Peraso Inc (PRSO) 2011 Q3 法說會逐字稿

Good afternoon and welcome to the MoSys third 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, Thursday, November 3, 2011. I would now like to turn the call to Beverly Twing of Shelton Group, the Investor Relations agency for MoSys. Beverly, please go ahead.

Thank you, Jeff. Joining me on today on today's call are Len Perham, MoSys's President and Chief Executive Officer and Jim Sullivan, Chief Financial Officer. The third 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. Thank you for joining us this afternoon. I'll start the call with comments on our IP business and then turn to progress on our Bandwidth Engine family of integrated circuits.

Jim will then discuss our third quarter 2011 financial results and after that we will open up the call for questions. And I do have a few closing comments today that I'll make at the end of the entire session.

In the IP business, we had a challenging third quarter as both our license and royalty revenue was down sequentially. The global economic conditions that impacted the semiconductor market as a whole contributed to a slowdown in our licensing business as customers delayed some of their projects due to this market uncertainty.

In addition, we experienced delays in our existing projects that resulted in lower revenue recognition. On the royalty front, inventory corrections by some of our licensees resulted in a significant drop in royalty revenue. However, we have recently received reports from our licensees, which address fourth quarter royalty revenue streams and they reflect increased shipments and improving market conditions. The net result is that we believe royalty revenue and total revenue will be up in the fourth quarter as compared with the third quarter of 2011.

Bandwidth engine. Despite the general market slowdown, progress on our Bandwidth Engine integrated circuit family in the third quarter was anything but slow. Most significantly, we achieved our first two hard design wins, meaning that the customer completed his prototype evaluation and has informed us that Bandwidth Engine will be used in his system.

These first two designs wins are with customers bringing high performance add-on boards to market for the purpose of demonstrating substantial performance upgrade opportunities in existing systems or to address small niche markets that need really superior performance.

These high performance add-on boards use state of the art FPGAs for high-speed packet processing. As we had mentioned on our previous calls, we believe these FPGA based systems represented the initial low-hanging fruit and would be an excellent platform to demonstrate the performance advantages of our Bandwidth Engine architecture and integrated circuit family.

While these initial design wins are into lower volume applications, they represent an indisputable demonstration of the performance potential of our Bandwidth Engine product family when applied to state of the art performance challenges founding today's advanced networking systems.

In addition to our first two design wins, we continue to engage with a growing number of prospective customers and partners that are either evaluating or have already begun initial design work on next generation networking systems that will incorporate one or more Bandwidth Engine components in order to meet or exceed critical performance specification.

In addition to our first two design wins, we achieved the following since we had our last opportunity to speak with you. First, increase the number of design wins in progress and sampling activity. Two, our second, expanded our sales in marketing capabilities in the Asia markets. Third, demonstrated additional interlock ability of the Bandwidth Engine, and our GigaChip interface with key customers or partners. Four, delivered development tools that we believe will further facilitate and enhance customer adoption of the Bandwidth Engine family. And five, completed the final definition of Bandwidth Engine 2. Let me discuss each of these in a bit more detail.

Starting with design wins in progress. During the third quarter, we engaged with an expanding list of prospective customers and partners who are actively evaluating or working with Bandwidth Engine 1, which we refer to as design wins in progress. As a reminder, we use this term to describe customer engagement where we know that the Bandwidth Engine IC is included in the customer's draft schematic design, but that schematic design is not yet frozen.

I am pleased to report that the list of design wins in progress grew in the third quarter and we now have more than 10 in progress. These include customers working on future designs for line cards that may contain anywhere from one to 16 Bandwidth Engines per IC board -- per line card or per board.

These schematics will remain fluid until the end customer confirms that the proposed design is meeting or exceeding required system performance criteria in the most cost effective manner. That process is ongoing and we are closely engaged in supporting all of these design efforts to ensure the successful adoption of the Bandwidth Engine architecture in both these current advance systems and future system development programs beyond that.

These design wins in progress give us very high confidence that the revolutionary Bandwidth Engine architecture is being very well received by all levels of engineering and all levels of management at our prospective customers and partners.

The second item on my list was the progress we've made in Asia. Last month I traveled again to Japan and China to speak directly with customers in an effort to understand the exact progress we are making toward design wins and additionally to expand our potential design win pipeline with more new prospects.

I was able to validate that our progress toward winning designs is progressing well and our potential customers continue to appreciate the technological advantages and cost benefit accruing to them by the adoption of our Bandwidth Engine architecture and Bandwidth Engine 1 family.

In addition, I was particularly pleased to see several schematic based designs utilizing multiple Bandwidth Engine devices on a single board. Based on the direct positive feedback from customers and partners, I believe we will continue to build our potential design win pipeline and look forward to announcing hard design wins throughout 2012.

China, home to WireWay and ZTE, two of the top five enterprise equipment suppliers worldwide, remains an area of intense focus to MoSys. As mentioned on our last call, we have hired our first employee in China in order to have a direct and local presence with each of these two networking equipment giants. Additionally, during the third quarter, we signed up RTI Technology China Limited, a leading applications engineering-rich sales representative firm to further support our design win effort at both WireWay and ZTE. Discussions with our China based customers and partners are progressing very well.

In Japan, I'm pleased to report that we have just added TecStar, a Macnica company as our distributor and partner. Macnica is one of the largest semiconductor distributors in Japan and additionally one of the largest sales rep distributors in all of Asia. And they bring a wealth of applications engineering and applications expertise, as well as experience working with the various purchasing groups representing our prospective Japanese customer base.

Having a large and reputable distributor is critical to doing business in Japan and TecStar will play a key role in the early adoption of our Bandwidth Engine family of integrated circuits at the top tier Japanese networking equipment companies.

The third item on my list was the progress we made on Bandwidth Engine interoperability. The major network equipment companies we are pursuing require that we prove seamless interoperability with their other major chip suppliers. From a development perspective, during the third quarter we demonstrated the interoperability of our Bandwidth Engine IC with high performance network processing ASIC including a Avago Technologies 29 nanometer SerDes. Avago is a leading provider of ASICs and SoCs to the major network equipment suppliers.

This achievement expands on our previous interoperability successes with FPGA devices from both Altera and Xilinx. Achieving interoperability with these industry leaders was a critical step toward driving the adoption of our Bandwidth Engine ICs. We continue to work with other industry players to prove interoperability with their designs. For those of who are interested, we now have links on our website to videos demonstrating the interoperability of Bandwidth Engine with Avago SerDes, Altera's Stratix IV GT FPGAs and Xilinx's Virtex VI FPGAs respective families.

The fourth item on my list was the progress we've made on development tools and programs, which are essential in order to facilitate evaluation and accelerate adoption of our solution. We recently released our Bandwidth Engine FPGA Companion and Characterization Development Kit to help further support this critical customer partner market segment.

These kits enable system designers to more readily evaluate our Bandwidth Engine ICs and develop code for their systems. The FPGA Companion Kit includes a Bandwidth Engine evaluation board that can be integrated with standard FPGA 100-gig development kit. Our kits support any suitable FPGA or ASIC development system and SerDes evaluation on high performance test equipment. Both kits allow for connection of all 16 SerDes lanes operating at up to 10.3 gigabits and protocol communication via our GigaChip interface. Availability of these kits is an important milestone to facilitate the early Bandwidth Engine evaluation and sampling and will enable our customers to more readily develop next generation products that utilize our ICs on fully functional hardware platforms.

My final item was the progress we've made on our next generation Bandwidth Engine platform, BE2. Last quarter I announced that we had complete the product definition for Bandwidth Engine 2. As we bring our first IT family, that is Bandwidth Engine 1, to market and work with our industry partners, we determined that the addition of certain features to our planned BE2 design was warranted.

These additional features were identified by customers and were originally intended for Bandwidth Engine 3. These additions and resulting modifications to our product definition are expected to delay our tape out by perhaps a quarter until the end of the second or beginning third quarter 2012.

However, we believe pulling in these performance and feature enhancements will result in a more robust and broader design that is capable of addressing a wider range of applications and system (technical difficulty) enterprise system. Despite this short delay, we believe we will essentially advance the product an entire generation, allowing us to more timely meet customers' immediate and future requirements and needs.

Now a couple of final Bandwidth Engine related updates. During the third quarter we continued to work toward becoming ISO 9000 certified and working toward achieving an enterprise grade QA&R rating for the Bandwidth Engine IC family. Based on our current progress, we expect the ISO certification to be achieved sometime in the first half of 2012. No problems, just moving along on some schedule. Between ourselves, our QA group and the outside agency.

Recently we received our first Bandwidth Engine product back from 1,000 hours of high temp operating life testing and the results were very gratifying. Though we are making a few final changes to both the pre and post stress programs, and still struggling with final equipment selection for our backend assembly and test production flows, we expect to complete the full up enterprise grade certification very near to year-end. It will be a significant accomplishment because we will pass this QA&R benchmark with what is known in the business as ECC Off. It is the -- it's going to be a real new benchmark for people to look at.

We continue to work closely with TSMC, our foundry partner, and truly appreciate their ongoing support.

A little late breaking news. Perhaps it got posted on the website this morning, I'm not sure. I am proud to report that MoSys and the Bandwidth Engine was recently named a finalist for the UBM Check Insights Most Innovative Memory Product Award for 2011. The Tech Insights awards recognize achievements and innovation within the semiconductor and electronic industry and are generally acknowledged as a top prize within our industry.

This particular award we are competing for is given to the memory product or memory based device, such as our Bandwidth Engine IC, that is deemed to be the most innovative against fellow nominees. We view this prestigious nomination as evidence and further validation that the broader industry is taking notice of our systems level approach to solving bandwidth and access speed and performance challenges facing next generation networking system.

The winner should be announced in September -- I'm sorry, the winner should be announced in December and we are competing against such industry leaders as Intel and Micron.

In summary, although the third quarter was challenging for our IP business, we were very pleased with our progress toward advancing the adoption of our Bandwidth Engine family of ICs. Customer attraction is increasing, as evidenced by our first two design wins, and increased number of design wins in progress and the growing interest level among prospective customers. Looking forward, I believe we are well positioned to announce additional Bandwidth Engine IC design wins in the coming months and expect to see our first production orders during the middle or second half of 2012.

That said, I'm going to pass this call over to Jim for a little review of third quarter financials. We'll open it up for questions and I'll have a couple of closing remarks. Thank you for your time and attention. Jim, ball is in your court.

Thank you, Len. And good afternoon, everyone. During the course of my comments, I will make several references to non-GAAP numbers. Unless otherwise indicated, each reference will be to an amount that excludes stock-based compensation expense, 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 today, and can be found at the Investor Relations section of our website.

With regard to the results for the third quarter of 2011, total revenue was $2.1 million compared with $3.3 million for the second quarter of 2011 and $3.8 million for the third quarter of 2010. Licensing revenue for the third quarter was $0.8 million compared with $1.2 million in the second quarter of 2011 and $1.5 million for the third quarter a year ago.

The sequential decline in license revenue was primarily due to our lower number of new licensing projects and lower revenue recognition as a result of delays in customer acceptance of IP delivered under existing projects. A large portion of the year-over-year decrease was attributable to significant revenue contributions in the third quarter of 2010 from 1T-SRAM memory agreements entered into in the fourth quarter of 2009.

License revenue for the third quarter of 2011 included revenue from 11 licensees compared with 12 in the preceding quarter.

Royalty revenue for the third quarter of 2011 was $1.4 million compared with $2.1 million for the previous quarter and $2.3 million for the third quarter of 2010. Third quarter 2011 royalty revenue decreased sequentially and we believe the decrease was due to inventory corrections by licensees given the recent economic uncertainty. However, recently received reports from our licensees, which addressed fourth quarter royalty revenue, reflect increased shipments and improving market conditions. We expect a significant increase in royalty revenue for the fourth quarter of 2011.

Third quarter 2011 royalty revenue was recognized from 15 licensees compared with 13 licensees in the second quarter of 2011.

Our GAAP gross margin for the third quarter of 2011 was 83%, compared with 86% for the prior quarter and 81% in the year-ago quarter. In terms of our operating expenses for the third quarter of 2011, research and development expenses were $6.6 million comparable with the previous quarter and a decrease from the $6.8 million in the third quarter of 2010.

R&D expenses in the third quarter of 2011 reflect continued development of our Bandwidth Engine integrated circuit family.

Selling, general and administrative expenses were $2 million, compared with $1.9 million in the previous quarter and $2.4 million in the year-ago quarter.

Total GAAP operating expenses for the third quarter were $8.6 million, compared with $8.5 million in the previous quarter and $9.2 million in the third quarter of 2010.

Total operating expenses in the third quarter included $0.7 million for amortization of intangible assets and $0.9 million in stock-based compensation expenses.

On a non-GAAP basis, total operating expenses for the third quarter of 2011 were $7.1 million compared with $7 million in the previous quarter and compared with $7.8 million for the third quarter of 2010.

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 third quarter was $6.9 million or $0.18 per share compared with a net loss of $5.7 million or $0.15 per share in the prior quarter and a net loss of $6.2 million or $0.19 per share for the third quarter of 2010. On a non-GAAP basis, the net loss for the third quarter of 2011 was $5.3 million or $0.14 per share, which excluded intangible asset amortization and stock-based compensation expenses totaling $1.6 million.

This compared with a non-GAAP net loss of $4.2 million or $0.11 per share in the previous quarter and a non-GAAP loss of $4.7 million or $0.15 per share in the year-ago period. Net loss per share on both a GAAP and non-GAAP basis for the third quarter of 2011 was computed using approximately $38.1 million weighted average shares outstanding.

Turning to the balance sheet, as of September 30, 2011, our cash and investments balance was $26.4 million compared with $31.3 million at June 30, 2011. The $4.9 million sequential decrease in cash and investments compared with the $3.2 million decrease in the second quarter of 2011 and was primarily due to the increase in net loss and lower proceeds with stock options exercises.

Accounts receivable at the end of the third quarter totaled $0.6 million compared with $0.5 million as of June 30, 2011.

As of September 30th, our total headcount was 150 employees compared with 157 employees as of June 30, 2011, with over 80% of our employees in engineering and research and development. Of our total employee count, approximately 50 are located in India.

And our last note, I will be presenting at the upcoming Tech American Classic Financial Conference in San Diego on November 7th and Len and I will be presenting at the RW Baird Technology Conference on November 29th in San Francisco. We look forward to visiting with you at these events.

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, The Benchmark Company.

I wanted to start out asking about revenue trends for your IP business. You mentioned specifically that you expect royalties to increase substantially or significantly I guess is the word used in the fourth quarter. Maybe if you can put some numbers to that?

Yes, I don't want to provide specific numbers at this stage, but certainly we've seen the majority of our royalty reports, I'd say greater than 80%-85% of the total of our royalty reports come in. And we'll be up pretty significantly, much more comparable to as they were in the second quarter.

On the licensing front, that's always due to obviously new business and then subject to a couple of these contracts that pushed out. We're still working through the deliveries and the acceptance clauses on them. So we didn't really make a comment on the license front, but we're optimistic that that will be up in the fourth quarter. But I think you'll see a very substantial increase in royalty revenues.

And I'm assuming since the tape out of a revision for Bandwidth Engine 2 is delayed to the second half of the year, R&D might remain at this moderate level for the next few quarters. Is that correct?

I think its safe to say there'll be no increase. Clearly Jim and I have spent a fair bit of time talking about our cash because that's important to us. So you can assume there won't be any increases.

And you mentioned a revenue potential from Bandwidth Engine by perhaps mid-2012 or maybe a little bit after. I'm assuming this is for some of the add-on boards that you're designing to -- in conjunction with (inaudible) and Altera. I'm just wondering if you could talk about the initial revenue opportunity there and potentially what it could be when running at its full potential.

I think that we're expecting to start winning prototype quantity designs in the second half of '12 and that should increase reasonably steeply going into '13. And it's a little hard for us to be really definitive about how fast the ramp out or the steepness of the slope. The acceptance of the product and the enthusiasm by which it's been designed in is very, very high. But especially in light of the macroeconomic gymnastics that are going on out there, it's hard for us to tell what the slope will be, so we're being over cautious.

But it wouldn't be just the board level stuff that would be starting to show some signs of life in the second half of '12 going into '13. It should be some visibility into the really serious business opportunities and how fast it ramps up we can't be sure, but Gary, it's going to more than just the board stuff I think.

You mentioned these design wins in progress, which represent customers' line card schematics that haven't been I guess fully set in stone. I'm wondering if maybe you can give us some idea of when you might see some full definition of these line cards and whether or not MoSys is or is not included in the final line card design.

Yes, I'll give a couple of data points. One, we haven't been on a card yet that we've lost. So we haven't seen anybody go away. That'd be one statement I could make.

Another we'd make, I think we're going to bat 1,000 in Japan. Every single customer we showed it to is going to use the part. Some sooner than others, based on product ASIC design cycles and so on. So that part is very, very gratifying.

And getting back to your question, I think you were asking about -- were you talking about the ramp return on that? I make sure I understood your question.

Just a timeframe for when you would get some more definition on whether or not these design wins in progress turn into full-on design wins.

I would think that going out to starting maybe a little slowly in the first quarter but second, third and fourth quarter we should start seeing these things materialize and be able to announce that we have design wins. But it still may be reasonably small quantities as they ramp up.

As we've always projected of our 10 design wins in progress, or more than 10 now I guess, a fair number of those, probably 40%-50% of them, maybe 60% of them, are FPGA based and we've always maintained they would be the first guys to turn on. So we're -- those guys are going to be -- we'll have a -- I would think we'll hear from nearly all of them through the course of calendar 2012.

And I guess based on your current cash burn rate, you have perhaps five or six more quarters of cash on hand. But presumably you're going to receive an order at some point for Bandwidth Engine that's going to be a fairly substantial drag on working capital. I'm just wondering how you're going to transition with a potential revenue ramp with the current balance sheet you have?

Well, there's two things I'm going to say and then Jim can make a comment. One, and again looking at this very dynamic economy we have going on on the planet these days, I don't feel comfortable about anything I see. Markets up 500, down 500, this country goes broke, that country goes broke. So in light of this dynamic, there's two things we can do about our cash situation. We can work to preserve more of it and you can be sure we're going to do that.

And secondly you can be sure that we're looking at raising some money and we're not here today to say we're raising money and I've told at conferences and in meetings, and maybe even on this call, that our interests in raising money is to do it in a most -- in the least dilutionary way. And we don't have anything to report today, but you can be sure that Jim and I are looking at both preservation of and opportunities to bring more cash on to our balance sheet in ways that are neutral to our important shareholders.

Jim, you may want to add to that.

No, I think you covered it pretty well, Len. I mean from a -- looking at the -- just ahead for the next quarter, the fourth quarter, what we've seen on the royalty reports to date and the current expense spend, we'll definitely have a lower burn in the fourth quarter than third quarter. But certainly as we go out into 2012 and look at the ramp, it's hard to see when Bandwidth Engine turns on exactly and when we can start to see the contributions from that in the second half of '12 would start to have any impact really on our situation. So we'll be taking a hard look at it and certainly we're not going to come to a position where we're sitting here just out a few quarters.

And I think the other thing we need to be cognizant of is obviously the impact on our perspective customers and their purchasing groups, and making sure we have a balance sheet that makes them feel comfortable.

(Operator instructions) All right, ladies and gentlemen, that'll conclude the question and answer portion for our event. I'd now like to turn the presentation back over to Mr. Len Perham for closing remarks.

So ladies and gentlemen, thank you for hopping on the call today. I just wanted to share three or four thoughts with you. So it's always good for you guys to know exactly where my focus is. And my focus is as follows.

First off, my focus is on design win activity. Wherever it is, I'm prepared to go there anytime. We want to win every possible design we can and we don't intend to lose a design anywhere. So first off expect to see me where I have to be to make that happen.

Secondly, you can expect that I'm going to be focused on anything I do to achieve earlier adoption and a faster turn on. I mentioned in the call today that we always thought the FPGA guys would be first and indeed they're going to be. So one, win the design. Two, support the guy like crazy. Generate the collateral, do whatever you've got to do to get early adoption and get his ramp going sooner because we're moving the Company to a totally new place. And it takes a finite length of time to do that and we don't want to be wasteful of that time.

So third, you guys were kind to me today. No one mentioned second sourcing. But second sourcing is becoming important now because are more and more when I go visit companies I'm not talking to engineering departments anymore. After I get done with them I have to talk to the business side of the company and to the procurement groups. So second sourcing is taking on some added intensity here at the Company and I'm spending a fair bit of time looking at the potential second sources. And I'm hoping that I can say something by year-end and it may slip past that a little bit, but this issue has to be resolved so that our very big Fortune 100 or Fortune 50 customers can see a way to be assured of supply.

Fourth item was the one that you guys mentioned. And that was cash. Jim and I didn't make cash as centerpiece of today's call because to us cash is just something that's got to be solved. We know that we have to have cash to get to where we want to go, we need to have cash on the balance sheet to make our big customers feel comfortable. And we are working at the executive level of the Company, looking at both the preservation of cash and the generation of cash. And like I've said many times in meetings with you guys, I'm very interested in achieving these cash needs while minimizing dilution because the Company has enough shares outstanding as it is.

So after those four points, I would have to say in closing that we are extremely, and I am using the word extremely, gratified by the enthusiasm customers ae showing toward the adoption of the Bandwidth Engine architecture. I've not used that term. The Bandwidth Engine architecture implies that it would be used in Bandwidth Engine 1, 2, 3 and Bandwidth Engine N. I think our architecture is being widely adopted or widely greeted with enthusiasm. And it's been going very, very well.

And so we just have to manage ourselves well enough that when this turns on that we are all, everybody on the call, there to enjoy it and having the fruits of everybody's labor and patience.

That said, I want to tell you that I appreciate you believing in us and appreciate your time on this call. And we look forward to giving you another report soon on how we're doing toward achieving our goal. Thanks very, very much, everyone, and we look forward to seeing you or talking to you again soon. Good-bye now.

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