Peraso Inc (PRSO) 2007 Q3 法說會逐字稿

Good afternoon ladies and gentlemen. We are now ready to begin the MoSys Third Quarter 2007 Financial Results Conference Call. At this time all participants are in listen only mode. We will be facilitating a question and answer session towards the end of today's Conference. (Operator Instructions) As a reminder this Conference is being recorded for replay purposes. And, I will now turn the call over to Beverly Twing, Shelton Group Investor Relations.

Thank you Michelle. By now everyone should have received the 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 results, I would like to remind you that 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 , 1T-FLASH or mixed signal technologies, licensees of 1T-SRAM technologies and their strategy, the development and production of products that use MoSys's licensed technology, license fees and royalties attributable to 1T-SRAM, 1T-FLASH and analog mixed signal technologies and the Company's anticipated or prospective financial performance.

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 Chet Silvestri, Chief Executive Officer of MoSys. Go ahead,

Thank you. Good afternoon everyone. Thank you for joining us today. I'll begin by providing some specific results for the quarter. Total revenue for the third quarter was $4 million. The royalty component of this revenue was $2.4 million compared to $2.2 million in the second quarter and $705,000 in the third quarter of 2006. Our quarter-over-quarter increases in royalty revenue are driven by multiple development projects that have entered production, such as a Nintendo Wii game console. With regard to our license revenue, license revenue was $1.5 million compared to $2.2 million in the prior quarter and $3.3 million in the third quarter last year.

As we have discussed on previous occasions, out strategy is to continue to focus our sales and marketing efforts on signing technology licenses with other major integrated device manufacturers or pure play foundries in order to increase the adoption of our technology and drive future royalty streams. Although this strategy requires a longer sales cycle, this approach allows us to leverage the resources of these major manufacturing licensees who are better able to secure large numbers of design wins using our technology. Based on feedback from our current licensees, we are aware of a number of design wins that have been secured, and some are already entering the production phase. These design wins cover a broad range of applications in cell phones, consumer devices, other gaming consoles and networking products as examples.

As a result of the efforts of our technology licensees, we expect quarter-over-quarter royalty growth to continue throughout 2008. However, also as a result of this strategy, we do not expect to see increases in our 1T-SRAM licensing revenue, as we are channeling most new macro development projects to our IDM and foundry partners. With this approach, we will no longer see the direct upfront licensing fees that we used to get with our former classic macro program. However, to reiterate, our primary goal in pursing this technology licensing strategy is to rapidly increase the number of new design wins incorporated in our technology and drive increases in our royalty stream. The upfront licensing revenue is a secondary objective. Again, this strategy only relates to our 1T-SRAM technology.

Now, I would like to comment on our newer 1T-FLASH and mixed signal technology. Our development program for our embedded FLASH is going forward as planned. We have seen working silicon at 130 nanometers and 65 nanometers, and the results in both of these geometries are meeting our expectations.

In terms of the recent Atmel transaction, the transfer of the technologies that we acquired is proceeding well. We have made progress in productizing as intellectual property the Blu-ray DVD and gigabit Ethernet products, and it's started to actively promote these implementations. We are seeing strong interest from potential licensees for all of these newer technologies. So for these newer 1T-FLASH and mixed signal technologies, we do expect to see incremental licensing revenue going forward.

Our licensing strategy for these newer technologies is also to focus to signing licenses at the advance process geometries as we have been doing with our 1T-SRAM. However, with these newer technologies, there are many more potential licensees that we are targeting, since we are just at the beginning licensing lifecycle for these technologies. We expect to see incremental licensing revenue from the 1T-FLASH and mixed signal technologies going forward and throughout 2008. At the same time, we don't expect to see significant royalty revenue from these newer technologies until 2009.

So the overall outlook for the coming year is to see significant royalty growth coming from our 1T-SRAM technology and the licensing revenue growth will come primarily from these newer technologies, 1T-FLASH and mixed signal.

Now I would like to turn over the call to Jim Pekarsky, our CFO, who'll provide you with a more detailed review of our third quarter financial performance. Jim.

Thanks, Chet. During the course of my comments, I will make several references to non-GAAP numbers unless otherwise indicated. Each reference excludes stock based compensation charges and a one time chare of in-process research and development and amortization of intangibles in connection with the acquisition. These non-GAAP financial measures and a reconciliation of the differences between them and comparable GAAP measures are represented in our Press Release and related current report on Form 8-K, which can be found at the Investor Relation's section of our website.

As Chet mentioned, licensing revenue for the third quarter totaled $1.5 million. It compares to $2.1 million in the previous quarter and $3.3 million in the third quarter of 2006. Royalty revenue for the third quarter was $2.4 million representing a 12% quarter-over-quarter increase. This compares the $2.2 million in the second quarter of 2007 and $705,000 in the same period a year ago. Royalty revenue increased during the third quarter primarily due to multiple development projects related to consumer game consoles such as Nintendo Wii. We believe our strategy shift has positioned us to continue increasing our royalty revenue on a quarterly basis as more high profile consumer products containing our technology reach volume production.

Under GAAP, the gross margin percentage was 83% in the third quarter compared to 84% in the previous quarter.

Operating expenses were $7.3 million in the third quarter compared to $4.9 million in the previous quarter and $7.8 million in the third quarter of 2006. Operating expenses included a one-time charge of in-process research and development and intangible asset amortization of $1.2 million related to the recent acquisition of intellectual property from Atmel Corporation, as well as $1.2 million of additional operating expenses related to the newly acquired engineering team.

On a non-GAAP basis operating expenses for the third quarter were $5.4 million compared to $4.3 million in the previous quarter and $7.1 million a year ago. Non-GAAP operating expenses exclude stock based compensation charges $894,000 and $1.2 million related to IPR&D and amortization charges related to our recent acquisition. Non-operating income including interest income totaled approximately $1.2 million and was consistent with the previous quarter.

On a GAAP basis the net loss for the quarter was $2.8 million or a loss of $0.09 per share and includes stock based compensation charges of $894,000 and the in-process research and development intangible asset amortization charge of $1.2 million. This compares to a net loss of $146,000, or breakeven per share in the previous quarter, and a net loss of $2.9 million or $0.09 per share in the third quarter of 2006.

Net loss per share for the quarter on a GAAP basis was computed using 32,274,000 shares. Now on the non-GAAP basis, which excludes stock based compensation charges of $894,000 and in in-process research and development and intangible asset amortization of 1.2 million, net loss for the third quarter was $766,000 or $0.02 per share. Net loss per share on a non-GAAP basis was computed using 32,274,000 shares.

With regard to the balance sheet, as of September 30, 2007, our cash, cash equivalents and long and short-term investments were $85.6 million compared to $87.6 million in the previous quarter and $87.1 million in the third quarter a year ago.

Cash expenditures during the quarter included $1.4 million for the acquisition of certain analog mixed signal designs and intellectual property from Atmel Corporation and the repurchase of common stock under the Company's repurchase program at a cost of approximately $641,000. In August of 2007, the Board of Directors of MoSys recently approved a one-year stock repurchase plan under which we continue to purchase shares from time to time on the open market subject to market conditions and other factors.

Accounts receivable at the end of the third quarter totaled $829,000 compared to $356,000 in the previous quarter. This increase is within our normal range of quarter-to-quarter fluctuation.

Now, with regard to guidance. We expect royalty revenue for the fourth quarter to continue to grow sequentially in the range of approximately $2.5 million to $3 million. Overall we anticipate total revenue for the fourth quarter to be relatively flat with the current quarter. In Chet's earlier comments he gave some very general outlook for 2008 in terms of what trends we expect to see in royalties and license revenue. We will provide more detail on the 2008 outlook at the next earnings call.

Now I would like to open the call for questions and answers. Operator?

Your first question comes from the line of [Bill Fraricks]. Please proceed.

Bill Fraricks. Hi, Jim. I was wondering if you could tell me how many shares you bought for the $641,000 please.

The exact number of shares I don't recall. It was--

Or the average price?

It was obviously the average has been in the six fifty range probably.

Okay. Very good. Thank you.

(Operator Instructions) And you appear to have no further questions, sir.

In the past we have had some complaints that people have trouble entering the star or whatever. So, are sure that there's no problem with any of that.

Actually we do have a question now from the line of [Matt Alcott] of Stanford Group. Please proceed.

Yes, I thank you for taking my call. I'm calling for Chris Chaney with a few questions. My first question is did you say you've bought-- you've done a stock buyback recently?

That's correct. And the Company purchased approximately $641,000.

$641,000.

Yes.

Alright. And you said-- will you be presenting at the AEA Conference?

Yes, we are scheduled to present at AEA. We put a Press Release out yesterday that has details.

Okay got you because we didn't see your name on the list but we'll go back to the Press Release.

Yes.

All right, regarding the 1T-FLASH royalties, for what applications are those? Are they for LCD drivers or--?

This is Chet. So the application, there's a fairly broad range of application for our embedded FLASH technology but let's call it two primary categories. One is the system on chip designers that are designing all sorts of consumer product chips that would-- that could, that incorporate some sort of-- or would like to incorporate some sort of embedded non-volatile memory. This is everything from cell phones to portable multi-media players to gaming devices, all of that kind of technology.

The other major category are microcontrollers. So in the former, the SoCs we are targeting with our FLASH are very much the same as SoCs that we target with our 1T-SRAM technology. It may be that both 1T-SRAM and FLASH are the same SoC or one and not the other, but it's the same general application. The additional market opportunity with FLASH is microcontrollers where our 1T-SRAM doesn't really play because the onboard volatile or SRAM memory sizes aren't large enough to really get an economic advantage. But they all have some sort of FLASH technology, which they would like to incorporate and so that is a primary target for our FLASH as well.

Okay. Has Fujitsu begun production on the first design yet?

We aren't typically authorized to disclose the detailed production plans of our licensees. We certainly have disclosed that Fujitsu is a licensee with multiple design wins they're working on. But beyond that we're not really in a position to-- they would have to do that.

Got you. Let's see. Now regarding your sales mix for Q4, can you elaborate a little bit more on that as far as license revenue versus royalties?

So the specifics we gave is that of the $4 million, approximately $1.5 million was license revenue and 2.4 rounding is royalty revenue.

Right, for this quarter, right?

For this quarter.

Right.

So are you talking about for Q4.

For Q4, yes please.

So for Q4 we gave a range. So you just have to do-- you know without giving a detailed range for all three elements, we said the range of royalties is $2.5 million to $3 million. And we have some visibility, but we don't receive royalty reports yet for Q4. It's too early. But we have some visibility. Then you would-- we expect overall revenue to be roughly flat. So, say 4 so you just subtract the difference in the range and (inaudible) or minus that is--

About 1 million, I guess-- 1 million in license revenue.

1.5 to 1 depending on whether royalties come in at the low end or the high end.

Got you. All right and can you tell us what percentage of royalties is Nintendo?

We don't disclose that, but we certainly said that Nintendo represents a large proportion of our royalties but you can look back and before Nintendo went into production last year we did have ongoing royalty streams.

Right I mean I guess assuming a number around 75% am I way too off or--?

Well, if you look, royalty revenues a year ago was around $700,000 average and so the primary increase was Nintendo. We, however, on a going forward basis the other licensees we're going to see other high profile design wins ramping as well, so on a going forward basis we will be a significant contributor but we'll also have others that will start moving in.

So, for example, the royalty growth we're projecting for Q4 over Q3 is more than just Nintendo growth. It's other applications, volume applications, going into production as well.

Of which some are at different stages.

Yes.

And how many DSMC customers are now using 1T-SRAM? Is it still around 12?

I haven't seen anything. You know they've publicly said they've got more than a dozen and ongoing they're heavily promoting their-- they call it embedded Dram program. I don't know the exact number today that they're disclosing but they have to do that that. We're not really in a position to disclose their business momentum but they said some things publicly obviously, their engagement with Microsoft X-box, a number of other things.

Any word on how many of those are in production?

Certainly more than one so there are several. We don't know because we don't have day-to-day visibility on who they're shipping wafers to. They only report to us quarterly and we have not yet received their Q4 royalty report, so we have visibility. There are some and we don't know how-- but there are more coming and we'll just have to see quarter-over-quarter. We still won't disclose that other than in general terms, right, because it's proprietary information to them.

And finally I guess, on the stock buyback what do you plan on doing with the cash?

Well we, you know, we retire the shares and I think it's just a program that was put in place for a year that from time to time the Company can buy back shares and the overall cash position of the Company, as you know, is still very good and we do not have any short-term plans with that cash.

All right. That's it for me. Thank you very much.

[Brian Cravitz] of Outpoint Capital.

Just a question about the royalty rate on the Wii, has that changed at all? It seems like that given what a-- how the Wii has been selling it seems like their royalty numbers are coming out a little lower than we had expected given the--.

The royalty rating, it's a fixed rate but it is a percentage of the selling price of the chips so to the extent there's any price erosion in the selling price of the chips the royalty, the absolute royalty dollars could go down.

Are you aware of a change in the pricing of those chips?

No, no.

Nothing right now?

No.

Okay that was my question.

James Apostelocus of Lexington Management.

First off I have a couple questions. Who are your main competitors in the markets you're competing against?

So this is Chet. The main competitor really for our 1T-SRAM and, in fact, for our 1T-FLASH technology is really separate memory chips. There is no way to put the kind of the memory sizes with the density and the economics that we can offer onto a single SoC so today most designs that are going into production with large memories, be they SRAM's type memories or FLASH non volatile memories, are using separate chips and they're paying for an extra memory chip and board space and power consumption but it can be done and they're shipping products based on that. So we offer the opportunity to integrate and shrink and that's why our focus on the advanced geometries like 65 nanometers and beyond, when you get to these small transistor sizes you can put such a large number of transistors on a single chip. The real desire of most of these SoC designers is to collapse everything to a single chip solution, so that's our value proposition. We allow you to do that. If you don't use our technology then you're probably stuck using multiple chips.

And I guess the real issue remains will they continue to choose to use multiple chips or at what point do they really start to believe that you have such a competitive advantage technologically that they switch over to you.

Yes and part of it's-- we believe that by focusing on signing these major technology licenses with very large manufacturing companies, integrated device manufacturers or foundries, they promote the technology and the customers feel very secure in getting wafers or chips integrated and shipped from these big companies as opposed to getting little MoSys to design something for you. So we think that's going to accelerate the adoption.

I guess I've got a couple of other questions. You said essentially you're switching from a license to a royalty model going forward.

Yes in a sense it's like in the past we have done individual design for many, many end, you know, established chip companies so to speak, the SoC designers themselves. We would do it, a memory design for it, give it to them and they would then go to their foundry partner, integrate the whole thing, get it produced but we would collect some up front licensing fee per use every time we did a design plus some non recurring engineering charge like a design service. And so there was some revenue coming from that but--

So you're talking about now effectively I don't know whether you're going to lose $1.5 million a quarter but how are you going to make up $1.5 million a quarter by a ramp in royalty so quickly to make this up so that at least we could think the 2008 is going to be better than 2007, which has been a fairly disappointing year so far?

Yes so we believe and you know with our guidance for even next quarter and the increases quarter-over-quarter that the royalty rates are substantially increasing quarter-over-quarter. That's point number one. But point number two, we haven't given up licensing revenue but because instead of charging a few hundred thousand dollars to do each one of these designs individually with an end user we charge we have said in excess of $1 million of a technology licensing fee to these major IDMs, so they pay substantial licensing fees but it's lumpy, right. And there's not hundreds of these guys so it's lumpy and it's limited into how many you can get but it transitions us we believe adequately. Now that's for 1T-SRAM. On top of it we have two other very compelling technologies, FLASH and mixed signal analog, which will go through the same life cycle, if you will. We're starting because now nobody has the technology license for those so everybody has to license it in some way or form and so that will super impose upon the 1T-SRAM licensing, right, up front licensing revenue from everybody because nobody has licenses today generally speaking.

Two other questions--

The aggregation we think is going to bode well for us.

What was your previous guidance for the year?

In January--

The last quarter you had given guidance but I was just trying to remember what it was.

Well, you add it up to about $18 million, $18 million to $19 million I believe.

So right now you're reducing your guidance to probably $16 million.

Yes.

Okay and then I guess my last question is you know we've got a pretty cheap stock here and it would be nice to see you, Chet, and the CFO here start to buy some stock. You know, if this is so great and we have this terrific future with all these potential adoptions, it would be nice to see management step up and buy some stock. The only thing we've seen out of management was constant seller over the years, so I would love to see you particularly step up and buy some stock.

I appreciate your point. It's well taken.

Because the rest of us are getting crushed because you keep on missing quarter after quarter, so it would be-- if you really believe that you're going to start to perform here, I'd like to see you step up and buy some stock.

Okay thank you for the input.

[Joel Acromowitz] of MDB Capital Group.

Chet, could you just define once again this-- I mean is what you're saying about the licensing with 1T-SRAM is that in a sense you're just now providing like perpetual licenses and that like an up front one-time perpetual license and then you're going to make up the difference in royalties ongoing?

Okay, so it's not what I think what we would normally think of as a perpetual license. We license our technology on a per process node but it is for all of 65 nan so they can do as many designs and tape out as many designs to customers as they want at 65 nanometer for whatever their up front license payment is.

Okay that's all I need to know because you're going to continue to basically book license revenue as they move down on the process curve.

Of course.

Okay that's all I need to know. The other thing is how are you going to track? Other people in the IP industry have had difficulty tracking royalty income. I mean with these big players you're a small player. How are you going to get visibility into that? I mean I am concerned about the ability to track a fragmented royalty revenue from these big players. Any thoughts in that regard?

Yes, Joel, it's Chet. So it's actually easier and we have already instituted this program over the past year, so we have audit provisions in all of our agreements and we typically at least one company per quarter perform audits every quarter and because our royalty streams are going to become more and more concentrated into fewer and fewer large companies, it's actually easier. We will hit them all at least once a year and check, right? And we pay attention. Now the other thing we're trying to do actually because we have good relationship with these licensees, is trying to get some metrics back from them so we can start talking about the number of design wins that have been implemented in our technology or the number of designs that are going into production, at least so there's an aggregate number because we used to in the old days when we had our classic macro program be able to say well we've 4, 5 or 6 new designs that we've licensed this quarter for individual implementations. We can't say that anymore because TSMC is doing it or Fujitsu is doing it or whoever but we would like to be able to still give metrics that in fact those numbers are much bigger but we're just not doing it. So we're working on that as well with that part.

Yes because it's a transparent system so you've got to-- I mean it's obvious when we have real blockbuster products like the Wii because you can get clear data on demand poll, basically hold the companies honest with regard to that so but I mean with some of these fragmented you get a major player like Fujitsu and TSMC and the like, they have fragmented customer demand pull that's difficult to track.

Yes but we talk to them and they could tell us and we're having discussions with them about how we can do that and use that to help our own business. They're cooperative. The other thing is that we have been reporting how many new-- how many companies are paying us royalties every quarter. We've got to revise that too because it isn't the sheer number. It's going to be large royalty payments from fewer and fewer companies as aggregators going forward.

I've got to ask this question, Chet and Jim, because it's important and that is that I mean with-- I don't expect the Wii to shut down in 2008. I mean I continue to hear or see extraordinarily bullish signs for that particular product. In addition to that though, you're also in the X-box. I mean you also mentioned about opportunities in DVD display technology, what I think is a huge market. I am doing a lot of work in mobile devices and the buildout and video on mobile devices, the expected long-term demand is huge. What really concerns me is the issue about valuing your Company right now when you don't give me any indication of some kind-- with any confidence factor or at least a range of what you're going to be doing in 2008.

Yes you know it's a little bit early. I mean we've got to do that whether we can do that this quarter or we wait until our normal earnings call. We're starting to do that now because we're really building up the models, right. We're in the middle of our annual planning process now because we're on a fiscal and annual year, which is the same. So we're going to-- we'd like to figure out a way to do that and we see some things and we're working with our partners in the models and analyzing what's happening but I think what you said is what we see, that the volumes keep increasing in each of the segments that we have been designed into. We don't see any of our current major volume platforms dropping off in any way but now the question is how many and when do the new designs come in and add to that.

Yes I mean the only positive thing I can see in your numbers this year are the fact that a significant growth in very high margin 100% royalty revenue, which is great. I mean that offsets the decline in license revenue. I mean I can kind of-- I can live with that but I mean I've got to be able to look out and project where we're going with it and as a Company it's moving forward, that we see what kind of trends in regression so that we can value the Company and what concerns me is if from an operating perspective you don't have at least some range at this point of where you're going. And I mean you've had this Atmel business now for a number of months now and you talked about giving us some clarity and color on the potential there. I mean you have mentioned in the past that the license opportunities will be significantly more than 1T-SRAM and that's encouraging but we've got to-- I mean somewhere down the line we need to know your confidence factor in being able to land some of these license deals.

Yes, so we'll take an action that, you know in the fourth quarter we will try to figure out a way to more openly describe where we think this business is going, what the outlook is. We can certainly do that.

You know, one of the things, Joel, too is that if you look back at the royalty revenue component this quarter it grew about 12% sequentially from the prior quarter and if you look at our guidance 2.5 to 3, that's like a 20% to 30% sequential. So there's obviously it's ramping at a faster rate than we're really able to quantify yet and that's what we're still trying to get our arms around but to be able to say for 2008 what will be the year-over-year increase we're still trying to obtain more information from our major licensees to be able to do that.

But I guess I would have to say that at this point in 2008 if your royalties are not at-- I mean at the minimum you'll flat with 2007 it will be a bad year.

But it can't possibly be that if you look at first of all what Nintendo has been forecasting in terms of their unit volume growth year-over-year.

Exactly.

And you can project whatever you want from Microsoft X-box and then factor in any other swag you might have for LCD display drivers or anything but just the two of those alone it can't do anything but grow substantially, right?

Yes and, of course, Joel I mean we're comfortable saying that our royalties revenues are, you know, we expect them to continue to increase quarter-over-quarter throughout 2008. We did say that. It's just quantifying what, how large, the increase is we're still trying to get our arms around and it's because-- I mean it's very highly concentrated coming from some very large IDMs that have a number of new customers and designs where a lot of this stuff is just hitting production and so getting that information back from them is still taking us some time.

It's hard-- it's easy for us to read publicly announced volume projections from Nintendo or Microsoft or Sony Play Station. It's harder-- you're not going to get those projections publicly announced from networking companies or cell phone companies or anything else for our particular designs, right, so we have to get that by individually discussing these projects with our licensees.

Well, we'll just look forward to getting more, as much data as you can on that going forward as soon as possible.

We're committed to do that.

Very good and last question just a housekeeping, Jim, is how many quarters are you going to be amortizing this Atmel acquisition in term of non-cash charges?

Yes there's about $2.4 million in total.

So maybe another couple of quarters?

It actually runs out about 3 to 5 years but the way-- the best way to think of it is it's an average around 200k per quarter.

Neil Goldman of Goldman Capital Management.

In answer to-- in reference to your last comment about quarter-over-quarter royalty growth in '08, you're talking about the first quarter should be greater than the fourth quarter?

Yes.

Okay so if we do three and it builds from there you're 2.5 to 3 in the fourth quarter. Number two, you haven't signed up all the foundries for iT-SRAM, have you?

We have not. There's still more to go and we are in active discussions.

But if you do isn't that-- that's going to be an upfront licensing thing for the iT-SRAM, okay?

Correct.

I mean so you're basically saying we're not counting on any of it but you expect-- you're in negotiations now to sign up some of these guys, right?

Absolutely and we've not said we expect 1T-SRAM licensing to be zero. We just don't expect substantial growth in it.

Okay I understand. Okay also just as a comment, you authorized what, about $19 million in a buyback?

Correct.

You know, with the stock being in the mid sixes, you should have been much more aggressive in the last quarter and I would expect you to be much more aggressive this quarter and really use that money, okay, if we're so under valued relative to the earnings power of this Company okay?

Absolutely and I mean that's why the plan was--

That was a major mistake of going out-- to go out and make a statement we're going to buy back $19 million worth of stock over the course of the year and you sit back and you buy $600,000, you know it's not like you're burning cash even with the acquisition you didn't burn cash, okay?

Yes okay.

So I would get really aggressive, okay? And in reference to all these other comments, I would really hope before year-end calendar '07 is that you come out with a forecast for calendar '08 based on your best knowledge at that time because you'll have a much better handle on the royalty streams and forecasts, okay?

Yes.

But just give a range. I mean if you know you've signed up 10 phone companies and they're projecting X to Y to Z in terms of their sell through in terms of product, you could at least have a range of that kind of application from your various foundries.

Yes.

And I really think it's important because otherwise people just lose faith here that the opportunity isn't as great as it's supposed to be.

We will take an action to have some way of deriving what we see as the outlook.

Okay, guys. Thank you.

[Terry Waite] of Sparta Asset Management

Let's see. I just had a question with regard to the number of licensees. Can you tell me what the number of licensees were for the third quarter and if you can give me any idea of what the number of licensees were, how many products those represent and if you have any thought on what they might be for the fourth quarter?

Yes well what we were doing is we were reporting out the number of licensees or projects that the licensing revenue came from on the quarter-to-quarter basis and like, for example, this quarter I think it was 14 different projects represented, the $1.5 million in licensing. The problem is on a going forward basis this is not a good representation. The actual number of licensees that we're developing because our either founder or IDM partners are capturing incremental licensees that is going to generate royalties for us but we don't have the visibility of reporting that okay?

So, for example, if I just interrupt you, CSMC a while back announced that for their ED RAM program, which is our 1T-SRAM licensing agreement with them, they had signed 12 licensees for that and this was a while back. So in our report we would count that as 1 but in fact it's 12 and maybe many more today, so that's what Jim is referring to, that of the 14 they would appear as 1 so it may be misleading in terms of how much penetration we have in the marketplace. Hence, an earlier comment I made that we're going to try to figure out a way to actually disclose the number of design wins, not just the direct licensing revenue payers to us.

Yes that's what I was kind of getting at is just if you had a guess as to what that-- my recollection was that it was 16 last quarter and so you're saying it's 14 this quarter?

That's right. Now from on terms of royalty paying customers it's 18, up from 16.

Up from 16 okay. All right and for next quarter do you have an idea of what that number might be?

No we don't. Now the one thing is that the number of royalty paying customers is going to trend to become more concentrated because there's historical fables semiconductor companies that on maybe some of the older geometries are paying most of the direct royalties because those were direct project licenses. They will transitioning over to TSMC, a wave of them, and so since TSMC will be taking all that royalty and paying it to us then the number of actual royalty paying licensees could go down for the ones that shift over to TSMC. See many of these royalty payers even today, but particularly last year, that we collected royalties individually from and made up the number of 18 are now, as Jim said, going to be purchasing their silicon directly from TSMC and TSMC is going to pay the royalty.

Because at 90 and 65 nanometer they're moving-- they're going to get their IP directly from TSMC.

They're our channel.

That's right and so and likewise the IDMs, i.e. NEC and Fujitsu, those are channels and so where historically NEC has paid the Company royalties on one single design win with Nintendo, NEC will be having other customers moving to volume production with our IP as a channel because at 65 nanometer we did a larger technology license with them.

Okay and just a housekeeping question, do you-- what is your guess for OpEx next quarter?

It-- because it's Q4 it will be slightly higher but not much higher. I mean there's end of year expenses but it would only be higher by a couple hundred K.

From this quarter?

Yes.

Okay and what is accounting for this rise in OpEx exactly, you know, from the last counting back four quarters, 4.6, 4.7, 4.9, 7.3?

Well, in the most recent quarter over the prior quarter it was predominantly all the additional expenses that we incurred from the acquisition of the engineering teams. Prior to that it would have been more head count related, particularly in engineering where over the last multiple quarters we've been building up a flash engineering team.

So it's all predominantly head count except for the transaction related expenses that we booked for the Atmel acquisition.

And even that is predominantly head count.

Yes.

Okay I guess I was looking at-- yes I thought it was a $1.4 million was related to an acquisition expense. I thought that was like a one-time item and then you said it would only be so--

Yes if you look at it from a non-GAAP basis where we proforma that out, it's about-- the incremental increase was roughly around $1.1 million, $1.2 million.

Okay.

And that was all related to the acquisition expenses, the incremental engineering teams that we took on.

Okay so you're saying about $200,000 higher than-- on a non-GAAP basis is what we should be thinking about?

Correct, correct.

Tom Hardin of [Camber]. Sir, your line is open. (Operator Instructions)

There may be a technical difficulty here.

Bill Fraricks of Renowood.

Do we have some problems with this line, Operator?

I am sorry, sir. I am not showing any. Mr. Struther, your line is open.

I have just three general accounting questions. We're trying to get a handle on 2008. When you receive an up front licensing fee, let's say in the first quarter of '08, do you take that into the first quarter revenue or do you amortize it over a given period of time? Secondly, will it be offset by earned out by royalties for the first couple of royalties? Let's say $1 million would be earned out by $1 million worth of royalties down the road. Third of all, when you receive a report on a royalty report from let's say a Nintendo, how long does it take for the actual sale to get into the royalty report? In other words, let's say they sell a chip in December of '07. They gather their revenues and they report to you when, in the second quarter is basically the third question? When do they report to you?

This is Chet. I'll talk about the royalties first and then go to the back. So we get paid royalties one quarter in arrears of the shipment of the chips so if the chip was shipped to Nintendo in December of '07 it will-- and NEC is the shipper of the chips to Nintendo, then NEC will file their royalty report with us in Q1 and we will recognize it immediately. Whenever the royalty report is filed indicating the number of chips they've shipped we recognize that immediately.

As reference to your question about licensing, we generally have two components of licensing revenue whenever we're engaged with a new customer and it's definitely customer dependent, depending upon what geometry we're working at but let's assume it's a new licensee at 65 nanometer. There generally will be a technology license and, of course, that could be recognized as incurred but there could also be an NRE component, particularly if we're-- if part of the arrangement is to work with the customer and assist in the porting of the technology to their process design rules. Then it would be an NRE component. There would be a time frame for that with probably project milestones and then the revenue would get recognized over those milestones, so if I answered your question, if you could understand some or a part of the revenue could be recognized up front with other parts of it being recognized over milestones if there is NRE involved. If there's no NRE involved, then it's purely a technology license. We're giving the customer full design rights, full read distribution rights. It's like a patent license. Then it's all recognized up front and that explains why our licensing revenue in previous quarters can be lumpy because we've experienced both type of arrangements in different quarters and depending upon those arrangements it's caused lumpiness in our licensing revenue.

And are they offset by the royalty streams in generally speaking?

Yes the royalty streams are obviously more linear in nature because these are regular production shipments that won't have the type of spikes in it and so if you look at our royalty revenue over the last several quarters they've been growing on a more linear basis and that is the trend that we see in the future as more and more of these large manufacturers have more and more products moving in the production volume.

Right and generally your license agreement structure is that the royalties, the first royalties, will offset the licensing fee. In other words, licensing fee will be recouped by the royalties?

No, no, no. The licensing fee is actually separate.

There's no prepaid royalties or any offsets whatsoever?

No.

Do you have a sort of general mix that you look at in terms of the up front recognition versus the NRE? There's the general mix that you can see a 70/30?

It depends on the-- the NRE is really determined by the number of man hours that our engineering management anticipates it will take to complete the job and then we apply a standard mark up to it and we actually in general quote that separately in the agreement, so it's all separately identified and it's backed up by actual work that we think we have to do.

Yes the NRE is more than likely related to a specific project where we are assisting them to get started where the technology license is sole and separate because it's the technology license is really a patent license that's giving them full design, marketing, distribution rights.

Bill Fraricks of Renowood. Sir, if your line is muted, please unmute. All right, that appears to be the end of the Q and A session. We'll now turn it back to Mr. Silvestri for closing remarks.

Okay well thank you all for your participation in our call. If you have any additional questions or you had some problems with your line in getting through, please feel free to contact us directly. Both Jim Pekarsky and myself will be available to discuss any other questions you might have. Thanks very much for your participation in this call. Operator, you may now disconnect this call.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a good day.