Peraso Inc (PRSO) 2013 Q1 法說會逐字稿

Good morning and welcome to the MoSys first-quarter 2013 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, April 19, 2013.

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

Thank you Dave, and good morning everyone. Joining me on today's call are Len Perham, MoSys' President and Chief Executive Officer, and Jim Sullivan, Chief Financial Officer.

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 and ICs; expectations concerning the Company's execution and results; expected benefits of the Company's ICs, product development, achievement of design wins, and timing of shipments of the Company's ICs; predictions concerning the growth of the Company's business in future market 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 statements for any reason expect as required by law, even if new information becomes available or other events occur in the future.

So 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 Bev and good morning everyone. Thank you for joining us this morning. I'm going to begin today's call with an update on our design win efforts for the Bandwidth Engine family of products and now a bit of an update on our new product, the LineSpeed family, and then provide you a review of our progress on Bandwidth Engine 2 and other activities of the Company in the recent quarter. Jim will then review our first-quarter financial results prior to opening the call for your questions.

In regards to design wins, sales activity across all regions continues at a strong pace. Building on this momentum, we continued to aggressively pursue additional design wins for our Bandwidth Engine family of ICs in the first quarter 2013 as well as advance our pipeline of design wins in progress. These efforts have been rewarded as we are making gratifying progress across a wide front.

In February, we received our first order for Bandwidth Engine 2. We received this order from a tier 1 network equipment manufacturer, and we've been actively working on this opportunity for some time. And from the looks of it, the customer is jumping over testing on evaluation boards and getting right into subsystem prototyping. Because these sort of short-circuited our system, for today I'm going to call this a design-in and tell you it's a strong indication of a design win. We are operating under a stringent NDA, so we will not identify the company by name. However, we've been working closely with this customer for the last four or five quarters on this architecture.

Yesterday, when I wrote this, I had this next sentence -- we might even be able to let you know this potential win has extended to other platforms in the next quarter or so. But I can tell you now that it's already extended to other platforms. We received the second prototype order from this customer yesterday. Very exciting.

Additionally, we won another platform with one our existing customers and have also completed an extensive board level evaluation at yet another. Completion of this board level evaluation could result in another design win in the next quarter or two.

To a small emerging company like MoSys, design wins cannot be won fast enough. However, we made solid progress in the first quarter and hope to report continuing progress on this front three months from now. But we have had gratifying results throughout this quarter we are reporting on, up to and including the unexpected events of yesterday regarding our tier 1 partner.

Let's talk about the Bandwidth Engine 2. Package units arrived back at the Company in early March, and we are well into new product characterization, functional testing, and reliability certification. To date, BE-2 is performing like a champ, meeting or exceeding its various requirements, meeting its functional tests. And the engineering guys like to tell me that we can't say that it's 100% good yet. We have to do life tests and liability testing. However, whenever I ask questions, they all say we can't find a reason it doesn't work. In other words, we are making excellent progress and it looks like this mask revision might in fact be totally good.

We are on track to fill any and all sample of prototyping orders released for shipment in this quarter, so we've made good progress across the testing front and meeting requirements we mandate for ourselves before we ship samples and prototypes. We can support all requirements for samples and prototypes for BE-2 in this quarter.

Though much remains to be done, we are extremely gratified with the progress to date. We have early interest from potential customers who've become very familiar with the unique advantage of the Bandwidth Engine family and find a need, for example, the higher I/O speed of BE-2, the burst mode capability of BE-2 or even the increased availability of macro functions found in BE-2 but not in BE-1.

In short, the performance requirements of the next-generation systems under design have convinced them they should use BE-2's levels of performance and/or its extended functional capability.

We are very enthusiastic about the progress we've made with BE-2 in such a short period of time. And as such, I would like to enthusiastically congratulate the MoSys team that has created such a dynamic and powerful system level solution. The amount of time and the personal sacrifice the team extended to define, design and tape out the chip was considerable indeed. Beyond that, the efforts put into design verification and timing closure resulting in functionally correct parts on the first mask release are truly appreciated. I have to say I'm very proud to be a part of this team.

Let's talk a little bit about the third member of the Bandwidth Engine 2 family, what we call BE-2 macro. Last quarter, we announced the first two members of the Bandwidth Engine 2 family of integrated circuits designed to meet the requirements of next-generation 100 gigabit, 200 gigabit, and 400 gigabit networking systems. The first of these, BE-2 Burst, the MSR620, is optimized for high-speed buffering applications. The second BE2 Access, the MSR720, is optimized for high-speed access applications. During this first quarter, we followed these announcements through the unveiling of a third member of the Bandwidth Engine 2 family, that being Bandwidth Engine 2 Macro with onboard functions that support the needs of 400 gigabit networking equipment.

The Bandwidth Engine 2 Macro, or MSR820, represents a significant step-up in intelligence for the system designer to draw upon. It delivers the highest access rate throughput of any device currently available on the market and is designed with offload accelerators for metering, statistics, accounting, and other critical system functions that state-of-the-art line cards have to perform. The MSR820 delivers up to 12 billion operations per second for onboard or host-based processing, eliminating as many as six to eight transactions with a single command. This industry-leading performance enables networking architects to reduce power, reduce pin count, and host resources in a very meaningful way. The macro functions can complete entire operations in 30 nanoseconds or less, far quicker and substantially lower power than any alternative solutions, making BE-2 Macro a device unique to the industry in its capabilities.

With our three new tightly focused Bandwidth Engine family members that I've just discussed, the 620, 720 and 820, we will be bringing to market a wide range of solutions to meet the challenges facing the systems architects and designers grappling with the challenges of 100 gigabit, 200 gigabit, and 400 gigabit networking equipment.

Now let's talk about this new product that we didn't mention on the last call. We call it trademarked or copyrighted the LineSpeed Gearbox. I had mentioned on previous calls that we were always doing a little something out-of-the-box, so looking further at the evolution of networking equipment, it has transitioned to high-capacity processing systems consisting of highly parallel multithreaded SoCs that require an inordinate amount of memory bandwidth. We developed the Bandwidth Engine family of products to address this need. These high-performance line cards must be capable of aggregating hundreds of gigabits of data using many 10 gig, 40 gig, and 100 gig interfaces.

This need for speed and density on the line cards -- recognizing this need for speed and density on the line card, we further leveraged our IP and expertise to launch the LineSpeed 100 gig Multi-Mode Gearbox PHY integrated circuit, MSH310. This very high-performance SerDes device is our first non-memory product imported to support next-generation networking, data center, and communication systems. And we expect it to be the first in our family of LineSpeed products. The MSH310 device is designed to support 10 gig, 40 gig, and 100 gigabit industry standards for line cards and modules.

The LineSpeed IC can be used on line cards to enable next-generation network and data center systems to efficiently support hundreds of gigabits of aggregated bandwidth per line card using multiple combinations of high-density ports.

For flexibility, the MSH310 supports both short and extended reach data path applications. They can also be used inside the optical modules and cells as a power and cost alternative replacing legacy solutions fabricated using expensive and outdated silicon germanium technologies.

We recently successfully demonstrated the functionality and the extended reach capability of this LineSpeed solution at DesignCon and at the Optical Fiber Conference in San Diego. These two events generated a great deal of interest and significant booth traffic from prospective customers. We are in discussions regarding potential reference boards and evaluations with more than a handful of customers. With its ability to process data for extended reach applications, LineSpeed will transmit and receive data further or across lower-cost materials than other very short and/or short reach competitive devices which may only support a limited amount of line card trace length.

The LineSpeed Gearbox has proven to be functional with a complete set of features in its present form. We have continued to characterize and fine-tune certain minor features in preparation for various customer applications, and we fully expect to be in a position to sample this product in this quarter.

The combination of our LineSpeed Gearbox to enable high port density and our Bandwidth Engine family of ICs for accelerating packet processing capabilities supports the requirements for increased speed and intelligent data processing on networking -- on next-generation networking line cards. We are very excited about this new product and its potential for creating additional opportunities for MoSys to increase its product content in our customers' systems.

Our LineSpeed products leverage similar high-speed SerDes technology and expertise required in present and future Bandwidth Engines. The market for high-density 10 gig, 40 gig and 100 gig capability is in its early stages and growing quickly. We were able to develop this additional product, the first of a new family, with a strong value proposition at a fraction of the normal R&D costs, and plan to utilize our existing sales channel to further expand on our customer base. You can expect that we will be adding more products to the LineSpeed family in the quarters ahead.

A little bit on Gen 3. The definition of Gen 3, the memory-based product beyond Bandwidth Engine 2 is now complete and in the hands of our design department, and we expect to see silicon in the first half of 2014. It will not be incompatible to BE-1 or BE-2 and it will set a new benchmark as a highly intelligent, uniquely architected networking memory. Its definition, architecture, and feature set will derive from many meetings with our customers and partners, and it will substantially enlarge the served available market that our Bandwidth Engine family currently serves. In a nutshell, what I am calling Gen 3 is a very serious technical contribution to future networking system designs.

Closing. The first quarter 2013 has been very kind to us with progress on many fronts. The new BE-2 and the LineSpeed products, first in the new family, both seem to be meeting their goals and objectives right from the outset. Customer interest in BE-1, BE-2 and the LineSpeed family is very robust, as illustrated by design-ins, design wins, orders for samples and/or prototyping quantities of these various products. I am feeling very good about our progress this past quarter and hopeful that we will see the same progress and success rate in this, the current quarter.

With that, I'm going to turn this call over to Jim to discuss our first-quarter financials. We will then open the call for questions. Thank you for your time and thank you very much for your attention.

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 in the amount that excludes stock-based compensation expense and intangible asset amortization. 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.

Prior to discussing our financial results, I would like to first briefly address our IP business. We continue to record licensing and royalty revenue from ongoing SerDes and 1T-SRAM IP projects. However, our IP licensing and royalty revenue have declined as we have not been actively pursuing additional new licensing agreements since late 2011 and have been focusing on becoming an IP-rich fabless semiconductor solutions provider. We have substantially completed our obligations under these ongoing projects and our revenue reflects this business shift.

Now, let's review our first-quarter results. Total revenue was $1.3 million compared with $1.6 million for the fourth quarter of 2012 and $1.4 million for the first quarter of 2012. Licensing and other revenue for the first quarter was $0.2 million, which was comparable to both the fourth and first quarters of 2012.

In the first quarter, we continued to make shipments of our Bandwidth Engine integrated circuits to multiple customers and the revenues we have recorded have been included in Licensing and Other. Royalty revenue for the first quarter of 2013 was $1.1 million, compared with $1.4 million for the previous quarter and $1.2 million for the first quarter of 2012. The sequential decrease in first-quarter royalty revenue was due primarily to reduced royalties from licensees whose products are used in gaming products. First-quarter 2013 royalty revenue is recognized from 13 licensees compared with 15 licensees in the fourth quarter of 2012.

GAAP gross margin for the first quarter of 2013 was 99% compared with 97% for the prior quarter and 96% in the year-ago quarter. The sequential increase in gross margin was primarily due to lower engineering services expenses associated with existing licensing contracts.

In terms of our operating expenses for the first quarter, research and development expenses were $5.3 million compared with $7.3 million in the previous quarter and $7.5 million in the first quarter of 2012. The sequential decrease in R&D expenses reflects lower development costs in the first quarter compared with higher development activity last quarter which included approximately $1.3 million of Bandwidth Engine 2 tape-out expenses.

Selling, general and administrative expenses were $1.6 million compared with $2.1 million in the previous quarter and $2.9 million in a year-ago period. The sequential decrease in SG&A expenses was primarily attributable to lower Professional Service expenses in the first quarter.

Total operating expenses on a GAAP basis for the first quarter of 2013 were $6.3 million and included a $0.6 million gain representing the final milestone payment from the sale of SerDes technology in the first quarter of 2012. Total operating expenses in the first quarter of 2013 included $0.3 million for amortization of intangible assets and $0.9 million in stock-based compensation expense. We were pleased with the reduction in operating expenses compared with the prior quarter and year-ago quarter, and we will remain focused on cost containment in the coming quarters.

First-quarter total operating expenses of $6.3 million compared with $9.4 million in the previous quarter and $8.6 million in the fourth quarter of 2012. On a non-GAAP basis, total operating expenses for the first quarter of 2013 were $5.2 million which includes a $0.6 million gain for the SerDes IP asset sale and compares with $8.3 million in the previous quarter and $6.9 million for the first quarter of 2012, which included a $1.9 million asset gain.

On a GAAP basis, net loss for the first quarter of 2013 was $5 million, or $0.12 per share, compared with a net loss of $7.8 million, or $0.19 per share, in the prior quarter, and a net loss of $7.2 million or $0.19 per share for the first quarter of 2012. On a non-GAAP basis, net loss for the first quarter was $3.9 million, or $0.10 per share, which excludes intangible asset amortization and stock-based compensation expenses totaling $1.1 million compared with a non-GAAP net loss of $6.7 million or $0.17 per share in the previous quarter and a loss of $5.5 million or $0.14 per share in the year-ago period. Net income per share for the first -- excuse me, net loss per share for the first quarter of 2013 on a GAAP and non-GAAP basis was computed using approximately 40.3 million weighted shares.

Now turning to the balance sheet briefly, as of March 31, 2013, our cash and investments balance was $37.3 million compared with $40.7 million at December 31, 2012. The $3.4 million sequential decrease in cash and investments included approximately $4 million of cash used in operations which was partially offset by the $0.6 million in cash proceeds received from Synopsys.

As of March 31, our total headcount was 97 employees, compared with 95 employees as of December 31, 2012, with over 80% of our employees in engineering and research and development. Of our total employee headcount, 18 are located in India compared with 17 in the previous quarter.

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 Instructions). Gary Mobley, Benchmark.

Good morning guys. Len, I was hoping you could share with us the additional steps that had to be met between a prototype for Bandwidth Engine 2 and when you may actually see a full on design win with this tier 1 customer specifically.

I think -- I'm kind of looking right on past the design win question you just asked, if you'll be patient with me. We received what I'm calling prototyping orders for the subsystem level, board level prototyping of various parts of the customer subsystem. In my opinion, what we're going to see now is him doing the final design of his end big networking router, and what we should expect to see is that he is going to be bringing up various parts of the subsystem and interfacing with us even more than he has been, which has been fairly intense for a long time now. And we should be expecting that we would start seeing system prototyping orders where he is releasing a number of boxes into his channel later in this year or maybe even in the first half of next year. I haven't tried to nail the schedule down on that.

And the downside could be that he could decide, for marketing reasons, that his box is the wrong one to bring to the market or he could cancel it and let us know that he's decided not to release that box to the market, but that is not a very usual occurrence in this business, so that would be unusual. And otherwise, he would have to find some reason why our -- one of his subsystems doesn't work for this to not go forward now.

So, for me, it's a reasonably short path between design-in and design win. And some of that question probably was answered implicitly yesterday when the customer called in and made a second -- placed a second order for another platform out of a different location. I hope that's a reasonable answer here.

Yes. That's great, thanks. And is it going to be a requirement to have a second-source supplier arrangement in place for Bandwidth Engine 2 with this tier 1 OEM? I'm assuming the answer might be yes. But extending the question, how might we see a financial arrangement with a second-source partner materialize? And if you're not willing to explicitly detail that, could you give us some precedent, as in the case of RLDRAM 3 and how second-source relationships materialized on that front? Thank you.

So basically, as you've heard me mention on calls in the past, Gary, we have a continuity of supply arrangement in place with respect to our early-on customers out of Asia. And reflecting back on a company where I was chairman a while back that most of you guys are aware of, a company acquired by Broadcom a year or two ago, in the early days of that company, we discussed those kinds of arrangements too, because that company also brought a lot of products to market that nobody else supplied. And over time, they proved to be a bulletproof, reliable supplier with a high-quality product, and some of that stuff kind of vanished into the background.

So, the continuity of supply arrangements work well and they are well understood in the industry. With a continuity of supply arrangement in place, I don't think we are going to have any problem with these platforms that have been released, so these platforms that are not released are contingent upon us having a second source in place.

Now, having said that, (technical difficulty) MoSys remains committed to bringing up a second source, and we are in discussions with a couple of different companies that have come a long ways. And one of the reasons we're going a little bit slow, it's reasonably difficult to finalize a second-source arrangement when we haven't seen a first real production order yet. And remember, even though I'm reporting a lot of very solid progress that we've all been waiting for, there is a bit of runway before we see the production orders yet. And these things are going to take off late this year or the first half of next year. And so when we start shipping some volume production, I think we're going to -- if it doesn't happen before, you're then going to hear us talking about signed up second sources.

So the answer to your question today is, one, no. There's no contingency to have a second source on the business I've reported on this morning, none. And two, we are committed as a company to having it, a second source in place. And three, we're making measurable progress in that direction. And that's a good answer.

Last question for me and I'll jump in the queue. Could you talk in a little more detail about the go-to-market strategy for Gearbox, and when might we see some revenue from that product? Thank you.

That's a good question, Gary. Let me tell you what the go-to-market side is. John Monson and Mike Miller are leaving for the Pacific Rim tomorrow, so that's the go-to-market. We've been talking about this part -- we talked about it at DesignCon. We actually had a 100 gigabit link running at DesignCon. My understanding is that it was running cleaner and signal integrity better than anything else that was being demonstrated at that event. And we then went down to the optical -- the fiber conference. And I mentioned on my call San Diego but it wasn't; it was in Anaheim. And we showed it again, and it generated an enormous amount of interest that the booth -- both from customers and from competitors.

We have -- we've got -- the events around the Gearbox are moving faster than our ability to cope with them. We are in the business of generating the support collateral for the product, and we are in the business of scheduling customers. And we've got a fair bit of characterization and reliability testing to do on the part yet, so there's still some stuff -- it's a new part not totally through the final and full release, because that takes a while. But the go-to-market strategy is to put it out through the same channel. It goes on the same line card where optical signals might come into a line card and go through an optical module and you come out of that with maybe a couple of 25 gigs, a couple of 40 gig, and a bunch 10 gig lines, and they go into a gearbox where they get re-synchronized, retimed, and you output ten 10 gig lines. And exiting the void, you might have a perverse gearbox. You might think bring 10 gig lines in and output something else back into the optical module and into a fiber over to another line card or back to the back plane.

Anyway, I've given you more than you probably wanted, but there's a lot of action around this. We just chose not to say much about it until we knew we had it. Okay Gary?

Thanks guys.

Jeff Schreiner, Feltl & Co.

Thanks for taking my questions, gentlemen. Jeff Schreiner, Feltl and Company. Jim, OpEx certainly came down. There was probably some charges, as you've highlighted, associated in Q4 that might've just been associated with Q4.

What's the expectations about being able to sustain I guess current OpEx levels through the remainder of calendar year '13? And thrown on top of that, you said no BE-3 (inaudible) is likely in calendar year '13. Is there going to need to be any type of development costs, mass costs, what have you, for any the Gearbox products in calendar year '13?

Yes, as I said on the call, we were obviously very pleased with the expense levels in the first quarter. If I look at it on a non-GAAP basis and put back in the Synopsys asset sale, which obviously won't recur, we were at around $5.8 million. And I'm certainly pleased to see it anywhere in the, non-GAAP, in the $6 million or so range.

Right now, looking out and with the fact that BE-2 is looking great, there is still testing characterization going on. While Gearbox is looking great, there is still a little more to be done there.

Right now, I'd probably have to say I couldn't see -- it would be tough to sustain them at this low level, but I don't see them moving up significantly other than when we have timing of, as you said, development costs. I think Gen 3 will see most of the costs out, possibly as early as Q4 '13, more likely into '14, but that's more of an operations engineering as far as timing, etc. Obviously, we're focused on the current levels of Gearbox. And as Len mentioned and alluded to in his call, we are looking to expand that product family. We could have some development costs there. Tough for me to predict it, but I'm giving you a lot of words. That answer is I think we will see some uptick possibly in the second quarter, maybe as much as -- it's tough for me to say looking out at it.

I think the other area where we are achieving some savings is on the CAD tool front as we had a lot of our license -- licenses with the big CAD providers come up for renewal here in the end of the fourth quarter and into the first quarter. And we were finally able to change our mix of licenses moving away from some of the IP tools and bring some costs down there.

Okay. And I guess, just kind of staying around that on the costs and such, has your annual expectation, in terms of where you might end up with ending cash balance by the end of calendar year '13, has that changed at all following the March quarter in which you didn't see incredibly high levels of cash burn?

Obviously, we are not giving forward-looking guidance, but with that said, I've taken this question and given answers on previous calls. I think, in the past, I've said just assuming a steady run rate and certainly with the -- we can't control the production ramps of our existing design win customers, although we do still expect that you're going to start to see those volumes in the second half of this year. I've said 15% to 20% in the past. Today and after a good first quarter, and with looking out ahead here, given the fact that we like what we see with both Bandwidth Engine 2 and Gearbox, I'd have to say probably in the -- keep it in the $15 million to $18 million burn range for the year.

Okay. And the last question for me, Len, just to get your thoughts on this and try to get my arms around just possibly the situation here of the industry also started to shift as MoSys is entering -- and a question to T.J. yesterday, the CEO of Cypress Semiconductor, they stated that their next generation product is going to offer serial I/O. I'm just wondering how that maybe impacts Cypress, who maybe could be a potential second-source partner, or how does that influence the industry who oftentimes in the past has always chosen the evolutionary path, not the maybe MoSys revolutionary path. Can you help me understand that?

Actually, I have to smile. It's been a long time since somebody brought up T.J. to me on a call, probably since I have been -- when I was running IDT. It's good to know he's out there. He's a bit younger than I, so he is going to be around longer. And he is a very smart guy. There's no question about that. However, I think it would be absolutely marvelous if somebody brought out a serial I/O QDR memory. And I would greatly encourage my good friend T.J. over there at Cypress to do that. It would be good for the industry. It would be even better for the industry if he brought out that QDR serial I/O memory and he used the GCI interface. As a matter of fact, I would publicly say that if he -- I would personally come over and give them a hand doing it. And since neither of us are circuit designers, it would probably take us a very long time.

However, having said that, let me say further, I hear much more conversation from people around the -- or I hear an equal amount of conversation around the people in the QDR camp or the SRAM Camp regarding wide I/O, the 1024 I/Os or something like that, and even conversations now and then about these high-bandwidth memories or hybrid memory cubes and -- or in multichip solutions at 2.5 D. And I've been in this industry a very long time. In the history of the world, that has never been anything other than the highest possible cost solution. And what MoSys has brought to market here is what I call the traditional old solution, a (inaudible) integrated circuit that can serve your needs while increasing performance, reducing power and cost.

Now, we've said from the beginning, in order for us to totally achieve our dream, we need more and more of the people who are on the bill of materials of line cards with us to move more and more quickly to serial communications on the line card, recognizing that the line card now runs as fast as the server room did 10 or 15 years ago. We would like to encourage them to use our interface so that, by working together, we enable the shared customer to get to the performance levels he needs for his next generation systems. And to that end, there's a place for QDR, and it's not going to go away and a serial I/O QDR would be an interesting product. I would really encourage T.J. to take a look at it. And that's my position on that, Jeff.

Thank you very much for your time this morning.

Ian Ing, Lazard Capital Markets.

Good morning Len. Good morning Jim. Congrats on the prototyping orders at the tier 1 customer.

A couple of questions -- perhaps you could talk about the time frame to fulfill the delivery of the prototype quantities as this multi-quarter request.

Yes, thank you for the question. It is a multi-quarter request, but some of it is required in this quarter, and we are going to be in a position to support it. We won't have a completely what I call Group C certified product in this quarter which requires 1000 hours of life test on three different date-coated runs from your wafer supplier, your foundry. However, we will provide life test of that level on the run that we sample from. We've made great progress with characterizing the part, and we've made great progress verifying the functionality of the part. Much remains to be done, but we are in a position to supply samples and prototype quantities this quarter and next quarter to the product specification that we built the product to serve.

Great, okay. And then this LineSpeed product you're announcing sampling this quarter, could you compare it to the design win process to the Bandwidth Engine 1 and 2? Is it sort of the same level of complexity, the same time frame to get a design win, or would it be a faster process?

Actually, the LineSpeed, our first member of the family is a 65 nanometer process node-based. That was because we had a lot of tools already developed and we're very familiar with it. The barrier to entry into the Gearbox market is not going to be as high as the barrier to entry into the Bandwidth Engine market.

On the other hand, there is a limited number of players that have the ability to do stuff that's running 25 or 30 gigs on the I/O today. And the people that serve that market primarily right now would be -- and I'm not sure the order but certainly [Info-I] and Broadcom and maybe AMCC or ARM, whatever they call themselves. It's a very valuable solution on the customers' line card, and it commands a very good price. I think the learning curve on the pricing will be more predictable and perhaps a little bit steeper because gradually people can come and back you up with multiple sourcing on that.

I think we are a little bit late to the market because a lot of people have been working on this for a very long time. On the other hand, it's notable that we just tried it once and it came out and worked the first time. We are encouraged by our progress and we have an absolutely outstanding analog design team at our disposal here in the Company. So it's -- it's taking advantage of the capability that we have. It's on the board that we want to serve, so more ownership and being more important to our customer is good. It commands a good margin, and it's a location and it's a product that's strategically significant to us. I hope I've answered your question.

Yes. So given the easier design win process, is it possible that LineSpeed could ramp in production volume ahead of Bandwidth Engine 2? Is that within the realm of possibility?

I think there is a real need for this product right now. And I didn't say much about it but we've talked about this part being able to serve what we call extended reach applications. This particular product, the Gearbox, there's a very short reach standard. I think it's 12 decibels. And there's a short reach standard which I think is 15 decibels. And then for backplane applications, there's a long reach, either 30 or 35 decibels. And our part was designed for the applications for short reach and maybe very short reach and short reach, applications more on the linecard then across the backplane. But the part has proven to be extremely robust, and we are able to push through maybe, I don't know, somewhere between 8 and 35 decibels. So, we haven't specified that we have a long reach part yet, and we are continuing to evaluate the part. But some of the interest on the part is in the backplane, and so this is a very significant development for us. We're very excited about this product.

I hope I answered your question. I'm sort of rambling.

That's a great update there. My last question, perhaps it's a bit too early to ask this, but where are we on getting on approved vendor lists at tier 1 and tier 2 OEMs? You can get design wins but sometimes being on the approved vendor list helps drive more adoption. I just want to see where we are with that.

Actually, the steps to get onto the AVL at the tier 1 guys are going to require us to make sure we are paying a lot of attention to getting our Group C. And what we would normally do is get the Group C for Bandwidth Engine 2. We already have it done for Bandwidth Engine 1, so we would be more than happy to have our tier 1 guys come in and audit us. We have been audited by a number of suppliers already. As we get closer to production quantities in BE-2, or as we move down the road to more and more action around the LineSpeed product, I would expect that our QA guy would get a call from the QA guy at the tier 1, and he'd ask to come over and audit our processes. We're very, very strong and robust in that respect. We have ISO certification. Our QA guy I would use in some of my other businesses to come in and help other companies bring up their ISO capability. Phil is very experienced and has been at it a long time. So I would think we would get an inquiry from the quality guy at the tier 1 that he'd like to come by and do an audit. It will sort of follow a standard course, I think. In one case, the LineSpeed part has developed enough interest that I think it is a tier 1 guy has already said that, hey, you're not in the AVL yet but we can fix that. I think, as I said, we're going to -- things can happen a little faster perhaps on the LineSpeed device than BE in that it's a part that's being looked at and needed for a while as opposed to BE, which is a revolutionary step forward.

Great, thanks for the update and good luck.

Kevin Cassidy, Stifel.

Thanks for taking my question. Congratulations on your progress. I wonder if you could tell me the processor that your customer is using along with BE-2. Is it a custom processor, or is it off commercial processor?

I'm going to be a little vague about this. Most of our business to date has been on FPGA-based platforms. The various -- the very highest performance projects that we are working on are, at the current time, some of them are using generic -- I'm going to call it generic NPUs, the kind of thing you might get from a Cavium or an EasyChip or an RMI, who is now part of Broadcom of course. So we are involved in several of those projects that we haven't even declared design wins yet, and most of that very high-end stuff is with tier 1s. The project -- at least one of the projects we're talking about this morning with the tier 1 is FPGA-based, and the other one I'm not sure of at this time. It's kind of moved forward quicker than I had anticipated.

Okay. Great. Maybe along those lines on those companies you named, are you working with them directly for a reference design to start -- try to get some leverage on your sales efforts?

We've been working with some of these folks for a fairly lengthy period of time, but there's nothing of note to report this morning.

Okay. Just one other question on alternative design or the competition for your tier 1 customer -- do you know what they were considering, what are you replacing?

Actually, if we take a look at BE-1, it was initially targeted for replacing RLDRAMs, which are getting a little bit long in the tooth. And as you go to higher and higher performance, they have some issues with latency and in some cases they have some issues with -- well, mostly it's latency. Just core memory speed is just not acceptable. Then Bandwidth Engine 2 of course has an onboard cache and can meet burst applications, which is that MSR620. So in that respect, some of the applications we are seeing are QDR -- where we replaced some QDR devices. And because BE-2 has a higher I/O speed and a broader feature set, it's just -- and a better, higher, maybe a 20%, 25% better latency, it's getting into some higher high-speed platforms.

Ask me your question again so I make sure I give you the right closing answer.

Yes, I was just wondering what the alternative designs would be. You had --

There is really -- when we take a look at the competition out there at the very high end, we are not seeing anybody with a monolithic solution. The RLDRAM guys have come now with RLDRAM 3, which is capable of gig access, gig access per second. If we look out to Gen 3, which will be available the first half of next year, it's probably somewhere between 8 and 12 gig accesses. It just changes the whole nature of things.

So the RLDRAMS have stepped up a bit. QDR memories are trying to get to 144 meg in size, but they're pretty small. And I didn't mention it but you know I think that T.J, may have mentioned on his call yesterday that there are some soft error rate problems with QDR memories now because the cell size is so small and they are struggling and perhaps some of that can be overcome with the advancement of thinset technology, I'm just not sure about that.

But a lot of people talk to us about the roadmap to 2.5-D and 3-D solutions where you have multi-chip modules that are either sitting on interposers or sitting on organic substrates or even memory (technical difficulty) where you stack one die on top of the other. My opinion is, for stacking die on top of one another, it's probably not going to do a lot in the networking business because we -- such high-performance is required, there's too much power dissipated.

But I think, looking down the road three to five, six, seven years, I think we will start to see some 2.5-D solutions using either organic substrates or interposers with 2.5-D or just very sophisticated multi-chip modules. And we are actually having some conversations with people about that as well. But in the horizon over the next three to five years, I think there's going to be some very, very good monolithic solutions, and at the current time, I think we might be the only guy that has one.

Great, thanks.

You have no further questions now gentlemen, so I would like to turn the call back over to Mr. Len Perham for closing remarks.

Yes, I have just one closing remark; it's a little bit long. First off, I want -- I intended this morning to convey to you that we have made serious progress or excellent progress this quarter against the goals and objectives that have been -- that I've identified as important to us and therefore important to you.

But closing, let me close on a cautionary note. Yes, we've made great progress. However, there is a long runway before networking equipment customers release their systems in full production. That hasn't changed. In spite of the fact, we had some very good results this morning and expect more results of the same nature going forward. The long runway before the network equipment gets released into production is still there. It hasn't changed. It's what I always say when I'm out talking to you guys individually or at some of your meetings. We've received great encouragement via these sampling product typing orders. However, we have a ways to go before the huge production orders are received. We are very gratified about the progress we are reporting to you this morning.

We are very, very thankful for your continuing support. I'm very grateful to the team of engineers that just seem to get things right first time, every time. It's great to talk to you, and I look forward to giving you a further update next quarter. It's been a good quarter for us, and I hope you all have a great day. Thank you.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.