Peraso Inc (PRSO) 2005 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. We are now ready to begin the MoSys third quarter 2005 financial results conference call. I will now turn the call over to Beverly Twing, who is with Shelton, the investor relations agency for MoSys.

Thank you, Colby (ph). 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 third quarter's results, I would like to acquaint with your forward-looking statement. 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 limitation, statements about the market for the MoSys technologies, benefits and performance expected from use of the 1T-SRAM technologies, licensees of 1T-SRAM technologies and their strategy, the development and production of products that use MoSys' license technology, license fees and royalties attributable to 1T-SRAM technologies and the company's anticipated or prospective financial performance.

Any forward-looking statements made during this call are subject to risks 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 in the section titled Risk Factors in the Form 10-K and in other 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 as new information becomes available or other events occur in the future.

Thank you for your attention. I will now turn the call over to Mark Voll, CFO of MoSys. Mark?

Good afternoon, everyone, and welcome to MoSys' third quarter earnings conference call of 2005. With me today is Chet Silvestri, our CEO.

I will begin the call with a brief summary of the financial results of the third quarter and provide our business outlook for the fourth quarter. Chet will then discuss the recent highlights of the quarter and provide an overview of our business. Finally, we will conclude by answering your questions.

Today we reported unaudited financial results for the third quarter ended September 30th, 2005. Total net revenue in the third quarter was $4.1 million, which included licensing revenue of $3.2 million and royalty revenue of $900,000. Total revenue exceeded our guidance of $3.5 to $4 million for the quarter because we earned approximately $250,000 of revenue originally forecasted for the fourth quarter.

Licensing revenue in the third quarter was $3.2 million compared to $1.9 million in the prior quarter and $128,000 in the third quarter of last year. Licensing revenue was recognized from 17 different chip development projects this quarter compared to 11 chip development projects last quarter.

Royalty revenue in the third quarter was $900,000 compared to $1.1 million in the prior quarter and $1.5 million in the third quarter of 2004. Third quarter royalty revenue was earned from 15 different licensees. We believe that the decrease in royalty revenue was due to seasonality in the consumer electronics business, which normally results in higher royalty revenue from consumer products in the fourth and first quarters.

We recognize royalty revenue in reliance on reports provided by the licensees, which reports are typically received in the quarter following that in which the licensee has sold or manufactured products containing our 1T-SRAM technologies.

The gross margin percentage in the third quarter was 84% of net revenue compared to 81% in the third quarter of 2004. Operating expenses, including research and development, were $4.1 million in the third quarter. During the quarter, approximately $450,000 in operating expenses was attributable to expenses incurred from the UniRAM litigation, which exceeded our original forecast by $200,000. Operating expenses for the quarter exceeded our guidance of $3.7 million to $3.9 million because of the additional litigation expenses.

Non-operating income, including interest income, totaled $679,000 for the quarter. Net income for the quarter was $50,000 or $0.00 per diluted share, compared to net income of $5.1 million or $0.13 diluted earnings per share in the third quarter last year. Last year's third quarter results included the $10 million termination fee from the aborted Synopsys acquisition agreement.

Absent the UniRAM litigation expenses, net income for the third quarter would have been $500,000 or $0.02 diluted earnings per share. Third quarter diluted earnings per share were computed using 30,465,000 shares.

Significant revenues from licensees included Fujitsu and NEC, which represented 45% and 17%, respectively, of total revenues for the quarter. Significant revenues are expected throughout the next several quarters from both of these licensees from contracts entered into in prior quarters although the revenue from these contracts should not represent as large a percentage of our revenues as the last several quarters.

Regarding our guidance for the fourth quarter, we maintain the same overall guidance that we gave in the third quarter, that is, we see total revenues in the range of $3.5 to $4 million. This guidance takes into account approximately $250,000 that was recognized in the third quarter, as was mentioned previously.

We expect operating expenses will range between $3.4 to $3.6 million in the fourth quarter, included an estimated $125,000 in expenses relating to the UniRAM matter.

Net cash used in operations was approximately $2 million in the third quarter and was a direct result of the increases in accounts receivable and unbilled receivables in the quarter that we do not believe will recur in the foreseeable future.

Cash and equivalents in both long and short-term investments totaled $84.2 million at the end of the quarter.

That concludes my prepared remarks about the financial results. I will now hand the call over to Chet.

Thank you, Mark. Let me begin by saying that we were pleased with the third quarter results, particularly the notable increase in total revenue resulting in a 35% sequential increase and in excess of 100% year-over-year.

This increased revenue is attributable to the strength of the bookings recovery that we have seen this year. We expect this bookings trend to continue because of the significant increase in licensing inquiries that we saw in the quarter. In fact, we are planning a slight strengthening of our sales force in order to adequately cover the inquiries. I'll speak more about this later, but the resulting bookings from this increased interest should continue to fuel our revenue growth.

This increased interest is a direct result of the rapidly increasing need for larger embedded memories in system-on-chips for high-volume consumer applications. Examples of these products include cellular handsets with enhanced features such as higher resolution cameras and higher quality audio and video, as well as other products such as digital TV set-top boxes, portable audio/video players and data storage devices.

For all of these applications, there's a common need for more memory in a smaller footprint that uses less power and at much lower cost. As the electronic complexity of these increases, the challenge in meeting the customer needs for power, speed, reliability and cost also increases. As such, these system-on-chips are now entering the sweet spot, as we think, for the MoSys 1T-SRAM memory, which is specifically designed to meet this need for higher memory density at a lower cost and power consumption than traditional 6T-SRAM or even DRAM memory.

By way of further example of this trend, during the quarter we made key customer announcements that included LG Electronics, a powerhouse in consumer electronics and cellular handsets, who licensed our 1T-SRAM embedded memories for use in high-volume consumer applications and, additionally, Azul Systems, a recognized leader in the emerging network-attached-processor market.

Now in terms of our product portfolio, in June we introduced our CLASSIC macro family of off-the-shelf silicon-proven designs and we've experienced very strong interest in these products. We are pleased to report that we've already closed several customers who are incorporated CLASSIC macros into their designs and we're in active negotiations with additional customers.

Now turning back to sales and marketing, as I mentioned earlier, we've made it a priority to expand and refine our sales and marketing efforts. Recently we announced the appoint of Dhaval Ajmera as our new VP of Worldwide Sales and Business Development. Dhaval has over 23 years of executive management experience in sales, marketing and business development at companies which include AMD, National Semiconductors, Sun Microsystems and CEVA.

He has extensive experience in technology licensing and has successfully negotiated very large, complex licenses with major companies. Most recently, during his tenure at CEVA, Dhaval served as VP of North American Sales and under his direction there was significant sales growth.

We're also looking to selectively add additional sales people to Asia, particularly Japan, Korea and Taiwan. Because of our high volume consumer products focus, these regions represent a huge potential for licensing growth.

While we remain committed to continue to strengthen our products and revenue, we believe the results of the third quarter are a positive indication that our products remain very competitive in the market place and that the overall business of the company is fully recovering. At the same time, we continue to grow our revenues, we will maintain strict limits on spending in order to achieve our profitability goals. The IT licensing business is a highly leveraged business and we can support substantial revenue increases by maintaining current operating expenses.

That concludes our prepared comments. We're now ready to take questions. When introducing yourself, please your first and last name and your firm's name. Let's open it up for questions.

[OPERATOR INSTRUCTIONS] Chris Chaney, Stanford Group.

Congratulations, gentlemen. Nice quarter.

Thank you, Chris.

I wanted to just sort of dive into the CLASSIC macros for one second. You said that there were several that were closed and others that were-- you're engaged with. I was wondering, within the license revenue stream, what percent of that would be attributed to the CLASSIC macros?

Chris, this is Chet. I actually don't, off the top of my head, have the numbers, but let me-- let me answer it a little bit differently. I think we want to be a little careful. We have CLASSIC macros which are point of an SoC, right? It's basically a macro that's silicon-proven and a fixed spec and characterization target. But the fact is, that some customers want some little derivation, even as simple as porting it to a different foundry than we already have or maybe by changing the output from by 32 (ph) to by 64 (ph).

We're sort of having a debate internally, do we call those CLASSIC macros, derivative macros? They're not really fully custom macros-- so it's really a continuum and I think it's probably misleading to think that we should put one in one bucket and one in another.

The very important point is every one of our deals in Q3 started with a CLASSIC macro. That's what they evaluated. That's what we engaged with and as we got deeper into optimizing the design or engaging with them maybe we tweaked something. I consider that a CLASSIC macro design process.

OK.

See what I'm saying?

Sure. I understand.

Then just moving on, then, on the cash, the cash was around $84 million. Any plans for the use of that cash such as stock buy-back or potential acquisitions of other technologies? Or is there any plans for that, there?

Well, we've announced that we do have a stock buy-back plan in effect, so that's the only stated objective that we have currently in place.

OK, excellent. Now in terms of the growth in your-- growth in sales people, are you looking to add a few people in Asia? Is it 2 to 4, 4 to 6? What sort of numbers are you generally thinking of?

Yes, I think we want to, at a minimum, add an additional person in Japan, in Taiwan and Korea, so that's 3. And whether we want an FAE to be local with them in Taiwan or we run out of-- So we're in the 3 to 4 range of people.

OK. Now I noticed that your-- went back to the income statements for second and I noticed your gross margins went from about 80% up to 84% and that was despite the fact that the royalty revenues came down. And so I'm just wondering what caused the gross margin to come up there? Was there better pricing built into your licensing?

No, it's-- the larger contracts -- and there were two this particular quarter -- tend to have a little bit higher margin associated with them.

OK. Then, I guess, looking at your guidance from Q3 to Q4 it looks sort of flattish and-- but you were saying that with typical seasonality for royalties you might expect that to go up, which would, I guess, suggest that licensing would be coming down a bit. Is that the way we should think of sort of the way the mix will change in the next quarter?

Perhaps. I wouldn't say it would be materially different. But I would say, again, that we had $250,000 we were originally forecasting for the fourth quarter. It just happened that we were able to recognize it in the third quarter. So I think we-- on a normal basis we probably would have thought about our guidance or our revenues being higher in the fourth quarter than they would have been in the third quarter. It just happened that we had about these-- about $250,000 in contracts that came into the-- into the third quarter.

I understand. OK. Then, finally, on the UniRAM lawsuit, you spent a good deal on that last-- this quarter, with another, I guess, $125,000 or so to go next quarter. Is there-- I'm sorry, I guess, it's $250,000-- what was it? $125,000 next quarter? Anyway, what's the plan for 2006? Do you think that-- and what's the next stage of this process for UniRAM?

We had the claims construction hearing earlier in October and we're waiting for the judge's ruling on that matter. That's why for the past two quarters litigation expenses have been quite high. Again, I don't think that we would anticipate they would be nearly that high this particular quarter.

OK. So then in 2006 that should come down pretty materially?

Well, we'd hope that the judge would find-- draw the same conclusion that we don't think the claim has any merit. We'll just have to wait and see what happens.

Got you. OK. And this, finally, then. Is there any update you can give us on the competitive landscape, others out there that may be trying to mimic an embedded high-density memory such as your own or anything like that that we should be aware of?

It's Chet. No, I mean, I've only been here 3 months, but we haven't seen a lot of competition other than some companies attempting to try to do some things in house. But mostly it's off-board memories and so the real-- the only real competition is whether to leave it off board and try to optimize the system costs some other way or bring it on board. If they bring it on board, they're engaging with us.

OK. And I just thought of one last question and that is that I was wondering if there might be any other technology that you might be looking at outside of SRAM or flash DRAM in order to kind of broaden your product portfolio next year or is there any-- any projects going on internally that might help that along?

Well, we've mentioned that we're working on flash, as well.

OK.

But we're in the middle of that process, actually, this quarter, because this is our-- our annual strategic plan time where we get-- we build our '06 operating plan as well as the strategy for development. And so we're looking at a number of things. I think it's a little early to tell. We've got some debate going on internally. There are some interesting things we can do to extend and expand our technology reach. We haven't really decided how and how much on that yet.

OK. And would the flash technology be something that would potentially be introduced in 2006 or is it beyond that?

It could. It could. It depends on the-- it'd depend on the expenditure that we want to make.

OK. And will that-- is there any effect that we should see on R&D expenses as a result of the work on flash?

No. We don't expect any fundamental change. We're trying to get all these things done with our current budget, basically.

OK.

And that's where we're trying to optimize.

OK. I'm sorry for taking up so much time on the call, but thanks so much. I'll turn the call back to you. Thank you.

You bet. Thanks.

Nimal Vallipuram, Benchmark Company (ph).

Yes, this is Nimal Vallipuram. First of all, thank you for giving me the chance and also I would like to congratulate you, especially on the number of-- the number of new licensees you have increased in the third quarter over the second quarter. I would think that would act as a reasonably good leading indicator of how things might turn out going forward. Congratulations on that.

I have two questions. Number one is that on the increase of sales people, is it possible-- I guess the way I want to ask this question is that going forward as you add more sales people and given the inherent lead time in your business, is there a risk at all that your business model might change to some extent in the near term as you add sales people and only beyond an intermediate to a long-term horizon you would be able to get the benefit of incremental sales? Can you explain how that's going to go forward?

Sure. No, I think it's-- because we already are represented in these regions, typically we have a number of reps that we're paying a commission to close these deals. So adding sales-- adding a sales person in a country would actually mean we'll take some accounts over directly and we will pay the reps for those and then ultimately reduce the number of reps that we have. So we think it's actually going to be a net plus, but the strategic reason to do it is the size of the deals and the customer engagements, the interest level that we're seeing is getting very large in Asia and we need to have a direct presence, a direct connection to the factors, be able to negotiate these deals much more quickly than through a third party.

So, in other words, given your size right now you are using a particular channel, which are reps, and given that the interest in your products are going up pretty significantly and you want to change that existing channel-- part of that channel into a different channel, which would be direct sales people?

Correct.

OK. My second question is that-- and there are a number of questions. Going forward in 2006 and 2007, can you give us an idea in the memory IP market, how do you see the memory IP market evolving from your perspective? What do you see happening out there?

So I think-- I'll just elaborate a little bit on my earlier comment that what we're seeing now is a strong and definite movement toward larger blocks of embedded memory in these consumer devices. And in that drive, now, the real need because a 6T-SRAM consumes more power, it's bigger and so the die area goes up and the cost-- it's really forcing companies to look very deliberately at how they're going to address.

For example, if you take an mp3 player it now becomes a video mp3 player, you need much larger on-chip memories to do that-- to do that decompression and video buffering, for example. Even in a cell phone, when you go from a 1 megapixel camera they're now all going to 2 and 4 megapixels and even beyond. You need much bigger memories to do the JPEG compression, the image processing and handling this thing on the phone. So that's-- and that trend looks to be starting now and continuing and only getting stronger throughout all of-- all of next year, as I can see.

And just finally, if I may, historically one of the reasons-- one of the factors which has acted as a gating factor for semiconductor IP companies is that some of your potential customers who are large semiconductor companies tends to develop these things internally, even if they are not really successful at it. Do you see anything changing at the margin from that perspective, that some of these companies are incrementally more coming to the realization that they can actually on a cost/benefit basis that they can license technology like a memory IP from a company like Monolithic System? Or is it something you are still facing when you talk to some of the customers that they potentially want to do it-- continue to do that internally?

That's a very good question. Historically, the in-house capabilities of most major semiconductor manufacturers were-- were either conventional 6T-SRAMs -- they can do those very well, sometimes they licensed from a Virage or others, but they can do them well in house -- or DRAMs. And many tried to convert the DRAM knowledge to an embedded DRAM capability to take advantage of the density improvement over the conventional SRAM and failed. Embedded DRAMs just never really took off, but many companies attempted that.

But-- so as we move forward when the-- and memory sizes get bigger, they're really caught. They can't really use embedded DRAM. 6T-SRAM they can still use, but they're going to pay a cost and power penalty to do it. So they continue to try to optimize as much as they can. It's kind of like -- I'm old enough, unfortunately, to remember core memories and semiconductors versus silicon memory -- you can optimize to a point, but you're getting-- you're running out of runway and that's where they are right now.

So they had no choice but to look outside because the ability of a company to develop the know-how, meaning really the circuits, to do an embedded high-density 1T-SRAM, we've been at it 14 years. Even if you can navigate around the patents, which would be a challenge in itself, the know-how-- you don't have the time to do that any more. So they come to us.

But when you talk to your customers -- I hope this is my last question -- when you talk to your customers, without asking you for any confidential details of those discussions, are you seeing that some of the customers are seeing the market as you are seeing that they would like to-- they would be forced to go to the external IP vendors like Monolithic Systems?

I would say yes. I've been here roughly 3 months and I've visited a number of customers or prospects myself and I can tell you that virtually every call we're making -- and some of them, just because they're contacts I have in the industry and companies that have done business with us, they welcome us in the door. They want to talk to us. They're looking for solutions.

It's not the end of the world. They can pay a little more money and continue to use their conventional solutions -- sometimes pay a lot more money -- or they can try to make it work with off-chip memory, but here again, you have power issues and you have frequency issues to deal with. So they would rather not and given that we look stronger and stronger with our product offering, everybody's interested to talk to us. Whether they adopt us now or 2 quarters from now or a year from now, I think the trend is clear. They have to move in this direction.

All right, gentlemen. Thanks a lot for the time. I appreciate that and good luck.

Thank you.

At this time, there are no further questions in queue so I will turn the call over to Mr. Voll for closing remarks.

A final note before we end the call -- MoSys will present at the 2005 AeA Classic Financial Conference on November 8th and 9th at the Manchester Hyatt Hotel, room 802, in San Diego. We welcome everyone to visit us at the conference, but for those of you who are not traveling to AeA, our presentation will be webcast and available on our website at www.mosys.com.

Thank you for your continued support and your participation in this call.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.