Peraso Inc (PRSO) 2009 Q3 法說會逐字稿

Good morning and welcome to the MoSys third quarter 2009 financial results conference call. At this time, all participants are in a listen-only mode. At the conclusion of today's conference call, instructions will be given for the question-and-answer session. If anyone needs assistance at any time during the conference call, (Operator Instructions). As a reminder, this conference call is being recorded today, Tuesday, October 27th, 2009.

I would now like to turn the call to Beverly Twing of Shelton Group, the investor relations agency for MoSys. Beverly, please go ahead.

Thank you, Jonathan, and welcome, everybody. I realize we're starting a couple of minutes late and we appreciate your patience as we were waiting for our 8-K to clear.

Joining me today on today's call are Len Perham, MoSys' President and Chief Executive Officer, and Jim Sullivan, Chief Financial Officer.

By now, everyone should have received the third quarter press release. However, if you haven't, you can find it on the MoSys website at www.MoSys.com. Before we begin today's discussion of the third quarter financial results, I would like to remind everyone that this conference call will contain forward-looking statements based on certain assumptions and expectations of future events that are subject to risks and uncertainties.

Such statements are made in reliance upon the Safe Harbor provisions of Section 27A of the Securities Act of 1993 and Section 21E of the Securities Exchange Act of 1934, which include, but are not limited to, benefits and performance expected from use of the Company's embedded memory and interface technologies, expectations concerning the Company's execution and results, projected improvement of operational efficiencies, anticipated expense, and revenue synergies from our recent acquisition of Prism Circuits, predictions concerning the growth of our business and our markets, our future business prospects, the estimated cost savings from restructuring plans and any other statements of plans, strategies, objectives, expectations or beliefs.

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 and quarterly report on form 10-Q filed with the Securities and Exchange Commission, in particular in the section 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 if new information becomes available or other events occur in the future.

Thank you for your attention and, again, we apologize for the delay. I will now turn the call over to Len Perham, Chief Executive Officer of MoSys. Len, go ahead, please.

Thank you, Bev. Good afternoon, everyone. Thank you for joining us today. I'll start the call with a few short remarks and then we'll pass the call on to Jim for a discussion of our financials, and after that we'll open up the call for a few questions. Then at the end of the question-and-answer session, I'm going to have a few closing remarks. So that's the agenda for this afternoon.

With regards to the macroeconomic climate, during the third quarter we began to see improvement in the macroeconomic environment, and I expect it to continue for the remainder of 2009 and on through 2010. The high tech industry is one leading-edge driver of the economic resurgence that we're all seeing happen here slowly. In this environment, I am optimistic about future opportunities for MoSys as we position the Company for growth and profitability.

We're anticipating a modest and continuing high tech recovery through 2010 and 2011 and it is our intention that MoSys be well-positioned to benefit as the market turns around. We have always believed we could start to make sense of MoSys in 2010 and we are positioning the Company for that eventuality.

Strength in the MoSys-Prism integration is already contributing. I'm very pleased with the progress we made in the third quarter; and while the improved environment helped, I'd characterize the improvements in our business as the result of the new MoSys serving a larger total available market with our expanded memory and interface technology offerings. This was the first full quarter after our acquisition of Prism Circuits and we are already seeing it contribute via a significantly expanded total addressable market. Additionally, it has accelerated our growth opportunities in the networking and communications markets.

In the third quarter, our total revenue increased 70% sequentially, driven by strong growth in our license revenue, which increased threefold sequentially, and was up 11% over the quarter three of last year. This growth was further driven by contributions from the high speed interface IP from our acquisition of Prism Circuits.

As I've discussed in the past, I see networking and communications applications as the largest strategic growth area for MoSys going forward. The explosive demand for Internet and bandwidth is driving the need for significantly more memory and extremely fast access to that memory. As the processor cores used in these advanced systems have become faster and faster, the lack of substantial performance increases in memory has become a bigger and bigger problem. In short, memory performance has become a major system bottleneck. Here at MoSys we call it the bandwidth barrier.

Our 1T-SRAM memory IP is a perfect fit for this application. Its advantage is that it provides three times the density and half the power consumption, coupled with very high speed and very low latency. Additionally, the 1T-SRAM cell is dramatically less sensitive than the 6T-SRAM cell to soft error rate problems. This physical limitation of the 6T-SRAM starts to become unacceptable at the 40 nanometer scaling node and smaller in most enterprise-grade systems. This gives our solution a compelling advantage over 6T-based solutions.

In addition to the need for very dense, very fast memory, next-generation networking, systems are being designed with very high-speed serial interfaces, or IOs, called SerDes -- serialized/deserialized -- that run at 10 gigabits per second or even faster. This is exactly the area of strength that Prism brought to MoSys. Our 1T-SRAM embedded memory, together with a high-speed SerDes interface from Prism, provides a very compelling solution for the network and communications markets' ever-increasing need for higher speed and more bandwidth.

I am pleased to report that we added two new customers during the quarter in the network and communications markets, both of which are adopting our high-speed SerDes IP. Our goal is to become the partner of choice for our customers' high-speed interface IP by exceeding their expectations.

Early in the fourth quarter, we booked a follow-on project from one of these two new customers. The combination of MoSys and Prism is already contributing in meaningful ways to our business and has significantly improved the positioning of MoSys to exploit the growth opportunities that we see ahead.

We also see good opportunities in our memory IP business. In early quarter four, we signed a significant technology agreement for a 1T-SRAM solution with a major Japanese IDM, which is also another new customer to MoSys. The license is initially for a display driver IC or a display driver application, and it may expand to additional applications in the future.

Let me give a short update on our 1T-FLASH. During the quarter, we continued to make progress in the development of our 1T-FLASH, working closely with our initial foundry partner. While I remain very optimistic about this technology, it will take the first half of 2010 for us to have a solid assessment of this technology and its total breadth of applicability.

In summary, I am very pleased with the progress we've made this past quarter. We've integrated the Prism and MoSys teams and merged them into a new, unified, formidable team which is already providing a meaningful and positive contribution to our business.

Total revenue and license revenue are both up significantly over the last quarter. We've added two new high-speed SerDes customers in our target growth areas of networking and communications and we've signed a major 1T-SRAM technology license with yet another new customer.

I am confident that MoSys is well-positioned with a strong balance sheet, a stronger product portfolio, and expanded market opportunities to drive additional growth and future profitability.

At this point, I'm going to pass the call to Jim for a discussion of the financials, and then at the end of the question-and-answer session I'll have a few closing remarks. Thank you very, very much.

Jim?

Thank you, Len, and good afternoon, everyone. We appreciate your time today.

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 includes stock-based compensation expense, intangible asset amortization, restructuring, and acquisition-related 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 third quarter, total revenue for the third quarter of 2009 was $3.4 million compared with $2 million for the second quarter of 2009 and $4.1 million for the third quarter of 2008.

License revenue for the third quarter was $1.3 million compared to $306,000 in the previous quarter and $1.2 million in the year-ago period. License revenue is recorded from ongoing projects as well as from two new serial interface IP license agreements related to our recently acquired technology from Prism Circuits. License revenue for the third quarter of 2009 was recognized from 14 licensees compared to 15 in the previous quarter.

Royalty revenue for the third quarter was $2 million compared to $1.7 million for the previous quarter and $2.9 million for the third quarter of 2008. The sequential improvement in royalty revenue was primarily attributable to an increase in royalties from an IDM licensee whose SOC contains our 1T-SRAM memory and is used in a popular gaming console, as well as increases in royalties from a major foundry partner.

During the second quarter, our IDM licensees substantially completed the transition of its SOC to a more advanced process node and is now paying royalties on its advanced process SOC a quarter in arrears. As a result, our royalty revenue from this IDM licensee increased significantly in the third quarter.

Royalties increased from our foundry partner due to an increase in shipment volumes. Third quarter 2009 royalty revenue is recognized from 14 licensees, which is the same as the previous quarter.

On a GAAP basis, gross margin was 80% for the third quarter of 2009 compared with 86% for the previous quarter and 79% for the same quarter a year ago. The sequential decrease in gross margin was primarily due to customization and development costs associated with the higher license revenues recognized from our interface IP projects.

In terms of our operating expenses for the third quarter, research and development expenses were $5.7 million compared to $4.1 million in the second quarter of 2009 and $4.2 million in the year-ago quarter. Research and development expenses in the third quarter of 2009 included $643,000 of expense for amortization of intangible assets. The increase over the prior quarter was primarily attributable to additional expenses related to the Prism interface team and technology, which were acquired in June 2009, and part of MoSys for all of the third quarter.

Selling, general, and administrative expenses were $2.2 million for the third quarter of 2009 compared to $2.5 million in the previous quarter and $2.6 million in the third quarter of 2008. The sequential decrease in SG&A expense for the third quarter of 2009 was due primarily to the reduction in acquisition-related transaction and costs incurred last quarter.

Total gap operating expenses for the third quarter were $7.9 million and included $1.1 million of acquisition-related costs, including $643,000 of expense for amortization of intangible assets and $488,000 related to the retention components of the acquisition earn-out, which will be a recurring quarterly expense through the second quarter of 2010, as well as $835,000 in stock-based compensation expenses.

Third quarter total GAAP operating expenses of $7.9 million compares with $7 million in the second quarter of 2009, which include the $748,000 in stock-based compensation expense and approximately $1 million in restructuring and acquisition-related costs. Third quarter 2008 total operating expenses were $6.8 million.

On a non-GAAP basis, total operating expenses for the third quarter of 2009 were $5.9 million compared with $5.2 million for the second quarter of 2009 and $5.8 million for the third quarter of 2008. Non-operating income was substantially comprised of interest income and totaled approximately $139,000 compared with $151,000 for the previous quarter and $391,000 for the third quarter of 2008.

The decrease in non-operating income reflects lower interest rates earned on lower cash and investment balances combined with foreign exchange losses on cash balances denominated in foreign currencies.

On a GAAP basis, the net loss of the third quarter was $5 million or $0.16 per share, including $925,000 in stock-based compensation expense and $1.1 million of acquisition-related costs. This compares with a net loss of $5.1 million, also $0.16 per share for the second quarter of 2009, which included acquisition-related charges of $611,000, stock-based compensation of $788,000, and a restructuring charge of $431,000.

On a non-GAAP basis the net loss for the third quarter was $3 million or $0.10 per share, which excluded acquired intangible asset amortization, acquisition-related expenses, and stock-based compensation totaling $2.1 million. This compares to the non-GAAP net loss of $3.3 million or $0.11 per share in the previous quarter, and a loss of $2.1 million, or $0.06 per share, in the year-ago period.

Net loss per share on both a GAAP and non-GAAP basis for the third quarter was computed using approximately 31.2 million weighted average shares outstanding.

Now turning to the balance sheet, as of September 30th, 2009, our cash, cash equivalents, and investments balance was $42.7 million compared to $45.4 million in the previous quarter. As we've previously mentioned, our investments include money market funds, government agency and municipal debt securities, corporate notes, and student loan-backed auction rate securities.

The auction rate securities have a face value of $9.1 million, which can be put back to UBS at par on or after June 30th, 2010, under the previously disclosed settlement. Cash expenditures for the third quarter were approximately $2.8 million. Accounts receivable at the end of the third quarter totaled $1.3 million compared to $1 million as of June 30th, 2009. The increase in accounts receivable is primarily due to the timing of invoicing, primarily related to the achievement of milestones on interface IP projects.

Unbilled contract receivables of approximately $1.1 million represent future billings under customer contracts assumed by MoSys on the acquisition of Prism. As of September 30th, our total head count was 140 employees as compared to 134 employees on June 30th, 2009, and 191 at December 31, 2008.

The sequential increase was primarily attributable to headcount growth in our engineering team located in Hyderabad, India. The head count growth was partially offset by a 6% reduction in head counts in our Sunnyvale locations. These changes in personnel better align our staffing with requirements of the combined companies and our future needs.

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 questions.

Operator?

(Operator Instructions).

Your first question comes from Salomon Kamalodine. Please proceed, sir.

Hi, I'm with B. Riley. I wanted to get an update on your R&D head count in the quarter.

Sure. As of September 30th, our total head count was about 140. About 80 percent of that was engineering and R&D related, so about -- call it 110 heads with the -- about -- of that, about 40% in India and the rest here in Sunnyvale.

Okay, and can you just help me understand why the Company needs that much in the way of R&D to support $3 million in revenue? Maybe there's a really good reason for that. I'm just trying to understand the dynamics of the way you need to have that degree of R&D support for that kind of a revenue level.

Actually -- I'm Len Perham -- the question you raise is a valid question. I think that it takes a certain base of engineering to be in the IP or IC business, and when you go below that, you sort of approach what I call stall speeds. And if you start cutting out other than fat and you start taking muscle and bone out, you end up with less than you need to have a viable company.

So when I joined the Company in the beginning of 2008, the revenue was rather small compared to the manpower. We took a look, we cut back what we could. The fact of the matter is we needed to think about how to take the IP that we have, and as we went forward, of course, we had the good fortune to merge together with Prism Circuits and be able to offer a wider span of IP to our SOC customers.

But we need to increase our revenue beyond where it is today. It's not really a practical thing to cut bone and muscle out of the Company. I don't think that's a viable solution and perhaps if you'd been on the very early calls -- and that's not a criticism at all -- I said when I got here that you wouldn't hire me to shut the Company down and you wouldn't hire me to cut costs to make profitability. You would hire me if you wanted to have a strategic plan that took the Company to a better place.

It's our intention to get to that better place and if it appears we have a little bit too much engineering, we do for the revenue, but the objective of the game is to fix the revenue, not to murder the costs. So that's an answer, sir.

Okay. What type of revenue level would you be happy with, given the Company's cost structure at this point?

Well, if we talk about that for a minute and we say that we made an acquisition of Prism, if we assume that in order for an IP company to be doing business in the IC business in this day and age, the SOC creator or developer, he needs a microprocessor IP, IO/IP, analog IP and memory IP -- those are the four major pieces of an SOC or a complex ASIC.

So with the acquisition of Prism we moved from providing one of those to providing three of the four, which would be analog, IO and memory. So we have a wider product portfolio to offer our customer base now, and the customer likes to not buy from too many people, so this advantages our business to -- our opportunity to do business with him.

I think, initially, the only thing that makes sense in a company is to be cash flow positive and after that have the P&L be in the black. It looks to me, and Jim could give us a sharper pencil answer, that it takes about $7 million a quarter for us to break even on the balance sheet in the P&L, they're close to one another.

So the first place we want to get to is to generate cash, and we've told our investors and shareholders that we thought we should start making sense out of the Company by the middle to the end of 2010. And making sense of the Company is very simple to me. It's that you start generating cash instead of reducing it.

Then to go further with your question, we have a few things in mind and we touched on it vaguely in the wording of our discussion today, that our IP, that is analog and IO, and 1T is very valuable to people that buy IP, but the integration of our IO/IP and our memory IP, the integration of those two, cleverly arranged, can possibly enable the creation of a dramatically important solution to next-generation system problems.

So if you ask me what I would like the Company to be leaving 2010 and going into 2011, I'd like it to be generating cash. If you ask me where I want the Company to be at the end of 2012, it's got a dramatically bigger revenue stream reflected in revenue and profit and also in shareholder value, and I think we're going in the right direction to make that happen.

Okay. Thanks for taking my questions.

Thank you, sir.

(Operator Instructions). At this time, we have no questions. Mr. Perham, would you like to proceed, sir, with your closing remarks?

Yes, I would. So thank you, Operator, I do have a few closing comments I'd like to make. First, we've completed the integration of Prism Circuits and begun to realize the measurable benefits from this strategic acquisition. Business for our interface IP is ramping and we anticipate continued revenue growth from this technology as we further penetrate our expanded target markets.

Second, we have expanded and integrated our engineering resources. As a result, we are working closely with our customers and foundry partners, and have made significant progress in the research and development of new products for next generation designs. We remain committed to prudently investing in R&D in order to further enhance our position as a valuable IP partner.

Finally, as a result of the acquisition, we've positioned the Company to realize greater operational efficiencies by leveraging our low-cost operation center in India and implementing other organizational initiatives that are expected to reduce our cash burn, increase revenue, and assist in the achievement of our goal of profitability over the coming quarters.

Just to touch on it, third quarter bookings were reasonably good, and we expect the fourth quarter to be sequentially up. Another point worth making is we will be presenting at the AE meeting in San Diego next week, and we are planning to have a substantial presence at the Design Conference in Santa Clara in February 2010. Any of you folks out this way probably would enjoy coming to see what we're talking about and doing there.

Finally, 2009 will mark the end of -- the end of or the lessening of a period of thoughtful planning and positioning of the Company. 2010 is going to mark the beginning of an intense execution phase aimed at an ever-clearer target objective. We probably will change dramatically this meeting and what we say on this meeting, and for me being basically an operations guy, the messing around is over. 2010, we're going to be on the move.

I want to thank you for joining us on today's call. I look forward to providing additional updates on our progress over the coming months. Thank you, Operator, and you may now disconnect the call. So long, everyone, talk to you soon.

Ladies and gentlemen, thank you for your participation in today's conference. You may now disconnect. Good day.