Peraso Inc (PRSO) 2014 Q3 法說會逐字稿

Good day and welcome to the MoSys third-quarter 2014 financial results conference call. (Operator Instructions). As a reminder, this conference is being recorded today, Tuesday, November 4, 2014.

I would now like to turn the call over to Beverly Twing of Shelton Group, investor relations. Beverly, please go ahead.

Thank you and good afternoon, everyone. Joining me today 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 27a of the Securities Act of 1933 and Section 21e of the Securities Exchange Act of 1934, which include, but are not limited to, benefits and performances 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 IC design wins, 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 as new information becomes available or other events occur in the future.

Thank you for your attention. I will now turn the call over to Len Perham, Chief Executive Officer of MoSys. Please go ahead, Len.

Thank you very much, Bev. Good afternoon, everyone. Thank you for joining us today.

I'll begin our call with an overview of recent highlights and activity, after which Jim will discuss our financial results. And then we will open the call to your questions.

During the quarter we continued to make progress expanding our sales funnel activity and design win opportunities for both Bandwidth Engine and the LineSpeed product families. We also spent significant time on further developing alliances and partnerships to expand our market opportunities and to increase our presence with our products at the customer's desk.

That being said, the third quarter was definitely more challenging than usual, due to a difficult market environment. As has been widely reported by various other suppliers to the telecommunications and networking market sectors, there was strong evidence of a slowdown these past few months. Although we recorded some new design wins in quarter three, we did not enjoy the robust new design win activity I was anticipating and did not close as many design wins as had been expected.

Furthermore, third-quarter revenue and shipment volumes were impacted by this slowdown, as carrier spending stalled and the rollout of next-generation systems appeared to pause, pushing some system rollouts and ramps out a bit into the future.

However, I am pleased to say that new design win activity has recently begun to get back on track. Field trials with customer release systems continue to go well, although on a case-by-case base it's still taking longer than expected which is not unusual, I suppose, in the carrier environment.

And most notably, we continue to expect all of our line card design wins to advance as market conditions improve. To reiterate, none of our design wins have been cancelled; rather, they are just not moving forward and getting released into production and ramping deliveries to the internet service providers as originally forecasted by our customers.

Based on current visibility and our most recent customer inputs, we are cautiously optimistic that our Bandwidth Engine 1 platforms will start to be released into full production early in 2015. Our initial wave of BE 2 platforms are also anticipated to begin ramping by the second quarter of 2015. Although we expect these ramps to continue to be a bit lumpy, we hope to have improved visibility as we progress into 2015.

As just mentioned, a new design win activity continued for our Bandwidth Engine 2 and LineSpeed device families, though not quite as robustly as we'd expected. We believe the industry headwind has definitely resulted in delays in our customers' and/or potential customers' new system development programs.

However, despite this hiccup in the market, we still expect to report a significant increase in total design wins year over year and remain cautiously optimistic that 2014 may yet come close to producing nearly twice the design wins we were awarded in 2013.

We are currently closely tracking a fair number of Bandwidth Engine and LineSpeed design wins that we anticipate closing before our fourth-quarter earnings call. These design wins in progress include new opportunities with leading-edge optical equipment suppliers, where we see a multitude of potential sockets for our newest LineSpeed products. Further, we believe these design wins might result in commencement of shipments as soon as the fourth quarter, perhaps fourth quarter 2015.

Multiple new datacenter and datacenter edge-related applications have been coming our way, with these designs representing new customers, new applications and, in some cases, new markets. These opportunities have the potential to ramp faster than many of our existing carrier designs.

And, finally, a number of new platforms and designs from both new and existing customers in the carrier market segment. We are optimistic that we will be able to close a fair number, if not all, of these design win opportunities by the time we next speak.

Though we were slow at closing new design wins during the summer quarter, we did continue to engage with numerous prospective and current customers, laying the foundation for new design wins. Several of these represent new market areas, as mentioned just previously. Since September we have seen that the pace of activities accelerated in the sales channel, which gives us considerable confidence that we can close a fair number of new designs as we move through the fourth quarter of 2014 into the first quarter of 2015.

We are also seeing more new design win opportunities in both the edge and the cores, where the systems are being spec'd to run at up to 400 gigs and, in some cases, beyond and supported by datacenters anticipated to run at 100 gigabit per second rates. We continue to believe that as speeds and performance ratchet up it is to our advantage and makes our solutions more desirable to the end user.

To further showcase the performance capabilities of our Bandwidth Engine and LineSpeed product families we established a strong presence at this year's European Conference on Optical Communications and the Optical Internetworking Forum's Interoperability events, where we conducted technology interoperability demonstrations for module and line card applications with industry leaders, including optical module vendors such as Finisar and Fujitsu and, as well, cable and connector vendors such as Amphenol, Molex, TE Connectivity, and Yamaichi.

During this late September event we introduced our newest product, the low power LineSpeed 100 gig full duplex retimer and demonstrated its interoperability with several leading optical device suppliers and partners. This newest member of our LineSpeed product family was fundamentally defined in cooperation with these customers, the customers who evaluated our initial LineSpeed product offerings.

The MSH 110 features the industry's lowest power dissipation and optimizes performance in board space for 100 gig optical and copper modules, as well as line cards for datacenter, enterprise, or service provider applications. This new LineSpeed device is already sampling and being evaluated by multiple key customers and we believe it will open up new applications, customers, and markets for us.

Our LineSpeed family product roadmap is becoming quite robust and work continues on additional new products. With the addition of the MSH 110 and other new products in our development roadmap, we look forward to expanding lines for this market penetration with both new and existing customers.

In addition to showcasing the complete LineSpeed product family at the European conference, we also demonstrated BE 2 interoperating with Altera and Xilinx FPGAs at speeds up to 15.6 gigabits per second. The most recent Bandwidth Engine demonstrations generated very positive customer responses, as well as new opportunities for future design wins. We continue to engage with multiple prospective customers for new BE opportunities. Over the last quarter, interest in BE 2 applications running at its highest speed, 15.6 gigabits per second, has accelerated.

Bandwidth Engine 3 development continues, including not only verification but the implementation of a few new features that we are including based on customer and partner requests and requirements to support their SoCs. BE 3 is a complex device. It should easily set benchmark performance metrics while running at very, very high Ser Des speeds and demonstrating memory access rates not previously achieved by any monolithic networking memory device.

The complexity of the design effort, combined with the additional features, have driven the need for considerably more verification, thus adding time to our overall chip development schedule. As a result, we now expect BE 3 to tape out in the second half of the first quarter of 2015 and be available to customers in samples mid-2015.

Before concluding, I want to provide a brief update regarding our multi-sourcing partnership with GSI. We have a solid relationship with GSI and the agreement is progressing as intended. We've already seen examples of the influence of this alternate sourcing capability on design engagements with customers. We believe that it will help us progress faster with design engagements and ultimately expand the overall market and revenue opportunities for both of our companies.

In summary, the third quarter proved to be challenging but also resulted in continued progress for MoSys. For the remainder of the year we are focused on converting our design wins into real orders, as well as driving increased sales activities and securing new design wins to maintain our pipeline of revenue opportunities for the coming year.

We are also continuing to advance and invest in R&D with the intent to bring new Bandwidth Engine and LineSpeed products to market, while concurrently implementing new initiatives that will enable us to lower manufacturing costs, improve margins as product production volumes begin to ramp up.

Finally, we are closely following the progress being made by our current design wins as they move toward full production release. While it continues to remain difficult to predict the timing of our revenue ramp, I believe we've made notable progress to measurably enhance the foundation of our IC business over the past year and remain well positioned for future growth.

That being said, I would like to turn the call over to Jim for his discussion of our third-quarter financial results. Jim?

Thank you, Len, and good afternoon, everyone.

During the course of my comments I will make several references to non-GAAP numbers. Unless otherwise indicated, each reference will be to an amount that excludes stock-based compensation expense 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.

As a reminder, we are reporting our IC product revenues separately from our IP licensing and royalty revenue, which is now being reported as a combined amount. Prior-period amounts have been reclassified to conform to this presentation.

Now let's review our third-quarter financial results.

Total revenue was $1.1 million compared with $1.8 million in the second quarter of 2014 and $1 million in the third quarter of 2013. For the first nine months of 2014 revenue increased 24% to $4.2 million compared with $3.4 million for the same period in 2013.

Product revenue from the sale of our integrated circuits was $0.4 million in the third quarter of 2014 compared with $1 million in the previous quarter and $0.1 million in the year-ago period. Although product revenue decreased sequentially in the third quarter, revenue from IC sales for the first nine months of 2014 increased to $2 million compared with $0.2 million during the same period last year, representing the initial ramping of our Bandwidth Engine products.

Royalty and other revenue for the third quarter of 2014 was $0.7 million compared with $0.8 million in the previous quarter and $0.9 million in the year-ago period. 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 increased to 61% from 42% in the second quarter of 2014 and 83% in the year-ago quarter. The sequential increase was due to a higher mix of royalty and other revenue, which carry higher gross margins.

In terms of our operating expenses for the third quarter, total operating expenses on a GAAP basis for the third quarter of 2014 were $9.2 million compared with $7.9 million in the previous quarter and $7.8 million of 2013. Total operating expenses included $0.3 million for amortization of intangible assets and $1.1 million in stock-based compensation expense.

The sequential increase in operating expenses was primarily due to increased research and development and engineering costs. Research and development expenses were $7.5 million compared with $6.4 million in the previous quarter and $6.2 million in the year-ago quarter.

Selling, general and administrative expenses were $1.7 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 third quarter of 2014 were $7.9 million compared with $6.6 million in the previous quarter and $6.6 million in the year-ago period.

On a GAAP basis, net loss for the third quarter of 2014 was $8.5 million, or $0.17 per share, compared with a net loss of $7.2 million, or $0.14 per share, in the prior quarter and a net loss of $6.9 million, or $0.14 per share for the third quarter of 2013.

On a non-GAAP basis, net loss for the third quarter was $7.2 million, or $0.14 per share, which excluded intangible asset amortization and stock-based compensation expenses totaling $1.3 million, compared with a non-GAAP net loss of $5.9 million, or $0.12 per share, in the previous quarter and a loss of $5.7 million, or $0.12 per share, in the year-ago period. Net loss per share for the third quarter of 2014 on a GAAP and non-GAAP basis was computed using approximately 49.6 million of weighted average shares outstanding.

Now turning to the balance sheet, as of September 30, 2014 our cash and investments balance was $33.7 million compared with $40.1 million at June 30, 2014.

As of September 30 we had 49.8 million total shares outstanding.

Total headcount was 116 employees compared with 114 employees in the previous quarter. Of our total employee count more than 80% are in applications, engineering, and research and development, including 26 located in India compared with 25 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. Operator?

(Operator Instructions) Krishna Shankar; Roth Capital.

Len and Jim, given the sort of tough market conditions you saw in Q3, how did bookings trend through the quarter? Did you see a little bit of a pickup in bookings toward the end of the quarter? And what is kind of the outlook? Would you expect modest sequential growth in revenues or will we have to look to Q1 of 2015, where you mentioned that you are seeing kind of a rebound in Bandwidth Engine 1 demand for shipments?

So, basically, I would say that the recent activity in the sales funnel is perhaps the best that it's been all year. I was quite surprised at how quiet it got for a few months in the third quarter. It really did concern me. And then we made a few comments today in the body of my comments, that we've had a series of visitors now from different areas, people that are basically serving the optical communications markets, people that are concerned about next-generation security appliances, people that are running datacenters faster than ever before.

So we're very encouraged by what we're seeing. It's a bit -- I don't know if it's a perturbation or if it's a ramp that we can see continuing on. But for the time being up to including today, I would say that the activity is as good or better than any time this year.

And what was the second part of that question, Krishna?

I think the second part of Krishna's question -- I'll take that. It's just regarding kind of revenue outlook and whether we had seen the bookings come in even subsequent to the quarter end. As has been our past practice, we're not in a position to give guidance. That said, nonetheless I do usually make comments on that front.

Based on where we sit right now, I would say the fourth quarter is from a flat to up perspective. We're not seeing the bookings in backlog that we had hoped since the end of the quarter, but there is still plenty of time left in the quarter. And, again, I want to be overly conservative, but from where we sit right now I'd say a flat to up for the fourth quarter.

Okay. And then the new design win that you mentioned, Len, in the press release, is that for a brand new customer for Bandwidth Engine or is that an addition for new platform at an existing customer?

No, actually. The two that I referenced would be new customers. Additionally, we had a few people that did evaluations six or nine months ago and decided that they would go with their traditional architectures. And in a couple of cases after looking at it for a while, they've come back. And I believe that we could probably call them customers now but we didn't today. There's a few more things they have to do in the way of placing some orders and so forth and so on.

But the examples I gave today were new customers. They weren't traditional customers placing another order.

Okay. And then turning to LineSpeed, sounds like you're getting good traction there with the new 100 gig timer product. Since that sort of targets existing sockets, what's the revenue outlook for those types of parts over the next 6 to 12 months? It sounds like you have pretty good traction there.

So, for the first time we have a product that's -- a short-reach product that is very, very low power, a retimer, if you will. And the form factor fits into the optical modules. And in that world the king -- the most important thing is power. And I think we're a few hundred milliwatts lower than anything out there, either in real physical parts or in datasheets. Consequently we have reference boards at four or five of the top players in that business, people such as, maybe such as, among others, a Sumitomo or Finisar or Oclaro or maybe JDSU, people of that ilk, different than the people that we would call our Tier 1 guys in the infrastructure equipment business.

So it's probably a little bit pre- -- we would expect that if we start winning orders that we'd see some product going out the door in the second half of 2015. It wouldn't be too big in 2015, but it could be substantial, in the $5 million or $10 million, I think, in 2016, perhaps better. But the ramp is out a little bit to the middle of 2015, maybe the last quarter of 2015, something like that.

Okay. And then my final question, at the Linley conference you talked a little bit about Bandwidth Engine 3 and the intelligent co-processing capabilities of that. Can you talk about where you stand in the design of that, the tape-out and what kind of customer traction or discussions you've had on Bandwidth Engine 3?

Yes. So needless to say, our close partners Altera and Xilinx can get significant performance kick-ups, I think, using FPGAs for packet processing engines using our part. We're very encouraged that we can become a very strong partner when BE 3 is available.

And we've made note from time to time that in the case of BE 3 that there's some SoC players, people that do either customer-specific or application-specific SoCs, that are building the I/O into their -- on the edge of their SoCs. And that's all going along fine. In some cases there may be people that have already committed to using these parts and they're just waiting for the availability.

Regarding tape-out, I think we said that we would like to see the tape maybe middle to the later part of the first quarter, seeing silicon then run the first half of the second quarter. Have to do some rel testing characterization. So we would have parts around here the end of the second quarter, right around mid year.

Great. Thank you.

Gary Mobley; Benchmark.

It appears as though you're still having a hard time generating gross profit on product sales. So I was hoping that maybe you can share with us your plan to improve the gross profit margin on those products, when you can get to that target 60%, 65% gross margin level. And does the lack of gross profit on product sales thus far really have to do with accounting for tiny volumes or just not getting volume discounts on wafer pricing? Or do you really need to go down a couple of process node shrinks to really get to the gross margin desired?

So, Gary, basically I didn't say too much about our cost cutting efforts on today's call because the volumes are low enough that you can't make any sensible comments about driving costs out of your backend process, if you will. We've made quite a few changes that should allow the gross margins to start moving up.

Up until now most everything Jim ever reports on is Bandwidth Engine 1, which is a 65-nanometer solution. And Bandwidth Engine 2 is where most of the volume is going to go. I don't know if it will cross over in 2015, but Bandwidth Engine 2 is a beneficiary of a different processing node and the die is probably 40%, 45% smaller than BE 1.

I think that when we start running volume through there and it's sensible to talk about cost controls on a -- beginning to have a manufacturing flow, if you will, that we'll quickly jump up into the 50s and into the lower 60s. But I haven't changed my position on this being a 65% gross margin product. I just didn't mention it today because when the volumes aren't -- we know we had some inventory coming into the quarter and it wasn't sensible to talk about it. We just need to have a little bit more flow. But it isn't that we can't make 65%; we just need to have a few -- a little volume flowing through for you to start seeing the gains.

Okay. In light of product revenue that seems to be in a bit of a hold pattern, what sort of steps have you taken to eliminate some of the OpEx and minimize some of the cash burn for the interim?

So right now it's -- again, for the short term here, BE 1 -- I'm sorry, BE 3 and the next-generation of LineSpeed products for both the line card and backplane, we're right at the edge of tape-out or right at the edge of finishing verification. So we're not thinking too much in economies of scale. We're thinking about getting our stuff into the mask shop.

But Jim and I have been looking, or Jim's probably taking the lead more than I and looking at what we can do to get our costs under control, everything from can we cut labor expenses in some way or can we cut our CAD costs in some way. They're always the two big things in a fables semiconductor company.

But first things first. We need to be continuing to move in lock step with our partners that are waiting for our chips to tie up against the side of theirs. So until we get that into a good, solid, safe place we'll just drive forward.

Okay, I would just add for the next three to four months we're all in with bringing to market the next set of LineSpeed products and then BE 3. So there's not a lot of room right now without putting those programs at risk. And we are in a situation where we do have customers waiting for those and certainly with BE 3 working with one primary processor partner and, as Len said, close relationships with the FPGA guys as well. So it's something -- we don't want to do anything that puts those at risk.

But kind of looking ahead at Q4 and then in Q1 as tape-outs hit we will remain expense challenged. I think after we get done with Engine 3 taped out we'll be in a better position.

Yes. The $1.3 million sequential increase in non-GAAP OpEx, was that a function of what you were just talking about, trying to get LineSpeed to market and work out any sort of design changes and verification for BE 3?

You know, it was higher consulting and contracting expense, peak-time CAD licenses. We had some prototype expenses related to some BE 2 units and related to some of the testing initiatives we have underway. So those were really the drivers there.

Okay. Last quick question from me relates to the adoption of BE 1. I know that's basically been the main source of revenue up to this point. Perhaps you can share with us to the best of your knowledge what your customers' plans are for product releases based on BE 1, why you saw a bit of a spike in the mid part of this year and why we're seeing a lull now and what gives you confidence that those Japanese OEMs might start to come back to you and purchase in the first half of 2015? And that's it for me.

So I think that we're -- so we're doing very, very well in Japan, where we've won designs at all the major divisions of the major players. And to me they're all moving forward towards getting into production. And for the most part they have contracts and they're going to deliver to the contracts.

I think one of the things that upset the market occurred at the ISP level. I think that -- I don't quite know what month it occurred in, but there's a lot been written now about the fact that AT&T took a very hard look at pricing. And I believe that probably quite lock-stepped behind them was NEC -- or, I guess, NTT, excuse me. And I think there's been a lot of conversation about it. With our customers, they've been very open talking to us about it, both the US-based customers as well as the Asia-based customers.

And I think when the big infrastructure providers clamped down our customers all stopped dead in their tracks and took a look at what they had to do to make sure their margins were okay. And I think that caused what we referred to in my comments today as a pause in what was going on. But as far as I can tell, things are back on schedule.

And if we just look to Japan expressly, if I had to guess, they go through a major budgeting cycle at the end of March, going into April. And I could see things getting back on track right about that time, which would mean we should start seeing some orders in the first part of the first quarter. But that's just speculative on my part; I don't know it for sure. But I can tell you it was the aggressive position that some of the big ISP guys took about what they were going to pay for their capital that stopped everybody dead in their tracks.

All right. Thanks, guys.

Jeff Schreiner; Feltl and Company.

Len, I'd like to talk about how deep is this current carrier spending freeze and how does this one compare to the average lumpiness that we can see sometimes in carrier spending based on what you've seen in the past. It seems that this is affecting a broad spectrum of networking IT companies and across broad end markets. Is this something that could really slow things down for a couple quarters? Or is this just maybe a third-quarter/fourth-quarter event?

Well, I've looked at everything that I can get my hands on, anything written by people that are in your business, Jeff. I've probably read 100 different analyst reports and I've been to a fair number of Supplier Day meetings and talked to my customers and tried to talk to the ISPs on the other side of them. And it seems to me that the argument out there is it's a one-time event, that the big ISPs came in and they restructured their pricing and therefore -- or they restructured what they were willing to pay for capital equipment and drove a very, very hard bargain.

And most people are saying it's a one-time event. And certainly some of the people that we have as cash customers, we have very close relationships with, predominantly they'll tell you that the largest market they serve is the United States and the largest guy in that market is AT&T. Right? And he was being particularly aggressive about his capital spending.

But from what I can see, it's a one-time event and it's not going to be ongoing. And our customers look to be making adjustments and moving on. And that's why I say I'm very encouraged about the activity in the sales funnel, but I need to see it for a few months or even a couple of quarters to make sure that it truly is behind us now and we're moving on. So that's probably the best visibility I have, Jeff.

Okay. Could you just come back to discuss a little bit further regarding the tape-outs that were addressed per the press release? I'm assuming -- are these BE 2 products? And can you talk about the average size of the potential deals when you say there are customers' designs kind of waiting for them? What are the size of those customer designs?

And is this now shifting a little bit later than you previously thought, if we talked about BE 2 in the second half of 2015?

So, to make sure I'm -- first off, all the activity, predominantly all of the activity, in the sales funnel is BE 2. BE 1 has won a fair number of designs. Most of those are in Asia. Most of the activity is BE 2. We don't have much in the sales funnel that's BE 3, but we know that if we had half a dozen reference boards right now that they would all be gone instantaneously. We know that our FPGA partners are just waiting to get their hands on our product so they can put it on their reference board and start showing it to customers and so on.

So coming back to BE 3 -- BE2, I'm going to have you expand on your question a little bit more, Jeff. BE2 -- make sure I understood. What is it you're asking me, now?

I think Jeff was talking about the tape-outs. And I think specifically, Jeff, taking the Bandwidth Engine product line first, BE 3 we'll tape out hopefully around the midpoint of Q1 of 2015. During this current fourth quarter we'll have tape-out activity on LineSpeed products. And we're not in a position, we don't really want to comment further, given the competitive nature of that market and things we're working on, et cetera. But the fourth quarter activity will be LineSpeed-based. The first quarter of 2015 will be Bandwidth Engine 3.

I think the next question was the statement, whether it was in the press release or in the script, regarding customers waiting for these products. And with regards to -- with Bandwidth Engine 3, I think as we've said on most of these calls historically, and Len certainly reiterated in his comments, we've had great success where our processor partner is an FPGA from either Altera or Xilinx.

And to date not as many -- not as much success where it's either a standard processor, whether it be an NPU or an ASSP or ASIC from a customer. And we're looking for BE 3 obviously to give us further traction with those types of designs, particularly given the processor relationships we have, and working to get that part out. And certainly ASIC and large NPU designs can generally be higher volume than traditional FPGA designs. And certainly ASSP designs, as you probably know better than me, can with success on the platforms and full production, could to a supplier like us be greater than $20 million in annual revenue after a couple of years of ramping.

With regard to LineSpeed, we launched the MSH 110, the retimer, we announced it prior to that ECOC show and then demonstrated it there. As Len said in his comments, that specifically arose from customer discussions and feedback of truly -- if you build this I will come. And we continue to engage with those customers, primarily optical module players. And volume's in the couple of hundred thousand units a year is what we've been quoting back and forth and haggling over pricing, which is positive that we've moved on to that stage with those prospective customers. But we still have more to do.

But I think that -- let me stop there and see if Len has anything else to add or if that covered your question.

The LineSpeed products that we haven't taped out yet, Jeff, have some features and benefits sitting around on the I/O that are probably not widely available. And so consequently we have some customers that we've spent a little time with over the last 6, 9 or 12 months. And we've come down the road together on this stuff. So they're waiting for the parts.

And that would be -- and then, just touching again and it's redundant now. But BE 3, the minute we have that, there's people waiting for that to get into a reference board. There's a lot of activity, a lot of discussion now about 400 gigabits per second line cards. And I personally think that's definitely within reach comfortably for -- latest generation FPGA supported by BE 3 can have a go at that opportunity. So there's a lot of enthusiasm for that.

Without us soliciting it, we -- been reviewing our international business and we see BE 3 sitting on preliminary first-draft schematics, sitting alongside various FPGAs, or in a few cases sitting alongside of various SoCs.

Okay. Very helpful, gentlemen. Just one last question for me. Jim, you typically talk in generalities about maybe what cash burn would be for an annualized basis. And I was wondering what you're thinking about for 2014 and if you had some initial expectations for 2015.

Yes, as I mentioned earlier I believe in response to Krishna or Gary's comment, we are going to remain expense challenged for the next quarter or so with this new product activity. And given how far we've come we need to see these through and get them out there. And it is a case where we do have customers waiting for these new products, which has been the case, frankly, for every product we've done since BE 1. When we look back at when we launched BE 2 back in the spring of 2013, we were fortunate enough within a short period of time after that to be talking about our first Tier 1 win, et cetera.

But back to your question, I see the burn up in the fourth quarter and kind of up in the first quarter of 2015 when compared with the third quarter we just closed, driven by these tape-out activities. That's really going to move the needle.

That said, we closed the quarter still at almost $34 million in the bank, still a significant amount of cash. The lack of visibility with our early design win customers ramp and things slowing down certainly has created top-line challenges, which are going to and have at least for the next quarter or so will contribute to our burn rate and delay our ability to see an inflection point. We're going to closely monitor our cash balance and of course review alternatives if necessary. I believe we've been creative in meeting our needs in the past and could do so again.

Okay. Gentlemen, thank you very much for your time, as always.

Quinn Bolton; Needham Capital.

Just wanted to come back on the carrier pause and just to confirm on the Bandwidth Engine 1 delays. It sounded like those are really all related to sort of this carrier spending pause that you referenced in the script. I just want to make sure that you didn't see any major Bandwidth Engine 1 platforms cancel during that pause. And then I have a few follow-ups.

Actually, Quinn, we have not had any cancellations of any -- occasionally we have something in the sales funnel that we don't win the order. But anything we've called a design win has not gone away. So in Japan some of those carriers sell extensively into the US -- or through the US into the international market. And some of the things that were forecasted by them to take place got pushed out. In the case of one of those companies they actually came here to the US and talked about what had happened to them.

And so the answer to your question is, they're just sitting there. And we've met with most of them on their next-generation systems now going into -- looking into 2015. And they refer to us as the incumbent on the board. I mean, we are in a very, very strong place in Japan. We've not lost any orders, none.

Okay. Good. Fine. And then I just wanted to clarify, on the Bandwidth Engine 2 I think you said in the script that you expected initial volume in the second quarter. Just wanted to confirm I heard that right and then to ask -- is that really sort of preproduction shipments for trial activity? Or do you think that's the actual production start for Bandwidth Engine 2 in the second quarter?

Well, basically, the early BE 2 wins were our Tier 1 partner. And he, too, was affected by this slowdown. And, again, we had the chance to talk at a very high level so we'd understand what's going on. And I think Jim made the comment, but I may have said it in the body of my comments, too, I can't remember. But basically, as nearly as we can tell, these Bandwidth Engine 2 wins at the Tier 1 guy, they should have started to tilt up and to the right in the first quarter of 2015, or maybe even some orders in the fourth quarter of 2014 .

And in light of the situation I think we're going to -- Jim commented or I did that we'll see it happen maybe in the middle of the second quarter, going into midyear. And when it happens I think it will be them starting to fill their channel with hardware to see how that product -- their product is going to sell. That's how I see it. I could be wrong, Quinn, but I think it would be the beginning of them taking these platforms into production.

Perfect. Great. And I just wanted to shift over to the LineSpeed application. It sounds like you're seeing some pretty good design activity on the shorter reach retimer solution, mostly with optical module companies. Wondering if you could tell us what types of applications those are targeting? Is that really mostly datacenter applications? Is it more metro?

And then a follow-up question on LineSpeed -- are you seeing any applications outside of the optical modules, perhaps for backplane or other types of line card solutions?

Well, basically, some time ago we did what I call an out-of-the-box part when we just took a lot of input from customers. And we went off and we did a retimer that we decided that rather than go for how far we could push signal into -- how big a [DB] load, that we would just go for a short reach or -- and that we would go for very, very low power and we would put it in a form factor that made it ideal for optical modules.

And I believe we're seeing that in the enterprise and I think we're seeing it in stuff that's sitting on the edge in the core and in the datacenter. I think John's pursuing business across the whole spectrum with that part. And that part is running roughly 30% lower in power than anything that we're aware of out there, including datasheets.

So now, and then we skip and say -- okay, all right, that was an out-of-the box thing, but that isn't one we talk about. We have a new LineSpeed family coming out. The new LineSpeed family addresses both the line card and also it addresses the backplane. And, again, we've got a pretty comprehensive feature set on that part and some of those features are not widely available. So consequently we've got customers that want those features, so they're clamoring to get silicon.

And so we have two different things going on here, Quinn. I think probably that's an answer to your question.

And it sounds like it's the extension or the broadening of the family of LineSpeed that results in the tape-out expenses you talked about being up fourth quarter.

Yes. That's correct.

Great. Okay, thank you.

Ladies and gentlemen, this concludes the question-and-answer portion of today's conference. And I'd now like to turn the call back over to Len Perham for closing remarks.

So because of the comprehensive set of questions you guys reeled out today I only had one closing comment today. I just wanted to leave you with a thought, and one of the guys has already asked me. And that is that recent sales funnel activity is very encouraging, probably the best it's been all year. And it includes a lot of opportunities and applications that we hadn't seen before. It also includes a few companies that were going to try to do it the traditional way and found out they couldn't make their performance or couldn't make the power requirement or whatever.

And we're pretty encouraged by what's going on right now and, provided we're not being fooled by some blip followed by a dull point again, which I personally don't think is going to happen, we should be able to have a reasonably encouraging conversation with you folks at the end of this fourth quarter. And we look forward to talking to you then.

I want to thank you for your time and attention today. I would have liked to have given you a lot better news, but this is the news that it is from our side and we look forward to telling you better news next time we get together. Thank you.

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