarter was $2.8m. Cash equivalent investments, both short and long term, increased to 84.7m at the end of the quarter. On June 30, 2003, total accounts receivable 1.9m of which 212,000 were attributable to product sales. Net inventory at the end of the second quarter declined to $794,000 from $892,000 at the end of the previous quarter. At quarter end MoSys had 91 employees of which 69 were engineers. That concludes my prepared remarks about the financial results. Fu-Chieh will now discuss the business highlights of the second quarter.

This past quarter proved to be a challenging one for MoSys and certainly our current quarters financial results reflect those conditions. However, we remained committed to the expansion and proliferation of our technology. Recently, we disclosed that our first cell phone application has moved into volume production. Our customer Sony released their new high-end camera cell phone model SO505I distributed by NTT DoCoMo in Japan. In May National semiconductor one of our original cell phone customers announced that he would exist the cell phone parallel business and as a consequence our design in this project will not go into production. We expect our other design programs in the cell phone market to move into volume production in 2004.

Highlighting some of the accomplishments in the second quarter, we announced that we had expanded our license agreement with Sony to include products manufactured at Sony's Kyushu fab. Increasingly, Sony has become one of our most insignificant customers and through this agreement and others we will provide additional designs to meet Sony's embedded memory requirement. We also announced during the quarter that our 1T-SRAM technology was successfully silicon verified at SMIC in China. This success represents our continuing strategy to make our technology available to customers of all the leading foundries. During the quarter, we received indications that chips for the GameCube may resume production shipment during the second half of this year. However, the quantity and timing of any production remains uncertain. Accordingly, we do not anticipate any significant revenues from Nintendo for the third quarter. Now, I would like to have Mark-Eric Jones give some more detailed insight into our markets and customers.

Thank you. As we have stated earlier, our customers are facing a difficult environment and many have continued to delay the start of new development projects. Of the business we booked in the second quarter a majority of the transactions came in the back half of the quarter. We certainly hope that this increasing momentum continues. During the quarter we announced the signing of [Zyrotex] technology limited as new licensee. [Zyrotex] located in the U K is a spin off from IBM with 600 employees. Representing the first fuse of our technology in the data storage market and another example of how our technology can be used across a wide range of markets. We are seeing strong interest in our 1T-SRAM-Q technology as customer projects specifying increasing amounts of embedded memory. This week we announced UMC support of this technology in their 0.13 micron and 90 Nanometer Processes. In addition to the continuing trend of increased embedded memories we are also seeing customers' requirements being driven by the growing need in low-power consumption in markets such as cell phones and automobile applications. The considerable power savings of 1T-SRAM office over other possible alternatives in both active and standby power makes it a very compelling solution. Now, I will turn the call back over to Fu-Chieh.

In summary, we are confident that there is a strong and growing need for our technology. We remain focused on diversifying our customer base increasing the number of licensees, improve the efficiency of the design cycle and devoting engineering resources to further expand and improve our technology offerings. In our prepared comments, we have outlined our business results and guidance for the third quarter 2003. I would like to reiterate that due to the confidential nature of our licensing agreements, we typically cannot provide detailed information on the specific project or licensee. This is a contractual obligation that we must uphold in order to preserve our relationship with our customer. At any point in time, when we are able to disclose those details we will publicly provide that information. That concludes our prepared comments and we are now ready to take questions. Please introduce yourself including your firm's name when you ask your questions.

Ladies and gentlemen if you would like to register for a question, please press the "1" followed by the "4" on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the "1" followed by the "3." If you are using a speakerphone, please lift your handset before entering your request. One moment please for the first question.

Our first question comes from the line of Brett Miller with A.G. Edwards. Please proceed with your question.

Good evening. I'm just curious on the [Connexin] issue. Do you know if that was with the mind speed division that was just recently spun off? And if that's going to be an ongoing licensee?

We can't actually give details of contracts with customers. Obviously, as you know, there has been a considerable reorganization of [Connexin's] overall business since that contract was signed. And we generally continue to explore our opportunities with old customers and divisions and groups.

Okay. I mean do, Okay. If you could, can we talk a little bit about maybe where some of the licenses -- currently that are out there are as far a maybe numbers or percentages of those licenses by kind of end market -- just a way to look at the numbers maybe into your still cameras, camera phones, phones, DVD controllers that type of thing, any color you can give there?

We are seeing going forward the continuing bias towards consumers markets compared to the communications markets when we first announced on [TS] ramps. So the bias has shifted over fairly heavily to a wide variety of consumer markets. One of the things I want to stress is that it is a wide variety of markets rather than being focused on a single market, as the [Zyrtec's] example that we gave earlier illustrates.

Okay. But there is no other color that you can give as far as maybe some of the higher volume end markets where some of the designs are going? Just to give kind of a rough breakout of percentages maybe more skewed towards DVD controllers or digital still cameras, that sort of things?

I think maybe the applications during the -- early in the manufacturing phase, so certainly I think that everyone as a fact that you mentioned they would believe would become very significant.

Okay.

Our next question comes from the line of Matthew Curtis with Kenny Securities. Please proceed with your question.

Hello everyone. Again my name is Matthew Curtis with Kenny Securities. A couple of quick questions for you here. First, did I understand correctly that the contract termination was actually closer to a $1m and 713,000 was booked into royalties?

That's correct.

Okay. The -- on the balance sheet, your accrued expenses items increased about 200,000 sequentially. Was there something in particular that was driving that this quarter?

Nothing, the ordinary as far as an accrual there to speak of.

Okay. The number of licensees generating royalties for you increased by one. Would you be able to tell us the -- tell us how many different projects were generating royalties for you in this quarter?

Yes, we generated royalties from 9 different licensees. And again, most of our licensees that are generating royalties have multiple projects.

Okay, but you don't want to breakout how many individual projects it was?

No.

Okay. Would you be able to tell us did the number of projects go up this quarter in line with the number of licensees?

It increased, correct.

Okay. And the LSI project that you mentioned -- has that design been completed or is that still ongoing at this time?

I am sorry, which project.

The LSI project.

Okay. That has been completed.

It has been completed?

Yes, yes.

Okay. All right, just a couple of final questions here, the long-term investments category on your balance sheet, we briefly touched on this last conference call, but I was wondering if you could give us little bit detail about what types of investments are typically held in there?

There are the typically the same type of investments are in short-term and these are highly liquid investments, very high quality investment grade. The reason why we are going for longer-term is to try to get a little bit better return on our money.

Okay. Two quarters ago, NEC accounted for some significant revenues for you all that disappeared last quarter as most of that was licensing that had been completed, can we -- do you anticipate production from any of those projects any time soon?

Yes, I think, that is not probably not for the while, I think, we mentioned before that the [found] in the beginning of the [inaudible] contract to the time [as volatility kicking] [inaudible] we take 18-24 months, and the licensing and TVT activity typically reflect the upfront development activity typically happens during the first of three full quarters.

Okay very good and then finally if I understand correctly you are not going to break out IP revenue guidance again this quarter?

Just total revenue guidance.

Thank you very much, Jones.

Ladies and gentlemen as a reminder to register for a question please press the "1" followed by the "4". Our next question comes from the line of Gary Mobely with BYV and Company. Please proceed with your question.

Hi gentlemen. Could you give an update on some of your compiler data of trials and perhaps when we can see some revenues from that specific product?

Yes certainly the compiler data trials are going well, and we expect to start to see small revenues as early as the next quarter. Bare in remind that just as with other projects we looking at the 18 months time lag before those products will go into volume production and royalties will kick in which is the true long-term focus of our business.

Could also talk about how much higher the development cost are for your customers to implement 1T-SRAM-Q versus original versions given more photomask a greater photomask requirement etc.?

Yes. Certainly yeah. Firstly, the 1T-SRAM-Q only uses one additional non-critical mask and that mask cost us typically less than $10,000. So it's very negligible when you look at the overall development cost today of an SOC that can be an excess of $10m.

Okay. And could you talk about the potential per deal sizes for licensees of 1T-SRAM, is it mainly incremental to existent 1T-SRAM licensees or will these potentially be new customers as well or totally new deals?

Yeah, we see both; the 1T-SRAM queue extends the range of 1T-SRAM into even larger memories that previously couldn't have been economically integrated on to a chip. So it enables a set of products that previously could not have been done on a single chip.

Okay thank you.

Our next question comes from the line of Richard Faust with Adams, Harkness & Hill. Please proceed with your question.

Hi, most of my questions have been answered but can you repeat the APEX guidance please?

$3.6-$3.8m for Q3.

Very good and any gross margin guidance that be trending up, down, or flat?

I wouldn't anticipate any real change in our overall gross margins.

And should you come in at the high end of the range and grow a little bit, what would you expect to be up more up would you expect to be driven by licensing at this point still?

Quite correct, driven by licensing revenue.

Okay, I think that pretty much gets me for now. Thank you very much.

Ladies and gentlemen as a reminder to register for a question please press the "1" followed by the "4". Our next question comes from the line of Sanjay Chopra with Sitody & Company, please proceed with your question.

Hi, again this is Sanjay Chopra from Sitody & Company, just want to follow up on the comment they made on the call, how Nintendo said that they may resume production of more chips used for the GameCube in the second half of the year. Have you gotten any sort of projections or forecast as to how many units you might be looking too manufacture?

I think that earlier we have indicated that at this point we do not have any quantity and the end of the scheduled information.

Okay have they, I guess specifically what did they say other than we may resume production, did they gave you any numbers or does, do you have any forecast or estimates from your own end that you could provide.

Yes, I think that earlier we indicated that we have received indications that such production shipments may resume; however since we are not sure about the quantity and the timing having our current third quarter forecast are basically assume negligible.

Okay. All right that pretty much satisfies me. Thanks a lot.

Our next question comes from the line of Gary Mobely with BYV & Company. Please proceed with your follow up question.

Sure, just a follow up to the previous question on Nintendo, would it be fair to say that there may be still as many as 2.9m GameCubes in supply chain or any [C] chips in the supply chain given today that they put out by Nintendo is well from the third party independent research firms?

I think that your question is referring to the inventory. I think that -- the information we don't have a accurate -- the knowledge of; that's why we will be allowing our opponent to inform us of when the additional production shipment for the chips may resume. So that is the best information we have right now. Again, we mentioned earlier we don't have a clear picture on the quantity and the timing. Other than the indication of that they expect our shipment should resume.

Okay. And could you talk about how far long your relationship is with the Kyushu fab in Sony and how your engineers are working with the various design teams at that boundary and any specific projects there?

Well, we can't talk about specific projects, but hence you see we announced this a little while ago during this quarter and the progress is good. The engineers are working together well.

Okay, thanks.

Ladies and gentlemen as a reminder to register for a question, please press the "1" followed by the "4." Our next question comes from the line of Caron Pain with Pacific Edge Investment Management. Please proceed with your question.

Thanks, I wanted to understand the revenue from Connexin (ph.) a little bit better. You said that it was 1m in total, 713,000 of royalties, and 288,000 in termination fees. The royalties -- that amount must be sort of a pent-up royalty amount that was due over a certain period of time. I wondered if you would clarify that, but I guess I wanted to understand -- it seems like this 1m even though you said it was included in your guidance is probably almost one time in nature and are we to assume that without this your core business was 3.5m and you are having to grow from 3.5-5m sequentially because the Connexin (ph.) business was almost one time in nature. I am thinking about that right or is there another way to think about that?

Well the royalties from [Connexin] represented both past and current royalties that were due to [Moses]. I would say that slightly less than half of the royalties could be considered in the current period. So, I think that's -- and then of course the $288,000 that we booked as a -- as other income -- it really was a fairly conservative approach as far as accounting for that transaction.

Your relationship with that part of [Connexin] though is now terminated?

That particular agreement is. Now we are exploring other opportunities.

Right. So you had, you know, when you take the 288,000 which was really pretty much a one-time thing and then the half of the royalties, that was a one-time thing. There is still, you know, that implies that implies that your core business was a bit lower than you might have anticipated. And that you will have to grow, you know, a fair amount sequentially to make up with that.

Correct.

Okay. Thanks.

Ladies and gentleman as a reminder, to register for a question please press the "1" followed by the "4." Our next question comes from the line of Richard Faust with Adams, Harkness & Hill. Please proceed with your follow-up question.

Yeah, just a follow up. What do you anticipate will make up for the dropping out of the [Connexin] revenue in the up coming quarter to maintain roughly flat revenue?

Well we see a -- we've seen some increases in the licensing activity, as Mark had indicated. A lot of the activities that we booked in the quarter happened in the second half under our revenue recognition. We recognized revenue as we -- presented completion basis. So as we do work on a particular project then we recognize revenue. So we carried those over into this quarter and then we are beginning to see some pretty good activity in this quarter as well.

Okay very good. Thank you.

Our next question comes from the line of Gary Mobely. Please proceed with your follow up question.

Sure. Since you didn't give us an exact amount of what Ninentdo contribution was for the quarter, I think you mentioned less than 5%. Could you at least be more specific there or give us some idea how business grew on a year-over-year basis, excluding Ninentdo?

Well I mean again we, it was less than 5% of our revenues in the quarter. I don't know if I can get any more specific that and give any confidential information that -- on our customer's business.

Alright, thanks.

I am sure there are no further questions at this time. Please continue with your presentation and closing remarks.

Thank you again for participating in our call. Before we close, I would like to reiterate the key highlights and our achievements of the past quarter. We expanded our license agreements with Sony to improve product manufacturers at Sony's Kyushu fab. 1T-SRAM memory [silicon] verified at [SMIC] generated a cash flow from operations of 2.8m in the quarter, increasing total cash equivalents and the investments to approximately 85m. Licensed our 1T-SRAM to [Zyrtec's] for use in the next generation data storage and networking product. Thank you again for your participation in this call.

Ladies and gentlemen that does conclude your conference call for today. We thank you for your participation and ask that you please disconnect your lines.