Peraso Inc (PRSO) 2011 Q2 法說會逐字稿

Good morning and welcome to the MoSys second-quarter 2011 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 today, Friday, July 22, 2011. I would now like to turn the call over to Ms. Beverly Twing of Shelton Group, the Investor Relations agency for MoSys. Beverly, please go ahead.

Thank you. Joining me today on today's call are Len Perham, MoSys's President and Chief Executive Officer; Jim Sullivan, Chief Financial Officer. The second-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 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 the use of the company's embedded memory and interface technologies and IC's; expectations concerning the company's execution and results; expected benefits of the Bandwidth Engine IC's, product development and timing of shipments of Bandwidth Engine IC's; 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 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 morning, everyone, and thank you for joining us this morning. I will start the call with some introductory comments followed by an overview of our progress on the Bandwidth Engine Integrated Circuit family and then an update on our IP business. Jim will then discuss our second-quarter 2011 financial results, and after that, we will open the call for questions, and I will close perhaps with a few summary comments.

First let me begin by formally welcoming Tom Riordan to MoSys. Tom became our Chief Operating Officer in early May and is overseeing our engineering and product development efforts as well as managing overall operations. We are very excited to have him on board as part of our senior management team. Tom brings a wealth of operational and design experience and has had a long and successful semiconductor career that includes Exclara, PMC-Sierra, QED and MIPS. I have known Tom personally for many, many years, initially when he was the head of the MIPS design team working feverishly to get the MIPS-4000 microprocessor -- completed it out and later when he founded QED and developed and grew the company and ultimately took it public.

Tom is also no stranger to MoSys. He has been an advisor to the company since early 2010. Tom's reason for joining MoSys was simple, he believes the MoSys Bandwidth Engine family of IC's is a revolutionary step forward in network system architected memory and he is excited to be a part of the team that will be driving this advanced system solution forward.

As COO of MoSys, Tom has also assumed, among his other responsibilities, the engineering leadership role previously filled by Sundari Mitra, who resigned as our Executive Vice President of Engineering at the end of the second quarter. Sundari decided to take a break, spend more time with her family, in light of the fact that she had spent three years building the Prism Circuits team, you may recall she personally funded the entire deal and then ran it right up until it was acquired by MoSys, and then spent enormous amounts of hours working alongside the MoSys team in the design, development, characterization and moved toward release of the first MoSys Bandwidth Engine IC family. Sundari's contributions to MoSys' transition into a fabless semiconductor company have been enormous, and we continue -- consider her a key part of the MoSys family.

Sundari remains an advisor to the company in a consulting capacity and will contribute her expertise and support to the team where needed and as requested.

On behalf of the company, I would like to thank Sundari for her efforts and significant contributions, and I genuinely look forward to continuing to work with her.

Now let me give you a little update on the Bandwidth Engine family of integrated circuits.

We continue to make significant progress towards bringing this new system-level solution to the market, and although last quarter I reported we were a few weeks behind schedule on our characterization and verification efforts, I am pleased to share with you today that we have completed these steps and now have a fully-verified bandwidth engine [won] in our possession. What this means is that we have verified all of the logic functions as well as the SerDes and memory performance.

More importantly, with the completion of full verification, we can now turn our attention to this revision of the mask set. This is the product we intend to take to market, and we envision no further design changes for the foreseeable future.

This is very significant in terms of both time and money. A full mask turn would have taken us six months and cost us a minimum of $1 million to $1.5 million.

The urgency now is on completing and releasing our first complete suite of test programs, that is programs for wafer sort, final test and QA. Once released, these programs will be used for driving not just production requirements but all of our QA&I work. Without these programs and without the disciplined use of them, we cannot realistically start our enterprise-grade qualification of the Bandwidth Engine family.

With regard to ISO 9000, we continue to make good progress towards achieving this certification. The achievement of this certification will mark a significant milestone in our journey back to becoming a fabless semiconductor company again. Network equipment companies, that is our potential customers for the Bandwidth Engine family, assume their suppliers will be ISO-certified among many other requirements and attributes. Therefore, this is an essential step forward for MoSys Corporation, one we expect to make without significant delay.

Our foundry partner, TSMC, continues to provide superb support as we move from full chip verification into the world of advance quality and reliability testing and characterization. I was in Asia earlier this month and while there, I spent a few days down in [Shenju] with the TSMC team. They are supporting our every effort to complete our product characterization and then all of the necessary various quality and reliability benchmarks, so we can begin the process of full production release of our Bandwidth Engine family. It is magnificent to have this team on our side. They are excellent people.

In regards to traction with prospective customers and partners, today is the time to define some terms that we're going to be using on a consistent basis now when we provide you updates on sampling, prototyping and design wins. It is essential we understand each other and we're always on the same page. Jim and I are going to try to be very, very disciplined in the use of these terms so you can always understand where we are and you know what lies ahead and what has been done and what needs to be done.

We intend to use the term design wins in progress. This will mean that we know the Bandwidth Engine is included on the current draft of the customer's system design, but his schematic illustration of this design is not frozen yet. As we approach the end of this particular phase, the customer is making sure his proposed design is meeting or exceeding his system performance requirements in the most cost-effective manner. Needless to say, the design remains fluid during this period while the customer is working to achieve that goal.

When we move from design wins in progress and start talking about samples or prototype quantities, we're going to be assuming the customer's schematics are frozen and we are on the board. The customer now intends to build prototype boards, maybe even prototype systems, to verify performance, and he's buying IC's not just from us but as well from his other suppliers.

At this point, his system is still not released to production yet. At the completion of the sampling and prototype quantities and the verification phase of the customers' system requirements, we will start referring to a term design win. Our customer has completed prototype system evaluation and he has informed MoSys that his system has met or exceeded performance requirements and their program is moving forward; and further, that his released system design rules -- his proposed released system design uses MoSys Bandwidth Engine integrated circuits in one or more applications on the board.

Prototype production -- prototype production will be meaning the customer is initiating a low-volume system run. Perhaps he's going to put a few systems out in beta sites now. He is learning now how does his system compete? Is his customer base going to buy a system or is it going to be a high-volume box, a low volume box, tremendously successful, or what is the status. We will have to live through that.

And finally, we will move to production orders. These will be generated as our customer's system, now released into production, starts to generate serious sales.

So, you know, you're going to hear us use design wins in progress, samples, prototypes, prototype quantities and, ultimately, design win. So we will use these terms a lot, and I'm sure on occasion you will want us to explain where we are in the process, and we won't mind doing that at all.

During the second quarter, we expanded our sampling across a wider array of networking equipment companies. We increased our evaluation pipeline, and we received our first paying purchase order for Bandwidth Engine samples, as described above.

Let me be clear that in many of the samples -- in the case of many of the samples that we have shipped prior to this, they have gone on to component evaluation boards. The customer uses these samples to singularly evaluate our Bandwidth Engine integrated circuit and convince himself it is working as described in our product documentation. A significant number of customers have completed that phase of B.E. evaluation.

During this most recent trip to Asia, and I think I got back a few days ago here, which included Taiwan, China and Japan, I visited with multiple prospective customers and confirmed that we do have a number of design wins in progress.

We will continue to work to provide close application supports to these prospective customers and work towards securing committed design wins, as these customers solidify the definition and design of their next-generation systems. We look forward to keeping you up to date on our progress toward meaningful design wins and ultimately the ramp and future revenue generated by these successful customer engagements. So on this most recent trip, I saw design wins in progress, so being straightforward, that means that I saw various schematic diagrams; all still fluid while the customer is evaluating what is the most cost effective way to achieve a certain performance level in his box; and indeed Bandwidth Engine was used, and I can say [multipl-ey], in those schematics.

Now we have to work with them and you know as they convince themselves that they've got the right design and the right build of materials and move to the next step.

In every case where we have a design win in progress, the network equipment company involved has embraced our GigaChip interface. However, none of the network equipment companies have joined the GigaChip Alliance. In some cases where they use or intend to use an SoC, System on a Chip, form of packet processing engine, they have instructed their SoC supplier to adopt our interface. And each time, that has occurred uneventfully, in other words, no problem, success.

One particular network equipment supplier has informed us in a most straightforward way that he has no intention of publicly announcing the adoption of our GigaChip interface because he considers it to be a competitive advantage in his system, one that he has no intention to broadcast around town.

Based on progress to date, I believe we can anticipate increasing cases of design wins and progress, backed up by orders for samples, and a subsequent increase in technical support activity as we move through the balance of the year. Recognizing this likely occurrence, we have increased the geographic coverage of our selling and application support organizations this past quarter. It is safe to say we are moving into a new phase in the development of our company, and our move toward being a prestigious supplier of complex integrated circuits.

We moved to strengthen our sales applications and marketing organizations in several ways this past quarter. We added an applications-rich sales representative in the United States. In fact, in the New England region.

In short, you know, we're not in the business of booking orders yet. We're in the business of winning designs. That is why whoever represents us at the customer's desk has to be applications rich. The selling of our product is a technical sell. We want to rack up a ton of design wins, and when they go into production, then we're going to rack up a lot of orders in terms of volume.

We hired our first China-based employee this past quarter who is both applications savvy and very sales experienced. We have needed direct and local representation in China specifically at Huawei and ZTE, two of the top five players in our target market, and this move should satisfy that need. Additionally, we have backed that up with an applications-rich sales rep in China. I met with them while I was on this MoSys trip as well.

Two of the top five customers in our target market are in China, and we need to dramatically increase the amount of time we're with them, educating them on the advantages of Bandwidth Engine solution, understanding its capabilities and features, enabling them to use it in every application possible.

At the home office, we have added a strong strategic marketing person with a lot of years of experience in the integrated circuit business, so that we can start looking at various strategic alternatives for MoSys as design wins flow and as we consider the feature set of Bandwidth Engines 3 and Bandwidth Engines of the future, and for that matter, what we should be looking at beyond the Bandwidth Engine that we could bring to a manufacturer and provide increasing value to our customer.

It should be noted that we acquired Prism Circuits in June of 2009. Since then, we have taped out BE 1, evaluated the mask set, made a one-layer change to the product, and successfully shipped sample units and reference boards in December 2010; have now completed the full verification of the product with no requirements for design changes and mask Alterations; have now received our first real simple request.

We anticipate identifying more design wins and progress and perhaps a full-up design win before the year end 2011. All of these milestones are only made possible through the dedication and super hard work of the entire MoSys team.

We have come a long way in a short time. We have a long way to go, but we've come a long way in a short time. MoSys has been accomplishing remarkable goals and achieving milestone after milestone, and I'm very proud to be a part of this great team.

Bandwidth Engine 2 is now through product definition and in the early stages of design. It will be a second generation of this revolutionary new system architected memory we have created and we are now starting to sample and deliver.

It appears Bandwidth Engine 2 will have at the minimum 4X advantage in memory access speed over recently announced competitive alternatives. We haven't seen any new players out there. This is attempts to try to hold their positions by announcing new versions of old parallel products, alternatives to where we are going and what we think the new standard will be.

Our early goal is to tape out this next generation Bandwidth Engine late in the first quarter of 2012 and have sample availability in the third quarter, beginning fourth quarter 2012.

Regarding our IP business, through the first half of 2011, we're tracking closer to plan on our IP bookings which are up compared to the first half 2010. We secured five new customers, three in Q1, two in Q2, and are ahead of our new customer account pace over the last two years. As we discussed last quarter, we booked our first 28 nanometer, 10 gig multi-protocol SerDes order. We believe there continues to be growing opportunities for our high-speed SerDes interface solutions and we're particularly focused on the advanced 28 nanometer node where we have got a strong pipeline of opportunities.

In addition to our SerDes IP growth, 1T-SRAM continues to generate solid revenue from existing licensing and royalty agreements. And we believe there are still many opportunities in the market for this technology.

We enter the second half of the year with a solid pipeline and project opportunities at new and existing customers, are probably resulting from the added focus we placed on IP in the first half. I remain optimistic about our ability to convert this pipeline into the second half of 2011 and achieve top-line growth for FY 2011 as well.

So to summarize before turning the call over to Jim for a review of financial performance, we continue to make rapid and meaningful progress on our journey to becoming an IP-rich fabless semiconductor company. We continue to see excellent opportunities ahead for our Bandwidth Engine family of ICs. We're actively expanding our sampling program with key customers, actively expanding our ability to provide application support, and we're looking forward to further evaluation and progress toward design wins.

We have yet to hear our prospective customers say they can't see a need in their system for our solution. We have yet to hear somebody say we are not interested.

I am optimistic regarding the second half of this year and expect we will continue to achieve our goals and be well-positioned for 2012. In 2012, I anticipate a continued high level of interest in Bandwidth Engine 1 from the leading network equipment companies and, additionally, I would expect to achieve our first solid design wins and subsequent production orders.

I'm expecting Bandwidth Engine 2 to become real, giving us the opportunity to cost down our current solution and simultaneously bring new features, capabilities and even new areas of application to our next generation Bandwidth Engine integrated circuits.

That said, I would now like to pass this call on to Jim for a review of our financials for the second quarter and then we will open the call for questions and answers. Jim, the ball is in your court.

Thank you, Len, and good morning, everyone.

During the course of my comments, I will make several references to non-GAAP numbers. Unless otherwise indicated, each reference will be to an amount that excludes stock-based compensation expense, intangible asset amortization 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 this morning, and can be found at the Investor Relations section of our website.

With regard to the results for the second quarter of 2011, total revenue was $3.3 million compared with $3.5 million for the first quarter of 2011 and $4.3 million for the second quarter of 2010. Licensing revenue in the second quarter was $1.2 million compared with $1.3 million in the previous quarter and $2 million for the second quarter a year ago.

The second quarter of 2010 included the benefit of significant revenue recognition from a follow-on order received from Rome for 1T-SRAM.

Second-quarter 2011 license revenue was primarily derived from serial interface IP projects, including the two new customer projects booked in the quarter that Len mentioned, as well as ongoing 1T-SRAM projects.

License revenue for the second quarter of 2011 included revenue from 12 licensees compared with 13 in the previous quarter.

Royalty revenue for the second quarter of 2011 was $2.1 million compared with $2.2 million for the previous quarter and $2.3 million for the second quarter of 2010. Second-quarter royalty revenue decreased sequentially due to the typical seasonal impact on royalties associated with gaming products that contain our 1T-SRAM embedded memory.

Second-quarter 2010 royalty revenue was recognized from 13 licensees compared with 14 licensees in the first quarter of 2011.

GAAP gross margin for the second quarter of 2011 was 86%, up from 81% in the prior quarter and compared with 87% in the year-ago quarter. In terms of our operating expenses for the second quarter, research and development expenses were $6.6 million compared with $6.2 million in the first quarter of 2011 and $6.7 million in the year-ago quarter.

The sequential increase in R&D expenses in the quarter was primarily driven by development of the Bandwidth Engine IC, including an increase in back-end costs for wafer fab lots, burn-in and evaluation boards and related costs, partially offset by lower headcount and software tool expenses.

Selling, general and administrative expenses were $1.9 million, down significantly from the $2.7 million in the previous quarter and $2.5 million in the year-ago quarter. The sequential decrease in SG&A expense was primarily due to lower compliance costs, legal fees, sales commissions and headcount.

Total GAAP operating expenses for the second quarter were $8.5 million, down from $8.9 million in the previous quarter and compared with $9.2 million in the second quarter of 2010.

Total operating expenses in the second quarter included $700,000 of amortization of intangible assets and $800,000 in stock-based compensation expenses.

On a non-GAAP basis, total operating expenses for the second quarter of 2011 were $7 million compared with $7.6 million in the first quarter of 2011 and $7.2 million for the second quarter of 2010. The decline in operating expenses is primarily attributable to the lower SG&A components I previously mentioned.

Our operating expenses remain on track against our planned investments for development of our Bandwidth Engine integrated circuits and prosecution of our IP business.

On a GAAP basis, the net loss for the second quarter was $5.7 million or $0.15 per share compared with a net loss of $6 million or $0.16 per share in the prior quarter and a net loss of $5.4 million or $0.17 per share for the second quarter of 2010. On a non-GAAP basis, the net loss for the second quarter of 2011 was $4.2 million or $0.11 per share, which excluded intangible asset amortization and stock-based compensation expenses totaling $1.5 million.

This compares with a non-GAAP net loss of $4.7 million or $0.13 per share in the previous quarter and a loss of $3.4 million or $0.11 per share in the year-ago period.

That loss per share on both a GAAP and non-GAAP basis for the second quarter of 2011 was computed using approximately $37.7 million weighted average shares outstanding.

Now turning to the balance sheet, as of June 30, 2011, our cash and investments balance was $31.3 million compared with $34.6 million at March 31, 2010. The $3.3 million sequential decrease in cash and investments included approximately $3.2 million of cash used on operations, as well as the $1 million earn-out payment made as part of the MagnaLynx acquisition. These cash outflows were partially offset by proceeds from option exercise of $1 million.

Accounts receivable at the end of the second quarter totaled $500,000 compared with $1.2 million as of March 31, 2011. The sequential decrease in accounts receivable was primarily due to favorable timing of collections from customers and timing of invoicing.

As of June 30, 2011, our total headcount was 157 employees compared with 153 employees as of March 31, 2011, with over 80% of our employees in engineering and research and development. Of our 157 employees, 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 question. Operator?

(Operator Instructions). Gary Mobley, Benchmark.

Good morning, guys. Happy Friday. I want to start with some of your definitions you provided, in particular your design win in progress. Approximately, how many design wins in progress do you feel you have right now?

And then as well, I'm sure each of those potential customers have multiple branches in their decision tree with respect to different options; what types of other memory options are you competing with there? Are you competing with RLDRAM 3 primarily?

Okay, Gary, first off, I'm looking back here to my definition. So design win in progress means that we are on the customer's schematic but the schematics aren't frozen yet. So I've met with five to 10 customers on my trip to Asia, and more than half of them are now talking to my -- and I had the applications with me. And more than half of them were talking about -- were showing us schematics now.

Interestingly enough, not one of these potential applications was showing me the use of one Bandwidth Engine. And I have to say that in some of these cases where they want to use a part, which is exactly what I would've thought of, they have came to an application that we had previously not really looked at too hard. But because of the macro function capability this part has, the ability of the part to do logical processing as well as behave like a memory, another area opened up.

So, I would tell you that I'm not going to be -- if I give you an exact number, then you guys are going to make me give you a scorecard on who dropped out and who stayed in, but I will tell you that right now we're looking at something at greater than 5 different sets of schematics around here and less than 15. So it is reasonably encouraging and gratifying.

So -- and I would tell you that we're on the control plane, which would mean we're probably looking at, an RLDRAM alternative with the disadvantages of that part. And we're also in a data plane where you would find a lot of QDR solutions.

We have said from time to time that this bandwidth engine family is capable of 15 different distinct product numbers, meaning that it can serve 15 different functions in the system, functions in performance levels. So we have seen this part being used for some statistics applications, as well.

There is interest in the part in some quarters for packet buffering, which you would think would be traditionally the world of the RLDRAM since it is not particularly access intensive. However, there is some unusual requirements that are being solved by multiple -- like a unique design area committed to some kind of a packet buffer that's several chips and it looks like our solution maybe could reduce it to one.

So all in all, we've got -- and I should say probably at least half if not more, since you might -- going to be asking me this anyway -- of our design wins in progress outside of the Pacific Rim. So it is well-balanced and it is where we would like it to be, and it is reasonably gratifying.

I think I've answered your questions, Gary. If I missed something, you can remind me.

No, no, that is perfect.

You did mention as well a first purchase order for Bandwidth Engine samples. I'm curious to know when you might see shipments for those particular products.

My final question, I guess is perhaps for Jim, in prior conversations, you mentioned that you delivered a macro, a 1T-SRAM macro for NEC's NextGen -- design for the NextGen Nintendo game console. I was hoping you can give us some update on how that is progressing?

So let me just start. I believe, and Jim can correct me if I'm wrong, that the backlog would show those samples are going to go out this quarter.

Correct.

So the schedule would be to ship this quarter. And in terms of the IP that we have previously delivered on -- to our NEC Nintendo partners -- I think you asked about that -- we delivered a large memory to them maybe a year and a half or two ago, a large high-speed compute engine. But I don't know that we know that it's in this new machine that they're going to bring to market in 2012 sometime or late 2012. Jim can give us a little more color on that. But they've been rather secretive about what they're going to do with this next box, and we've -- and with the merging of NEC and Renesas and with our tremendous drive into this Bandwidth Engine, perhaps we are not spending as much time with those boys as we should, although I did spend a fair bit of time with that company when I was in Japan. Their top management are very close to us. Jim.

I think based on what we have heard so far and frankly given the communication to date, I would have to say it's probably more likely than not that we are not in that next generation system.

All right. Thanks, guys.

Thank you, Gary.

Ian Ing, Gleacher & Company.

Good morning, Len; good morning, Jim. First question, there is headlines out there, big North American OEM having cost reduction efforts, cut in headcounts. I just wanted to see if the R&D impacts -- if there's any impact you are seeing in terms of getting into some initial systems or the ability to propagate to additional systems or their ability to innovate?

You know, it is a good time for us to be coming to market because there is a little -- we are aware that one guy is cutting back here a little bit in the valley and maybe another guy has got a bit of an inventory problem.

And you know, we are also acutely aware of the fact that the United States has got a lot of Internet infrastructure around, but other countries such as China, they have not as much infrastructure and they are very aggressive about expanding. And remembering that the top five guys for our solution would be Cisco, Juniper, Hauwei, ZTE and perhaps ALU. We're in close communications with all five of those guys.

And we're talking about a ramp starting -- on our early design wins in progress -- moving to hopefully a full design win phase. I would think those decisions on a number of these design wins in progress would happen in the late second through the end of 2012.

And I think these guys are all recognizing that the expansion of users on the Internet and the expansion of social networking onto the Internet is driving the need for new generations of systems.

So I think the downturn and the slight shakeout we are seeing should be behind us by the time these things are really taking off, and though there is some slowdown I suppose in real-time business selling into existing products, I don't think we're going to see much slowdown in what has to be out there in the way of Internet equipment in the second half of '12 and beyond. That is probably a fair answer, Ian.

Okay, great.

And then my next question is when you look at schematics on these design wins in progress, do you see devices exclusively accessing memory with a GigaChip interface or would the device also have some redundant interfaces like RLDRAM and QDR potentially accessing both legacy serial -- legacy parallel and serial interfaces?

We are continuously looking at the possibility of adopting some of the traditional interfaces, as you call them. But I would tell you that in every design win in progress, they're going with a serial interface. It isn't clear -- I don't have a clear technical position this morning on -- if I bolt some kind of a converter to an interlock and interface onto the front end of a Bandwidth Engine, I'm going to significantly affect the latency and the overall performance of the solution. So we continue to look at how we might open up applications by getting to a -- I'll call it a middle of the road that isn't like the old and isn't quite like the new, but it is kind of a transition, transitory opportunity for the system designer.

And we haven't come up with something we like yet. And so I have to tell you that everything to date is using the GCI interface, and it is being greeted -- it is actually not even discussed other than talking about how they make sure they understand how to use it.

Maybe I should've clarified -- when I say device I mean like FPGAs or network processors or some sort of ASICs, getting to memory through both a GigaChip interface and legacy parallel.

That is a good question. In the area of the FPGA, it's very -- these were the early adopters on our interface. It's simple for them to take our interface because they just program it, and as you might recall, it's very lightweight; it only requires 15,000, 20,000 [gates]. So where the FPGA is used as a packet processing engine, it is a really significant advantage for them to go with what we have.

Now I mentioned in the script here that we've got a number, and I mean it's a fair number of SoC's being developed that are going to bolt up against the side of the Bandwidth Engine. And in every single case, the SoC design company was provided an RTL by the end user, the network equipment company, and they specified that they wanted to use this interface, and we had multiple ANDA's put in place. And it is all moving forward uneventfully.

Great, thanks.

And then my last question for Jim, so other than tapeouts, there's a lot of sort of new costs or new steps associated with doing silicon. Any sort of one-time nature of OpEx you see? You talked a little bit about developing QA tests and getting iso-9000 certification, etc. Any other sort of one-time things that come and go?

You know, just as I mentioned, what we saw this quarter with the additional fab lots and the burn-in and related boards, frankly, some of those costs in our plan had been budgeted for Q1. As Len said, we were a bit behind at the end of Q1 in the verification, so those costs pushed out.

Right now, we're tracking towards our plan on those. So there will be spikes. I've already signed a couple of purchase orders this month, but nothing too major. So nothing outrageous.

I think we were a bit low on the Bandwidth Engine costs in Q1, so obviously we saw a couple hundred thousand dollar increase in R&D, which was those costs coming in, and they will continue in the third quarter, but nothing too outrageous.

Okay, thanks. I'll re-queue.

I'll just clarify; this could be a small amount of CapEx for our lab, but nothing too major.

Okay, thank you. I will re-queue.

Sandeep Shyamsukha, Auriga USA.

Hi, thanks for taking my question. Actually I was interested in finding out whether you know how many ASIC's and ASSP's are currently being designed with the GigaChip Interface?

I was hearing the first set of designs are probably more likely to be with FPGA's, but if customers are becoming more committed, have they started designing an ASIC with a GigaChip interface?

So, you know, we talked about the design wins in progress running somewhere between five and 15, and I'm going to say that it's probably something like 60% SoC's, 40% of FPGA's, or it might actually be the other way around. It is reasonably balanced.

I haven't counted them out just specifically. But there is a number of people that just jumped immediately to companies that prefer to use an SoC solution, I guess. They just jumped right out there and they're going for it.

And then of course, there's a number of other people that see the FPGA a packet processing engine that doesn't require a mask turn but can be just reprogrammed if there is an error in the software or in the implementation of the function. And it is cost effective and quick to market.

So I think it is close to 50-50, Sandeep, something like that. And we should expect it's far enough down the road that not only would we have the opportunity to close a design win with an FPGA-based system going out the next few quarters, but we're far down the road with some SoC stuff as well. So probably that's a good answer.

Okay. And out of these between five to 15 design win schematics you are mentioning, how many end customers does that represent? I'm assuming you have multiple design wins with [given] customers.

Actually in the spirit of learning a new jargon here, I'm not talking about design wins; I'm talking about design wins in progress. But I knew that you were just trying to make your question easy for me.

But I'm going to say that -- let me think about that -- if we have five to 15 design wins in progress right now, I'm going to say that 60% of them are unique customers. And on my -- I visited with six or seven of the network equipment companies on this trip into Asia, and more than half of them have one or more designs going that incorporate our product. And as I said earlier, they're using it in multiple locations. So I didn't try to count the average number of uses of a product per board, but it is actually quite gratifying.

And when we're getting right into the heart of the schematic now, I can see -- in my applications guides, you know better than I, we can see lots of places for the chip; it's a serious solution. Anyway, I hope that answers your question.

Oh yes, it does. Thanks a lot for all the time.

(Operator Instructions). Joel Achramowicz, Blaylock Robert Van.

Good morning, guys. I had a question, Len, since this is really getting into the granularity of the design process here, it's obviously got to be gratifying to be a potential vendor to some of these major box designs. Obviously, these are some significant hoops that these engineers have to get around if they are looking at maybe the alternative of a parallel memory solution versus the new and revolutionary Bandwidth Engine.

Since you spent a lot of time with some of these major designers, what are the -- could you perhaps just give us some color on the competitive dynamics and what you think are some of these significant objectives and hurdles that you need to overcome in order to get final design in? Because obviously these guys are making some big decisions about the architecture of the board. And I was just interested to know what kind of major issues might need to be addressed before we get some final design in wins leading to production. Any thoughts in that regard?

Yes. There were a couple of interesting things that happened on the trip. For a particular application at one of the customers, he was looking at trying to move 150 gigabits of information and -- or he wanted to run at 150 gigahertz, let me put it that way. And basically -- yes, 150 gigahertz. And it turns out that he was trying to solve the problem with one Bandwidth Engine. And we told him that due to the way the part was going to be partitioned for that application, it wasn't going to be capable of running that fast and it wasn't going to be -- it was going to require that he take two.

And, frankly, I thought that maybe the guy was going to come back and tell me well, I will drop back to whatever I was doing before. But it was quite impressive.

You know, we finished that meeting at like four o'clock or five o'clock in the afternoon. By the time we get back to our room, the design team at the customer sent us two new schematics that rearchitected that end of the system, and they asked us if we would meet with them the next day so that they could understand the most conservative way of the two that they had chosen to implement. Both of them now are using a couple of the Bandwidth Engines.

And we'd also showed them -- they had a unique problem involving packet buffering that we'd also proposed maybe they could consider going -- taking four or five chips out of the system. And they had that included as well.

So, in the case there, they were still learning the power of the system and of the chip and what it could do. And especially in this area where there is macro function capability or the ability to logical process, that is an interesting application; that is not really even a quote, unquote, memory application. That is kind of a logical -- a logic -- I don't know what they call it. I wouldn't call it a microprocessor function but it is definitely a logical function that [seems] the problem is being solved.

So basically, I didn't see anybody talking to us about the pros and cons of going back to the old way. We didn't have any of that. I didn't have any -- at no time did I have a conversation about whether or not the GCI interface is confusing or hard to use it, whatever, none of that.

Basically the only thing the meetings reigned over was understanding exactly what the part can do, which means that we need more applications at hand with these folks in the Asia market, and then a discussion about our timing to support the various steps it will take going forward, and a time when they're going to freeze their schematics so that we can see and get a final answer. But the problems were never in any case pros and cons of using it but pros and cons of understanding how to use it. (technical difficulty) good, Joel.

Which leads me to my follow-up question, Len. I admire you guys -- you and Jim are using your cash it seems very, very frugally and very effectively, but do you feel comfortable -- I think I asked this before last quarter -- that you have the requisite application resources where you need them on the team in order to address all these pre sales and these critical engineering development activities effectively, because you don't want to -- make sure you don't have a hole or whatever that could impact the long-term selling process. Any thoughts on that?

Yes. You know, we discussed the type of talent we had added to the team, and we probably do need to have an applications guy that operates either -- probably out of the corporate headquarters here that maybe is fluent in either Japanese and English or in Mandarin and English, or in all three. We're going to need to think about the application support to help these guys keep on their schedule. So we're talking about that. And so that is the answer to your question. But I would go one step further and say that I don't consider our use of cash pleasant or pretty at all. It just kills me.

And so Jim and I are resigned to the fact that the IP business make some money, but it's not particularly spectacular, and we're trying to bring in a new TAM to the company that would be 20 times bigger than the one we serve with our IP, and it is expensive. But I'm never happy about it.

So thank you for saying we are frugal in the use of money, but until we generate cash around here, as far as I'm concerned we're not a real company until we do that. So I hope I answered your technical question.

Yes.

And I think (multiple speakers)

I can add color to -- Joel, I think the last three personnel reqs that have hit my desk, the only one you approved was for an applications person. The other two are on hold, so we're definitely not holding out on the application side.

And then on the cash front, Joel, we're definitely taking a hard look at expenses and we definitely implemented some changes, cut down costs. We are obviously benefiting from the option exercises and then obviously our ESPP plan also contributing, so that is really helping.

I mean this quarter, the option exercises basically covered our earn-out payment to MagnaLynx, which was helpful. We got one more of those coming in the late third quarter, fourth quarter, another $500,000 for the holdbacks still to be paid to them.

I guess I would add to that the addition of Tom Riordan is going to be tremendous in this area. Tom is swarming all over the place. And having worked with me a long, long time ago to create QED and bring it up and he never had a lot of money around. And he is a pure engineering guy. So I think Tom working with Jim, we're looking at other areas where we can relieve things and we are making progress. And Jim and his team are trying to take all of the available financial data and turning it into meaningful information. But -- and we will be working hard on that ongoing.

Well it will be interesting to watch continued progress. Good luck, guys.

Thanks, Joel.

Ian Ing, Gleacher & Company.

Len, question for you, you might be able to answer based on your experience at other companies -- some networking OEMs require preferred supplier status or a compelling reason to use alternate silicon. So do you have a sense of when you need to go over that hurdle? Would it be like initial design wins or at some point when you are propagating to other systems and becoming more widespread?

Actually, we recognize the fact that we may have the good fortune to set a new standard for a networking system architected solution. And if it is, we have to work on -- we have to be open and compliant to the need for second sources, and we never have said ever that we aren't interested in pursuing that to give some security to our customer base.

I haven't been giving it too much priority because the first thing to do is get the part out there and continue to win the -- move toward full-up design wins. But I will have to say that I am a pretty old guy and been around a while and maybe that has some influence on it; I'm not sure.

But I was extraordinarily impressed and gratified that on this most recent trip talking to a number of very big companies that have all kinds of controls in place to make sure they don't get hurt in their procurement area, that it never came up even once.

These guys are just -- I don't know if it's because of the good relationship I had with most of them when I ran IDT or if it's the good relationship I had with them when we were getting NetLogic up and running, when Ron was first coming on board.

But there have been no conversations about this at all. And you know -- I still consider it my obligation to make sure these guys never get hurt. So we know we're going to have to do something about absolute guarantee of supply here, and we will never lose sight of that.

Okay, great.

And just kind of further down the road, I am assuming some of the SRAM vendors, like a Cypress or a GSIT will eventually adopt SerDes. So maybe the competitive dynamic there is SerDes plus SRAM or SerDes plus 1T-SRAM; how would that play out? Is to density where they would be an advantage or some other factors perhaps?

Actually, you know, we have occasions -- we've been talking to some of the QDR guys and we will continue to do so, and actually we have had some conversations with the RLDRAM guys as well. We're very happy if they want to adopt a GCI interface, which we think is the ideal interface for close proximity chip-to-chip communications; and I think one or two of them have shown on their long-term roadmap at meetings that they have presented at now they have a plan to get to serial some years out.

And we have, in every case, made it plain that we would be more than happy have them become adopters of the GCI interface. It is a very, very clean and very good solution to the proximity -- close proximity serial communication. So hopefully I think they're going to go that way. We encourage it.

Okay. Thank you very much.

Gary Mobley, Benchmark.

Hi, guys. I realize that bandwidth engine uses a lot of the intellectual property created within MoSys and associated with MoSys traditional intellectual property business, but at some point in the future for capital-raise purposes or for the purpose of focusing on Bandwidth Engine, does it make sense to sell the intellectual property business with some cross-lines licensing arrangement associated with that?

Actually, we haven't spent much time talking about it, but I have been open about the fact that as we journey along into 2012 and into 2013 in particular, the predominant sales in the company will be IC and not IP.

We will be expanding projects, the amount of things we're doing and hopefully generating some positive cash and making our house a little bit more in order.

And if it should turn out that we have more I will call it design resource here in either 1T-SRAM or in serial I/O, then we need to run a business that is more heavily weighted to IC, then we might seek out a partnership that enable that resource to be used effectively and to share the cost of that resource or even over some period of time to transition that resource.

The fact of the matter is, some of our customers and partners have talked about this because people that want to serve the -- well I'm going to call it the high-performance end of the integrated circuit business going forward, really have to think about what they're going to do with serial I/O because it's going to become the way of the land. And if you don't have that capability in-house and you buy it outside node by node, then you better ask yourself what your core competency is because you might be in a precarious position.

So we have nothing on the table. It isn't a totally foreign subject to us, and we recognize -- and we aren't sure we are balanced right with resources to make the transition to more IC. And we will -- and we are also aware of the fact that we have got a tremendous team of dedicated people here, so we aren't going to be precipitous. But over the few years here, maybe something will happen in that area that is good for everybody.

All right. Thanks, guys.

At this time, there no further questions. I would now like to turn the call back over to Mr. Perham for closing remarks.

Yes, just give me a quick second, operator. I was digging up some stuff. I'm just going to make a couple of closing comments. I'm going to make it very easy because we've been online -- keeping you guys a long time here.

So we've talked a lot about the Bandwidth Engine this morning. We're in an area now, we've been like a guy on the ocean on a raft and every day we're looking but we never see anything on the horizon, and it's been a long time of never seeing anything on the horizon. And these design wins in process and in essence are basically we see something on the horizon now.

And so we are making progress the way we thought we would be. It doesn't change the fact that the ramp is still what we've always said it is. It's -- these big boxes take a while to get to market.

But you know, clearly, I hope I've conveyed the message I'm very bullish on the product and our position in the marketplace. I don't see any competition that's particularly what I consider to be a particular threat. We're now hard at work supplying the applications support to make sure that we stay on the schematic and are in the ultimate design for our customers.

And the part is fully verified. We don't have to go out and create any more masks, and that's very, very gratifying. All in all, Bandwidth Engine is probably doing better than we had a right to expect, and I am very -- particularly thankful to the team for their tremendous efforts.

Secondly, we talked a little bit about financial performance. The IP business makes some sense around here in terms of a company that might generate some cash. But the Bandwidth Engine and the enormous total available market it brings to us is a money sink and it is a huge opportunity for us, and we've been open about going after it for awhile now; going after it maturely and with the intention to be successful. But we need to pay attention to our cash.

And we are even looking out a little bit now, as this thing ramps up, the instant thing you have got to start talking to yourself about is have you done the right long-term planning to drive down your startup costs and to get the margins where you want to as fast as possible. So you can just assume we're spending our time paying attention to making sure that we can not just ramp volume but ramp margins as well.

And finally, as an IP team, we did make some significant changes to how we're going to the market. And we have been more successful, and we have quite a few opportunities on our plate and opportunities to partner in unique ways that could be good for ourselves as well as our IP partners. And we will continue to pursue that in the months and quarters ahead.

So in my closing remarks, I would say we're feeling very good about the Bandwidth Engine. We never feel good about burning the cash, but we recognize we're going after a very big pot of gold here, and we've become a little bit more intelligent and successful and mature about how we're going after this IP business, and hopefully it will show in our numbers going forward.

I want to thank you guys for getting on the line with us today, and I thank you for all the very excellent questions. And we look forward to talking to you again along the way to success. Thank you very, very much.

Ladies and gentlemen, this concludes the presentation, and you may now disconnect. Thank you and have a great day.