Peraso Inc (PRSO) 2009 Q4 法說會逐字稿

Good morning and welcome to the MoSys fourth quarter and fiscal year 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. (Operator Instructions). As a reminder, this conference call is being recorded for replay purposes, Thursday, February 4th, 2010.

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, Kathy. 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 today's press release. However, if you haven't, it is available on MoSys' website at www.MoSys.com. Before we begin today's discussion, 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 1933 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 technology and IC, expectations concerning the Company's execution and results, projected improvement of operational efficiencies, expected benefits of the bandwidth engine IC, product development, and timing of shipments of bandwidth engine IC, predictions concerning the growth of our business and our future markets and 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 reports on form 10-K and 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 statements for any reason except as required by law, even if new information becomes available or other events occur in the future.

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

Thank you, Bev and good afternoon, everyone. Thanks for getting on the call and joining us today. Needless to say, as most of you know, we've had a very, very busy week here between board meetings and press conferences and so on. As you're probably aware, earlier this week we made a significant announcement regarding our new product roadmap for the bandwidth engine integrated circuit family.

This IC family represents breakthrough technology, which we believe will provide a system level solution, delivering unparalleled bandwidth performance in future networking systems. This is also a significant chance in our business focus, becoming a fabless semiconductor Company by leveraging and productizing our highly differentiated IP. I'm going to discuss these initiatives in more detail with you guys in a few minutes and also provide and overview of our 2009 business highlights.

But first, I thought I'd turn the call over to Jim for his discussion of our fourth quarter and full year financial results. And following those prepared remarks, he'll open the call for some questions and answers. And so, that said, Jim, why don't you roll through your stuff?

Thank you, Len, and thank you all for joining us this afternoon. Let me start with our results for the fourth quarter of 2009. Total revenue for the fourth quarter of 2009 was $3.5 million, which compared with $3.4 million for the third quarter of 2009 and $4 million for the fourth quarter of 2008.

License revenue for the fourth quarter was $1.3 million, which compared with $1.3 million last quarter and $0.9 million for the fourth quarter of 2008. License revenue is primarily derived from serial interface IP projects and included revenue from two new licenses we signed in the second half of 2009. Additionally, we recorded initial revenue from our recently announced 1T-SRAM technology agreement with ROHM. License revenue for the fourth quarter of 2009 was recognized from 12 licensees compared to 14 in the previous quarter. We signed three new license agreements in the fourth quarter, for which we were not able to recognize any revenue in that quarter. However, these agreements are expected to make a strong contribution to license rev in 2010.

Royalty revenue for the fourth quarter was $2.2 million compared to $2 million for the previous quarter and $3.1 million for the fourth quarter of 2008. The royalty revenue increase over the prior quarter was primarily due to an increase in shipment volumes from one of our foundry partners. Fourth quarter 2009 royalty revenue was recognized from 15 licensees compared to 14 licensees in the previous quarter.

GAAP gross margin for the fourth quarter of 2009 was 80%, consistent with the previous quarter, and compared to 84% in the fourth quarter of 2008. In terms of our operating expenses for the fourth quarter, research and development expenses were $5.7 million, consistent with the third quarter of 2009 and compared with $4.2 million in the year ago go quarter. Selling, General, and Administrative expenses were $2.4 million for the fourth quarter of 2009 compared with $2.2 million for the previous quarter and $3.1 million for the fourth quarter of 2008. The sequential increase in SG&A expense in the fourth quarter of 2009 was primarily due to expenses related to higher sales and legal fees related to new patent and trademark filings.

Total GAAP operating expenses for the fourth quarter were $8.1 million and included $1.1 million of acquisition-related costs, comprised of $0.6 million for amortization of intangible assets and $0.5 million related to the retention components of the acquisition earn-out from the Prism Circuits acquisition in mid-2009. The retention component will be a recurring quarterly expense through the second quarter of 2010. Total operating expenses also included $0.9 million in stock-based compensation expense.

Fourth quarter total GAAP operating expenses of $8.1 million compares with $7.9 million in the third quarter of 2009, which included acquisition related costs and stock-based compensation expense totaling $2. Fourth quarter 2008 total operating expenses were $10 million. On a non-GAAP basis, total operating expenses for the fourth quarter of 2009 were $6.1 million, which compared with $6 million for the third quarter of 2009 and $6 million for the fourth quarter of 2008. Non-operating income was substantially comprised of interest income and totaled approximately $250,000 compared with approximately $140,000 for the previous quarter and $217,000 for the fourth quarter of 2008.

On a GAAP basis, the net loss of the fourth quarter was $4.8 million or $0.16 per share. This compares with a net loss of $5 million or $0.16 per share for the third quarter of 2009, and a net loss of $6.5 million or $0.20 per share for the year ago quarter. On a non-GAAP basis the net loss for the fourth quarter was $2.8 million or $0.09 per share, which excluded acquisition-related and stock-based compensation expenses totaling $2.1 million. This compares to the non-GAAP net loss of $3.1 million or $0.10 per share in the previous quarter, and a loss of $2.4 million, or $0.08 per share in the year ago period. Net loss per share on both a GAAP and non-GAAP basis for the fourth quarter was computed using approximately 31.2 million weighted average shares outstanding.

Looking briefly at our results for the full year of 2009, total revenue for the full year of 2009 was $11.5 million, which compared with $14 million for 2008. Licensed revenue for the year was $3.5 million compared with $3.2 million for the previous year. The year-over-year increase in license revenues was primarily attributable to revenue from serial interface I/O projects, including new 2009 license agreements, as well as existing agreements acquired in the Prism Circuits acquisition.

Total royalty revenue for 2009 was $8 million compared to $10.9 million for 2008. The decline in royalty revenue for 2009 was primarily attributable to reduced shipment volumes by our licensees and the transition in the first half of 2009 by one of our major IDM licensees to an SOC at a more advanced process note. This transition resulted in a change to royalty reporting a quarter in arrears.

Now turning to the balance sheet, as of December 31, 2009, our cash and investments balance was $40.4 million, which compared to $42.7 million at the end of the third quarter and $67.5 million as of December 31, 2008. The cash burn for the fourth quarter was $2.2 million. In addition to cash used in operations, the year-over-year decrease in cash and investments included a $13.6 million cash payment related to the acquisition of Prism Circuits in June, approximately $1 million in expenditures related to the exit of the analog mixed signal product lines in the first quarter, approximately $0.9 million of stock repurchases, and approximately $0.6 million related to the closure of our Korea Design Center and headcount reductions in the United States.

Accounts receivable at the end of the fourth quarter totaled $0.7 million, which compared with $1.3 million as of September 30th, 2009. The decrease in accounts receivable was primarily due to collections, partially offset by the timing of invoicing on new customer licenses. Unbilled contract receivables of approximately $1 million primarily represent future billings under customer contracts assumed by MoSys upon the acquisition of Prism. Deferred revenue at the end of the fourth quarter was $2.9 million, which compared with $1.6 million at September 30th, 2009. The increase in deferred revenue was primarily attributable to new license agreements signed in the fourth quarter for which we were not able to recognize revenue in accordance with GAAP.

As of December 31st, our total headcount was 152 employees, which compared with 140 employees as of September 30th, 2009 and 191 employees at December 31st, 2008. The sequential increase was primarily attributable to headcount growth in our engineering team in India. Headcount in India was 52 employees at December 31, 2009 up from 43 at September 30th, 2009. The additions to our headcount were primarily to support our bandwidth engine development efforts and serve these customers. As of December 31, approximately 80% of our employees were in engineering and research and development.

This concludes my prepared remarks. At this time, I will now pass the call back to Len for a further discussion of our business highlights and the recent announcements we made earlier this week. Len?

Thank you, Jim. Well, as evidenced by Jim's comments, our full year 2009 financial results are kind of reflective of the macroeconomic challenges that persisted throughout most of the year. In particular, during the first three quarters when our customers were delaying projects, sliding this, that, and the other due to continued uncertainty in the marketplace. In the second half of 2009, we began to see a slow recovery in our end markets and we continue to be encouraged by these early signs. In response to the market conditions here in 2009, we implemented cost reduction initiatives and completed a companywide reorganization.

In addition, we made significant strides in broadening our product portfolio and engineering expertise through the acquisition of Prism Circuits back in June. At the beginning of the year, I stated that my top goals were to develop and successfully execute a strategic plan to improve our opportunities for long-term growth. That's pretty well done now. Return to a path of profitability, more to be done there, and -- but we should assume we'll be able to see it on the horizon, and create improved shareholder value over time. To accomplish these, and I didn't mean to ignore that one, guys, I'm a shareholder, you can bet I have plans for that. To accomplish these goals, we focused on improving our corporate structure, leveraging our technology for new products, expanding our growth opportunities in addressable markets.

Let me discuss a few of those achievements in each of those areas. Corporate structure. First, regarding our corporate structure, after a thorough review of our operating structure, we took steps to increase efficiency and effectiveness. All sales and marketing efforts now report to Dave DeMaria, Vice President, Business Operations. After the midyear acquisition of Prism Circuits, we completed the integration of the memory and interface engineering teams under Sundari Mitra's leadership.

Thomas [Lao] joined us to lead our flash team and Tom is playing a significant role in assuring that we have the appropriate product line infrastructure in place to become a successful and quality minded, service oriented, integrated circuit supplier. We also completed the shut down of unprofitable product lines and closed three foreign design centers, reducing headcount, and operating costs. Although, we will continue to fine-tune our organization, these actions resulted in a much stronger corporate structure that better meets our current and future needs.

Now, to technology and 2009 business achievements. In the second half of 2009, we gained traction for our 1T-SRAM and signed three new licensees. We recently announced one of these, a major technology license agreement with ROHM, a leading manufacturer of semiconductors to the electronic industry. We expect these three customers to generate significant revenues for the company in 2010. We ended the year with a strong backlog and we expect that will contribute to an increase in licensing revenue in 2010.

Also, during 2009, we made a major step towards achieving our vision of becoming a world-class supplier of differentiated high value IP for SOC designers by acquiring Prism Circuits and its high speed SerDes and DDR interface IP, as well as its very strong engineering team. The addition of interface IP has significantly expanded our market opportunity and in the second half of 2009, we added three new I/O customers in the networking and communications markets, and have already signed two follow-on projects with one of those customers. We're very pleased with the immediate and ongoing growth for our I/O technology and point to these achievements as further evidence of successfully executing on our long-term growth strategy.

Turning to flash, our 1T flash non-volatile memory, we received silicon back from our foundry over the holidays and continue to evaluate the silicon, sharing our results back and forth with our foundry partner. Unfortunately, we have concluded that we require one more engineering characterization run to be sure of the robustness of this 1T flash solution. That silicon should be back late March. We remain cautiously optimistic on the reliability and robustness of our 1T flash and should be able to come to some decisions regarding its marketability during the first half of our second quarter. That's today's quarter.

During a packed press conference at the Design Con industry show here in Silicon Valley, that was yesterday and the day before, we announced the expansion of our business model and our total available market to become a fabless semiconductor Company supplying high performance ICs in addition to our differentiated IP. We announced our plans for the bandwidth engine family of ICs, which will be a critical component to our long-term growth strategy, by developing and bringing to market products representing the combination of our 1T-SRAM and high-speed serial I/O technologies.

Specifically, we believe in IC combining our IT-SRAM and serial I/O with logic and other functions can provide a system level solution and significantly improve overall system performance at lower costs and lower power. A major challenge to system designers is what we call the memory performance barrier. Process and performance or core process and performance in applications such as computing and networking has continued to nearly double every 18 months for quite a few years now, while the performance in memory technology has been and may be able to double every ten years if even that.

The bandwidth engine product line that we announced earlier this week will combine the fast random access and very low latency of our 1T-SRAM memory core with a serial I/O that operates at ten gigabits, enabling the bandwidth engine to provide up to two billion accesses per second, more than twice the performance of current memory-based solutions. Designed to be the first solution capable of breaking the one gig access for second bandwidth barrier, the bandwidth engine is expected to enable up to four times the throughput, two to four times the density of today's SRAM based systems, up to 40% lower power, and cost savings of up to or even more than 50% for next generation networking systems.

This is not an evolutionary change. This is a revolutionary change. It's a change driven by architecture, a change driven by strongly concentrating on system needs. To further boost performance, the bandwidth engine includes an on-chip arithmetic logic unit, ALU, that will allow macro functions to be performed within the bandwidth engine, reducing iterations between the other packet processing ICs and the bandwidth engine, thereby further reducing latency and power consumption. We expect sampling of the bandwidth engine to begin in late 2010 and production quantities should be available in the first half of 2011.

Additionally, we announced the GigaChip interface, and open interface protocol compatible with current industry standards that will be supported in our bandwidth ICs. The GigaChip interface will enable efficient, high-speed serial chip-to-chip communications and networking, and in other systems. We are currently working with multiple potential partners, including networking companies and their FPGA and ASIC suppliers to develop and ecosystem that will support the GigaChip interface and the bandwidth engine. It is our intention to dramatically change the ease with which one can have serial chip-to-chip communications at the board level.

I believe that the bandwidth engine is a truly innovative product and would be the perfect solution to address the need for dramatic increases in bandwidth due to the exponential growth of video and data moving across the internet. Networking systems are quickly requiring advanced processors that can manage higher-speed, higher-density memory, faster access rates, and intelligent chip-to-chip communication. We believe that our bandwidth engine will be the breakthrough solution to meet the bandwidth challenges facing next generation network and systems. In addition, we believe the bandwidth engine will be able to address the design challenges facing the architects of next generation storage systems and other similar equipment. Storage systems is in addition to networking, storage systems is also a very, very large TAM increase for us.

Before I open the call for questions, let me encourage you if you haven't done so already to access the replay of our press conference webcast on our website for more detail about the bandwidth engine announcement. With that said, operator, we would like to open this call for questions. Thank you.

Thank you, sir. (Operator Instructions) Our first question comes from the line of [Gary Mobley] of the Benchmark Company. Please proceed, sir.

Hi, guys.

Hi, Gary.

I think most of us on the line are most interested in hearing your revenue outlook for not only the first quarter, but potentially for the balance of 2010, what your OpEx outlook is like in light of the bandwidth engine announcement. And then as well what your approximate quarterly break even level is?

Sure, Gary, I'll comment on that and Len can add in afterwards. Going into 2010, we will be continuing our practice of not providing guidance. That being said, I can make a couple of comments as we come out of 2009. As we mentioned on the call, we finished the second half of the year, and in particular the fourth quarter with a very strong backlog of business, which we expect to bring into revenue in 2010. I can just say, looking at the first quarter, subject to our delivery on these contracts and the acceptance clauses, et cetera, we are looking at an up quarter revenue wise for the first quarter with these contracts that we weren't able to take revenue on in the fourth quarter.

From an expense standpoint, we ramped up the bandwidth engine team in the second half of 2009 under Sundari's leadership after the Prism acquisition and we have a fair amount of the cost reflected in the fourth quarter. The cost will be increased as we move into 2010. In particular, we have staffed up late in the year. So we'll see further impact of that in the first quarter and rest of 2009 of having the headcount on board for the full year. In addition, we did have to purchase additional CAD tools. As an IP Company, there were a certain set of tools we had and being an IC Company, it's a different set of tools. So we will see an increase there of easily a couple of hundred thousand a quarter in our expense run rate from the additional CAD tools.

The other thing, which I think we'll primarily see to a large extent where we're targeting right now, the second quarter, is some of the third-party costs of bringing this chip, taping it out, mass costs, et cetera, which we're seeing a lot of those, expecting those to hit the second, third quarter and then to follow on in the fourth quarter. From an expense level, we had previously commented that we were looking at approximately $7 million of total expense and I say on a non-GAAP basis taking our total OpEx and then adding in, obviously, the cost of goods sold, which is just engineering time we allocate up there.

Moving into 2010, that number is probably looking closer towards the $8 million number a quarter, pushing us towards break even. Again, with my only caveat being the quarter where we have heavy kind of supplier costs on the bandwidth engine, the mass sets, et cetera.

Okay. Just a point of clarification, $8 million per quarter in operating expenses you expect in 2010 or that's the break even level?

That's the -- the break-even level, not factoring in the bandwidth engine tape out cost.

Got you. And my next question is really more of a housekeeping question, what is the total number of IP licensees to date? Do you have that number handy?

The total that are paying us revenue or kind of the historical number?

The cumulative number. Is that even a number worthwhile?

It's certainly a number. I don't have it at my fingertips. It's certainly a number we track internally, but we more look at the current active customers. So I don't have that number handy, I apologize.

Historically, Gary, we would probably -- it goes back well before my time here. We would have had some people paying royalties on process architecture. Most of those have gone now because the foundries really could have their own architecture these days. So I think it -- more to your point might be people that have licensees or pay royalty based on using our circuit design patents. If that is something that's important to you, why don't you let Jim take a look at it? We'll get back to you and try to give you an answer.

Sure. Thanks, guys.

I would just comment, all that stuff that Jim said is -- we've taken a very hard look at costs as we make this (inaudible) hard look at the balance sheet and making sure that we're going to be in good shape financially, and we never get to a place where we'd be in trouble on money. I think that some of the partners were in discussions with, there will be the opportunity for some cost sharing on some of the costs to bring out this product. It isn't something that we -- it may in every case have to bear alone.

So I have some encouragement about that and I think Jim is right that maybe we're as much as $8 million a quarter and we need to address that and drive the revenue very hard. We have a very aggressive plan for this year. It does assume considerable growth over 2010 and as Jim said, as an IP Company, we probably won't provide too much guidance for a while, but we are looking at enough years substantially up here. So next question please.

(Operator Instructions) Our next question comes from the line of Neal Goldberg of Goldman Capital Management. Please proceed.

I didn't know my name was changed, but it's Neal Goldman. But can you define the market opportunity for this bandwidth engine? I'm not talking about what you're going to do in the next year, two years, three years. I'm talking about what the real opportunity is in terms of size of the market.

Neal, I think that the -- in the last ten years, increasingly the people that are designing the advance equipment into the networking marketplace, which would be the -- probably the Ciscos, Junipers, [Latsilas], Alcatels, [Wild Ways], so on and so forth. As they design their systems, they've been trying to use what I'm going to call commodity memories to solve some very serious problem and that problem can best be described as the core processors went from single core, to dual core, to quad core, to eight core, to probably 16 core. And we invited multi-threading so all these processors can work in very precise unison without any loss and delay.

The rate at which these core processors can process information is doubling 18 months or every 18 months or less, but memory speed hasn't really changed very much and for various reasons nobody has taken a look at the system level solution. So the bandwidth engine is -- and we call this a bandwidth engine because it allows you to more effectively and efficiently use every amount of every bit of bandwidth you have in your system as opposed to losing it to bandwidth inefficiencies, which in some cases on existing systems you can see bandwidth efficiency drop down probably to 15% or so when you try to move certain kinds of information through the system.

So all that is said so that I can identify the fact that these commodity memories that have been trying to solve problems they're not designed to deal with. We probably address QDR memory. QDR memory is probably, today, a $500 million or $600 million business. Maybe I'd be better to say $500 million to $700 million. That business is heavily supported by Samsung and Cypress and then there's a half a dozen other guys. And then, I think we will address the RLDRAMs and RLDRAMs are, again, a commodity type memory that's not ideally architected for this problem. And that's probably also a $500 million to $700 million market and that's in the year 2010. And that market is heavily supported by Micron and Samsung.

I think we could, if we're very conservative, we would say that initially out of the box we should be able to address 50% of those two. So that would mean that right out of the box we're talking about a $500 million to $700 million market from the networking that this product that we're talking about could support. I think if we start taking a look at what will happen when we change the architecture slightly on bandwidth engine too, so that maybe we bring out a totally completely dual ported version or something like that, that we can, or we change it in a couple other ways as well and maybe add a few more features here and there, that we would be able to address storage systems and various other opportunities as well.

So I would say that out of the box we're looking at $500 million to $700 million market subject to design in time and seeing the customer ramp their new boxes. And I would think that over time, the market has the ability to grow to double that and triple that. So in terms of the served market to this bandwidth engine family, the total available market if you will, and the served available market, it is dramatic. It's dramatic compared to the market our IP serves.

Okay. And there's no on else, as far as you know, who's really coming up with solutions like this?

I'm going to -- you're getting to my summary, but I'm going to skip ahead and answer it. One, this is a very seriously innovative memory. We've filed five to eight patents on the architecture of the bandwidth engine. I would imagine we would file a minimum of ten, maybe even more in the next 12 months. So in honor of that, the 1T-SRAM IP is ours. There's no disputing that. People have -- that's been ours for a long time. There's some challenges. Our foundry partners are going to be people that are agile and adept at doing embedded memory. I think the very height that has to be hopped over to come after us in this space is quite substantial.

Now, that said, it would be our intention to provide multiple foundries if our customers need it, not because we want to, but this is serving the Fortune 50 guys, so they need that kind of assurance. It would also be that we would expect there would be selling the part with logos on the lid other than our own, and we don't have any problem working with somebody and teaching them to design bandwidth engine quality products. So that we facilitate all aspects of this industry so that this product family can win acceptance as the going forward solution to a very substantial challenge in system design.

We would expect that with our capability and enthusiasm that we would be able to carve our fair share out of that for sure.

Okay. Very good. Thank you.

Yes, next question.

The next question comes from the line of Joe Achramowicz of Blaylock Robert Van. Please proceed.

Hi, Len. How are you doing, Jim?

Doing well, thank you.

I have to tell you, I was very excited about the direction you've taken the company here. I think and I could compare and contrast your focus with other players in the market, but I mean you've put some time in and it sounds like you've really looked at some of the competencies. You've added this Prism acquisition, which brings significant technology allowing you to focus on this bandwidth engine product, which I think is very exciting. Obviously, the proof is going to be in your ability to get it out, get it taped down, and get it into the market and to sampling, and this kind of thing.

Do you have enough cash? You're burning about $20 million a year based on last year. You've got about $39 million. I mean, you say it's tape out and in the end of 2010. Do you feel very confident about being able to hit those targets?

Actually, Joe, the tape out on this product is going to be the middle of next quarter, or I should say maybe the second half of next quarter, not further out than that. So there's been a huge amount of work put into this product already and again, you and Neal have been hitting right on my closing points, but let me just give you one of the closing points because I think it's key to what you're saying. And it was -- we've successfully merged MoSys and Prism Circuits together and we've put in place a strategic plan that takes full advantage of the capability of these integrated companies.

So earlier in this call, I talked about the efficiencies of organization and you could easily come to the conclusion, well, Perham is just cutting heads here and there to try to make sense out of the P&L and the balance sheet. But that's not true. We were fortunate enough to merge MoSys and Prism together and the power of that group is ideally suited to the challenges of this product. So we've got the right team at the right place, at the right time and we have moved now from 2008, 2009 of studying system architecture and understanding what the system needs going forward to a period now of intense execution, and historically that would be our strong point.

We think we will tape out in time and we think we will sell some of these products for money in the fourth quarter of this year. Just a few, but enough to demonstrate that we're a major deal here that we've come to the service and it's happening.

I'm encouraged by that. I'm trying to think of what might help to drive the stock price for investors in the short-term and about the only thing that, I mean, were royalty business, any 1T business that that's great stuff, but I think now the focus based on your presentation yesterday, the growth and the excitement now in the Company is the potential success of this bandwidth engine product. And it's taking you in a whole new direction as a chip Company, which I think is a great idea.

The only thing I can think about that could drive this thing short of an actual order is maybe some type of a strategic announcement that a major switch company or -- is embracing this or working with you on this in some regard. Do you see any potential for that happening or are you just going to wait until you say, well, we sampled it and this kind of thing?

No, actually we have a goal to have -- we have to define and we will define for the next quarter, I won't try to define the words today, but I want to be able to come on this call and say that we've -- that the most important thing we need is we need ASIC guys and FPGA guys, and perhaps in some cases application specific guys all of whom serve the needs of the networking marketplace, if you will, to just simply arrange the I/O of their chip to accommodate our GigaChip interface and we make a big point of saying that our GigaChip interface is just a common electrical interface.

So it's not a difficult matter and I believe that we, as the year progresses, we will have the opportunity to tell our shareholders and interested investors that we might have a partnership with ASIC guy. He's arranged his ASIC to accommodate our bandwidth engine and we might find that maybe we can say that a key FPGA guy has hard coded the GigaChip interface right into one of his state-of-the-art [fuelable gamma GADA rays] of CPLDs and each time you hear us say that, that will mean that wherever that is sitting on a board now, the guy has the freedom to just use our part whenever he wants to.

Additionally, we have an internal goal to have three or four customers lined up that are committed to setting their system up to use our part by the end of 2010 and we'll find ways to tell our shareholders and investors as much of that as we can along the way because it will all mean that we're having progress, progress here, progress there.

So are we talking about maybe working with Xilinx, Altera, this kind of thing. Or are we talking about maybe working with actual semi players like PMCCR, for example, Broadcom, AMCC and that kind of thing?

If I go in order, first off, a lot of the high-end switching and routing guys have a few ASIC people they use. There's some very, very good ASIC guys out there. Among the ASIC guys would be, say, IBM or maybe somebody like a [VIGO] or somebody like NEC, somebody like that. We might very well tie up with one of them at the request of the networking guy.

The second place is that more and more as the years go forward now, I think because of the time to market there's going to be an ever-increasing need for FPGAs. FPGAs will be selected to take that place that has previously been owned by the ASIC because you don't have to redo the math. You can just reprogram it. So the FPGA guys in this case absolutely would be Xilinx and Altera. They need to handshake with our chips on the board in a very friendly and a very what I call lightweight way, that meaning that you can hook the two chips up to talk to each other without using many bits of data or tying up -- you don't want to tie up 25% to 30% of the FPGA just trying to interface to the other guy's chip.

And one of the things about the GigaChip interface, it's extremely friendly and very easy to interface to an FPGA and consequently, we would be very enthusiastic about talking with either or both of those guys. And finally, the third guy that -- the third choice you have is some customers are going to choose the application specific, standard product guys, which would be the Marvells and the Broadcoms, and maybe Easy Chip and people like that.

And we have every intention of opening a dialogue with those guys, but we're kind of small and in order of priority, probably we first need to deal with an FPGA guy because he's got the shortest product cycle to the market. His time to market is very good because you just have to program it or reprogram it. And we've got a few ASIC guys that we've been asked to talk to by various people that might be our customers down the road. But we will absolutely be talking to the application specific standard product people as well, because we want to -- the bandwidth engine with the GigaChip interface could easily talk to their solutions as well.

Well, I can tell you, I really -- I've got to go through and scrutinize the presentation in greater detail, but I'm very impressed that you've really come up with a strategy. And it doesn't mean that it's done yet, but it's very, very refreshing and it's going to be fun to watch your progress in the quarter's end. Thank you very much.

Take care. Other questions?

(Operator Instructions) We do have a follow-up question from the line of Gary Mobley of The Benchmark Company. Please proceed.

Hi. Out of curiosity, the SerDes interface IP carry any royalty -- much of a royalty element to it, and what is the contribution to the total royalties now? And if you could talk about the ebbs and flows of the royalty revenue perhaps for the balance of the year and maybe throw in something with the context of your largest royalty contributor.

So Gary, at the very beginning of that you asked -- were you asking about the GigaChip interface?

I was asking about Prism Circuits, if there's any significant royalty contribution from that portion of the business.

Okay. Okay. First off, let me just say that in the event that I raise the question, the GigaChip interface that we developed is a -- works in conjunction with a common electrical interface CEI11. That enables serial chip-to-chip communications at the board level in a very efficient and effective matter. We intend to make that available because it's our intention to enable serial chip-to-chip communications on the board. So that we don't tend to try to sell and make a lot of money now.

Now, regarding where our royalty comes from, I'm going to let Jim address that one. Jim?

Thank you. So Gary, to date all of our royalty revenue has come from 1T-SRAM. When we acquired Prism, they had a couple of license agreements that do call for royalties. Royalties have yet to turn on in those agreements and if I remember correctly, in both of those agreements the royalties were capped. And in summary, the answer to your question is, generally we don't see royalties on the SerDes agreements. That is analog mixed signal technology. It's a little bit tougher to command royalties. In our plan going forward, we don't project a significant contribution from royalties on the SerDes side. We expect it to be predominantly 1T-SRAM.

And looking forward to the outlook for our royalties for 2010, 2009 we were down significantly from 2008, almost $3 million, which was effected by our two primary royalty payers, which are NEC Electronics, primarily for the chip, the SOC that goes in the Wii, and then TSMC, which uses our 1T-SRAM in their embedded DRAM process. And then across our other licensees, we've got some guys in pixel processing and other applications, networking. We saw their volumes down significantly in 2009.

But focusing on the top two guys and taking TSMC, our foundry partner, obviously in 2009, their customers brought inventory levels down to record lows in the first half of the year and we saw that in our royalties. In our reporting, we've actually already gotten our first quarter royalty report, which is our Q1 2010 revenue, their Q4 2009 shipments and we're seeing a nice upward trend. We're seeing more designs turn on at the 65-nanometer node and we expect to see an increase there consistent with what the chip companies out there and TSMC and its customers are reporting.

With regard to NEC, our revenue was down in 2009. As we've discussed before, they transitioned to a more advanced SOC and as a result switched from current quarter-to-quarter in arrears reporting, which effectively cost us net about a quarter of revenue. The good news for us is that transition was (inaudible) to return back to normal royalty levels in our third quarter revenue number. Our royalty rate did increase as a result of this transition and them moving to the more advanced SOC and for the next quarter or so, that will offset, obviously, the decline in ASP that they're going to provide to their customer. Obviously, that was one of the reasons of transitioning more advanced SOC to provide cost savings to the end user.

Certainly, I watch every quarter Nintendo's forecast and look to that. I'm still a big fan of the Wii and I think a lot of people here at MoSys and we'll see how that plays out. We do have a couple of other designs turning on from NEC. They do use us, for example, in Pachinko machines and there's also a networking application where they're using 1T-SRAM. So we're -- we'll see what happens in 2010.

So to add to that, the contracts that Prism Circuits had done before they joined us and the contracts that have come our way since we became partners are mostly very, very high performance applications that are not so high in volume. So when you -- in that situation, you probably charge -- you make your money on the designing the high-speed I/O for them. The volumes won't be that high. They're very specific chips. It's not like a memory so you don't look for royalties so much in those applications.

Next question, please.

With no further questions in the queue, I would now like to turn the conference over to Mr. Len Perham for closing remarks. Please proceed, sir.

Thank you. I just have a couple of comments and the good questions by you folks covered a couple of them so I'll be just slightly redundant, but not totally.

So 2009 was a very pivotal year for the Company and I mentioned this one, but we'll do it again. We successfully merged MoSys and Prism Circuits together and we put in place a strategic plan with a plan matched to the capability of the group. It wasn't an accident that we were fortunate enough to merge our two companies together and it wasn't an accident we got to this product plan.

What we need to do and what our capabilities are, are very closely aligned, and I'm very excited about that. The second point I'd make is though we intend to continue aggressively prosecuting our IP business model both in the short and the long-term, we've additionally announced our intention to become a fabless semiconductor Company. When you say that, then what can we say about that. Well, we've announced our first family of products, the bandwidth engine family. This family product comes about as a result of several quarters of studying system architecture at our primary customs houses -- customer houses and looking for his most pressing needs and what is it he's been able to do in current systems, and it's going to be worse in future systems.

The bandwidth engine family directly addresses those most pressing system needs. We are going to just go right to where he needs the help to get the performance, and the cost, and the power that he'd like to achieve. Another point would be that the combined power of the MoSys and Prism Circuits is ideally suited to the challenges of this architecture as I mentioned before. The bandwidth engine design and architecture is very IP rich. We've to date filed five to eight patents and there are many more in the process of being filed.

Another point, internally we are moving to become ISO certified. We have a schedule in-house. We've put in place an outstanding QA&R organization and we expect to become expert at the service expectations of our soon to be IC customer base. These are all areas that I'm very familiar with and we don't intend to drop the ball on any of them. Quarter-to-quarter, we will update you on the progress being achieved toward the completion of these various initiatives.

A third point would be that bookings were quite strong in the fourth quarter of '09 and we expect today's quarter to be up. Jim touched on that, but I'll touch on it again. We did have a reasonably good quarter and we are very excited about that. Point to be made, as we embark into fiscal year '10, we don't tend to start providing guidance. However, as we move this Company toward becoming a fabless semiconductor company, we will simultaneously move to more traditional formats in how we report on this call. (Inaudible) break you guys hearts. So along through the year, you might expect us to start moving toward a more traditional model.

And finally, we've moved from a period of intense planning and product definition into a period of focus and driven execution, and we do truly appreciate your faith in us and look forward to updating you as we progress on our journey to this new place. Thank you for listening to us today and thank you for those of you who came out to our meetings yesterday, and there's a lot of stuff on the website. Please have a look at it and we look forward to talking to you again soon.

Thank you, operator, and goodbye everyone.

Thank you, sir. Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect and have a great day.