Peraso Inc (PRSO) 2008 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. We are now ready to begin the MoSys fourth quarter 2008 financial results conference call.

I will now turn the call over to Beverly Twing of Shelton Group, Investor Relations. Please proceed, ma'am.

Thank you. Good afternoon, everyone. I am joined on today's call by Len Perham, President and CEO, and Jim Sullivan, CFO. By now, everyone should have received the MoSys press release. However, if you haven't, it is available on the MoSys website at www.mosys.com.

Before we begin today's discussion of the fourth quarter and full year financial 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 MoSys' technologies, benefits and performance expected from use of 1T-SRAM and 1T-FLASH, licensees of 1T-SRAM technologies and their strategy, the development and product of products that use MoSys' licensed technology, license fees and royalties attributable to 1T-SRAM and 1T-FLASH, the Company's anticipated or prospective financial performance, and the timing and execution of restructuring plans and related cost savings.

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 and Quarterly reports on Forms 10-Q and 10-K, filed with the Securities and Exchange Commission. In particular in the sections titled 'Risk Factors', 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 Len Perham, Chief Executive Officer of MoSys.

Thank you very much, Bev. Good afternoon everyone, and thank you for joining us today. I am going to just make a few short remarks today, and turn it over to Jim for some financials, and then we will have a question-and-answer session at the end. I think I want to make about eight points total here in this opening.

The first point would be, of course, the macroeconomic environment is going to make 2009 and likely 2010 very challenging. We have had our share of push-outs or canceled projects, and expect more of these throughout 2009, and perhaps even beyond for a while.

My second point would be that we spent a lot of time talking about organization the past year. The organization at MoSys is now fine and normal, and changes and adjustments going forward would be only to allow to us execute our plan and strategic initiatives more effectively.

Point three would be the foundries, that is companies that manufacture silicon wafers are critically important to our success. We made great progress in our relationships with these silicon manufacturers in 2009, but much remains to be done. Strong emphasis will continue to be placed on improving these working relationships throughout this year, and into the next. Our success will depend on the ability of the foundry and the IP houses, such as ourselves, to integrate our solutions together, and as quickly as possible provide the critical SoC, or macro to our shared customer.

The IT-SRAM IP that we own continues to be very important and valuable. That is MoSys' intellectual property continues to provide the most cost effective highest performance solution to many of our customers' future product design challenges. This should provide us the opportunity to substantially grow our revenue this year, and going forward into the next.

In 2008 we confirmed that our application specific display driver is the solution of choice for many mobile Internet devices. As these mobile devices move toward more and more, and higher and higher performance graphics and video, our application specific solution should become even more appealing to the system architect. We tell people when they ask us that the WVGA level and larger, we have not lost a single opportunity at this time.

Point six, 2009 should be our year, our year for the Flash solution. We expect to gain significant traction with our 1T-FLASH in 2009. We represent a new technological solution, and as you might expect, the initial barrier to entry is a bit higher. However, late this quarter our beta site partner should start shipping prototype production. This coupled with our success at the 65-nanometer node and TSMC, should allow us to start winning business. Once it starts it should have a contagious effect. We are excited about our prospects in the Flash area, and it will get great attention in 2009.

Seven, we spent a great deal of time investigating the advantages and opportunities for our 1T-SRAM IP in 2009. The outcome of these investigations led us to serial memory. We are spending a lot of time studying this market, and the right products to serve it with. As 2009 progresses, you will hear more and more about serial memory at MoSys.

My final point for this morning would be we abandoned our efforts in the Blu-ray market in the fourth quarter fiscal year '08, and closed down our design centers in Shanghai and Romania. However, the Company continues to aggressively pursue business in the display driver 1T-FLASH, and now serial memory area. This is resulting in higher product development costs and driving us to continued losses.

In light of the current economy, continued losses are going to be unacceptable. We are studying these initiatives carefully. We want the Company to become profitable on a reasonable schedule, and you should expect to hear more about the progress we are making in this arena, as we move throughout the year.

That is all have I for this morning. I just wanted to be short and to the point, and I want to turn it over to Jim, and let you guys get a view of our financials in more detail.

Thank you, Len, and good afternoon everyone.

During the course of my comments I will make several references to non-GAAP numbers. Unless otherwise indicated, each reference will be to an amount that excludes stock-based compensation expense, in-process research and development expense, intangible asset amortization, and restructuring and asset impairment charges. These non-GAAP financial measures and the reconciliation of the differences between them and comparable GAAP measures are presented in our press release, and related current report on Form 8-K, which was filed with the Securities and Exchange Commission ,today and can be found at the Investor Relations section of our website.

With regard to the results for the fourth quarter, total revenue for the fourth quarter of 2008 was $4 million, comparable to the $4.1 million for the third quarter of 2008, and $1.1 million, or 37% higher than the $2.9 million recorded for the fourth quarter of 2007. In December we had preannounced our fourth quarter results, and indicated our revenues were expected to fall in the range from 3.8 to $4.1 million.

Royalty revenue for the fourth quarter was $3.1 million, compared with $2.9 million for the previous quarter, and $2.5 million for the fourth quarter of 2007, a 24% increase year-over-year. License revenue for the fourth quarter of 2008 was $859,000, compared with $1.2 million for the previous quarter, and $388,000 in the fourth quarter one year ago. The sequential decrease in license revenues in the fourth quarter was primarily attributable to the downturn in the semiconductor industry, as customers canceled and delayed projects. License revenue for the fourth quarter was recognized from 17 customers, flat compared to the prior quarter. Royalty revenue for the fourth quarter was recognized from 18 customers, also flat with the third quarter.

On a GAAP basis gross margin was 84% for the fourth quarter, compared with 79% for the previous quarter, and 72% for the fourth quarter of 2007. The gross margin improvement in the fourth quarter of 2008 was primarily attributable to the increase in royalty revenue, as well as lower cost of revenue, which decreased primarily due to the utilization of a $200,000 contract loss accrual recorded in the second quarter of 2008.

In term of our operating expenses in the fourth quarter, Research & Development expenses were $4 million for the fourth quarter, which includes approximately $430,000 in test chip tapeout expenses related to our 1T-FLASH products. The $4 million in fourth quarter R&D expenses was consistent with the previous quarter, and compares to $4.2 million for the fourth quarter of 2007.

Selling, general and administrative expenses were $3 million for the fourth quarter of 2008, compared with $2.6 million in the previous quarter, and $3.3 million in the fourth quarter of 2007. The sequential increase in SG&A expenses was primarily due to year-end audit and related compliance expenses. In addition, the third quarter of 2008 reflected the benefit of a $150,000 reversal of bad debt expense.

In December we announced and initiated a plan to exit our unprofitable analog mixed signal product lines, and expect to substantially complete the process during the first quarter of 2009. As a result of the product line exit, in the fourth quarter, we recorded charges of $2.7 million comprised of a $1.3 million restructuring charge, and a $1.4 million impairment charge for the acquired intangible assets.

We expect to incur cash expenditures of approximately $1.1 million in the first quarter of 2009 related to the exit activities. Upon completing the exit process including the shutdown of our China and Romania design centers, we will have reduced our headcount by approximately 90 employees. This product line exit is expected to result in approximately a $5.5 million reduction in operating expenses on an annualized basis.

We expect to incur an additional 100,000 to $300,000 of restructuring charges in first quarter of 2009 related to the exit activities, primarily related to lease termination costs. Total operating expenses were $9.8 million for the fourth quarter, compared with $6.8 million for the previous quarter, and $7.7 million for the fourth quarter of 2007. Fourth quarter total operating expenses included $1 million in stock-based compensation charges, $151,000 in intangible asset amortization charges, and $2.7 million of charges attributable to our exit from the analog mixed signal product lines.

On a non-GAAP basis, total operating expenses for the fourth quarter of 2008 were $6 million, a slight increase from the $5.8 million for the previous quarter, and a decrease from the $6.3 million for the year-ago quarter. Nonoperating income was substantially comprised of interest income and totaled approximately $217,000, compared to $391,000 for the previous quarter. The decrease in nonoperating income reflects lower interest rates earned on our cash investment balances, as well as foreign exchange losses on cash balances denominated in foreign currencies.

On a GAAP basis the net loss for the fourth quarter was $6.3 million, or $0.20 per share, compared to a net loss of $3.2 million, or $0.10 per share for the previous quarter, and a loss of $4.6 million, or $0.14 per share for the fourth quarter of 2007. In December we preannounced our fourth quarter results, and indicated our net loss was expected to fall in the range from 6.9 to $7.5 million. Our net loss came in lower than the range, primarily due to the restructuring charge being less than planned. The $3.1 million increase in our net loss over the prior quarter, was primarily attributable to the $2.7 million of charges recorded in connection with the exit of our analog mixed signal product lines, and the reduction in other income.

On a non-GAAP basis the net loss for the fourth quarter was $2.4 million, or $0.08 per share, excluding stock-based compensation, impairment of intangible assets, amortization of intangibles, and restructuring charges totaling $3.9 million. Net loss per share on both a GAAP and non-GAAP basis for the fourth quarter was computed using approximately 31.6 million weighted average shares outstanding.

Looking briefly at our results for the full year 2008, total revenue for the year was $14 million, compared to $14.3 million for 2007. License revenue for the year was $3.2 million, compared to $5.3 million for the previous year. The year-over-year decrease in license revenues was primarily attributable to a decrease in licensed revenues from a major IDM customer.

Total royalty revenue for 2008 increased approximately 20% year-over-year to $10.9 million, compared to $9.1 million for 2007. The year-over-year increase in royalties was primarily attributable to an increase in royalties associated with the Nintendo Wii game console, and an increase in royalties from a major foundry customer.

Now turning to the balance sheet, as of December 31, 2008, our cash, cash equivalents and short and long term investments balance was $67.5 million, compared to $72.1 million at the end of the previous quarter. The $4.6 million decline from the prior quarter in our cash and investments balance, included approximately $1 million of stock repurchases, and $300,000 of unrealized investment losses. Operating cash expenditures of approximately $3.2 million during the fourth quarter of 2008 were primarily attributable to our operating loss.

During the fourth quarter we repurchased approximately 275,000 shares of our stock, at an average of price per share of $3.55. Through last week we had repurchased a cumulative total of approximately 700,000 shares, and have approximately $3 million available under the existing share repurchase program. At this time, we have suspended our repurchase activity to preserve cash during this period of worldwide macroeconomic uncertainty. As we have previously discussed our investments consist of money market funds, government agency and municipal debt securities, corporate notes, commercial paper, and student loan backed auction rate securities.

In November 2008 we entered into a settlement agreement with UBS to provide liquidity for our auction rate securities. Under this agreement we have the right to sell the auction rate securities to UBS at any time during the period from June 2010 to July 2012 at par value. Prior to June 30th, 2010 UBS can redeem the securities at par value at its sole election. Additionally, the auction rate securities are sill subject to redemptions by the underlying issuers at any time.

As a result of this settlement agreement, we no longer have the intent to hold the securities until maturity, and the sale of the securities to UBS may occur before the markets for these securities recover. Therefore we have changed the classification of the auction rate securities to the trading securities category, and reversed the unrecognized losses previously record to stockholders equity. Accounts Receivable at the end of the fourth quarter totaled $688,000, compared to $550,000 as of September 30th, 2008. The increase in Accounts Receivable was primarily attributable to the timing of invoicing for a major IDM customer.

As of December 31st our total headcount was 191 employees, and is consistent with the prior quarter. We were reducing our headcount by more than 90 positions in China and Romania as a result of the analog mixed signal product line exit. Additionally during the first quarter we eliminated certain SG&A positions in Sunnyvale and in our Japan sales office, to right-size certain parts of our organization. We anticipate recording the majority of the associated severance expenses related to these headcount reductions in the first quarter of 2009.

This concludes my prepared remarks. At this time, we would like to open the call for a question-and-answer session. Please clearly state your name and company affiliation prior to asking your question. Operator?

Thank you. (Operator Instructions). Your first question comes from line of Larry Litton from Second Line Capital Management. Please proceed.

Hi, Len. Hi, Jim.

Hi, Larry.

Maybe some questions in reverse order. I just want to check my arithmetic with you, or check what you are saying. I mean basically you're talking about cutting the pro forma expense down to about $4.6 million, once you kind of get past the first quarter? Is that right?

More, Larry, I guess when I take, say looking at the loss for the fourth quarter, back out the non-GAAP adjustments, stock-based comp, the restructuring charges, et cetera, and then take out the portion of restructuring, were eliminated kind of more in the range of between $5 million and $5.5 million, call it $5.25 million for the fourth quarter.

Okay. I guess what I am thinking, you talked about a $5.5 million reduction on an annual basis in operating expenses, and that is $1.4 million per quarter, and I thought the pro forma expense is $6 million in the fourth quarter. So I was just looking at 6 minus 1.4 to get me to a pro forma expense going forward.

It was about 6.5 for the fourth quarter when you take out the 1.4. It was about 3.8.

Yes. Also taking out the stock-based compensation.

You need to in the cost of goods sold perhaps. I am not sure --

Okay.

That is the extra 600k. That is how I got my call it 5.25.

Okay. I am sorry. Therefore the breakeven level you are hoping is around $5.5 million of revenue per quarter?

Based on those numbers, that would be correct, yes.

Okay. And then is Len saying that you guys are going to work hard to try to bring that down even further, or you will be happy with that as an interim or intermediate goal?

Larry, this is Len. My intention is to attack it from both sides, both from the revenue side, as well as from the cost side.

If I would have lengthened my remarks today, we are moving now to create a business unit responsibility around each of the product areas that we serve, so that we can track allocated resources, project scheduling, project costs and we are looking at each one of the business areas for a return on investment analysis.

So we are going to be in the next quarter, quarter and a half or two, being able to rate each one of these product areas, and my comment that in this current economy, and no certain time when it is going to become boisterous and steeply ramping up again, we are going to move to attack both revenue and costs, and get the Company so it is operating in the black.

Okay. So you are alluding to the fact that if I look at the three or four legs to the stool currently, you are still going to assess whether we are going to keep all those legs?

We are going to assess what the long term ramifications of each one of them, and which is the best way to go to the market, and should we change our model for how we handle, say display driver versus 1T-FLASH versus 1T-SRAM.

Okay.

And so it isn't necessary that we would abandon them, but maybe we just take it to the market in a different way that would be more fruitful for us in the long term.

Okay. So for example, you could partner them as opposed to doing as much work in-house or something?

That would be correct.

Okay. And did you also say, Len, that basically you are suggesting that revenues will be up in '09? I mean you said something to that effect, but I don't want to put words in your mouth.

No actually I am going to make a couple of remarks at the end, and you have anticipated one. In spite of the tough year, we are expecting that it should be, we are expecting our plan to be an up year for the Company.

So carrying that forward I realize there are some one time, maybe we will take them in account but you got one-time cash charges in the first quarter, but it would be nice to exit this year with no less than $5 million of total burn, or something like that? Is that a fair goal?

It is something we are certainly striving towards, Larry. I mean subject to one of the challenges of the business is just timing of our license agreements, and as far as the development services required, certainly in this market, as Len mentioned in the internal plan we have put together we have been very conservative in cash collections and timing. A lot of our customers have 60 day terms. The challenge for us is most of our expenses, you know, when you look at it from an operating expense and COGS standpoint are people related, so we obviously have no terms on those.

Right.

But certainly I would like to see it, you and I have had conversations in the past, certainly be below $5 million, and part of it is a function of just timing of what comes in. As I did mention, we have already spent $1 million so far to date in the quarter on stock repurchases. So you would need factor that in as well.

Right. That is my next question. You said you suspended the repurchase, I understand we are in the middle of a depression, or something close to it, but by the same token you have some control over the business, both on the revenue and expense side.

You have some view, and it's not like we are sitting on $15 million of cash, or $20 million of cash, or $30 million of cash, or $40 million of cash, we are sitting on $65 million or $70 million of cash, given the valuation, given that we are trading below cash, I am not advocating the position, I am asking the question, why suspend the repurchase program at $2 a share, why not feel very comfortable spending $10 million?

There was a fair bit of discussion about that at the Board meeting, not on that specific point, but on the point of looking at each one of the business units in more detail. And where we came away was we don't mind suspending; we are not going to cancel our program. We still have available money allocated to it. We are just going on a hold for a moment. There are a lot of opportunities to do something that would be synergistic and strategically great for the Company coming onto our horizon.

We haven't found anything that is particularly great for us, but in the event we found something that could be accretive to the Company, strengthen the portfolio of products we have to sell, give us something that would be critical to directions going forward. We might find that more desirable than buying securities.

Okay. Last question, just give me the milestone for the Flash technology in 2009, or even 2010? What should we hold you accountable for in terms of delivering milestones?

It seems to me it is kind of hard on a call like this to set my own engineering milestones, but let me say that we are optimistic that our beta site customer is going to start shipping product. We are optimistic that we are going to get to the, and that would be not just shipped prototype production, but start being a major factor. I may have mentioned in my remarks that we are a new solution, in terms of a patented 1T-FLASH hasn't been used before, so people always want to be comforted that they are not the first guy to use it.

So we really need this beta site guy to be a success, and we have worked hard to support him, and we have worked hard with our foundry to get their technology to be spic-and-span, and ready to go. So we would like to see him ship prototype samples late this quarter as he is anticipating. We would like to see him shipping more production next quarter. We would like him to become a reference sell for us.

We have made very, very good progress with our 65-nanometer work over at TSMC, and we would like to book some business at that scaling node. So what we would think is that we would hope our beta site starts shipping real production, becomes a reference sell for us, that we do bring the 65-nanometer node into reality, and available for potential customers to use at TSMC, and we would like to think we will book one or two orders before the year-end, and kind of go into 2010 with the same kind of opportunity that we came into 2008 with on the display drivers, Larry.

Okay let me piggyback a final question on that, and then I will get back in line, but why won't we have the same experience with Flash as we had with 1T-SRAM, where we brought it to market with Nintendo. We have proved it out. It is validated, et cetera, et cetera as well, as all kinds of other applications, yet everyone is scared to utilize the technology because it is still unproven?

So here you are talking about it seems like an analogy with the Flash. You get one beta site ship shipping, and you are hoping everybody uses that as a reference site and is very comfortable with it, but the experience with the 1T-SRAM in spite of having reference sites, production, et cetera, et cetera, nobody gets comfortable with it anyway?

Actually I think that the experience that we could have with the 1T-FLASH, would be quite like the experience that we had with the 1T-SRAM. In the early days of the 1T-SRAM there were a lot of business came toward the original founders of the company, say back in 1998, '99, 2001, something like that, maybe 2002, '03, where the big foundries wanted to have the help to become, I am going to call it construction literate with 1T-SRAM. We are seeing some of that now.

We didn't say much about it today, but we have had a very prestigious end user subsidize us on our Flash at the 32-nanometer node, and we have got another guy subsidizing us, meaning that they just want to get it onto their shuttles. So we have got two or three very prestigious users looking at this and wanting to work, intervene between us and the foundry, to accelerate us to some goal line. It could be that we will experience a similar behavior that the 1T-SRAM gave to the company back in the early 2000 period, and we probably will know that by the end of the year, Larry.

Okay. Thank you very much.

Thank you, Larry.

(Operator Instructions). At this time there are no questions in queue. I will now turn the call back over to Mr. Perham for closing remarks.

Yes. Thank you, very much, operator. I only have a couple of comments I want to make. First off, Larry hit on it. My first point would be that we are expecting in spite of the tough economy an up 2009 for the Company.

And my second point would be, as Jim mentioned, we will absorb some residual costs for our shutdown of Romania and Shanghai in this first quarter, but the second quarter should be fairly clean, and give us a chance to establish through what I am going to call the new going through forward run rate.

And my third point would be that it is difficult to see how much visibility into today's quarter, the first quarter fiscal year '09, with all the pushouts, cancellations and anxiety attacks that potential partners and customers are having. However, we are pursuing a plan right now, that we would expect to be maybe flat to up on this quarter. There is a lot to be done and there is some uncertainty, but we aren't expecting to take a bath here. There is lots of business. We are pursuing lots of opportunities, and we are paying a lot of attention to each of them.

So I am going to hang it up now. Thank you, operator. Thanks, everyone, for coming on the call. I am sure I will be talking to you here and there along the way, and be assured we are at work and paying attention to the Company. Thank you, very much, and good-bye.

Thank you for your participation in today's conference. This concludes your presentation. You may now disconnect, and have a wonderful day.