Peraso Inc (PRSO) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q1 2014 MoSys Inc. earnings conference call. My name is Mark, and I will be or operator for today.

(Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Beverly Twing. Please proceed.

Thank you. 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 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 win and timing of shipments of the company's ICs, predictions concerning the growth of the company's business and future markets and business prospects, strategies, objectives, expectations, or beliefs. Forward-looking statements made during this call are subject to risks and uncertainties that could cause actual results to differ materially from those projected.

Additional information concerning factors that could cause actual results to differ materially from any forward-looking statements made during this call are contained in the company's most recent reports on Form 10-K 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 Mr. Len Perham, Chief Executive Officer of MoSys. Please go ahead, Len.

Thank you Bev. Good morning everyone. I will begin today's call with a few highlights and then provide more details on our first-quarter accomplishments, turn it over to Jim, who will review first-quarter financial results prior to us opening the call for your questions.

So, getting started, simply stated, 2014 is off to a good start. We won multiple new designs with customers in Japan, China, and the US during this quarter primarily for various members of our Bandwidth Engine 2 family. These design wins serving burst access and/or intelligent offload applications illustrate the breadth of system-level challenges the Bandwidth Engine family addresses, or to look at it another way, the number of functions on the board this uniquely architected networking memory is capable of competing for. These new design wins came from a combination of new customers and, as well, existing customers sending their next projects our way. We're very gratified by that.

We substantially increased the total units shipped. Albeit still a small number at this point in our life, but we did substantially increase the total number of units shipped quarter over quarter, shipping nearly as many units in the quarter -- I'm sorry -- shipping as many units in the quarter as we shipped in all of 2013. We are very gratified by this upturn in shipments. However, there are a few observations I would like to make regarding this current situation.

One, we are witnessing the early turn on of the Bandwidth Engine 1 design wins we were awarded in Asia in 2012. And though it's gratifying to see these shipments increasing in units and dollars, it is not the significant revenue inflection point we are still looking for. I want us to be cautious and not have our expectations too high.

We hope to see the first Bandwidth Engine 2 design wins we were awarded in mid-2013 turn on in the third and fourth quarter of this year. No strong indications yet, although progress with the customer and his system is going very well. We know these customers are working very hard, are very satisfied with BE 2 and its performance. However, they have not yet released their early production orders to us as yet.

I'm following up on comments from last quarter's analyst call with this next remark. It is not easily possible for us to project with accuracy when customers will release their systems to full production. We try hard to forecast it. However, in the end, only the customer controls that release date. We remain confident it is coming. We remain confident that the future is good. However, we cannot precisely call that inflection point, and that inflection point is critical to us. It's a good measuring point that you guys all watch. That's when revenue significantly ramps up and losses on a period-to-period basis significantly decline.

We did very well in the design win category this past quarter, and we expect to repeat that in the current quarter. As a result, we should record substantially more design wins in 2014 than 2013. However, the critical inflection point where revenue ramps up is still elusive, most difficult to forecast, and we've been partners for a long time. I just wanted you to know that.

In addition, Bandwidth Engine 2 has now has now passed full carrier grade qualification and has been released to production. These accomplishments provide additional validation of our technology, further supports our expanding sales efforts with customers and position us for volume standard product shipments. In order to pass our carrier grade qualification and achieve what we call full production release, we have to freeze and document backend assembly and test production flows. This done, we can now focus real energy on driving costs out of these standardized backend flows. You may see a relatively short period of high IC unit costs here and there, but you can be sure that now that we've standardized these processes, we will be moving to drive the costs out of them as fast as possible. We continue to feel very strongly that the Bandwidth Engine family is a very valuable solution, solve very important system-level problems, and should enjoy both a long product lifecycle and very high gross margins.

Let's talk a little bit about the sales funnel. The best indicator of our success right now is design wins, how many we win, with whom and what on what projects. Later, you will want to watch incremental revenue growth, as I mentioned earlier, and the amount of revenue that falls through to profit. We're not quite to that crossroad yet. Having said that, the high level of sales activity on both the Bandwidth Engine and the LineSpeed product families is very encouraging. Management remains very optimistic regarding our current situation and the likelihood of us being successful in achieving our goals and objectives.

We were particularly pleased with the customer traffic and feedback at recent Optical Fiber conferences and Interop trade shows where we demonstrated Bandwidth Engine with its highly efficient GigaChip interface using Xilinx's latest Kintex UltraScale FPGA. This also allowed us to showcase our LineSpeed 100 gig PHY solutions. The exceptional performance of these solutions during these partnership demonstrations was well-received and resulted in a good many new sales leads. These are probably the best shows I've been to in a very long time in terms of the outcome for the company.

Currently, the majority of Bandwidth Engine sales activity pertains to Bandwidth Engine 2, said interest being focused on one or more of its three distinct solutions -- the MSR620 for burst applications, MSR720, access, and the MSR 820 macro with an intelligent offload capability. Customers have the option to select specific solutions tailored to their system requirements, which increases our competitiveness, expands the TAM we can compete for, and has driven heightened interest and increasing sales activity. While the trends in performance favoring serial interfaces and the Bandwidth Engine concept are driving activity in our sales channel at a strong pace, we are also experiencing increased customer interest for our LineSpeed family of products.

It is worth noting that we have a healthy ratio of both tier 1 and tier 2 candidates considering LineSpeed for their next-generation systems.

Let's move on to a bit more product specific detail. Bandwidth Engine 1. Our first Bandwidth Engine 1 customers are now showing signs of transitioning the systems that include our Bandwidth Engines into production. However, they are still in the early stages of ramping, and we have yet to achieve any significant visibility on their full production release and their ongoing volume requirements. This is not atypical. We are now trying to get the customers to sit down and give us a long-term forecast, and engineering is trying to transfer the system to manufacturing on their end. This is a very typical problem. We are trying to get their attention to talk about where does it ramp, what do we need to think of start levels, and so on and so forth.

We remain focused on meeting our customers' needs for bring up support while standing by to provide on-time delivery of their early on volume requirements. While all this has been going on, we've been winning strong follow-on orders for other systems and, in most cases, these wins will utilize BE 2 products.

A little bit more about BE 2. Bandwidth Engine 2's release to production is a very solid step forward for us. That is manufacturing test and quality assurance flows and specifications are now frozen. And we can ship a standard product to address any and all of our customers' needs. All the learning we accumulated supporting the customer bring up requirements for BE 1 is applicable to BE 2 bring up. Therefore, we hope the turn on can be quicker and cleaner for BE 2 products. We expect BE 2 to have a long product lifecycle. Clearly, we will be spending considerable time and energy cost reducing the manufacturing steps and flows that allow us to build BE 2 because we expect it will be with us a very long time and we want to strive to attain the highest margin possible on these products.

I'm extremely gratified to see a positive reception for the MSR 820 intelligent offload Bandwidth Engine 2 option. We won our orders for this BE 2 option last quarter and I'm quite sure we'll see more as the year progresses. This product really reflects what we are all about. The customer can offload difficult time-consuming, power-consuming computations from his ASIC, NPU or FPGA onto the MSR 820, increasing system performance, reducing system cost, decreasing system power, very, very exciting for the engineering team here to see.

BE 2 brings fast and intelligent memory access to packet and data processing applications. The product can support up to 4.5 billion accesses per second, which is at least twice the access rate of any traditional memory.

The majority of design wins we have been seeing with customers relate to solving access problems in their systems. Our BE 2 devices provide intelligent memory access and offload capability and relieve constraints in capacity in performance from the main central processing unit. Using the offload capability of the MSR 820, customers can increase the effective performance of the product up to 6 billion accesses per second. This exceptional performance underscores how BE 2, with its high-speed GigaChip interface, supports MoSys' efforts to provide solutions that will open up memory access bottlenecks for 200 gig+ through terabit networking systems.

And as just a small afterthought here, we've won some designs in this area. This is really an exciting step for us. People are pushing BE 2 right to the rails.

With regard to Bandwidth Engine 3, we formally announced our third-generation architecture in the first quarter featuring the industry's highest serial throughput and memory access rate. While it's too early to be announcing design wins given we don't have the part yet, our sales team is focusing on aligning use of BE 3 with our processor partners and the majority of our discussions to date are with prospective tier 1 networking and communications companies. Once BE 3 becomes available, we expect solid demand for reference boards and bring up support from both our processor and FPGA partners as well as customers' internal SOC teams. As such, we are focused on getting BE 3 past the development stage and into silicon and into customers' hands by the end of the year. That's this year.

The BE 3 architecture will deliver unprecedented performance capability, offering 800 Gb per second of IO performance, up to 10 billion data accesses per second and in excess of 1 Gb of high access rate embedded memory. Multiple product options will be derived from this architecture with many new features of optimized code processing for NPU, ASIC, and next-generation FPGA-based solutions. It will also have macro functions for even greater offload capability.

BE 3 is not a replacement for BE 2 but rather a complementary product family that will raise the bar in terms of system-level performance. Many projects we are looking at now will require both BE 2 and BE 3 components sitting on the same platform.

Development is progressing well. Current targeted tape out is late third quarter, that's next quarter, with a goal of having silicon in hand by year-end.

Turning for a moment to our LineSpeed product family, we continue to gain interest for our Gearbox and Retimer products in the market. Their flexibility, distance, and low-power attributes make both of these high-performance solutions flexible for customer applications. We expect to release our 100 gig Gearbox to production in the first half of this year, followed by the release of the Retimer in the second half. We continue to see an increasing amount of sales activity pertaining to our LineSpeed 100 gig PHYs as interest in new opportunities have increased over the last few months.

Our 100 gig LineSpeed solutions support a broad range of data rates and channel lengths for flexible support of high density 10 gig, 40 gig, and 100 gig Ethernet and OTN applications in networking, communications, and computing. These applications range from long reach across backplanes, mezzanine connectors, and passive copper cable to very short reach connections to optical modules and in fact just across the line card.

In addition to current market opportunities, we expect our addressable market for LineSpeed to expand as the market completes its transition to 100 gig and CFP2 in CFP4 modules start to gain traction. When we launched the LineSpeed product family, we knew we were entering a competitive environment and we've been very pleased thus far with our initial design wins and the level of customer interest.

With 100 gig technology maturing, we are establishing new technologies and new customer engagements as our LineSpeed devices are becoming more and more relevant. While we are still early in the 100 gig product lifecycle, we are seeing increased sales activity not only for our current LineSpeed devices but also for the next generation devices currently well along in development.

Before I conclude my remarks, I want to provide a brief update on our progress to offer our customers a second source for our Bandwidth Engine family of products. As of today, we are very close to establishing that partnership that we've talked about so long. That will provide both parties with more than a typical second source agreement. We believe this arrangement will strengthen customer confidence and will likely result in more advanced solutions for the marketplace. And by extension, expand our sales channels and market opportunities. Once the agreement is finalized, I look forward to jointly announcing the relationship with our partner and to providing more details. So, you know, saying something this bullish, it's probably more of a logistics problem than a negotiation now.

In summary, we are off to a good start for 2014 with multiple new design wins and the step up in IC shipments. With the completion of carrier grade qualification and BE 2's full release to production, we are now able to support our BE 2 customer base -- support our customers' future production ramp with a steady supply of standard products while we continue to make solid progress on new product development and further expand our sales funnel activity.

I believe we are well-positioned to make 2014 a very good year in terms of design wins, and increasingly more and more closer very strategic customer engagements. While we wait to see more and more of our customers' products or systems get released to market, we will be supporting his every effort to get his boxes out the door as efficiently and effectively as possible.

I'm going to turn the call over to Jim for a review of our first-quarter financials. Thank you for your time and 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 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.

In addition, starting with the first quarter of 2014, we will be reporting our IC product revenue separately from our IP licensing and royalty revenue, which will be reported as a combined amount. Prior period amounts have been reclassified to conform to this presentation.

Now, let's review our first-quarter financial results. Total revenue was $1.3 million compared with $1 million in the fourth quarter of 2013 and $1.3 million in the first quarter of 2013. Product revenue from the sale of our integrated circuits was $0.6 million in the first quarter of 2014 compared with $0.2 million in the previous quarter, reflecting increased shipments of our IC products.

First-quarter 2014 product revenues reflected a $0.15 million reversal of sales reserves recorded in prior periods. Royalty and other revenue for the first quarter of 2014 was $0.8 million, consistent with the fourth quarter of 2013. Royalty and other revenue is primarily comprised of royalties received from semiconductor customers whose products include our IP as well as small amounts of revenue generated from maintenance and support services related to legacy IP license agreements.

GAAP gross margin for the first quarter of 2014 was 57% compared with 78% in the prior quarter and 99% in the year-ago quarter. The sequential and year-over-year decrease in gross margin was primarily due to increased IC sales which carry lower gross margins than royalty and other revenues.

In terms of our operating expenses for the first quarter, total operating expenses on a GAAP basis for the first quarter of 2014 were $8.9 million, compared with $7.3 million in the previous quarter and $6.3 million in the first quarter of 2013. Total operating expenses included $0.3 million for amortization of intangible assets and $1.5 million in stock-based compensation expense. The sequential increase in operating expenses was driven by higher personnel related expenses and engineering costs associated with the development of our new products, as well as the $0.6 million increase in stock-based compensation expenses due to the timing of vesting of restricted stock units granted to employees.

Research and development expenses were $7.1 million compared with $5.8 million in the previous quarter and $5.3 million in the first quarter of 2013.

Selling, general and administrative expenses were $1.8 million, compared with $1.5 million in the previous quarter and $1.6 million in the year-ago period.

On a non-GAAP basis, total operating expenses for the first quarter of 2014 were $7.1 million compared with $6.1 million in the previous quarter and $5.2 million in the year-ago period.

On a GAAP basis, net loss for the first quarter of 2014 was $8.1 million, or $0.16 per share, compared with a net loss of $6.5 million, or $0.13 per share, in the prior quarter and a net loss of $5 million, or $0.12 per share, for the first quarter of 2013. On a non-GAAP basis, net loss for the first quarter was $6.3 million, or $0.13 per share, which excluded intangible asset amortization and stock-based compensation expenses totaling $1.8 million, compared with a non-GAAP net loss of $5.3 million, or $0.11 per share, in the previous quarter and a loss of $3.9 million, or $0.10 per share, in the year-ago period. Net loss per share for the first quarter of 2014 on a GAAP and non-GAAP basis was computed using approximately 49.2 million weighted average shares outstanding.

Now, turning to the balance sheet, as of March 31, 2014, our cash and investments balance was $45.7 million compared with $50.5 million at December 31, 2013. As of March 31, 2014, our total headcount was 111 employees compared with 104 employees in the previous quarter. Of our total employee count, more than 80% are in applications, engineering, and research and development and 25 are located in India compared with 23 in the previous quarter. As of March 31, we had 49.5 million total shares outstanding.

This concludes my prepared remarks. At this time, we would like to open the call for a question-and-answer session. Operator?

(Operator Instructions). Gary Mobley, Benchmark.

Happy Friday. Jim, for clarification, how much was the reversal, revenue reversal, on IC sales in the quarter?

Approximately $150,000.

Okay. So, in the quarter, you shipped I'm guessing somewhere between 7000 and 8000 BE 1 units. I'm just hoping that you will indicate where those shipments are going and for what type of application. And I guess ultimately I'm curious to know what the potential volumes are for BE 1 as the 2014 unfolds and as we transition to sales of BE 2.

So, basically, we are shipping those units into line cards, or they are going into new EDGE routers. I don't think there's anything in the core. It's mostly EDGE routers, Gary. And, in terms of the size of that business, we've speculated that those various design wins might amount to somewhere between maybe as much as $10 million, or maybe as much as $10 million a year or maybe even $15 million a year over time. The various customers that we're doing that business with have awarded us quite a few more platforms over time now. And so I think the business that we can do in that theater is considerably more than that. And I think that these -- you can make a rough estimate of what we might ship into that market by just the way you just did that last computation, just roughly figuring that the units are $100 each and compute what's going on.

I would just also add to Len's comments, Gary. Obviously we are on a sellthrough accounting, so necessarily shipments and revenue recognition, there will be timing differences, particularly with our BE 1 customers in Japan. We go through distributors, so there is some time lag between when we recognize revenue and when we ship, and sometimes that can obviously cross over a quarter.

Okay. Len, you've been fairly confident that you'll have a second source lined up, confident for a couple of quarters now. But yet we have yet to see something come to fruition. I'm just hoping you could share with us what the impedance has been so far and how close potentially we are to completing such an arrangement?

You know, it's easy to sell your house today if you're willing to give it away. So basically, you know, we had a fair bit of progress on some very major relationships to get down the road with both BE 2 in BE 3. And anybody that was trying to negotiate being our partner in an alternative source was negotiating from a point, a very strong point when we were a long ways from having relationships of potential customers become perfected. We are now getting closer and closer to these things being real, and we've gone from interested candidates to be our partner that are waiting for us to call them to them saying when can we get this done?

So, one was all good things have to come at the right window of time so that everybody can see the value provided by the other parties. And I guess, if there's a second thing for me, I struggled a long time. I'm obviously not a particular fan of second sources that just provide the customer with the opportunity to thrash your prices. Although over time now when working on a bilateral relationship, I've convinced myself that what we are looking at now can be very, very good game changing for all parties involved. And, I'm enthusiastic and I' made that offhanded comment this morning that it's not so much of a negotiation now perhaps than maybe it's logistics thing. So all those -- you know there's a point in time when this is right for everyone is perhaps upon us or very nearby.

Okay. Correct me if I'm wrong, but the reason that you didn't show much gross profit for the Bandwidth Engine 1 IC sales was the need to standardize the backend test and assembly. But once that's completed, would you still anticipate gross margins for BE 1 to be in the 50% to 60% range and then for BE 2 to be north of 60%?

Actually, I'm going to let Jim comment too after I make a short comment. You know, BE 1, there's still a lot of noise level. The volumes are low enough that you're rattling around inside of these offshore assembly houses and so on and so forth and you're not getting very good attention and you're not able to negotiate very good pricing because your volumes just aren't very high yet. So there's a fair bit to be done there.

Now, having said that, in terms of the amount of effort that we'll put into BE 2 versus BE 1 or BE 1 versus BE 2, the BE 1 will probably not win many designs after the end of this year, and that's being gracious. The fact that BE 2 is three distinct integrated circuit solutions for the three different options I mentioned earlier, it's a very, very desirable and it gets targeted by the user.

So, I would tell you that you have every reason to expect that the Bandwidth Engine family is going to be a 60% plus gross margin product. To break out BE 1 from BE 2 from BE 3 from whatever we do next is probably a bit too much detail.

Now having said that, BE 1 will not, in my opinion, be as easy to get the same gross margin out of as BE 2 for a lot of reasons, including the die size is bigger and etc. etc., but also because of the fact that we have now -- with me running meetings -- been meeting with our suppliers and just driving, starting to talk very serious, now we've got engineering flows. I want to see the cost side of this right now. So, Jim you may want to add to that.

I think your answer is very comprehensive, Len. And I think I would say, with Bandwidth Engine 1, it will be a challenge to get the margins above kind of the low 50% range. I don't see anywhere near 60% for Bandwidth Engine 1, given what Len talked about, the die size, etc. But certainly Bandwidth Engine 2, and as Len mentioned in his comments in the call, we see a much longer design cycle and lifecycle for Bandwidth Engine 2 looking forward for design win, etc. So we'll be putting more emphasis on that here in 2014.

I guess I would add to that, Gary, that just you know I said we could see a little chaos in what we say in the next couple of quarters about margin and costs. But I tend to have this well underway by the end of this calendar year in terms of taking -- getting efficiency and effectiveness into the Bandwidth Engine backend flows. So for people that watch our window, we are not talking about a five year project here. We are talking about turning this thing around in the next few months and getting it where we want it to be.

Okay, all right. Well I'll hop back into queue. Thanks guys.

Krishna Shankar, ROTH Capital.

Len and Jim, congratulations. The design win momentum and the progress with both Bandwidth Engine and LineSpeed, Len you mentioned that you've got additional new design wins for Bandwidth Engine 2 at both existing and new customers. Can you give us a flavor for these customers and the types of applications and what kind of milestones do these design wins that you already have, what things need to happen before you start to see production orders from these Bandwidth Engine 2 customers?

So, in the early going, I'm just going to talk about BE 2 here, Krishna. In the early going, I'll say the first few months after we -- or maybe a quarter and a half or so after we had the Bandwidth Engine 2 family available, we saw a lot of people using it for very, very -- for burst applications where a packet processing engine suite couldn't handle the incoming information so it dumped it into bandwidth engines and it could be burst back out whenever there was a space in the traffic flow that would enable you to do that. And we saw it being used for some access, but we didn't see anybody getting too interested in intelligent offload where you suddenly push so hard that you find out your packet processing engine suite can't keep up.

So now we come to what kind of applications are we seeing today? Well, I mentioned on the call, I kind of shoved it in there as a statement. It wasn't in my prepared remarks that the MSR 820, the intelligent offload part has in fact made some -- covered some real ground here recently. And people are running that thing at in and around 6 million accesses per second now and they are talking about the latest and most advanced FPGAs they can get their hands on in dominating the heavy -- doing the heavy lifting in these packet processing engines. And they are finding that they can increase the efficiency of the packet processing engine by starting to really think about offloading things. And we have a lot more people talking to us about that now.

So now having said that, it's just skip ahead, a long ways ahead. So now we have Bandwidth Engine 3 coming. And where Bandwidth Engine 2 provided intelligent offload, it's what I call hardwired intelligent offload. There are certain functions we allow you to offload, and those are the only ones you can offload. And I forget if there's five, six, seven, or eight of them, but there is a number that you can take advantage of if it's good for you, and as I mentioned, they are now being used.

However, when you start talking about BE 3, you have the ability to consider inserting your own algorithm into a special place in our chip and being able to be rather innovative in what you offload and how you offload it and what you can achieve by doing that. So when we start talking about -- and when we started talking about BE 3 some 18 months or 24 months ago, customers talked about just using the hardwired part and never exploring the options to really be innovative about optimizing their system behavior. And I think we've moved past that now too. There's people looking at innovating and what can be done and solved with something as powerful as a Bandwidth Engine 3. So, I hope I've answered your question.

Yes. And then in terms of design wins, the additional design wins with existing tier 1 and tier 2 customers, can you give us a flavor for the additional Bandwidth Engine 2 design wins?

So far, most of the design wins we have are with -- among the our tier 1 guys are BE 2. And I may have missed part of your question. And in fact we didn't announce on this call and I probably would consider it significant enough to share with you guys that we signed up a new, a totally new tier one guy. We did announce that at this call. But we've -- so we're going into new high-end platforms that are FPGA-based is a number of the designs. Some of them are previous customers and some are new customers. I'm going to say that, in almost all cases, it's either an IP EDGE or a data center EDGE. We're -- it was a very good quarter in terms of strategically important design wins.

Great, thank you.

Jeff Schreiner, Feltl and Company.

I guess I would like to just start off with what were the total design wins in the March quarter?

Well, we said that we were going to try to double over last year, and I would go so far as to say that the first quarter with will support that achievement. So we specifically didn't bother to mention it. I think I will say I think it was -- I don't remember if we counted any LineSpeed wins in the quarter or not, but it may just have been all Bandwidth Engine, but we are on track to meet our goal. I think at the end of last year we said we'd had a 4 to 5 times increase from 2012 over 2013 and could optimistically look to close to doubling this year and that if we did that, that's a huge number of design wins. And I would say after what I consider to be kind of a -- first quarter is usually a little bit sleepy, but we are on schedule to make our goals and objectives, yes.

Okay. And then in some of your comments, it seems, Len, maybe that there's a little less confidence in BE 1 revenue, you know, contribution or ramp during calendar year 2014. Has something occurred with the product ramps or what you're hearing from customers that's led you to be a little bit more bearish, let's say, in terms of what may happen with BE 1 in 2014?

No. Actually that's not the case. I think I got a little carried away with myself last quarter and I don't mind -- and that was that last quarter I said that you know that through the period of 2014, we might see you guys getting less and less interested in looking at design wins and more and more interested in looking at the increasing revenue and the increasing amount of margin per incremental dollar of more revenue and so on. And I think that was a bit impetuous of me. We should recognize that we are just really doing well at winning designs. We are doing very, very well at proliferating new products that people want, and that we are going to see that inflection point in revenue before we know it in that it's very -- it's probably the toughest thing for a guy in my chair to call is when these guys turn on.

I think that Bandwidth Engine 1 and those designs that we won early in Asia are still -- they are all being pushed very hard. We are -- it's typical of every company I've ever been with were fighting and clawing to get 12-month visibility into their demand because right now they just call you on Thursday for delivery on Friday. And so, we are trying to get them out of the engineering mode and into the manufacturing mode as well.

I think BE 1 will be what BE 1 was supposed to be, and I have no reason to think that BE 2 isn't going to meet all of our expectations as well.

So, now to your point -- bearish, I'm not bearish in the least. I can't see when my next round of design wins are going to release into early on volume. And you know, I said on this call here a little earlier that a lot of these guys that are listening right now have been partnered with me for a long time and I've been really straight up with them and I can't see that inflection point, but I can tell you good things are happening and it's coming.

Okay. Talking about kind of BE 1, BE 2, what's the mix maybe? Can you give us -- you know we are now into April. I know you just answered that you have difficulty knowing when an inflection point is going to come due to customer product shipments, but what are you guys kind of looking at internally in terms of the mix between BE 1 and BE 2 in calendar 2014?

So, in calendar 2014, BE -- Jim would argue with me on occasion. I said I thought that BE 2 could probably match up to BE 1. But that may not be the case. It may be that BE 1 is going to represent anywhere from, I don't know, 60% to even as high as maybe 70% of all the Bandwidth Engine sales. And BE 2 will make up the balance. It could be that we see -- we are surprised that we see some orders come in because the people that are -- among the next round of design wins to start getting released are some pretty large equipment companies, and so we may be pleasantly surprised. But for this morning, I would say that I think BE 1 will be greater than 50% and BE 2 will be nearly the balance. And I say nearly the balance because I think we'll see some small but growing shipments of LineSpeed. It won't amount to too much revenue in 2014, but it will set a good trend for where we are going to go in 2015. And so, probably -- I think we might -- there is a very slight chance that we'll show some reference boards or something on BE 3, but it's a little early whether that will be the fourth quarter or the first quarter.

And final question for me. Jim, just coming back to your commentary about gross margin levels for the products, given what we saw in the first quarter for cost of sales, expecting maybe that there is some improvement quarter-over-quarter as you move through the year, when do you get to recognize actual 50% gross margin for BE 1?

You know, at this stage, certainly it's going to take us more than a quarter or two. So ideally, I'd be looking towards the fourth quarter of this year, first quarter of next conservatively.

And Jeff, I'd like to add to what Jim said. I think usually Jim is slowing me down. Right now we are in the second quarter and will report to you guys what the second quarter did in the third quarter and will report to you in the first quarter what we did in the fourth quarter. So I think that, in terms of when we report to you guys where we are, it could be the second quarter next year. There's lots to be done to get to 50%. It's a combination of driving costs down, moving from in some cases single site to double site to four site or more testing. And, you might get some of this stuff done and turned on but you won't report it till -- you won't see the results of it for a quarter because, as you can imagine in your mind, that -- so Jim is being -- I would say Jim could be a little more conservative. I think it will be, I'm guessing we'll start to see real gain into the first quarter but we'll see measurable progress this year so that our partners, which are the guys on the phone call here, will see that we are making real progress.

Thank you for your time, gentlemen.

Kevin Cassidy, Stifel.

Do you have any design wins that are waiting for the second source, and what magnitude would that be?

No, no design wins that are waiting for the second source. Up until now, it has not been a problem. And, I think there is a -- you know, I can't look at anything and say that if we had the second source in place, we would've booked another order somewhere. But I do think that the second source provides a whole new channel with a huge amount of excitement because of the enthusiasm of the partner. So, but we have not -- we don't have anybody that's holding back, and I don't know that I've had anybody holding off on an order. So, we have sort of been allowed this grace period to try to get the best possible arrangement for all people involved.

And have you mostly been working with semiconductor companies, or is it even system-level companies that are interested in second sourcing?

No. For the most part, we've -- my interest was a company that had been in the semiconductor business for a while that was on the AVL of all the top 10 potential customers that my products might sell to so that he has a channel that is more mature and seasoned than mine. You know, we may have -- we may open up some channels. And we've mentioned in the past that the BE 3 behaves like a co-processor and you could kit it together with a very advanced FPGA or an uniquely architected NPU. We might set up a channel like that where we could even private label the product to another partner and let him put it through his channel. And we may have mentioned from time to time that we would treat that guy like a distributor and pay him a commission on sales. But, the particular thing we're talking about right now, this would be a bilateral sourcing and even involve some codevelopment of products I think.

Okay great. Thanks. Congratulations on the progress.

I would now like to turn the call back over to Len Perham for closing remarks.

I don't have many closing remarks today. The only thing I have to say this morning is 2013 was a very good year for the company. We projected that 2014 would be more of the same. I think the next few quarters, Jim and I will be telling you about a lot of things that -- increasing design wins, some things getting released into production, costs being driven down. We're going through kind of a maturation period now, and then one day, we will get on this call together and realize that, hey, look at this. This thing is really tilting up now. So, we're kind of going through the necessary space between creating products, finding that there are people that really like them and are going to use them, and when it explodes into reality. We are in between those two events.

I have nothing else for today. I really do appreciate you guys getting on the call and listening to me. And we look forward to talking to you again in the near future. Thanks very, very much. Bye now.

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