Peraso Inc (PRSO) 2011 Q1 法說會逐字稿

Good afternoon and welcome to the MoSys first-quarter 2011 financial results conference call. At this time all participants are in 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 call is being recorded today, Thursday, April 28, 2011.

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

Thank you, Crystal. Joining me on today's call are Len Perham, MoSys's President and Chief Executive Officer, and Jim Sullivan, Chief Financial Officer. The first quarter 2011 financial results press release was distributed earlier and is available on the 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 27-A of the Securities Act of 1933 and Section 21-E 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 in ICs, expectations concerning the Company's execution and results, expected benefits of the Bandwidth Engine IC, product development and timing of shipments of Bandwidth Engine IC, predictions concerning the growth of the Company's business and future markets and business prospects, 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 are made -- made during this call are contained in the Company's most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission, in particular, in the section titled Risk Factors 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. I will now turn the call over to Len Perham, Chief Executive Officer of MoSys. Please go ahead, Len.

Thank you very much, Bev. Good afternoon, everyone, and thank you for joining us today. I'll start the call with an overview of our business highlights and then pass the call to Jim Sullivan for a discussion of our first-quarter 2011 financial results, and after that, we will open up the call for some questions if there are any.

First, a little bit about our IP business. During the quarter, we implemented several initiatives aimed at reorganizing and intensifying our IP selling efforts, simultaneously bringing greater focus and energy to IP marketing and deal closing. Having [taped] down our first Bandwidth Engine platform, applications engineering, and other enter -- in-house engineering we're now able to give more focus and energy to the sales of our various IP solutions.

In short, our sales and marketing teams are now better supported from all levels of the organization to aggressively pursue what appears to be an increasing number of IP opportunities in our target markets. These changes contributed to a strong first quarter on the IP front with notably increased activity and opportunity for our high-speed SerDes interface solutions.

We booked multiple new I/O projects, engaged with three new customers. Two of these projects leverage existing 40 nm and 16 [F5] nm macros immediately available from our IP library with modest change.

The third project represents our first order at the more advanced 28-nm process node. We believe this will be one of the first 10-gig I/Os in the market at this very advanced scaling level. This project provides MoSys with free shuttles, free test silicon, which will allow us to deliver a more complete data package to future potential users of this solution.

This renewed focus on IP sales, coupled with the increasing number of candidates in our funnel, positions us to build additional momentum in our IP business throughout 2011.

Regarding our 1T-SRAM IP business, we have multiple current licensing and royalty agreements that are consistent revenue producers. And we believe there are still many market opportunities for our industry-proven, high-density 1T-SRAM embedded memory IP that have not yet been tapped.

Currently, in this quarter, we have been negotiating with a number of repeat customers looking for the 1T-SRAM macros necessary to support their next-generation systems. In many cases, these partners are looking for increased memory capacity, higher speed, smaller footprint, lower cost, lower power, all these features required for their future systems.

Additionally, the 1T-SRAM remains a key component of our overall growth strategy in the consumer products arena, in networking and in the advanced computing markets. In short, it is a key part of our strategy going forward.

With regard to 1T-FLASH, we continue to look for a customer or partner that might share the cost to bring our latest revision of this technology to market. I think I have mentioned in a few off-site sessions and seminars that we are reasonably satisfied that we have a viable solution now for commercial applications, but currently lacking a partner to be with us in this engagement.

We have redeployed our FLASH engineering resources to various revenue-generating IP projects and to next-generation Bandwidth Engine development. Our IP business continues to be our primary revenue driver funding future Bandwidth Engine development efforts, the cost to bring this family of ICs to market and the cost of expanding our business model to include IC sales.

Let's talk about the status of our Bandwidth Engine platform -- what has been accomplished, what is currently being worked on, and what it needs to be done in order to bring this very advanced network architect and solution to the marketplace.

In 2010, we focused on the development and the design of this next-generation network, networking system solution that integrates high-speed serial I/O with a uniquely architected, uniquely petitioned, if you will, 1T-SRAM memory with the intent to directly access the bandwidth and access challenges of future networking equipment. Through the design testing and [bring up] phases, we met our target milestones ending the year with initial samples of this advanced system solution being delivered both as a stand-alone IC and in reference boards, subject only to the potential customer preference.

Though we have made significant progress on the characterization and the verification of the Bandwidth Engine during the first quarter of 2011, I believe we might be a couple, three weeks behind our initial schedule. We have identified a few issues in the early -- during early testing that were easily cleaned up the software workaround and without additional mass changes.

It seems to me the majority of the characterization and verification work should be completed in the third quarter and in light of Bandwidth Engine adoption and production ramp schedules, this few weeks slippage is of -- should be of no issue to what we have been forecasting and thinking as possible for the Company to achieve.

I cannot emphasize enough the sacrifice and contributions made by our engineering team that have enabled us to execute so well against our original development plan. To date, we have required but one mass change, that required to optimize the I/O speed and to enable the Bandwidth Engine chip I/O to run at speeds greater than the specified 10.3 Gb per second, thus, satisfying the high-performance end of Bandwidth Engine one's product specification.

Serial I/O speeds of 10.3 Gb per second will be extremely important as the network equipment industry transitions to systems running at 100 gigs or faster. As you may recall, the Bandwidth Engine platform includes a powerful programmable built-in self test or better known PBIST capability. This feature is very important and will play a major role in our ability to quickly and effectively test this superfast integrated circuit.

Currently, we would anticipate prototype production build, which means we would be using production testing so on and so forth, starting in the second half of 2011. It is gratifying to note that earlier in the quarter at DesignCon 2011, a local area industry trade show, we were able to demonstrate the interoperability of our Bandwidth Engine and its highly efficient giga chip interface with a very high-performance SerDes board brought in from Avago Technologies.

Avago Technologies is the premier supplier of ASICs or SoCs that serve the networking market.

Additionally, we demonstrated the same level of interoperability to FPGA devices and boards supplied from both Altera and Xilinx. As you may have read, Xilinx is the latest company to adopt the giga chip interface and join the GigaChip Alliance.

Demonstrating interoperability with such premier suppliers to the networking equipment industry are key milestones and provide MoSys Bandwidth Engine significant additional credibility. Interoperability is an important consideration for prospective Bandwidth Engine customers, reducing risks, allowing faster implementation and shortening design time while lowering costs.

Simply put, we have demonstrated that our chip works when interconnected with advanced solutions provided by these suppliers to the network equipment industry. Proving interoperability with these industry leaders, devices and technologies -- excuse me, proven interoperability with these industry leaders, devices, and technologies is a solid proof point of our Bandwidth Engine technology that, thus far, has resonated well with other network equipment vendors.

On another note, we continue to push hard to become ISO-9000 certified. Being awarded this certification is to be recognized as having all the controls, policy, procedures, and disciplines in place to be a top-tier supplier to the premier companies designing and building next-generation networking equipment. We anticipate being awarded an ISO certification in the third quarter of 2011.

Toward this same end, we have now initiated a project, gathering steam I might add, aimed at achieving an enterprise grade rating for the Bandwidth Engine platform and the family of ICs -- and this family of ICs.

Enterprise grade products are acknowledged to be the highest -- of the highest quality and reliability. The Bandwidth Engine family needs to achieve this standard in order to optimally satisfy the QA in our targets of our networking equipment partners. We are and we will be collaborating extensively with the outstanding engineering team at TSMC, our foundry partner, in achieving this goal.

Let's stop for a moment. Let me answer a question that you might have. The question is what's going on out there? Why do I believe the Bandwidth Engine is becoming critically important to the network equipment industry?

There's a simple answer, at least in my opinion. We are in the very early stages of the development of a totally new exploding multi-trillion dollar industry. That industry, social networking, is bringing to the Internet a massive global increase in users, all of whom want to be passing increasingly more complex information back and forth between themselves at high speeds and in real time.

This massive increase in users and growing complexity and data being transferred around will overwhelm existing networking equipment. We are seeing the advent of multicore networking processor units, but they are not going to be of any use unless we can solve the challenges of bandwidth efficiency, and the need for ever-faster memory access, while at the same time, addressing an increasing memory capacity.

Our goal, to enable serial chip-to-chip communications at the board level utilizing an advanced serial giga chip interface and a superfast roll latency, uniquely partitioned 1T-SRAM. This should enable the networking and equipment supplier to overcome many current system deficiencies. Supported by our giga chip interface, the Bandwidth Engine is currently capable of 2 to 2.5 or even greater giga accesses per second, which is far superior to any currently available alternative solution.

It achieves this ultra-high performance that is four times the throughput with a memory size four to eight times the density of the alternative solutions while utilizing less than 50% of the power and at a cost of less than 50% of current designs providing the same level of performance. MoSys believes network and equipment has to go, serial chip-to-chip, adopt a superefficient interface that is not wasteful of bandwidth and be architected in such a fashion as to directly and effectively address memory access.

Bandwidth Engine 1 does just that. And it is the first product on a carefully thought-out and very exciting roadmap.

Customer interest in the Bandwidth Engine continued to be gratifying throughout the first quarter. We are experiencing a high level of interest in the product, the product family, and substantial demand for sample units and/or reference board [pairs].

Interest in feedback from prospective customers has been very positive. Typically, they are quickly convinced about the power and capability of the product, and in most cases their interest turns to multiple sourcing, application support, channel support, and pricing philosophy.

We are hard at work developing applications notes and white papers supporting and clarifying the proper use of our product. Additionally, we are now looking for applications engineering-rich alternative channels through which to sell our Bandwidth Engine. I am pleased to say we will soon announce the addition of (technical difficulty) application to engineering-rich alternative channel that will help us support our customers' needs here in the US.

We remain optimistic that we will begin securing design wins later this year.

We have essentially completed the definition of Bandwidth Engine 2. This product will report a cost reduction strategy for Bandwidth Engine 1, while at the same time directly addressing the need for ever -- evermore efficient serial chip-to-chip communications at the board level, the need for evermore effective utilization of bandwidth and the requirement for faster and faster access to the memory. The internal architecture of our product allows us to look forward to dramatically addressing these critical network equipment requirements again and again as we make progress along our road map.

All in all, we have made good progress on our journey to become an IP-rich fabless semi-disc company and we are gratified by the opportunities we see for the Bandwidth Engine family of integrated circuits.

Closing, I am pleased with the effect that our organizational initiatives and intensified focus on IP business opportunities have accomplished so far this year. Much remains to be done. I am optimistic looking out through the year and into 2012.

Meanwhile, the Bandwidth Engine family are now thrust into the integrated circuit space as a very long-term strategy. And I am satisfied with our progress and successes here too.

With that said, I am going to pass the call to Jim for a review of our first-quarter financials and then open the call for a question-and-answer session. Thank you very, very much for your attention and time. 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 excludes stock-based compensation expense, intangible asset amortization, and acquisition-related charges. These non-GAAP financial measures and a 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 first quarter of 2011, total revenue was $3.5 million compared with $4 million for the fourth quarter of 2010 and $3.6 million for the first quarter of 2010. Licensing revenue for the first quarter was $1.3 million consistent with the previous quarter and compared with $1.5 million for the first quarter a year ago.

First-quarter license revenue was primarily derived from ongoing 1T-SRAM and serial interface IP projects as well as the three new I/O projects that Len discussed. License revenue for the first quarter of 2011 included revenue from 13 licensees consistent with the previous quarter.

Royalty revenue for the first quarter of 2011 was $2.2 million compared with $2.6 million for the previous quarter and $2 million for the first quarter of 2010.

First-quarter royalty revenue decreased 14% sequentially, due to the typical seasonal decrease in royalties associated with gaming products that contain our 1T-SRAM embedded memory. First-quarter 2010 royalty revenue was recognized from 14 licensees compared with 15 licensees in the fourth quarter of 2011.

GAAP gross margin for the first quarter of 2011 was 81%, consistent with the previous quarter and compared with 78% in the year ago quarter.

In terms of our operating expenses for the first quarter, research and development expenses were $6.2 million compared with $6.1 million in the fourth quarter of 2010 and $5.5 million in the year ago quarter. R&D expenses in the quarter were primarily driven by development to the Bandwidth Engine integrated circuits, including a slight increase for CAD software licensing and personnel costs. These increases were partially offset by lower production Bandwidth Engine IC costs and contingent compensation expense-related acquisitions.

Selling, general and administrative expenses were $2.7 million compared with $2.9 million in the previous quarter and $2.6 million in the year ago quarter. The sequential decrease in SG&A expense was primarily due to lower compliance costs partially offset by higher sales commission expense.

Total GAAP operating expenses for the first quarter were $8.9 million, consistent with the previous quarter and compared with $8.6 million in the first quarter of 2010. Total operating expenses in the first quarter of 2011 included $0.7 million for amortization of intangible assets and $0.7 million in stock-based compensation expense.

On a non-GAAP basis, total operating expenses for the first quarter of 2011 were $7.6 million compared with $7.3 million for the fourth quarter of 2010 and $6.6 million for the first quarter of 2010. Our operating expenses remain on track against our planned investments for development of our Bandwidth Engine integrated circuits.

On a GAAP basis, the net loss for the first quarter of 2011 was $6 million or $0.16 a share compared with a net loss of $5.7 million or $0.17 per share per share in the prior quarter and a net loss of $5.7 million or $0.18 per share for the first quarter of 2010.

On a non-GAAP basis, the net loss for the first quarter of 2011 was $4.7 million or $0.13 per share, which excluded intangible asset amortization and stock-based compensation expenses totaling $1.4 million. This compares with a non-GAAP net loss of $4 million or $0.12 per share in the previous quarter and a loss of $3.7 million or $0.18 per share in the year ago period.

Net loss per share on both a GAAP and non-GAAP basis for the first quarter of 2011 was computed using approximately 37.3 million weighted average shares outstanding.

Now turning to the balance sheet, as of March 31, 2011, our cash and investments balance was $34.6 million compared with $37.5 million at December 31, 2010. The $2.9 million sequential decrease in cash and investments included approximately $3.9 million of cash used in operations, partially offset by the receipt of a $0.8 million [ARM] withholding tax refund.

Accounts receivable at the end of the first quarter totaled $1.2 million compared with $1.1 million as of December 31, 2010. The increase in accounts receivable was primarily due to the timing of collections and invoicing. Prepaid expenses and other assets decreased primarily due to the receipt of the $0.8 million ARM withholding tax refund. This decrease was partially offset by additional CAD tool licensing costs.

The accrued expenses and other liabilities line on our balance sheet included $1 million in earnout consideration that will be paid to the former shareholders of MagnaLynx in the second quarter of 2011 vis-a-vis the achievements of agreed upon milestone specified in the March 2010 acquisition agreement. The remaining $0.5 million indemnification holdback related to the MagnaLynx acquisition is expected to be paid in the fourth quarter of this year net of any costs related to indemnification plans if they arise.

As of March 31, our total headcount was 153 employees compared with 162 employees as of December 31, 2010. Over 80% of our employees are in engineering or research and development. Of our 153 employees at March 31, 55 are located in India.

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). Gary Mobley with Benchmark.

I wanted to start with some questions relating to your intellectual property business. First, I'm curious how your backlog of licensing business ended the quarter. Is the increase in deferred revenue indicative of increase in backlog? And what kind of potential revenue run rate might you be on the licensing front during Q2?

I'll take that one. This is Jim. We certainly did have an increase in backlog in the first quarter and you definitely saw that in the deferred revenue balance. Two of the deals we signed in the quarter were signed in the month of March. So we had modest revenue impact; a lot of that is still on our backlog to be carried forward.

Looking ahead to the second quarter and where we sit right now almost a third of the way through it, I think we'll see the primary benefit from these new deals more in the third and fourth quarter, just based on the timing of the deliverables under them and, again, based on where we sit right now on the timing of the revenues of deals we will put this quarter. So we definitely had an increase in backlog.

I don't expect a large increase in licensing revenue this quarter. I think we'll see the benefit more in the third and fourth quarters.

Okay and then focused in on the royalties for a minute. How do you think the quake in Japan will impact your royalties coming from your gaming partner? And then as well, as it relates to gaming, I know the one system you are designing to is expected to be refreshed in 2012. How would you -- how are your prospects in being included in the next-generation platform?

I'll start that off. We are a relatively small company in a very, very large market. The games partners that we have, are -- we were not located in the northeastern part of Japan when that horrible event occurred. So I think that the earthquake and subsequent tsunami probably won't have too much impact on us. There's a dynamic, there's a number -- there's a bit of dynamic upheaval in the game business right now in that 3DS is coming out from Nintendo and they are talking about an upgrade or some movement into a new product on the part of [Lee].

Additionally, Microsoft's Kinect seems to be doing reasonably well, and I think we are in that box as well.

Having said that, I will let Jim -- Jim is always tracking this space a little bit more than I am. I'll let him make a few comments as well.

Yes. I believe Nintendo reported Monday Japan, Sunday night our time. I didn't have time to get through all of it. I didn't see whether they had made mention of softness in the market.

If I remember correctly, they missed for Wii hardware. I think they missed their Q4 ending March 31 and missed their -- as a result missed their 16 million unit target, I think they had, for their fiscal ending 3/31/11. I think they only came in around 15 million or 15.1 million.

They are projecting, I think, 13 million units or so for their upcoming fiscal which runs through 3/31/12 which is about probably a 14% decline and lower than I guess the declines the past couple of years. The product has aged. So I don't know that we are going to see a big dip in that.

Certainly in our internal plans, I had projected a decline versus last year. Right now we don't have a lot of visibility. We certainly saw a drop in their Q4 shipments our Q1 revenue, which is consistent with past years. And their Q1 shipments, our Q2 revenue historically tends to be low as well.

Obviously some would say that's seasonality, folks, the winter ending, etc., but I expect things will stabilize in the third and fourth quarters. There's also rumors of a price cut. I think a $50 price cut coming on the unit sometime this spring to bring it down to $150 which, hopefully, will generate more sales.

You know, fortunately on the royalty front, we did see strong, strong results from our other two largest royalty payers, one in the foundry business and one in the networking business. And so far we are seeing that trend continue in their Q1 shipments and what we've gotten, what will be in our Q2 reporting. They are fairly early reporters.

Okay and then shifting gears to Bandwidth Engine. What is --? I would imagine the likelihood of receiving a design win from a networking OEM would be fairly low if you were the only supplier of this type of memory chip. So how do you solve the problem in bringing on an alternative second source? Do you work with an additional partner? Do you license some intellectual property components at Bandwidth Engine to bring on a second source?

So first off, I would say that your first comment is fortunately for us not correct. You know, I want to be very conservative about when we announce our first design win, but the fact of the matter is there are a number of people who have been working with us on a very early going, our alpha sites, if you will, beta sites, whatever. And I believe that their commitment to this is very real.

So I'm not choosing today to announce a design win. But I would strongly -- I strongly believe based on my many years, a couple of centuries actually, of experience that the second source is very desirable, but it will -- it will not prevent us from having design wins.

Additionally, our mission here is to enable serial chip-to-chip communication. So right off the bat, we created this very efficient giga chip interface which allows serial chip-to-chip communication. And as I've said, probably on this call, but other places as well, that interface could be accepted very, very widely, but never be used on -- nobody ever uses it to bulk up to one of our chips. Because we are in fact enabling serial chip-to-chip communications and we are seeing a lot of action around that interface. But not that I think we aren't going to get designed in because I have already stated that I think we will.

Third, as I may have said on this call one time or another, the first and most important thing for us to do is to get this product out and have it totally released. That means, some kind of decent [deep] entity, some opportunity to have a positive contribution margin at the lowest possible volume and then profitability, cash flow positive (technical difficulties).

But I also remain committed to second sourcing where the guy might be able to initially access our masks, our test programs, our packaging documentation, everything else. And then I think for him to become a true second source in designing products that we may bring to the market together or actually innovating will take a fair number of years. Because this 1T-SRAM behaves in the technology like a DRAM, but the technology it rides on is an SRAM and it does take a little experience to really effectively make sense of it.

So to date, we get a lot of pressure on us for second source. And there's one or two guys that may opt to stay out, but some of the top five guys have -- I believe are going to opt in and at the right time we will announce that.

Thanks.

Thank you.

[Niall Brash] with Artis Capital Management.

Any color on when you expect to announce your first customer for the Bandwidth Engine?

Probably would be inappropriate to make any kind of futuristic statements here. I think we are making good progress now, but I would like to think that we have already said that we would be announcing these kinds of relationships in the second half and I continue to believe that. I probably have to put a criteria around it, because a fair number of guys in the time they could make an argument that it may have happened or not happened, but we don't have a date for it.

But I continue to believe it would be second half of the year or middle of the year, something like that. I hope that is adequate for today.

Okay, great. Thanks.

Joel Achramowicz with MoSys.

Thank you. That's Blaylock Robert Van, thank you very much. Thanks for taking my call.

You never know. Obviously the excitement here is the potential of this market that you've pioneered and really carved out, and I guess the question I have is you've been working away now for some time, a number of months with some big players that are interested in this really turbocharged device.

You had started off thinking that this could easily be $1 billion market. Have you changed your tune in any regard there, Len and Jim? Is it -- you think it could be bigger than that or I mean any new information in discussions with prospects and this kind of thing?

Actually, it's a difficult thing for us to say. I believe that we discussed in the past that at 40 gig systems and below, the solution of choice was a combination of [RL DRAMS and QBI] memories. And I think a case can be made that sales into the networking space on those two guys combined is in excess of $1 billion a year.

So in that respect, I think we can say that we are addressing [a tam] of roughly $1 billion in size. I have always been conservative and said $600 million, $700 million, but if you look at it and you really get disciplined about it, I'm probably a bit conservative.

I think I read an article, I think I have something in my computer where somebody recently said that in light of what's going on in the vastly and fast expansion of users of the Internet that are trying to pass more and more complex stuff around, that the line card or the interface are the lined card or the network interface card business is going to be a $50 billion business?

In that case you know that's a space we are targeting, right, is serial chip-to-chip communications on those boards that it out there in those interfaces between the giant boxes and the users. I think our roadmap is very, very exciting.

I have never said it before, but if a guy is to look at architecture, there's multi-cored processor chips out there now, but if you look at -- and today maybe for the first time, I use the word partitioned -- if you look at the way we partitioned our memory, I could call it the multi-cored memory.

So basically I think when you look at the applications for that kind of a solution and that solution that we have has got some owned IP to it, I think that looking down the road, the opportunity for us to have the oppor -- quite a large growth potential over the next three, four, five years is very real and has not diminished in the least bit, Joel.

Very good. Those are great numbers. Len, just a thought as far as your resources and technologically. Do you see any -- are there -- is there anything that you lack now in terms of competency in the engineering and development side to make, to bring this to fruition and to sales? You, anything missing in the technological ranks that needs to be sold or do you feel that you have an adequate team now?

We don't have to grow the Company anymore. One of my closing remarks today will be in all this hype and all this excitement that the part generates, we have to play a hell of a lot of attention these days to our financials because it drives me crazy not to be able to tell you guys we're making money and doing better and better quarter over quarter on a per-share basis.

So, we have -- we don't have to add any net net cost. We may have to pull in and redeploy costs, I suppose now and then to get a person to get -- to always be trying to get your entire employee base to be more exactly synergistic to the technical needs of the company. But I would say we are very close right now.

We are in a kind of a funny place now. I said at the end of -- coming into this year, we had the chip. The chip looked pretty good. We are able to sample it. We are able to do preference boards, but now we have to create these very, very efficient test programs and we have to create the ability to access this programmable built-in self-test capability.

And a lot of this is new and it takes a lot of work and it goes slower than you would like to think. It's like trying to run through high grass.

I think we have the right mix on the team, but we -- it just takes a lot of slugging along. And it might look now and then like we've lost some time, but I don't think it's the lack of the right people. I think it is just perhaps the history, my history would be that I am optimistic so I'm rarely ever ahead of schedule. I'm always usually fighting to be on it.

Very good.

It's okay on our cost basis. (technical difficulties) be either staying roughly the same or getting better.

So basically on the burn perspective, Jim, we could probably expect some incremental sequential operating expense increases. Right? But nothing significant in terms of the step function going forward. Except for maybe tapeouts.

That's correct. Subject to the timing of our Bandwidth Engine 2 tapeout, putting that to the side, the operating expenses this quarter were about $8.2 million. We did have some deferred costs that we put on the balance sheet related to a couple of our 1T-SRAM projects, not too significant.

We also with just the verification and characterization efforts and you know as Len said, we definitely ran into some challenges, but -- which were fixed -- but they probably delayed some expenditures on boards. Reference boards, things like that. So we will see some of that kind of hit in the second, third quarter.

When I look at taking the $8.2 million and putting aside special items like tapeouts or quarters where we have an IP shuttle, for example. Generally expenses should only rise at a maximum in one quarter 8% or so, more like sub 5%. You probably noticed from the headcount numbers we did do a very small headcount reduction in the first quarter basically to bring down some costs there.

We probably will be adding different talents in different places, certainly going through Bandwidth Engine and that process. Have identified some areas where it would be good to have resource in-house whereas going through Bandwidth Engine 1 we relied on, in some places, consultants. But bottom line is, the expenses, no, there's no large increase to put aside the tapeouts, etc.

Very good. Good luck going forward. Look forward to charting your progress.

Thank you. Appreciate it.

Ladies and gentlemen, that concludes our question-and-answer session. I would like to hand the call back to Len Perham for closing remarks.

Okay, thank you very, very much. I just have a few comments in closing today, not very long.

I think maybe last quarter or in the recent past, I said there were a few things that I track carefully and they -- I just wanted to address them again for you. One is the need to pay attention to our IP because the IP business is what is going to maintain us in a reasonable position here until we see the Bandwidth Engine or our thrust into IC start offsetting our cash burn and we start to generate some cash.

So we will continue to pay a lot of attention to IP. We did make some organizational changes. We generated a lot of collateral to enhance our customers' ability to understand what we have and how to use it and we are gratified that it looks like it is making good progress for us.

Secondly, regarding -- the second point would be the Bandwidth Engine 1 itself. I didn't used the term today, but the only thing that really matters to me is that the product gets released. That means that I get it completely transferred from the technology development side, all questions answered over into what I am going to call a business unit side of the company where they now have accepted it, meaning that it is working and characterized properly. It is responding well to what the integration of the design to the process architecture that we are using at our foundry is close and we are on some decent part of the deeper density curve. And at that point in time it becomes a matter of just polishing the apple 24 hours a day, seven days a week.

And so that BE1 release I would like to think is somewhere between the end of the second quarter to somewhere in the second half of the third quarter. And we continue to be focused very hard on that.

I mentioned briefly that we would continue to work on improving our financial performance and managing cash utilization. We are investing heavily in the Bandwidth Engine in 2011. We just got done telling Joel we don't see any step-up in cost, but nonetheless we do burn cash and we are focused on growing the IP business and it's a primary source to offset the expenses, and it's a support of non-dilutive cash as I often refer to. It supports our development efforts and -- but we need to manage costs carefully and we will continue to do that.

And finally, just on a sort of a scheduling thing, we are going to be with Benchmark in Milwaukee at their Investor Conference on May 12. We would welcome the opportunity to meet you face to face if you can get by there. Just schedule a meeting with us or just contact your Benchmark representative and I'm sure he will set it up for you.

So I'd like to thank you all for coming on the call today. I thank you all for the patients you have with the team and we look forward to talking to you again soon and letting you know that we are on schedule and on plan and moving to the right place. Thank you very, very much.

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