Peraso Inc (PRSO) 2016 Q2 法說會逐字稿

Good morning and welcome to the MoSys Second Quarter 2016 Financial Results Conference Call. At this time, all participants are in a listen-only mode. (Operator Instructions) As a reminder, this conference call is being recorded today, Friday, July 29, 2016.

I would now like to introduce your host for today's conference, Beverly Twing of Shelton Group. Please, go ahead.

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

Before we begin the call, 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 and Exchange Act of 1934, which include, but are not limited to, benefits and performance expected from use of the Company's ICs and embedded memory, and interface technologies, expectations concerning the Company's execution and results, production development, product development, achievement of IC design wins, timing of shipments of the Company's ICs, predictions concerning the growth of the Company's business in future markets, and business prospects, strategies, objectives, expectations, or beliefs.

Forward-looking statements made during this call are subject to the 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 report on Form 10-K filed with the Securities and Exchange Commission, in particular in the section titled Risk Factors, and in other reports that the Company files from time to time with the Securities and Exchange Commission.

MoSys undertakes no obligation to publicly update any forward-looking statement for any reason except as required by law, even if new information becomes available or other events occur in the future.

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

Good morning, everyone. Thank you, Bev. Thank you, all, for joining us today. During the call I will review our second quarter with an emphasis on progress towards ramping revenue in the near-term while expanding our design win pipeline and sales funnel to drive future revenue growth. Following my remarks, Jim will discuss our financial results and then we'll open the call for your questions.

I'm pleased to begin by noting that the second quarter marked our sixth consecutive quarter of increase product revenue. Through the first six months of this year we've already exceeded the total number of IC shipped in all of 2015. I would like to see the ramp steeper, up and to the right, but we are moving in the direction we forecast. We're heading in the right direction, I'd just like to get there faster.

Driving this increase is the continued benefit we accrued from our early Bandwidth Engine 2 design wins as they ramp toward volume production. This ramp is being driven by various early onset design wins, including those with our tier one network infrastructure customer and partner.

We also made considerable progress during the quarter with our new products, including the shipment of prototype quantities of our new recently announced Programmable Search Engine. It's a derivative of the family of Bandwidth Engine 3. This customer's target market is next-generation data center systems I think. Additionally, we shipped early production orders to various LineSpeed users while at the same time supplying prototype quantities to multiple other design wins.

I expect our revenue and shipment volumes will continue to gain momentum in the second half of this year as additional design wins primarily for BE2 start to turn on and ramp in the direction of full production. Further, we expect a roster of customers starting to ramp up the demand on us will grow as first 2014 design wins are released to manufacturing and then later the wins from 2015 start to merge in and so on.

Turning to design wins, we saw activity pick up in the second quarter as general market softness we experienced in the first quarter appeared to ease. As a result, both our existing customers and prospective customers began to increase their product development activities again, resulting in additional design wins and related other activities for the Company.

Of note in quarter two, we secured our first Programmable Search Engine designs and the development toward a system going to the market is advancing quickly. The customer boards are being built, utilizing prototype deliveries. We're working hand in hand with this customer in an effort to get his products to market as expeditiously as possible. And in winning these designs, as well as achieving product delivery so quickly after launching PSE in quarter one is a significant achievement for MoSys. I really do need to credit and commend our development teams and our sales and marketing teams for this unusually short go to market ramp. Congratulations and thank you, team. Thank you, one and all.

We also recorded multiple new Bandwidth Engine and LineSpeed design wins in quarter two with the Bandwidth Engine representing the majority of these wins. Our growing pipeline and design win opportunities and expanding product portfolios positions us for a significant number of additional wins before year end.

We've been targeting at the outset of the year a 40% increase in wins over 2015. However, based on progress through the first half 2016 I think it's more realistic that total designs will track more closely to 2015 which would still equate to in excess of 50 new design wins. Needless to say, 50 or more new design wins would represent a good opportunity for a solid growth in revenue when they're all released into production by our potential customers. Moreover, we're on pace to meet our goal of securing 8 or more new customers in 2016.

Our second quarter wins include an additional BE2 design win with our tier one customer, reflecting a continued expansion of our footprint with this worldwide provider to the networking infrastructure market. We have a close relationship with this customer and through this collaboration we continue to identify new applications for additional design win opportunities.

We are more and more often seeing new applications emerging as markets move to higher data rates and start to experience the same memory bandwidth and access challenges that come with aggregating 100 gig and higher data flows. Some of these applications including IP security appliances, video monitoring, and high performance data center line cards -- excuse me, let me read that sentence again.

We are more and more often seeing new applications emerging as markets move to higher data rates and start to experience the same memory, bandwidth, and access challenges that come with aggregating 100 gig and higher data flows. Some of these applications include IP security appliances, video monitoring, and high performance data center line cards. Generally speaking, we're seeing expanded opportunities across all of our products. It appears that the various solutions we offer are increasingly synergistic with the needs of our customers and potential customers as they struggle with the performance requirements of their next-generation networking equipment.

Our Bandwidth Engine and LineSpeed and PSE products can be used in combination within the same customer designs -- that is on the same line card, for example. BE2 and BE3 have already proven to work well together and with the addition of our Programmable Search Engine family to these offerings, we expect the opportunities for side by side design wins to multiply.

For example, every 100 gig line card needs a retimer and/or gear box functionality onboard and as well, several solutions on that board have to be sold with one type or another of high performance networking memory which opens up a big opportunity for our Bandwidth Engine products. As current customer engagements for our Programmable Search Engine, BE3 and LineSpeed products mature, we would expect to secure additional new design wins which add incremental revenue to our expanding revenue base.

A little bit on market trends. The technical requirements for new designs continue to trend favorably for the Company. The demand for more memory bandwidth, lower latency, higher access rates to enable increased processing per packet, such as 25 gig Ethernet and requirements for more intelligence and programmability in a broader range of applications continues to increase in devices supporting the networking, security, data center, and cloud markets.

In fact, we are seeing the integration time for BE2 shortening for a number of important reasons. Switch over costs and switch over risks have gone down. That is less risk is perceived in the adoption of serial memory now than in the previous year or previous couple of years in the past. People are more familiar with it now. Two, fewer feasible options are available to the customers or potential customers to achieve the pin count and board space budgets they need while providing the required performance levels in their systems. And finally, our ecosystem and our ability to support our customers and partners is continually improving. These factors help to drive even more interest and initiate more customer engagements across our entire product portfolio.

Turning now to a few product specific updates. As I mentioned earlier, Bandwidth Engine 1 and 2 ICs are shipping to customers moving into production with Bandwidth Engine 2 being the largest in both unit quantity shipped and total design win counts. Some of our 2014 wins in Japan have been slow getting into production due to design upgrades or other changes they're required to meet for their customer's system level specifications.

Although these changes caused delays in reaching production and delayed revenue to MoSys, their supplier, it is important to note that all these wins are still viable and active. None of them have been cancelled. We have not been told that something has gone by the board and it's too late to be successful with our customer's end customers. They're still alive and just moving a little slower than we like.

Interest in our Bandwidth Engine 3 devices continues to build as we move toward its full release to production. Customized for buffer and/or access and statistics functionality, the BE3 630 and BE3 830 are tracking interest for use in both current 100 gig and next-generation 400 gig systems. We are closely working with Mellanox as they work to further develop the market for easy chips NPS network processors for which our customized BE3-Z30 makes an excellent companion chip.

Over time this relationship holds the potential for us to expand our BE3 footprint into other applications and into next-generation networking systems. BE3 can be used at 10 to 15 and/or 20 to 25 gig applications and therefore is a good fit for both the existing and the new FPGA families from Xilinx and Altera.

Regarding our new Programmable Search Engine product line, following our successful launch of this product in the first quarter, as we have mentioned, we have already secured initial design wins and we've already shipped prototype quantities. This product uses the same infrastructure, I/O infrastructure as the Bandwidth Engine 3 family from an interface perspective but has a different architecture and it has customizable capabilities that enable the customer to program their own functions such as for example an algorithmic version of the TCAM and/or you might want to enable some specialized search.

We're very excited about the Programmable Search Engine and its potential to expand our revenue opportunities. Additionally, it should lead us to new applications that up until now we may not have recognized or understood.

About LineSpeed, we continue to gain increasing momentum for our LineSpeed products in terms of design wins, product development, and customer engagement. We've completed sample deliveries of the latest long reach devices in the second quarter and are achieving operability with multiple customers and partners for our LineSpeed Flex family. Opportunities for LineSpeed Flex are expanding with the growth into retimer requirements for Ethernet switches, line cards, and intelligent processing applications supporting 25 gig and 100 gig capability, for data center interconnect, wide area networking, and router applications in the telecom space.

Our devices also support innovative features and higher data rates for optical transport networks and fiber channel at 25 gig and above. Furthermore, the LineSpeed ICs are well suited for module solutions that require specialized high-end features. Sampling activity for our LineSpeed Flex devices is increasing and we're targeting production release of multiple other devices throughout the second half of this year and into the next.

My summary of the second quarter is quite simple. The second quarter started out a bit slowly but ended with increased revenue, multiple new design wins, and the addition of new customers as well as what appears to be an improving market environment. Our design opportunity pipeline that appeared less clear at the end of quarter one has solidified considerably from then to the second quarter.

So we are optimistic for a strong second half on the design win front. I believe considering the actually results from the first half that we are reasonably well-positioned for continued revenue growth and should be striving to achieve our full year revenue goal. Though of course this achievement continues to be dependent on our customers meeting their system release dates for their production ramps and the market's adoption of their next-generation systems.

Our early Bandwidth Engine 2 designs are ramping into production at an accelerated rate and the market opportunity for customer engagements for Bandwidth Engine 3, the Programmable Search Engine, and LineSpeed product families continues to increase. I'm looking forward to this quarter. It's off to a pretty good start. And I look forward to giving you an update on our progress at the end of the third quarter.

This concludes my prepared remarks. I'll turn this call over to Jim for a review of financials and following this we'll take some questions, and we'll close the call with a few comments. Thank you very much for your time and your attention. Jim?

Thank you, Len. Good morning, everyone. During the course of my comments I'll make several references to non-GAAP numbers. Unless otherwise indicated, each reference will be to an amount that excludes stock-based compensation expense, amortization of recorded and tangible assets, and restructuring charges. These non-GAAP financial measures and a reconciliation of the difference 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.

Turning now to our second quarter 2016 results, total revenue was $1.6 million, compared with $1.5 million in the first quarter of 2016 and $1 million in the second quarter of 2015. Product revenue from the sale of our integrated circuits was $1.3 million in the second quarter, compared with $1.1 million in the first quarter of 2016 and $0.5 million in the prior year quarter.

IC sales increased to 79% of total revenue in the second quarter compared with 77% in the previous quarter. As Len mentioned, IC revenue is primarily driven by ramps in production of our Bandwidth Engine 2 design wins to our tier one and other customers. In addition, we recorded additional revenue from prototype shipments of our Programmable Search Engine ICs as well as initial LineSpeed production and prototype units.

Royalty and other revenue for the second quarter of 2016 was $0.3 million, consistent with the previous quarter and compared with $0.5 million in the year ago period. Royalty and other revenue is primarily comprised of royalties received from semiconductor customers who products include our IP. GAAP gross margin was 41% in the second quarter, consistent with the previous quarter and compared with 43% in the year ago quarter.

In terms of our operating expenses for the second quarter, total operating expenses on a GAAP basis decreased sequentially to $6.5 million. This compares with $7.4 million in the previous quarter and $7.3 million in the year ago period. The sequential decrease in operating expenses reflected our first quarter restructuring and the benefits of our cost reduction initiatives as well as lower back end costs primarily related to Bandwidth Engine 3.

Second quarter operating expenses included $0.7 million of expense related to a shuttle tape-out for our LineSpeed Flex products. Also the second quarter of 2016 included stock-based compensation and amortization expenses of $0.6 million consistent with the previous quarter and compared with $0.8 million in the second quarter of 2015.

Research and development expenses in the second quarter decreased sequentially and year over year to $4.9 million and compared with $5.2 million in the first quarter of 2016 and $5.8 million in the year ago period. Second quarter research and development expenses reflected lower backend costs, personnel expenses, and stock-based compensation which were partially offset by the LineSpeed shuttle tape-out.

Selling, general, and administrative expenses for the second quarter were $1.6 million compared with $1.5 million in the previous quarter and consistent with the year ago period. On a non-GAAP basis, total operating expenses for the second quarter of 2016 were $5.9 million which excludes amortization of intangible assets and stock-based compensation expenses. This compares with $6.1 million in the previous quarter and $6.5 million in the year ago period. We continue to target non-GAAP expenses of approximately $5 million per quarter in the second half of 2016, excluding any tape-out shuttle or significant backend expenses.

On a GAAP basis, the net loss for the second quarter of 2016 was $6 million or $0.09 per share compared with a net loss of $6.9 million or $0.10 per share in the prior quarter and a net loss of $6.9 million or $0.11 per share for the second quarter of 2015. On a non-GAAP basis, net loss for the second quarter of 2016 was $5.4 million or $0.08 per share which excludes stock-based compensation and amortization expenses of $0.6 million. This compared with a non-GAAP net loss of $5.6 million or $0.08 per share in the previous quarter and a loss of $6.1 million or $0.09 per share in the year ago period. Net loss per share for the second quarter of 2016 on a GAAP and non-GAAP basis was computed using approximately 66 million weighted average shares outstanding.

Now turning to the balance sheet, at June 30, 2016, our cash and investments balance was $16.5 million compared with $20.9 million at March 31, 2016. Cash burn in the second quarter was approximately $4.4 million and reflects a significant sequential reduction as compared with cash burn of $7.2 million in the first quarter of 2016. Our restructuring and other cost reduction activities have positioned us to continue reducing our expenses and cash burn over the coming quarters, especially when combined with our expected growth of product revenues and improved gross margin.

We remain committed to minimizing cash spend while our revenue ramp continues to gain momentum. In the third quarter the Company intends to pay the interest due on its convertible notes in kind through the issuance of an identical convertible note. As of June 30, 2016, our worldwide headcount was 66 employees compared with 69 as of March 31, 2016 with the majority of our employees in applications, engineering, and operations.

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

(Operator Instructions) Gary Mobley, Benchmark.

Happy Friday, guys. Jim, as a point of clarification, what did you say non-GAAP OpEx will approximate for the two remaining quarters of the year?

Approximately $5 million.

And that again is down from $6.5 million in Q2?

Yes. Q2, the $6.5 million was the GAAP number. The non-GAAP number in Q2 was about $5.8 million and we had that shuttle which was just over $600,000. So, we would've been around $5.2 million.

Okay. I'm going to ask the same question that I ask every quarter and that is about gross margin. I know you've had some supply chain inefficiencies, in particular on the backend and it was my understanding that you were working through those issues but it's not evident in the Q2 gross margin. So, if you could just give us some explanation on that front, that would be helpful.

Basically, Gary, when you look at the gross margin reported, it's a combination of BE1, BE2, and some LineSpeed products. The Bandwidth Engine 2 which is our workhorse, is moving up and to the right reasonably well. We received a number of new lots from our foundry this quarter. One of them had some problems and we don't know if they should credit it or not. There's been no change made yet. We can't tell. So, that pulled it down a little bit.

Jim, I haven't talked to Jim about this yet but I've talked to our operations guy. Next quarter I'm going to take a look at just breaking out BE2 so you can see just BE2 and how it's doing because I knew you were going to ask me this question. Some of the BE1 material we bonused back in I think had a negative effect on it for one reason or the other and Jim and I have been so busy we haven't got together on this yet. And we have one lot that I like to think that our foundry might credit to us but right now it's in the numbers.

So, that coupled with the fact that we're still not running very many lots, so I'm feeling reasonably good about our gross margin in terms of where the operations are and how smooth the backend works. When we can buy a higher production level mass set for BE2 that we haven't expended the resources for yet, that will give us somewhere between 10 and 13 or 14 points of gross margin.

So, where I think we made the long -- somewhere in BE2 at small to medium level volumes that maybe 45% to 50% or 51%, 52%, 53% gross margin, that would give us the opportunity to get somewhere substantially above that. So, it wasn't very clear and I just got a look at it knowing you'd ask me the question. I'm going to see if I can't break it out differently next quarter. I'll have to see if Jim will help me do that.

Okay. All right. And one thing I didn't hear you mention in your prepared remarks was the status of some type of strategic relationship which may carry some type of investment and/or revenue capture opportunity. So, if you could just give us any update on that front?

We're working right now with three to five companies on this and a couple of them are well down the road but there's nothing to report yet this morning. It isn't like we expended all of them. I would say it's operating at a higher level than at any time before.

So, that coupled with the fact that BE3 and the Programmable Search Engine have some features and capability that look like it's very supportive of next-generation systems. So, we're talking to the who's who of the market sectors that we serve. We didn't have anything finished so we didn't put it into our prepared remarks this morning. But I would like you to know that Jim and I are spending a good significant percentage of our time on it. It's come down the road a fair ways. Thanks for asking.

Last question for me. Obviously you haven't been working at this for six plus years to generate $1 million a quarter in product revenue. You have to be somewhat optimistic to come into work each day and whatnot. So, the question I'm leading to is where do we stand with respect to the revenue ramp at your one strategic customer and what the potential can be and why you haven't quite fully tapped into that potential at this point in time?

Basically I think the biggest lesson that I'll probably take for the balance of my life is I was at a luncheon here a few months ago with Marc Andreessen and he made the comment that you have to really be thoughtful about things now because in the New World anything you want to create takes ten years. It didn't take ten years when we did IDT and it took probably seven or eight years when we did NetLogic.

So, I'm just amazed at the customer's -- I'll call it issues that he deals with, the seeming slowness with which we've gotten to full release. There's no question it's taking longer. And I would say -- and we don't say much about this either. We really don't have simply one strategic customer anymore. We really serve network infrastructure and we have one of the top players there and we serve the IP security appliance business.

We have several top players there. And we've made good progress into the data center. I just mentioned in passing this morning that the Programmable Search Engine applications in the early going seem to be into the data center where there's a pretty exciting amount of growth projected. We have major customers in all three of those areas. But I can't dispute with you that I would've projected that we would ramp faster and you got to my closing remarks.

We are ramping revenue up and to the right. We've been talking to our top customers and they're either back to us and projecting a reasonably good second half or they haven't gotten back to us yet. I have to confess that I would've expected that we could see these products ramp faster than they have. Andreessen made a good point at lunch when he said nowadays you have to plan for ten years because that's what it takes.

Okay. Thank you, guys.

Alex Silverman, Special Situations.

Actually my question was asked and answered. Thank you.

I'm showing no further questions at this time. I'd like to turn the call back over to Len Perham for closing remarks.

Yes. Gary helped me make my first point and that is as we pointed out we've been ramping both units and revenue the last few quarters and I mentioned in my remarks earlier that I would like to see it steeper. We are dealing with the top players in the market segments that we serve but I sure as hell would like to see it be ramping faster. So, that's my first closing remark.

The second is most of our applications in customer support right now is going to BE3 and Programmable Search Engine applications and that's very, very exciting. And the reason I think is because as we've said over the years, the type of performance and the feature sets that our products have are very suitable for advancing and further advancing high performance systems that our customers might want to build. So, we seem to have a family that's in the right place to solve important problems for the next few generations of high performance equipment.

Now, that said, it isn't that BE3 and the Programmable Search Engine is going to eat Bandwidth Engine 2. It's doing very, very well too. And the BE3 and BE2 don't compete with each other. One doesn't eat the other, if you will. And I would think that BE2 will be the main player in our sales funnel and the main player getting released into production well into the future, at least through '17, I think. So, BE3 and the Programmable Search Engine are exciting because of the level of interest but BE2 will still remain the workhorse. So, we have a good number of products that are going to be generating revenue.

That's all I had to say for today. We really appreciate you guys coming and listening to us. We have a lot going on here with extraordinary activity. I think that was Gary's last question. And nothing to report today, but perhaps in the near future. I want to thank you again for listening to us and we look forward to talk to you next quarter. Thank you, everyone.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone have a great day.