Peraso Inc (PRSO) 2013 Q2 法說會逐字稿

Good morning and welcome to the MoSys second-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, July 19. I would now like to turn the call to Beverly Twing of Shelton Group Investor Relations. Beverly, please go ahead.

Thank you, Gary. Good morning, everyone. Joining me on today's call are Len Perham, MoSys's 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 on the Safe Harbor provisions of Section 27A 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 the 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 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 reports on Form 10K and Form 10-Q filed with the Securities and Exchange Commission, in particular in the section titled Risk Factors and in other reports that the Company files from time to time with the Securities and Exchange Commission.

MoSys undertakes no obligation to publicly update any forward-looking 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, Bev. Good morning, everyone. I will begin today's call with highlights and key accomplishments from the second quarter and then provide updates on our design and sales activity as well as product updates for the Bandwidth Engine and the LineSpeed product family. Jim will then review our second-quarter financial results prior to opening the call for your questions.

About our public offering, a significant highlight in the quarter was the completion of our $30 million public offering of common stock. Jim is going to provide you with more details, however, suffice it to say that we are pleased with the results of the effort which reflected strong support from both new and our magnificent existing shareholders and investors.

This transaction has greatly strengthened our balance sheet, provides us with the needed runway to execute the business plan and allows us to turn 100% of our focus now toward customer partnerships, design wins, product definition and development, and the growing of our overall semiconductor business.

A little bit about design win activity. Let me now turn to our design win activity for this quarter. But before I do, I want to revisit how we define a design win in order to ensure consistency with our internal management tracking process and better help our investors understand and follow that progress.

We define a design win as the point at which a customer has made a commitment to build a board against the fixed schematic for his system. The design win is tracked by each onboard socket we are -- I'm, sorry. The design win is tracked by each onboard socket we are competing for and by the board or platform -- as I have called it in the past -- itself which gives an indication of new customer traction and further penetration of existing customers.

That said, our design win activity in this past quarter remained very high as we continued to track significant interest for our expanding array of integrated circuit products. We secured multiple new design wins in the second quarter, most of them being for Bandwidth Engine. However, we also entered into a couple of new engagements for our recently announced LineSpeed Gearbox IC family.

The majority of the design wins are with new customers which speaks to the depth of our sales pipeline and the effectiveness of our ongoing marketing and sales efforts.

In addition to the growth in our BE our Bandwidth Engine design and customer count, we are quite pleased to secure our first design wins for the LineSpeed Gearbox product family. These early engagements will allow us to further demonstrate the capabilities of the Gearbox and provide us with the critical insight required in order that the future generations of this product family most perfectly fit the application requirements of the future systems of our customers.

We have already made initial shipments to our LineSpeed customers and look forward to working closely with them in the coming quarters. Additionally, we are actively pursuing a number of other opportunities for this new product family as we speak.

In summary, our sales activities and funnel remain very strong reflecting the growing customer interest in both the Bandwidth Engine family and our new family of LineSpeed IC products as well.

Let me take a few moments to provide more specific updates on each of these families, with regards to the Bandwidth Engine. Starting with our Bandwidth Engine, sales activity continues to increase and with that we have begun to see a noticeable shift in interest toward Bandwidth Engine 2, although we continue to pursue and support opportunities for Bandwidth Engine 1. And just as a matter of interest, Bandwidth Engine 2 is not replacing Bandwidth Engine 1 in the designs we have announced that we won in the past. These are all looking forward opportunities.

This shift is primarily attributable to the solution-specific characteristics, that is, the increased performance and the significantly enhanced feature sets of Bandwidth Engine 2 that resulted from our ever-closer customer relationships and our ability to see their specific applications and requirements more clearly. This experience translated into the development of three unique Bandwidth Engine 2 parts to address the specific needs of next-generation high-performance line cards.

The first, the MSR620, which we refer to as the Bandwidth Engine 2 Burst device, is specifically designed to handle oversubscription activities and is highly suited for use in applications where high-speed buffering is a primary requirement. The second, the MSR720 or Bandwidth Engine 2 Access device, is configured to support the very high speed access rates required in some of the more advanced networking applications that we support. And the third, the BE, the Bandwidth Engine 2 Macro device or MSR820 not only delivers equally high or even higher access rates but is coupled with intelligent offload accelerators for statistics and atomic memory operation.

Bandwidth Engine 2 Macro can offload multiple processor calculations, thereby reducing the burden of these operations from the host packet processing engine, thus significantly accelerating packet processing performance and efficiency by as much as six times. The MSR820, by increasing the efficiency of the packet processing engine, allows the designer the opportunity to favorably increase his overall system performance. The MSR620 and 820 are now available for sampling and the MSR720 is soon to follow.

During the quarter, we made great progress toward finalizing and freezing our back end production flows for Bandwidth Engine 2. As you know, once we are able to freeze our process flows, we will be in a position to formally commit to achieving our carrier grade quality and reliability benchmarks.

Included in these back end production flows are the exact specifications and procedures for conducting our assembly operations; our testing close, all of our testing and burning operations; specification of our unique piece parts, et cetera. And I am very pleased with our progress to date in this area.

The Bandwidth Engine 2 continues to look very good meeting or exceeding its functional specifications. However, we are still in the middle of characterizing and verifying that the product runs at speed and power, the speed and power specified over its entire range of operating voltage and temperature. We are in the midst -- as I mentioned, we are in the midst of these what I call product characterization efforts. And things are going fine.

Additionally, we have initiated our formal quality and reliability benchmark testing as I mentioned earlier. Better known as the HTOL, high temp operating life requirements. This is a rigorous process requiring the testing of three different date coded runs, testing them for 1,000 hours at the correct elevated operating temperature. And the acceptable AQL level for this type of testing is to accept on zero fails in each of the three lots and reject -- and fail the entire test if you have a failure in any one lot.

This will likely be the last step in meeting full carrier grade quality and reliability requirements. And upon its completion, we would expect to release the Bandwidth Engine 2 family to full production sometime mid-fourth quarter.

Before I move on to address our LineSpeed products, I would like to make comment on the status of securing a second source partner for our Bandwidth Engine family. We continue to hold serious discussions with multiple interested candidates with the intent to establish a partnership but need to ensure that second source partnership reflects terms that are of benefit to all parties involved.

In the meantime, we have a continuity of supply arrangement in place to satisfy the requirements of our existing customers. And to date, our sales activities have not been hampered in any way and we have had no customer turn or walk away from us because we haven't identified a second source.

Closing on this subject, I do think we are making reasonably good progress and I have said for a long time we should probably deal with this and get it behind us in this calendar year.

Moving to our LineSpeed product family, we are very gratified with the level of the sales activity surrounding this new family of products. Our sales funnel reflects a significant amount of activity involving the LineSpeed Gearbox which was announced in the first quarter and the more recently announced LineSpeed Retimer is being received enthusiastically by potential partners and customers as well.

The newest and second product in the LineSpeed family, our Quad Retimer, leverages our high-speed silicon-proven CMOS physical interface technology to enable industry-leading performance for line cards, backplanes, copper cables, optics modules with extended reach capabilities. Our Quad Retimer integrated circuit serves to ensure the signal integrity of high-bandwidth data transmission and allows for extended reach while minimizing signal distortion.

Retimer ICs are primarily used in applications that don't require the functionality provided by the Gearbox -- excuse me, I read that incorrectly. Retimer ICs are primarily used in applications that don't require the functionality provided by our Gearbox IC products. The addition of our Quad Retimer significantly increases the served available market opportunity for our LineSpeed IC family, likely nearly doubles it.

Our first LineSpeed product, the Multi-Mode Gearbox, was designed for use on line cards. Despite being a relative newcomer in this area, we have developed credibility and a robust pipeline of opportunities in a short amount of time. Further, based on initial customer feedback and opportunity, we are updating the Gearbox design to enable initial additional features and functionality with the intent to address specific customer needs.

Towards that end, we will be doing a second tapeout of the line speed mask set over the next few weeks and expect to receive new silicon late third quarter. The LineSpeed Gearbox silicon will allow us to serve an extended range of applications with this base 65 nanometer solution. Remember this generation of MoSys LineSpeed products was designed at a lower cost 65 nanometer node, yet we believe our products stack up very well cost-wise against competition whose products are either in the 40 and or the 28 nanometer configuration. I think going with a lower-cost node has been a very competitive move on our part.

Our go-to-market strategy for the LineSpeed IC involves capitalizing on the same sales channels and marketing an application efforts that have been underway for Bandwidth Engine. The requirement for speed, density and higher performance in next-generation networking systems has become self-evident and continues to be of primary importance throughout the industry. As such, our current and prospective customers and partners who have an active interest in Bandwidth Engine are also among those who can benefit most from the LineSpeed devices.

We already have our foot in the door with most of these companies and are leveraging existing as well as new relationships to introduce our expanded family of LineSpeed products. By offering a second family of products to the line card as well as new first offerings for the backplane, we expect to significantly increase our addressable opportunities.

In summary, in less than four months from the initial release, we have already generated a healthy sales funnel of opportunity for this new family demonstrating the value of these products -- demonstrating the value these products offer, next-generation networking and communication systems. I also believe the opportunity to ramp revenue on this new family is a little bit more quick than Bandwidth Engine for the simple reason that there is no need to adopt our new and innovative GCI interface when you are talking about the wireline LineSpeed products.

In addition to our exciting success with our current products, we also continue to make notable progress on future product development for both the Bandwidth Engine and the LineSpeed product families. We have seen early interest from customers beginning the development of cards that run in excess of 400 gigabits per second. Their interest is in our future Gen 3 Bandwidth Engine product.

We are currently in the process of collaborating with a number of these companies and formalizing strategic customer and partner relationships.

Gen 3 further extends both our performance capabilities and flexibility and can target even the highest performance platforms. These new platforms enable increased functionality and performance for packet processing engines by supporting flexible offloading of tasks to the Bandwidth Engine in a very cost-effective way, resulting in the potential for a significant upgrade in overall systems' performance.

Features of this type aren't available from other chip suppliers. This really sets us apart. As of today, the definition of Gen 3 is frozen, and design activities are well underway as a result of our early high level collaboration with a few strategic partners and potential customers. There is a very significant effort being put forth by the development team to tape out Gen 3 into the first half of 2014.

With regard to our LineSpeed family of products, customer reception to feedback has been very gratifying and is providing an excellent mechanism for learning in more detail the application requirements for our next generation LineSpeed physical interface devices that will be optimized for higher performance and deliver yet a further expanded feature set.

It is a bit premature to provide more details today, but our next-generation development targeting system projects and line cards, modules, and the backplane are well underway.

In summary, we've made significant progress during the quarter both inside and outside of the Company. In addition our successful fundraising -- in addition to our successful fundraising we secured multiple additional design engagements; increased our addressable market by expanding our product offerings; and further expanded our sales pipeline for both the Bandwidth Engine family and the LineSpeed product family. We still have a lot to do between now and the end of the year, but we are well on our way to achieving measurable revenue improvement in 2014.

With that, I am going to turn this call over to Jim to discuss our second-quarter financials and then we will open this call for questions. I want to thank you for your time and thank you very, very much for your attention. James, go ahead.

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 and intangible asset amortization. These non-GAAP financial measures and a reconciliation of the differences between them and comparable GAAP measures are presented in our press release and related current report on Form 8-K, which was filed with the Securities and Exchange Commission today and can be found at the Investor Relations section of our website.

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 a fabless semiconductor solutions provider.

We have substantially completed our obligations under these ongoing IP projects and our declining revenue reflects this business shift.

Now let's review our second quarter of financial results.

Total revenue was $1.1 million compared with $1.3 million for the first quarter of 2013 and $1.7 million for the second quarter of 2012. Licensing and other revenue for the second quarter was $0.1 million, consistent with the previous quarter, and compared with $0.6 million for the second quarter of 2012. Revenue attributable to shipments of our Bandwidth Engine and LineSpeed integrated circuits has been included in licensing and other revenue.

Royalty revenue for the second quarter of 2013 was $1 million compared with $1.1 million for both the previous quarter and the second quarter of 2012. This sequential decrease in royalty revenue was due primarily to a decrease in shipments by fabless semiconductor customers, which was partially offset by increased royalties from a major foundry partner.

Second-quarter 2013 royalty revenue was recognized from 13 licensees, consistent with the first quarter of 2013. GAAP gross margin for the second quarter of 2013 was 93% compared with 99% for the prior quarter and 90% in the year-ago quarter. The sequential decrease in gross margin was primarily due to higher support expenses associated with existing licensing contracts.

In terms of our operating expenses for the second quarter, research and development expenses were $6 million compared with $5.3 million in the previous quarter and $6.7 million in the second quarter of 2012. The sequential increase in R&D expenses reflects higher development cost associated with Bandwidth Engine 2 and CAD tool costs required for next-generation to graded circuit product development.

Selling, general and administrative expenses were $1.4 million compared with $1.6 million in the previous quarter and $1.4 million in the year ago period. This sequential decrease in SG&A is primarily attributable to lower stock-based compensation and professional service expenses.

Total operating expenses on a GAAP basis for the second quarter of 2013 were $7.4 million and included $0.3 million for amortization of intangible assets and $1 million in stock-based compensation expense. This compared with $6.3 million in the previous quarter which included a $0.6 million gain in the final amounts on payments in the 2012 sale of our SerDes technology and also compared with $8.1 million in the second quarter of 2012.

On a non-GAAP basis, total operating expenses for the second quarter of 2013 were $6.2 million compared with $5.2 million in the previous quarter and $6.6 million for the second quarter of 2012. On a GAAP basis, net loss for the second quarter of 2013 was $6.4 million or $0.15 per share compared with a net loss of $5 million or $0.12 per share in the prior quarter and the net loss of $6.6 million or $0.17 per share for the second quarter of 2012.

On a non-GAAP basis, net loss for the second quarter was $5.2 million or $0.12 per share which excludes intangible asset amortization and stock-based compensation expenses totaling $1.2 million compared with a non-GAAP net loss of $3.9 million or $0.10 per share in the previous quarter and the loss of $5 million or $0.13 per share in the year ago period. Net loss per share for the second quarter of 2013 on a GAAP and non-GAAP basis was computed using approximately 43.9 million weighted average shares outstanding.

Now turning to the balance sheet. As Len mentioned, during the second quarter we significantly strengthened our balance sheet by completing a public offering for 7.475 million shares of our common stock at $4.00 per share. Net of customary underwriting discounts, commissions and offering expenses, we received cash proceeds of $27.7 million.

Subsequent to this offering as of June 30, 2013, we had approximately 48 million total shares outstanding. We are very pleased with the outcome of the capital raising event and believe it reflects continued investor confidence from existing as well as new shareholders. We intend to use these processes for working capital and general corporate purposes, including research and development for current and future products as well as sales and marketing efforts.

As of June 30, 2013 our cash and investments balance was $58.9 million compared with $37.3 million at March 31, 2013. Excluding the proceeds from the public offering, our cash burn in the second quarter approximated $6.1 million and included a $1.3 million payment for the cost of the fourth-quarter 2012 Bandwidth Engine tapeout and related foundry expenses.

As of June 30, our total headcount was 97 employees consistent with the previous quarter. Of our total employee count more than 80% are in engineering and research and development, and 17 are located in India compared with 18 in the previous quarter.

This concludes my prepared remarks. At this time we would like to open the call for a Q&A session. Operator?

(Operator Instructions). Gary Mobley, Benchmark.

Good morning, guys. Happy Friday. Wanted to push for a few more specifics on Bandwidth Engine and as well some of the economics in LineSpeed. With respect to Bandwidth Engine 2, I think last quarter you mentioned that tier 1 design win. I'm wondering if you can officially count one additional tier 1 design win for Bandwidth Engine 2 which you perhaps gained during the second quarter.

I think last quarter we referred to those as design ins causing a bit of question probably in the minds of our listeners here. And it is safe to assume that those opportunities are now design wins.

So you have more than one design win, official design win for Bandwidth Engine 2?

I think we said on the last call that we had seen a couple of opportunities come in, one followed closely by another, both multiple chips per board, and I said earlier this morning a design win we followed both the sockets and it is multiple sockets per line card. And I think I mentioned on the call there were two line cards. And I think you heard me correctly. I would list them both as design wins.

Okay. And on LineSpeed, could you share with us the revenue model for that particular product line with the ASPs -- what kind of unit potential there is for each specific router or switch line card and then what the gross margin potential is for that product?

So, that product, I think we had said that that product -- I am going to speak to the Gearbox. I don't think we have set the pricing up for the Retimer yet. We have got a lot of talks here in marketing we are sampling. But let's just talk about the Gearbox. And I think what I say extends to the Retimer in terms of the trends. Maybe not the exact ASP.

I think we believe that the Gearbox should sell in the range of $150 to $200. We believe that the learning curve pricing might be a little steeper on that quarter over quarter because in the case of the Gearbox we -- there are other people supplying those kinds of solutions primarily probably Inphi, Broadcom and maybe to a lesser agree or to targeted customers, maybe Avago.

The margin for us on that product should be very strong because we built it in a 65 nanometer technology. So the cost of our mask sets end cost and the infrastructural cost I will call it a probably a half or less than the guy doing it in 40. And dramatically less if you had done it, the same element, in the 28.

The critical thing about a gearbox is that you can what I call drive the signal into a load and for very short reach applications you have to be able to drive into a 12 decibel load, which to me means that you can drive through 12 decibels of loss and still have signal integrity, and all the information is intact in your signal.

For short reach applications you are required to drive into a 15 decibel mode and maintain signal integrity. And we were very gratified that our first time out of the box we are driving into something in the area of a 28 to 33 decibel load. So we are vastly stronger than what is required for just the short distances on a line card which opens up our opportunity to serve backplane applications and that substantially changes the served available market.

The last thing I will say is one of the reasons -- the two things that are critical when you are driving into these loads is that you are able to drive into this load and you are doing it a certain amount of reach, but also not burning an excessive amount of power. If a guy beautifully creates a very short reach device and it is only going to be used for very short range applications between adjacent chips, then his opportunity to excel is his power is lower than everybody else's because it can only go a short distance.

However, having said that, I would say that we were very, very gratified at our ability to keep power reasonable while getting a lot more reach out of our device. And in future products -- the future product family, call it LineSpeed 2, we will almost certainly have both a family for the backplane where we plan on driving and burning a little more power and a family for the line card.

Having said all that, the last point that you had asked is about opportunity for these parts per line card and I don't have all the application stuff in front of me. But for applications aggregating or in the core, I think there's probably an opportunity for anywhere from 5 to 10 parts per board. It is, again, an area where we didn't go in to compete for one socket.

There's -- Retimers are required in the optical module as well as other places on the line card. And gearboxes are required coming and going as you go in the direction of -- for the line cards or into the backplane and as you come back out.

So, I would say we should be thinking of 5 to 10 parts per board once we have won widespread acceptance. And that is on the line card.

And I won't address the backplane because it's, again, multiple use opportunities. So, this is a good thing for us. And it is going to -- and we didn't say it on the call and my words didn't say it, but we now have an exponential increase and reasons to go and talk to our customer. When you only have one product family, he maybe sees you once every few weeks.

But we can go see the customer a couple of times a week now if we want to. It has made a huge difference.

Last question for me. Between the two different product families, Bandwidth Engine 2 and LineSpeed, which of those would you expect to break the $1 million per quarter revenue threshold first?

I think it is of course going to be the Bandwidth Engine because we have been working on it a lot longer and the served available market is substantially bigger. Again, there is an opportunity for 10 or more of those parts per line card as well. And we should expect that the Bandwidth Engine is going to go through $1 million first. But we are going to be happy at how fast the LineSpeed device comes on as well.

Thanks.

(Operator Instructions). Jeff Schreiner, Feltl.

Good morning, guys. I was just wondering, Len or Jim, if we could talk a little bit about when we should expect this licensing revenue stream, it has gotten pretty low here to fall off and conclude given the refocus on the Bandwidth Engine product line. And trying to understand is there going to be some recovery there from potential BE ramp or is there going to be maybe a little bit of a gap here as we move through the year with licensing possibly concluding before we see some of that initial BE contribution, product contribution?

I will make a quick comment, then I am going to let Jim talk to the subject a bit. In the last 20 -- 12 to 18 months or maybe 24 months before we announced that we were going to take the Company strongly in the direction of the integrated circuit business and become a fabless semiconductor company, we sold IP into applications where maybe we got some upfront pre-paid royalty or something. But if the volume goes by a certain point, then some additional revenue would flow after that.

It is hard for us to tell how successful our customers are going to be. But there is the opportunity that we will see revenues start coming our way. It won't -- it will never again be the size that it was when I got to the Company a few years ago. But nonetheless, it isn't going to go to zero for a while.

And having said that, I think Jim watches that reasonably close. So, Jim, maybe you want to add something.

Yes, from the -- let me take the royalty, the biggest number. That will continue on certainly for the next few years. It is tough to have visibility as to existing customers and how long their designs will remain in the market. Our largest royalty payer this past quarter, our foundry partner has multiple part numbers using the technology and we just don't have a lot of visibility, but I expect that to continue for a while.

As I talked about on previous calls, our other large payer for the part used in the Wii, we are starting to see that taper off and I expect that to continue. So the net of it is royalty will continue on a couple of years, but erode off gradually each year based on lifecycle of the products.

And, frankly, I don't see new royalties turning on. We probably only have maybe one or two arrangements out there where we could see new royalties turn on.

On some of the other later contracts we had done as we look ahead to being in the fabless semi business we started to take prepaid upfront cash to fund ourselves. So we will go -- forgave that future royalty stream in favor of upfront cash.

With regard to licensing and other, and as I said on the call, there is IC revenue in there. And I think as I have said on previous calls, right now we do have a pretty reasonable sales return reserve against our IC revenue, just given the early stages of the product which we are still holding on to be conservative and, obviously, at these low levels it is really irrelevant.

But at some point here we will be taking that out and we will start to say that component grow. And eventually at some point in the future when the time is right and the numbers are more meaningful, we will break those out.

That said, I think the licensing component which right now is basically just some continued revenue recognition as we complete deliveries, final deliveries and more completing support. As customers bring up their designs and as well as maintenance obligations, I think we will say that taper off throughout this year and then into early 2014 and then obviously see the IC component in there grow and then eventually you will see that broken out on our financials.

And, Len, you talked about a customer count going up for a Bandwidth Engine in your prepared remarks. What is the current customer account for Bandwidth Engine?

I don't have a chart in front of me. Somewhere between probably 6 and 8 or something like that. And I said something about I had been heard to utter carelessly here that maybe by the end of the fourth quarter we should be thinking that on our backlog of customer wins we are talking something in the area of 12 to 14 customers. And maybe it will be the high number could be the number of my using my old term platforms and that would mean multiple platforms with some customers. But we should look forward enthusiastically to going out of this year with I think 10 or more real customers. And probably a few more platforms than that since we win more than one design.

And I have long believed that after we win the first design in the company and they have gone through the switchover I will call it, aggravation of going to a serial that they are going to use us across as many platforms as they can. And we are already seeing that with our early on customers that we talked about for the last year or so. Once they master this and they bring something to the market, they like what they see and they put it across -- they standardize the platform. We will see more of that too, Jeff.

Final question for me, I appreciate your context. Just, again, trying to get some -- trying to quantify some of the statements in the prepared remarks. I think I apologize, Len, I don't have the exact words you used, but some commentary related to some reasonable expectations for growth or the even better expectations for growth in calendar year 2014. Can you help us quantify where you are getting that kind of conviction from?

Yes. Actually, we are working very closely with the early design wins we have. And we can see that they are starting to go from 10s per month, 100 -- to 100 a month to multiple hundreds per month and we can see when they are going to start ramping. I believe I have heard from our guys now that we think a couple of our customers may have systems out at their end users now. So we are going to -- we have said that sometime in the third quarter or the first quarter or so of 2014 we are going to see this stuff ramp up.

And then I think they will employ these -- as I said, a few moments ago, they will employ these platforms across other systems they are bringing out. And because it has already been what I will call proven and integrated together with the other components that they use on their line card, the time to bring it up should be a little shorter.

We are coming to a different place in the Company's life now. It is very gratifying to me personally.

Thank you for your time today. Appreciate it.

Krishna Shankar, ROTH Capital.

Congratulations on the execution and the design win momentum. A couple of questions. You said that you expect significant ramps in revenues beginning in 2014. Do you see Bandwidth Engine 1 revenues ramping and being a significantly larger stream than BE-2 over the next 12 months or will BE-2 overtake BE-1 pretty rapidly?

I think that Jim and I have been -- and Jim is going to have -- I am just quoting his information here. I think BE-1 will be the largest source of integrated circuit revenue in 2014. And we've said right along that I think in 2015 it is likely that BE-2 will cross over.

Also, we haven't said much about it in the past, but the Gen 3 part is being -- and if you might recall that from -- we had silicon to sample in the fourth quarter of 2010 and didn't book our first real design win until first quarter of 2012 on Bandwidth Engine 1 because it was a lot of selling to the customer. A lot of missionary work to do.

Bandwidth Engine 2 came out early in the middle of the first quarter of this year. And there were thousands of pieces already on the backlog that people wanted right now. And Gen 3, we talked about it is not going to tapeout until sometime in mid-first quarter. And that one isn't even out yet and people are all over it.

So I think even we will see that Gen 3 is coming alive in the latter stages of maybe the second half of 2015.

But to your point, BE-1 should be the largest single volume, I think, in 2014. And I think 2 will cross over in 2015 and there will just be a lot of things going on. A lot of good things.

Okay. And then, LineSpeed, in your prepared comments you said that you had a couple of customer engagements on LineSpeed and can you talk about those applications, what you have now and what you plan to target with the new designs which are more optimized for short reach and long reach applications?

Actually I am going to give you a good answer to the first part and not so good to the second. Because I am not that familiar with the -- what I am calling our wireline products. But let me say first that when we first turned on the Bandwidth Engine, we found that a couple of these add-on board makers, one in particular that was aligned with Xilinx and another one that -- another high-speed add-on optical networking card, I think it was marketed directly by Altera. And those guys continue to buy reasonable numbers of parts from us. And because we said they were very low volume, but allowed our partner the packet processing engine guy being an FPGA on these two different cards. And it allowed them to showcase the performance of their chips in this application by taking advantage of the features and benefits of the Bandwidth Engine family.

So, when we came out with our LineSpeed Gearbox here, we tracked down a couple of small companies that had very, very strong engineering. And they have a reason to want to run very, very high Wireline speeds. And we have already shipped them product. I think I mentioned that. And I don't think they are going to be a particularly high volume, but it is going to showcase our -- the performance and the value and the competitiveness of our offering.

And right behind that, we have got a couple of tier 1 guys that are looking very, very hard at adopting the part as well. We -- because we are so new, we missed -- we did miss out on the tier 1 opportunity that I think we would have won it, except that we didn't have all of our qualifications and characterization done. The part is quite exciting to some of the -- because of its ability to drive into a substantial load.

Okay. And then on Bandwidth Engine, I think you have said that when a tier 1 OEM is in volume production, the opportunity for each tier 1 OEM design win could potentially be and their full-time production could be in the range of $10 million to $15 million in terms of their needs for a product like the Bandwidth Engine on each platform or by customer.

Can you just quantify the revenue opportunity potentially at each top-tier OEM and Bandwidth Engine is in full production and then LineSpeed on top of that?

I am not sure what you asked me. Why don't you ask that question one more time?

So, I am just trying to quantify the size of the revenue opportunity at each top-tier OEM when Bandwidth Engine is in full production and when LineSpeed is in full production. The revenue opportunity at each top-tier OEM. Assuming multiple design wins.

Yes, certainly if we win one of the major platforms at one of the top-tier ones, there is no reason to think that isn't a $25 million to $30 million, $40 million opportunity per year, but that is when you win one of the top platforms. There's probably -- I am guessing, at the top tier -- the top guys in the five guys in what we call tier 1, that being Cisco and Juniper and ALU and Huawei and ZTE, they have platforms that are going to require $25 million, $30 million a year of this kind of a product and maybe even more. And they have other platforms that are going to generate just a few million dollars per year.

So it isn't just that you win that one big platform. What you want to do is win as many as you can. And I commented that once a guy goes through the aggravation of adopting a serial interface and we think that sort of de facto GCI can be -- our GigaChip interface can become sort of a standard because people are learning to use it and work with it, then they are going to use it at more places across more platforms.

So having said that, and I am not able to predict what we might do at each one of the top tier 1 guys, but I can tell you that we have talked about -- Jim, why don't you comment on what your model says about revenue in 2015 and 2014, 2015 and so forth?

Yes, certainly, folks have maybe heard me make a comment with initially with Bandwidth Engine 1 and 2. Even in my model I only assume conservatively that we have design wins at two of the top five that we have talked about. I think Bandwidth Engine 3 is where I assume we have additional traction with additional tier 1 customers. And Len would say that's I'm being prudent. As the CFO I am being conservative in my modeling and obviously looking at our runway and ramp.

But that is what I look out right now in our model. We have obviously had success with 1 and have design wins there. And certainly John Munson and his team are working on gaining additional.

And I can certainly say now with the financing concluded last quarter, Len is practically spending pretty much all of his time on customer activities and out there in customer and partner meetings, et cetera.

So stay tuned for more to come on that front with regard to tier 1 -- further tier 1 activity.

So --

So, Jim yes, Krishna, just a minute. Hold on. Jim, comment on where you see -- what is the Company going to burn for cash this year and where do you speculate in your model that we might see cash flow positive?

With regard to this year, I think I have said previously we will burn in calendar 2013 anywhere in the range of $15 million to $18 million. Putting aside the effects of the financing and the proceeds received in the second quarter, we probably burned about $9.5 million in the first half. So I obviously think we will do better than that in the second half. But certainly in a worse case I don't see us burning more than $18 million this year.

With regard to being in a position where we can generate adequate integrated circuit revenue to further dovetail back to Jeff's question earlier, let me even say IP revenue just went to zero at some point even sooner than later. We would need integrated circuit revenue with a conservative gross margin probably in the range of $14 million or so a quarter. And we could see that potentially early 2015 is probably what I would say right now.

So that is an expanded answer to your question. Go ahead.

That is very helpful. Thanks a lot. My final question, Len, can you talk about the recent announcement you had with Xilinx and then also any updates you may care to provide with both your ASIC partners and the merchant packet processor partners?

So, it was -- Jim, what did we just announce in regards to Xilinx (multiple speakers)?

Alliance program.

We just joined Xilinx's Alliance program. It is a program that they operate internally. We -- as you would probably expect we are very, very close to both Xilinx and Altera because they both sell a solution for packet processing engine applications. And we have a number of ongoing partnerships, if you will, with Altera and we have a number with Xilinx and we co-sell with one another.

So, this is just an ongoing collaboration of efforts to take care of the customer's system needs.

Okay, then having said that, the third thing you suggested -- and we didn't say much on the call today, but we continue to collaborate with -- when we look at the very highest performance applications, something in 400 gig or higher and we talked about what our future product Gen 3 did today, we continue to collaborate very closely with them in -- with our -- because Gen 3 is really exploiting what I am going to call onboard intelligence which we have been building more of into each succeeding Bandwidth Engine.

And we can offload some of the work from the -- or help our customer offload some of the work his packet processing engine is not so good at doing over on to our coprocessor, if you will, if you want to call it that, Gen 3. And the end result is you achieve substantially higher performance.

And when you figure that the cost of the packet processing engine per unit area of silicon is probably four times greater than the cost of a very cleverly architected high-speed coprocessor, it is not just a performance upgrade and a power savings. It is also a cost savings to move the work to another place. And it allows him to think about getting considerably more performance out of an existing system. So, each generation of system, if you will.

And actually, there's one gentleman on the call, I think, who has an engineering degree, maybe more, but one guy that I'm -- I think he is probably smiling now. And basically we -- it is important to realize that when you start talking about Gen 3, we don't talk about accesses per second across that critical interface anymore from the packet processor to what I will call the header processing memory, which is BE.

What we talk about now is operations per access. So that by doing more than one operation each time, you cross that boundary, you start reducing the accesses for a given level of performance. It is a huge thing. And it's -- we are talking over, Krishna, not just with some of the guys architecting the future very highest performance systems, but also with some of the generic MPU guys that supply alternative solutions if they are doing their own internal ASIC. We think we are forming some long-term strategic partnerships now or are working very hard on it.

Great. Thank you. Congratulations again on the execution and good luck going forward.

Thank you very much, ladies and gentlemen. That now concludes your question-and-answer session today. I would now like to hand over back to Mr. Perham for any final comments. Thank you.

Yes, I just have a couple of comments in closing. So, for the folks on the call, still on the call, I come to work every day clear in my mind that I am not at the end, I am at the beginning. And so there is much to do, but the purpose of Jim and I's comments today was to make a clear point that we are making measurable progress.

I believe that the Company has gone over a tipping point and this measurable progress is going to be more easily seen now as we go forward and we chat with you guys on a quarter-to-quarter basis. For a long time now we have talked about solving system-level problems by creating differentiated integrated circuits. And soon now each quarter we are going to be able to talk about the changing and improving financials. And I can't tell you how enthusiastic I look forward to that.

It has been -- we really bit off a big undertaking by trying to do such a, I am going to call it, powerful integrated circuit, a really serious contribution to system architecture, and it took us a while to get to where we are. So I am enthusiastically looking forward to Jim telling you that the financials are moving up and to the right now and we are starting to meet or exceed our goals of getting to cash flow positive.

I think we are generally making progress to the end goal of driving shareholder value and I can't tell you how much I appreciate you guys that have been with me along the way on this journey.

Today it was intended that we would bring you guys a good message and I hope we conveyed that. We are rolling along over here. As I said, we are at the beginning. There is a lot to do. But things are moving a little bit and it is just great.

So thank you very, very much for your time this morning and we look forward to talking to you all again soon.

Thank you very much. Ladies and gentlemen, that now concludes your conference call for today. And you may now disconnect. Thank you very much.