Peraso Inc (PRSO) 2014 Q4 法說會逐字稿

Good morning, and welcome to the MoSys fourth quarter of 2014 financial results conference call. (Operator Instructions). As reminder, this conference call is being recorded today, Friday, January 30, 2015.

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

Thank you. 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 this conference call will contain forward-looking statements based on certain assumptions and expectations of future events that are subject to risks and uncertainties.

Such statements are made in reliance upon the Safe Harbor provisions of Section 27A of the Securities Act of 1933, and section 21E of the Securities Exchange Act of 1934, which include, but are not limited to, benefits and performance expected from 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 IC 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 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.

Good morning, everyone. Thank you for joining us today. I will begin today's call with a review of our progress in 2014, and then address recent business highlights, provide some comments on our goals for 2015. And after that, Jim will discuss our financial results. Then we will open the call for your questions.

Let's begin with a quick look back at 2014. On the design front, we finished the year quite strongly, as the fourth quarter was the best design win quarter we have ever had; the best design quarter we've ever had since we took the Company back into the fabless semiconductor business. With this strong finish, we came very close to achieving our goal of doubling the number of design wins secured in 2014 compared with the number of design wins secured in 2013, and finished the year with a total of approximately 25 additional design wins. It was quite an exciting finish to the year.

On our last call, I expressed concern about the industry slowdown in the telecommunications and networking markets, which had negatively impacted our design win activity. I was pleased to see the rebound in the fourth quarter, as our sales team closed a significant number of design wins that we had, in some cases been, working on for a fair length of time. Sadly, and at significant cost, the slowdown in the middle of the year cost us some area under the curve cost us a fair bit of money off our balance sheet. However, indications are that those headwinds are now behind us.

While 2014 went well on the design win front, unfortunately we did not see the revenue ramp we had expected. This is primarily a result of program delays experienced by our initial BE1 at customers, perhaps some of it resulting from the industry slowdown and the reduced capital expense spending by carriers during the last three quarters of 2014.

In addition, we had been hopeful that our earliest BE-2 customers would begin some early production before year end, but this was also pushed out into 2015. With the BE-2 projects, I am reasonably certain that the delays were primarily the result of carrier cutbacks in capital spending. I can't be quite sure of that with the BE-1 wins.

We continue to make progress on our product development roadmap, announcing BE-3 and introducing our LineSpeed Low Power Retimer. This substantially expanded product portfolio allows us to access a greater served available market, which will directly result in an increase in market opportunities in 2015 and beyond.

Let's take a closer look at our fourth-quarter design wins, which were largely for our Bandwidth Engine 2 family of products, and included multiple new customers in the United States as well as incremental wins with an existing customer who continues to expand his use of our integrated circuits across a number of additional new platforms.

All in all, these wins represented nine unique line cards, with BE-2 serving approximately 15 different functions or applications on these line cards. For example, in one case, we have six Bandwidth Engine 2s per board. Our new BE-2 design wins represent a broad range of applications with known, leading OEMs. Even better, fourth-quarter wins reflect a significant upturn in the number of wins we garnered in the United States.

We believe the higher demand for our Bandwidth Engine solutions is being driven by the ever-increasing need for more performance in next-generation networking equipment. One of our earlier customers who awarded us additional wins in quarter four, now has numerous functions where he is using a Bandwidth Engine, and we have more opportunities with him in the funnel. This is a strong indicator of the power of the various Bandwidth Engine solutions we are offering for sale.

As a customer becomes more familiar with using serial memory solutions, and his comfort level grows, it is much more likely that it will become the solution of choice, solving the challenges that he faces in his new designs. In this case, we will always have the opportunity to win many more applications per board; all good for us. To date, most of our Bandwidth Engine design wins have been for header processing and oversubscription applications on line cards in the carrier router or Ethernet space.

In the fourth quarter we secured two new customers, targeting applications in the enterprise space, one at the edge of the data center, and the other in the data center or in the cloud itself. These recent enterprise-targeted design wins approximated 30% of our total 2014 wins and represented new traction, both in high-speed security appliances and cloud applications. These are two new market segments that are large. And the customers that we've won there are major players in each of their respective markets.

We have been working with one of these customers for more than a year. And he finally concluded that he could not achieve his performance objectives without switching to serial memory, and, in fact, switching to BE-2. Through much hard work and a great deal of tenacity, our salesforce and applications teams secured multiple design wins from this customer last quarter. We are proud of their work.

We continue to believe that these new areas of application will represent another high-growth market segment for us as we expand our data center and cloud footprint in 2015. It's also further proof that the adoption of serial memory solutions and our BE architecture is gaining momentum, as network speeds and performance requirements force systems companies to evaluate new ways to meet their design challenges.

We believe these market trends are becoming increasingly favorable to us as next-generation networks, cloud and big data applications, intrusion detection, and network security monitoring are all requiring high-speed signal integrity and intelligent traffic flow in order to achieve faster and more efficient performance.

Many of these trends play directly to the strengths of the products we have created these past couple of years. We believe these market trends, combined with next-generation system requirements, were major contributing factors in our overall design win successes during 2014.

Currently, our very active sales funnel continues to expand, and includes several projects already at the schematic review stage. This means we are nearing the point of conversion to actual design wins. While it is premature to conclude that these projects will become official design wins, we are very encouraged by the quality of the engagements, as several are with top-tier participants in the markets they serve, and represent multiple potential design wins for both BE products and LineSpeed.

We certainly did not drain the well in the fourth quarter, and we anticipate that the first half of 2015 will be robust from a design win perspective. All in all, we're quite pleased with their recent design win activity and the expansion of our customer base into these new market segments, some of which may have the potential to ramp into production faster than the carrier applications we more traditionally served.

Throughout 2014, we focused strongly on supporting customers as they brought up and initiated field-level trials of their systems incorporating our Bandwidth Engine products. Needless to say, these new upgraded systems utilizing BE-1 or BE-2 are at various stages of being released.

Specifically on BE-1, in the first half of 2014 we saw an initial ramp in shipments, over 10,000 devices shipped. However, at that point, BE-1 shipment volumes tapered off significantly in the second half of 2014, and we do not yet have complete visibility as to when or if that project will resume ramping.

Earlier, I cited, or we cited, the industry slowdown and reductions in carrier capital spending expenditures as likely factors contributing to the slowdown. We are not in the business of speculating on the status of performance and success of the trials of our customers' systems at their customer shops. However, I've been in this business a long time. In the past I've seen cases where my customers had to modify their systems in order to meet carrier requirements or to address new or different performance issues.

From our perspective, we know there are no issues with the performance of our Bandwidth Engine products. Our customers continue to use them in their new system designs, and they are more readily -- readily to use them now that they understand the serial I/Os better. And all we can do is support these customers and deliver our products in a timely fashion.

We continue to win designs for BE-2 with these customers; even had multiple wins with one of them in the most recent quarter. And if and when the customers transition to the next-generation systems, I anticipate they will be using BE-2 or BE-3, or both.

All that said, we expect continued rollout -- we expect a continued rollout of BE-1-based systems in 2015, at which time they could potentially begin generating unit shipments as previously predicted. Longer-term, updated systems from these early BE-1 adopters, built on BE-2, will deliver the predominant volume as they become available in the second half of 2015 and 2016.

Turning to BE-2, we expect this family of products to be the primary growth engine for shipments and revenue in 2015. Our early BE-2 wins continue to move forward. While we expect to see unit shipments meaningfully increase this year from some of these designs, ultimately the timing of the ramp to full production volumes remains in the hands of our customers and their end users. Some of these carrier platforms can take some time to ramp, and it is difficult for MoSys to predict precisely how that ramp will occur.

BE-2, representing the majority of units shipped in the second half of [2014] (corrected by company after the call) also accounted for most of our 2014 design wins and represents a good share of the design wins in progress in our sales funnel. As we expected during 2014, BE-2 surpassed BE-1 both in new design win opportunities and in declared design wins, which is favorable for us, given BE-2's higher performance, broader range of applications, and higher ASPs.

Also during 2014 we invested significant effort toward completing the development of Bandwidth Engine 3, which was first introduced a year ago. At this point, BE-3 is projected to tape out in the March-April timeframe. Though considerable work remains to be done on our BE-3 family of IC's, we expect to bring these products to market in the second half of 2015. And, additionally, we expect BE-3 to win some designs in 2015.

Rather than replacing BE-2, BE-3 will be sold alongside our current family of BE-2 products. The BE-3 family truly represents a meaningful increase in our product portfolio. BE-3, with its higher performance, expanded functionality, larger memory, and many new unique features targets applications BE-2 was unable to solve from either a performance point of view -- well, from a performance point of view, or a features point of view.

Also during the year we spent a great deal of time and effort working with our existing and prospective partners to open new market opportunities for our ICs, and further accelerate the adoption of our products. As a result, we recently announced a collaboration with EZchip Semiconductor to provide customized version of Bandwidth Engine 3 for its NPS family of C-programmable network processors. This BE-3 derivative product has been customized to improve performance when used in combination with NPS, and has the potential to enable a substantial increase in system-level performance.

As you know, EZchip is a leader in high-performance data path processing solutions for networking, with a very large market footprint. We have been working with EZchip and its exceptional development team for some time to maximize performance while minimizing pin count and power consumption in applications where our products sit side-by-side.

We believe a combination of EZchip's NPS, coupled with the high-performance features of our Bandwidth Engine 3 architecture, will deliver scalability and flexibility to network and data center equipment OEMs looking for enhanced performance while maintaining efficiency in power and board area.

Performance and features can be scaled by adding one or more BE-3s in support of an EZchip NPS. Both BE-3 and NPS have been designed to address the challenges faced by OEMs as they attempt to deal with the ever-increasing requirements for features, intelligence, and capacities that range from hundreds of gigabits to terabits per second. The combination of NPS and the customized BE-3 is targeted towards smart and secure terabit routers, switches and network appliances in carrier, cloud and data center networks.

At this point, it would be premature to speculate about what percentage of NPS designs will have a BE product sitting alongside them. However, we are excited about the opportunity to work with EZchip. Given the design win and track record with leading network companies, we believe this relationship will provide us with significant new design win opportunities, and we expect to be sampling these products later this year.

Turning to our LineSpeed product family, we now have three LineSpeed devices available to sell: the 100-gig multi-mode Gearbox MSH310; the 100-gig retimer, MSH210; and the newest addition, our 100-gig low-power retimer, MSH110, were designed for both optical modules and line card applications.

The MSH110, which was announced late last year, addresses new market opportunities in both 100-gig optical and active copper modules. This leading-edge product offers extremely low power dissipation, and applies to all module sizes and all optical reaches. Currently, the MSH110 is an evaluation at multiple customers, where we have initiated a number of early engagements.

We released a production tape-out of this product -- including finalizing its feature set, optimizing the product characteristics -- in the fourth quarter. Silicon is back. It is in final test and characterization. Things are looking good. Subject to the conclusion of this testing, we may well record our first design wins in this very current quarter.

In addition, we continue to make progress on our LineSpeed product roadmap, and we fully expect to release additional products this year. The LineSpeed family of products is targeted for a broad range of feature-rich applications in line cards, modules, and backplanes.

I won't say too much about these new product plans. Much of it is still in the stealth mode. But I will say that there is demand within our customers for several of these uniquely featured products. Our team has been pushing hard to get these products through the development cycle and released into the market.

I expect that we will introduce a fair number of new products this year. And I believe 2015 could well end up as a very strong year for LineSpeed, in terms of both product introductions and design wins, setting the stage for meaningful revenue generation in that product family in 2016.

In summary, assuming the introduction of our BE-3 family products and the next generation of LineSpeed and including our low-power retimer, we anticipate having somewhere in the area of a 3X increase in the number of products that sit in our sales portfolio by the end of 2015.

In addition, these new products will also target multiple new applications, resulting in a meaningful increase in our served available market. This increase in served available market should allow us to grow the Company toward profitability and increase shareholder value at a faster rate.

In closing, 2014 was a challenging year for us and other suppliers through the network communications industry. But we held to our course, engaging with new and existing customers while continuing with the development of our next-generation products.

As a result, we were well positioned for the increased design win activity in the fourth quarter, and squarely on track for future growth. This momentum, enhanced by our recently announced collaboration with EZchip, sets the stage for an even more positive year for MoSys in 2015, and further validates the value of our technology and its long-term prospects for supporting the growth of the Company.

As we move forward into 2015, we will be focused on several key areas. And our investors should expect see us striving to achieve, among other objectives, the following: a doubling again of design wins in 2015 over 2014; recording design wins and booking initial orders for our new LineSpeed products; releasing and starting to sample Bandwidth Engine 3, and recording initial design wins; securing design wins with additional Tier 1 customers; and commencing a more meaningful revenue ramp in the second half of this year; and, finally, expanding our product offerings, substantially increasing our served available market, and driving to increase at a faster rate the shareholder value we have been hoping to get going in the right direction here for the last couple of years.

I believe 2015 should be an exciting year, as we significantly expand our product portfolio, increase our design win count, and begin to see revenue ramp up on our increasing number of design wins.

This concludes my prepared remarks. I'm going to hand it over to Jim for a review of our financial results, after which we will open the call to your questions. 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. And 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.

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

Now let's review our fourth-quarter financial results. Total revenue was $1.1 million compared with $1.1 million in the third quarter of 2014 and $1 million in the fourth quarter of 2013. Product revenue from the sale of our integrated circuits was $0.3 million in the fourth quarter of 2014 compared with $0.4 million in the previous quarter and $0.2 million in the year-ago period.

Royalty and other revenue for the fourth quarter of 2014 was $0.8 million compared with $0.7 million in the previous quarter and $0.8 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 76% from 61% in the third quarter of 2014 and compared with 78% in the year-ago quarter. This sequential increase was due to a higher mix of royalty and other revenue, which carried higher gross margins.

In terms of our operating expenses for the fourth quarter, total operating expenses on a GAAP basis for the fourth quarter of 2014 were $9.8 million compared with $9.2 million in the previous quarter and $7.3 million in the fourth quarter of 2013. The increase resulted from higher R&D expenses. Total operating expenses also included $0.3 million for amortization of intangible assets, and $1 million in stock-based compensation expense.

Research and development expenses were $8.3 million compared with $7.5 million in the previous quarter and $5.8 million in the fourth quarter of 2013. Fourth-quarter R&D expense increased as we continued to invest in the developments of our next-generation LineSpeed and Bandwidth Engine products, and included approximately $1.7 million of tape-out expenses specifically related to further developments of our LineSpeed product line. Additional tape-out activity is anticipated in the current coming quarters, as we continue to expand the Bandwidth Engine and LineSpeed product families.

Selling, general and administrative expenses were $1.5 million compared with $1.7 million in the previous quarter and $1.5 million in the year-ago period. On a non-GAAP basis, total operating expenses for the fourth quarter of 2014 were $8.6 million compared with $7.9 million in the previous quarter and $6.1 million in the year-ago period.

On a GAAP basis, net loss for the fourth quarter of 2014 was $9 million or $0.18 per share compared with a net loss of $8.5 million or $0.17 per share in the prior quarter, and a net loss of $6.5 million or $0.13 per share for the fourth quarter of 2013.

On a non-GAAP basis, net loss for the fourth quarter of 2014 was $7.7 million or $0.15 per share, which excluded intangible asset amortization and stock-based compensation expenses totaling $1.3 million, compared with a non-GAAP net loss of $7.2 million or $0.14 per share in the previous quarter, and a loss of $5.3 million or $0.11 per share in the year-ago period. Net loss per share for the fourth quarter of 2014, on a GAAP and non-GAAP basis, was computed using approximately 49.8 million weighted average shares outstanding.

Looking briefly at our results for the full-year 2014, total revenue for 2014 increased 23% to $5.4 million compared with $4.4 million for 2013. Product revenue from the sale of our integrated circuits was $2.3 million for the full-year 2014 compared with $0.4 million for 2013.

Total royalty and other revenue was $3.1 million compared with $4 million for 2013. The year-over-year increase in IC sales was primarily due to increased shipments of our Bandwidth Engine ICs, while the decrease in royalty and other revenue reflects our transition away from IP licensing activities.

Total GAAP operating expenses for the year were $35.8 million compared with $28.9 million for 2013. Full-year 2013 included a $0.6 million net gain from the sale of a portion of our SerDes IP. On a non-GAAP basis, total operating expenses for 2014 were $30.2 million compared with $24.2 million in 2013. The GAAP net loss for 2014 was $32.7 million or $0.66 per share compared with a net loss of $24.8 million or $0.55 per share in 2013. The non-GAAP net loss in 2014 was $27.1 million or $0.55 per share, excluding stock-based compensation charges and acquisition-related intangible asset amortization charges totaling $5.6 million.

This compares with a non-GAAP net loss in 2013 of $20.1 million or $0.44 per share, excluding stock-based compensation and acquisition-related intangible asset amortization charges totaling $4.7 million. Earnings per share for 2014, on a GAAP and non-GAAP basis, were computed using approximately 49.5 million weighted average shares outstanding.

Now turning to the balance sheet. As of December 31, 2014, our cash investment balance was $25.8 million compared with $33.7 million at September 30, 2014. As of December 31, 2014, we had 49.8 million total shares outstanding.

Total headcount was 116 employees at December 31, 2014, consistent with the previous quarter. Of our total employee count, more than 80% are in applications, engineering, research and development, including 25 located in India compared with 26 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). Gary Mobley, Benchmark.

I wanted to start out with some questions regarding the EZchip relationship. I'm wondering how deeply this relationship may run. And will the customer ultimately have the choice of utilizing Bandwidth Engine 3 alongside EZchip's NPS? Or is this more of a pull-along relationship, whereby EZchip's NPS pulls along design wins for MoSys?

I'm not totally sure that I understand the question, Gary. But let me make an attempt to answer it. If I don't, just come back with the question again.

Basically, the press release indicates that there's a substantial increase in available bandwidth when NPS is supported by one, or more than one, Bandwidth Engine 3s. So the implication of that is that as the customer wants to go to higher and higher levels of performance, and he's talking, of course, in great depth with EZchip about this powerful processor, NPS or SoC, then as they go up the performance level there will come a time when they might add in a BE-3, or they may add in more than one. So it's really that the customer is going to be driving for some level of performance. And it's going to get to the point that, in order to achieve that level of performance, it's better done by having one or more BE-3s running alongside NPS.

So I think that, as I see it, EZchip is negotiating a design win for their -- this very, very powerful, this revolutionary new network processor of theirs that they will just -- in order to meet the spec, they will incorporate this into the design. So to that end, we don't intend to sell to EZchip and have them resell. The partnership is that they will do a reference sell; we will be responsible for delivering to the customer and maintaining the quality, and blah, blah, blah. But in the system architecture, if you will, the (technical difficulty) performance goals can be achieved, they will have a great deal to do with it.

So, consequently, in summary, I would say the high-end performance customers that use EZchip's NPS are going to be driven in the direction of using one or more Bandwidth Engines. And if you take a look at the history of that company, they are in the business of building super-fast, super-powerful stuff. And the majority of their big customers go to the highest levels of performance, which should bode well for us. So hopefully, that answered your question.

That was helpful, thanks a lot. How many versions of Bandwidth Engine 3 will there be, ultimately? And how many of those versions will be taped out in the March quarter? I'm just trying to get a sense of the R&D in the March quarter.

Well, actually, Bandwidth Engine 3, we only have to run one tape-out right now. And we would tell you if you are talking to us -- and, very likely, EZchip would say the same thing -- that one of the powers of BE-3 is it's capable of receiving a lot of intelligent offload. And that is stuff that the packet processing engine is not so good at doing. You can send over and have it done at Bandwidth Engine 3, and it will implement the solution to minimize traffic across the critical interface.

It's a highly configurable part, configurable by the customer. So we have several products coming off from it, but the fact of the matter is, it's also configurable in the hands of the customer. So I don't -- in the foreseeable future, I don't see any reason to tape out more than one part. But the part is very configurable to the needs of the end user.

Okay. Now, I'm just curious to know, as well, whether or not you have captured an additional Tier 1 customer during your design win activity in the fourth quarter.

I think that there's a lot of stuff going on around here with Tier 1s. But in my transcript this morning, I did not say anything about winning another Tier 1. The activity level in the sales funnel is probably at an all-time high. And the fourth quarter was, as I said, the best quarter we've ever had. But we didn't announce another Tier 1 yet.

All right, very good. That's it for me. Thanks, guys.

I guess it might -- to just go on a little further, Gary, even though I've lost you momentarily here -- it's likely that the majority of the early-on business for NPS is going to be all Tier 1s, right? And in my transcript today, I didn't claim any design wins for BE-3 at this point.

Next question, please?

Krishna Shankar, ROTH Capital.

Yes. Len and Jim, congratulations on the design win momentum. You referenced a potential revenue ramp in the second half of 2015. Would these mainly be Bandwidth Engine 2 products? And can you give us some color on the backlog, or what kind of order activity you have from customers to support the possibility of a revenue ramp in the second half of the year?

So, basically, it's Bandwidth Engine 2 that's going to be -- it's going to be seeing most of the -- driving the ramp in the second half of the year. Bandwidth Engine 1 is -- there are some programs that should ramp up. But there's a lot of stuff going on that's been in design now, design wins from early 2013 that are all BE-2. So I think it will be more BE-2 than anything else. Some of the opportunities at the edge of the data center, or even in the cloud itself, tend to ramp sooner. So we may see a little bit of that in the last half of the year, as well, and that's BE-2.

LineSpeed products have been out being evaluated. There's a lot of boards being designed. There's a lot of stuff going on involving our low-power retimer. I think we will see some of that as well.

In terms of our backlog, I'll let Jim comment on that as well. But coming out of the slow middle part of 2014, our backlog is still not as high as I'd like it to be. But looking at how our customers are progressing, and what's going on, and trying to understand what happened to BE-1, and -- will it be more traditional with BE-2? We are forecasting that the second half of the year should start to see what I probably called in my transcript the beginning of a meaningful ramp of revenue.

Jim, do you want to comment?

No; I think you covered it very well. And I would just comment, with the BE-2 customers, while certainly, as you said, we're not seeing the backlog that we'd like just yet, we are seeing the right steps as far as the orders coming in from their contract manufacturers, rather than direct from the customer, which obviously is evidence that they are moving towards production, and a key sign.

Just one follow-up, quickly, Len. On BE-3, you referenced EZchip as a new strategic partnership. And they do have some top-tier OEM relationships. So can we assume that you are talking with some of their top OEM customers, also, and that could lead to some new engagements there?

You know, I believe that there have been some three-way meetings over the last 12 to 18 months, maybe even more. So occasionally we get together; occasionally the customer deals with it separately. But we've been very, very collaborative with one another. And we've made sure that -- we have every reason in the world to take superb care of a shared customer. And occasionally, I believe, those things go on.

So yes, this has been going on for a long time. As the press release noted, the collaboration has been close and long, and very, very friendly.

Great, thank you.

Next question, please?

Quinn Bolton, Needham.

I wanted to follow-up on Gary's question about the EZchip relationship, and was just curious -- you've got the relationship now for their NPS network processor. I was wondering if there's a reason why you selected, or why NPS was the focus, rather than some of their NP-4, NP-5 solutions. Are the applications of NPS just more applicable to Bandwidth Engine 3? Or is there a reason why the NP-4, NP-5 family wasn't targeted in that partnership?

Well, yes, Quinn. Fundamentally, NP-4 is way back in -- and it was no doubt defined, designed and out with a fixed I/O already in place, before Bandwidth Engine 3 was even probably defined. NP-5, we had a lot of chatting about that, but that design was way down the road. These designs are extremely sophisticated, and EZchip diligently works on them for a long time. So the first time where we intersected with each other where we could do something was around about NPS. So that's one reason.

Another reason is that the end customer's performance is jacking up from 40-gigabit line cards when we started the journey a few years ago to, now, a lot of 100s are coming into production. And there's lots of stuff on the drawing board at 200, 400 and 800. And suddenly the data centers have started -- we mentioned that we won a design in the data center. And the reason we are getting into the data center is performance levels are jacking up in the data centers, so that access and latency is becoming more and more important.

So I think the reason we converged together in NPS is the end-user system requires the levels of performance that you can get with our joined solutions. And, looking back, these other designs were too far down the road; they would have had to stop, back up, and start over, to use us on NP-4. And it probably would have been the same at NP-5.

Got it, understood. So perhaps maybe just another way to ask the question. On the NPS family, it doesn't sound like it precludes you from being able to participate in that carrier Ethernet application that the NP-4 and NP-5 has historically targeted. It's just -- it was a matter of timing when you started doing the design work and started talking to EZchip, that that intersected most closely with the NPS product family.

If I'm understanding you, that's correct. And there's going to be -- we didn't -- nobody asked the question about it this morning. But there's -- Bandwidth Engine 3 is going to fit together with our FPGA partners, Altera and Xilinx, very well. And it's going to -- because BE-3 is very, very powerful. And, as I call this, intelligent offload feature is extremely useful.

So you can expect, very early on, there are going to be reference boards out for customers to look at with working with a state-of-the-art Virtex, or a state-of-the-art Stratix or Aria, whichever one is the appropriate part.

Got it. And then just to clarify, it sounds like expectations for LineSpeed, the low-power retimer -- you may see, or hope to see, initial design wins as early as the end of Q1. And if that's the case, do you think that some of that could actually start to ship by year end, so a much faster time to revenue than you might see in the Bandwidth Engine family of products?

I don't think we would see an enormous amount of revenue in the fourth quarter. But I do think the time for ramping up in optical modules is shorter than ramping up on new generations of line cards. So the answer is yes. And we were prototyping a long time ago on the MSH110. And we went back and we -- I think we brought out maybe one new feature. And we may have just, I don't know, optimized one or two other things. I can't remember. And we brought out a production mask set.

And we've had that out now; and it's well along. We've got silicon package; it's well along in characterization. And we are very excited about this part. It has a good chance to really solve some serious problems at the customer's shop.

And just, again, to clarify that, the low-power retimer -- that targets shorter-reach applications, either data center or perhaps metro, and so could intersect -- I know there's been a lot of chatter in the market about some of the big carriers beginning, or just about to announce their metro 100-gig awards. It sounds like this solution perhaps targets some of those metro and shorter-reach applications.

Actually, in the transcript, I mentioned that the MSH110 is good for all optical reaches. It's for sure that when you start talking about a low-power retimer, and you are in the optical module, you are very short reach because everything is pretty compact in there, and power is very critical.

However, this product is very versatile. So it has -- it can operate outside of the optical module, as well. And we are seeing some opportunities for it outside the optical module; so, thus, the comment I made in my remarks that it's capable of serving all optical distances. It's a very powerful part, and used in the optical module itself. It's a very low-power part. It appears to have a significant advantage over anything else out there.

Great, thank you.

Craig Hoagland, Anderson Hoagland.

Congratulations on the design wins. It sounded like your plans for R&D spending in 2015 might be higher than they were 90 days ago. If you could just --

I think -- sorry, Craig. Let me let you finish.

If you could just comment on that, and then maybe talk about the balance sheet and options for funding that activity through 2015?

Sure. I had said on the last quarterly call, in response to the Q&A, that we were all-in on new product development. And as we all saw with the announcement this morning, on the R&D expense line, we have still got a heavy foot on the pedal here.

Now, let's assume Bandwidth Engine 3 tapes out in March, just to keep it simple. I expect that heavy foot to continue through the first quarter. And without saying too much, a Bandwidth Engine 3 mask set is kind of in the $2 million range. I talked about spending $1.7 million or so on LineSpeed in the fourth quarter. So put Bandwidth Engine just north of that. So we are going to continue pretty heavy in the first quarter.

However, after that, we will be in a position, once that product is taped out, there won't -- that I can see, subject to customer feedback and success of our products would be what would drive anything, if we did, say, an additional tape-out to make a function change or do anything like that.

But without that, there wouldn't be any tape-outs for quite a while. And we will be in a position to dial back the cost and make adjustments as soon as the second quarter. So I think we can see R&D spending coming down as we move out beyond the second quarter of 2015.

From a balance sheet perspective, I'll just round out and say we had $26 million in cash at the end of the year. Certainly not happy with the burn in the fourth quarter, or with what we are going to have in the first quarter. But again, we've just got to keep the foot down and get these products out.

As Len said, it's going to be a meaningful increase in the portfolio, and an increase in our served available market. And, as well, we have customers waiting for parts to evaluate; and wins, hopefully, at hand, once we deliver the parts.

We have been -- I think I said on the last call, we have been creative in the past in bringing in cash as necessary. We are looking at some strategic, non-dilutive transactions. We've had success on that front in the past. But these are always challenging to close, take a long time, et cetera. So we have some things on that front that we are working. Until the paper is signed, they are never done.

And should as necessary, if we need to, we have our shelf available and up there. Certainly something -- we want to exhaust the non-dilutive means first. And as we move out into the second half of the year, we will see the contribution from revenue that's been lacking to date.

That's very helpful, Jim. Thank you.

Next question, please.

I would now like to hand it over to Mr. Perham for closing remarks.

I want to thank everybody for hopping on the call and letting us give you an update on our progress to date this morning. And I just have a couple things I'd like to say.

So first off, regarding the fourth quarter, I could be sitting here rejoicing and telling you repeatedly that the fourth quarter was a very strong quarter, and that we feel very good about it. And all that would be true. But if you had asked me a few years ago what I would expect the quarters would look like as we got to this state of -- along the roadway to turning MoSys into a fabless semiconductor company, this is the kind of quarter I would have expected.

So when I tell you, barring some unforeseen or worst-case macroeconomic event or something that I don't see this morning, I think the quarter we had should be replicated. It seems to me that the window of opportunity is now open. And that means that our customer's next-generation systems are now quite challenging for him to try and figure out how to bring forth using traditional design techniques.

So that's evidenced a little bit, I think, by the fact we are now in the cloud, and we actually -- and of course, the security appliances are trying to do deep-packet inspection on everything going into the cloud. So speeds are running very, very fast. So it didn't surprise me that we won some opportunities, won some designs in both the edge and in the cloud itself. So I feel very good about it, and I want you to feel good about it. But it's what I would have expected. I did not expect that real bad period in the second and third quarter of last year.

Next point I would like to make is we are significantly better positioned for 2015 than we were 2014. In 2014, we were talking about having designs out imminently, looking into what I couldn't tell at the time was going to be a very tough couple of summer quarters.

Today we aren't looking at getting designs out; designs are done. Verification is either completed or near-completed. And, in some cases, we are characterizing silicon. In others, we are in the final stages of verification, and feeling good about where we are. So I just want to say, the Company is significantly better positioned, coming into this year than last.

The third point would be that I really appreciate your support and I appreciate your patience. We look forward to talking to you again in the weeks and months ahead, as we are going to be working our tails off to make 2015 all that it can be. When the fish are running, you'd better have your net in the water. And things are looking pretty good for us right now, so you can assume the nets are in the water.

I thank you for listening. I appreciate the time you gave us. And I look forward to seeing each and every one of you in the weeks and months ahead. Thank you, and goodbye. Have a great day.

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