Peraso Inc (PRSO) 2016 Q3 法說會逐字稿

Good morning and welcome to the MoSys third quarter 2016 financial results conference call. At this time, all participants are in a listen-only mode. At the conclusion of today's conference call, instructions will be given for the question-and-answer session. (Operator Instructions). As a reminder, this conference call is being recorded today, Friday, November 4, 2016.

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

Thank you, Andrew. Good morning 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 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 ICs and embedded memory and interface technologies, expectations concerning the Company's execution and results, product production, 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 annual 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, Mr. Perham.

Thank you, Bev. Good morning, everyone. Thank you for joining us today for our third quarter 2016 conference call. We'll open the call with an overview of our third quarter progress. Jim will then review our financial results in more detail and finally, we'll open the call to your questions.

The third quarter was another double-digit design win quarter. This is a good result and should position us to match or come close to matching last year's 50 plus wins. These new wins represent a good number of new engagements, coupled with an equally good number of repeat customers, that is an expansion of our footprint with companies that are already comfortable with using our high-performance serial I/O Bandwidth Engines.

We saw solid BE2, Bandwidth Engine 2, shipments in the third quarter and perhaps even better, we saw a definite movement toward production relief from one or two of our fourth quarter 2014 design wins. We are very gratified by the level of excitement being created by our third product family, Programmable Search Engines. The level of prototyping and pre-production units being ordered is very impressive. This family of products assists our customers in solving meaningful challenges in both the datacenter and in the emerging cloud systems.

Additionally, growth margins moved up sharply this quarter and we should see continued improvement in the coming quarters, and that's gross margin for the company as well as gross margin for our integrated circuit business specifically. Although I am pleased with our progress, I'm disappointed that production volumes have not yet reached the inflection point that will enable us to achieve our full year revenue target. 2014 design wins are moving toward production release, but the quarter-to-quarter ramp is somewhat disappointing. Our goal was to achieve $7 million or more in IC sales in 2016 and the fact is we're probably going to come in at just over $5 million.

Among the causes for this shortfall are delays in the rollout at carriers and in many cases, our customer's new product systems have taken longer to develop and move to production than either us or the customer anticipated. This has been true for both Bandwidth Engine design wins and for LineSpeed design wins, where we have anticipated a quicker contribution to revenue. We are starting to see the signs of some of our key fourth quarter 2014 Bandwidth Engine wins move to production, but it is two quarters later than either we or our customer partner had forecast.

Unfortunately, production timing and order volumes are a function of customer rollouts and platform acceptance, and are beyond MoSys' control. That being said, I believe it remains a situation of when rather than if IC shipments materially increase. Our design win base is increasing and we are seeing increasing indications that our number of BE2 design wins are moving toward full production release, including increased pre-production orders and 2017 in production forecasts.

On another note, we are very encouraged by the initial adoption in the datacenter market. We expect the growth trend will begin to materialize in this area over the coming quarters as more designs get released into production at both existing customers, where we have multiple copy and paste wins, and at new customers. In the past, I have said we are focusing on the network infrastructure and I wasn't sure how big a role it would be for us to play in the datacenter and in the emerging cloud applications arena.

I am pleased to say that with our newest product family, the Programmable Search Engine, the answer becomes yes. I believe this can be a real opportunity for us going forward.

Taking a deeper look at these most recent design wins reveals that activity has continued to increase since the early part of 2016. We are getting back to a quarterly double-digit design win run rate, which has been our target for some time. The majority of the third quarter wins were for Bandwidth Engine 2, aimed into video and IP security applications with existing customers. We also secured multiple LineSpeed design wins in the quarter with new customers in the areas of networking, monitoring, and module applications. We expect that newer LineSpeed, Bandwidth Engine 3, and Programmable Search Engine product families to start representing a large percentage of our wins going forward into 2017.

During the third quarter, our sales funnel continued to expand, resulting in multiple design win opportunities across all the families, including strong interest engagements for BE3 and the Programmable Search Engine family. These opportunities range in size and reflect new as well as repeat business with customers worldwide. The LineSpeed products are garnering more interest both in opportunities and in recent wins. For higher end applications, the Bandwidth Engine 3 product family provides a performance and size boost from BE or Bandwidth Engine 2 and aligns well to the latest generation of field programmable data rays.

One version of the Bandwidth Engine 3 device family we call the Z30 has provisions for direct connection to the Mellanox EZchip NPS-400. We anticipate the rollout of both the new generation of field programmable data rays and NPUs who will provide new opportunities as we go forward into 2017. As previously mentioned, with strong customer interest and the ability to leverage existing ecosystem, the Programmable Search Engine is currently progressing ahead of schedule and we expect interest to remain strong for this highly differentiated product.

It is possible that some of these designs could see a faster ramp than Bandwidth Engine 2 once architectures are released because we're serving more datacenter and edge applications. With the year-to-year growth in those segments larger than the network infrastructure, the ramp could indeed be faster.

Currently, the compounded annual growth rate of cloud, datacenter, and edge markets is projected to be considerably greater than the growth that's anticipated in the network infrastructure space. In addition to traction for Bandwidth Engine 2 with networking infrastructure customers, we have gained additional momentum with customers in the IP security appliances market, and are working with two of the fastest growing players serving that segment.

We initially secured design wins in this market segment during the fourth quarter of 2014 and are now in the process of advancing to volume production beginning first quarter 2017 with one of these two leading customers. Additionally, we are beginning to see an increasing number of new design win engagements looking to use a combination of our BE2, BE3, and LineSpeed devices for the same next generation designs they have in the pipeline.

Furthermore, other potential wins in our sales funnel call for the use of multiple units of a particular IC in the same design. We have something getting released that I think is using eight BE2s per card at the current time. It is very gratifying to see the variety and quality of our opportunities increasing as they form the foundation for future wins and demonstrate strong progress toward our goals of broadening our market footprint and accelerating our customer penetration.

A little about the Bandwidth Engine. As I mentioned, BE2 continues to represent the majority of revenue and new design wins. We are increasingly confident that many more of our Bandwidth Engine 2 design wins for 2014 and 2015 will turn on throughout 2017. We are also optimistic that BE2 has a considerable amount of life left in it. That is we will continue to have potential in the markets we currently serve, but should also find applications for Bandwidth Engine 2 in such new markets as video, government, access, security, and others as their performance requirements increase and they encounter similar memory bandwidth bottlenecks.

The combination indicates that we should continue to win BE2 designs going forward into the foreseeable future. For Bandwidth Engine 3, we continue to focus on qualification and certification efforts and expect full production release in the first half of 2017. Even though high temp operating life testing for carrier grade certifications is, in and of itself, a long and arduous undertaking, we are making progress toward completion of that goal. Our relationship with the EZchip Mellanox team for use of our BE Z30 and its NPS-400 remain strong and we are exploring additional opportunities with this excellent partner to broaden out footprint in the markets he serves. Customer interest in Bandwidth Engine 3 is expanding across our target market segments with multiple potential wins in our sales funnel.

A little bit about the Programmable Search Engine. In regards to the Programmable Search Engine, I'm very gratified with our newest product's initial traction. This product uses the same ecosystem and infrastructure structure as Bandwidth Engine 3 from a hardware perspective, but provides software powered programming flexibility, which enables customers to customize the product for a virtually limitless list of their own customizable functions, including algorithmic TCAM, specialized search, statistics, hierarchical metering and monitoring, et cetera.

Our customers can use this programming capability to customize the feature set for the devices going toward their end customers and we can load in a -- or they can load in a proprietary code specific to that customer's needs. Our design and security features are such that only our customer has the visibility to that code, thereby ensuring the customer's proprietary code remains tightly secured. The Programmable Search Engine supports the industry trend towards software programmable network functions with a flexible base for potential new products without requiring a full hardware redesign.

Our new Programmable Search Engine is in fact a software enabled integrated circuit, which allows our customers to input a wide range of codes, which in turn might support a long list of applications and features that both our customer and his customer want to provide to the end user. The Programmable Search Engine can support a much broader set of applications and performance trade-offs than a traditional memory architecture or a fixed hardware search device, such as a TCAM.

Our high access rate memory and 32 multi-threaded programmable cores allow the Programmable Search Engine to deliver performance comparable to most TCAMs in production today, but at four times the density, while introducing the ability to deliver exciting new functions and features not addressed or enabled by hardwired TCAMs. Our new Programmable Search Engine has been on a fast track since it was first announced in the second quarter of this year. On last quarter's call, we announced our first Programmable Search Engine design wins and initial shipments for some datacenter applications.

With the growth of the cloud and the datacenter projected to exceed 20% per year, we are optimistic that the combination of design wins plus raw market growth rate will provide additional fuel for our revenue growth. We also continue to build out our partnership network during the quarter, announcing a relationship with Oricane, a provider of algorithm based solutions for accelerating classification and the forwarding of internet traffic. Together with our Programmable Search Engine and Bandwidth Engine platforms, Oricane's BioCAM search algorithms and software will enable us to provide innovative alternative solutions for TCAMs in other traditional memory architectures, while enabling the introduction of new feature sets and new capabilities to the end users. We are pleased to be working with Oricane and count them among our other key partners, such as Xilinx and the Intel/Altera team.

Turning to LineSpeed, our wide range of LineSpeed 100-gig PHY solutions continues to gain interest from current and new customers. Design wins are increasing and several new design win opportunities were added to our sales funnel in the third quarter. Market adoption of 100 gig and highest speeds for newer systems is accelerating. This trend expands our LineSpeed opportunities, as every 100-gig line card requires re-timers and gearbox functionality.

Sampling to a wide variety of customers is going well and we've already received initial prototype orders from a fair number of our recent LineSpeed design wins. In closing, we are indeed disappointed with the continued delays and ongoing uncertainty within the networking infrastructure space in regards to design decisions and the direction of next generation hardware. We believe this market uncertainty has definitely resulted in delays in design win decisions and product launches.

Traditional network and equipment OEMs and newer datacenter and appliance OEMs are competing across a wider front than in past years. The good news is MoSys is well positioned to serve all of these companies and our customer list includes meaningful players from every segment. We remain encouraged by the recent traction and volume order opportunities, in particular for our new Programmable Search Engine family within our datacenter customer and BE2 for IP security appliances.

We still have several Bandwidth Engine 2 design wins from 2014 and 2015 that are expected to reach production volumes in the coming quarters, which will drive the measurable revenue improvement that we've been expecting. In the meantime, we have successfully layered on new design wins for both existing and new products to maintain a healthy pipeline and support continued and long-term revenue growth.

I'm going to now turn the call over to Jim to review our financial results and following his comments and that Q&A session, I may have one or two closing remarks. Thank you very much. Jim?

Thank you, Len, and good morning everyone. During the course of my comments, I will make several references to non-GAAP numbers. Unless otherwise indicated, each reference will be to an amount that excludes stock-based compensation expense, amortization of recorded intangible assets, and restructuring charges. 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.

Turning now to our third quarter 2016 results. Total revenue was $1.6 million, consistent with the prior quarter and compared with $1 million in the third quarter of 2015. Product revenue from the sale of our integrated circuits was $1.2 million in the third quarter compared with $1.3 million in the second quarter of 2016 and $0.6 million in the prior year quarter. IC revenue is primarily driven by Bandwidth Engine 2 shipments to our tier one networking and Japanese customers with additional contribution from shipments of our Programmable Search Engine ICs, for prototyping for datacenter applications.

Product revenue for the first nine months of 2016 was $3.6 million. As Len stated, we are now targeting total product revenue of $5 million in 2016 as the pace of our quarter-to-quarter product ramp remains somewhat unpredictable, as shipments volume are subject to customer's production schedules and market conditions.

Royalty and other revenue for the third quarter of 2016 was $0.4 million compared with $0.3 million in the previous quarter and $0.5 million in the year ago period. Royalty and other revenue is primarily comprised of royalties received from semiconductor customers whose products include our IP.

GAAP gross margin was 58% in the third quarter compared with 41% last quarter and 22% in the year ago quarter. Our product gross margin increased to 45% in the third quarter compared with 25% in the previous quarter. We expected our continued cost reduction efforts and increased Programmable Search Engine shipments to result in increasing gross margins in the coming quarters.

In terms of our operating expenses for the third quarter, total operating expenses on a GAAP basis decreased sequentially to $5.4 million compared with $6.5 million in the previous quarter and $10.3 million in the year ago period. Third quarter operating expenses included stock-based compensation and amortization expenses of $0.7 million compared with $0.6 million in the previous quarter and $0.8 million in the third quarter of 2015. Research and development expenses in the third quarter decreased sequentially and year-over-year to $3.9 million compared with 4.9 million in the second quarter of 2016 and $8.8 million in the year ago period.

The decreases reflect lower back end costs across our product portfolio and significantly reduced tape out expenses, as there were no tape outs in the third quarter of 2016. The decrease compared with the prior year also represents significant reductions in personnel related costs.

Selling, General, and Administrative expenses for the third quarter were $1.5 million, compared with $1.6 million in the previous quarter and $1.5 million in the year ago period. On a non-GAAP basis, total operating expenses for the third quarter of 2016 were $4.7 million, which excludes amortization of intangible assets and stock-based compensation expenses. This compares with $5.9 million in the previous quarter and $9.5 million in the year ago period. We continue to target non-GAAP expenses of approximately $5 million per quarter excluding any tape outs, shuttle, or significant one-time back end expenses.

On a GAAP basis, the net loss for the third quarter of 2016 was $4.7 million, or $0.07 per share compared with a net loss of $6 million or $0.09 per share in the prior quarter and a net loss of $10.1 million or $0.15 per share for the third quarter of 2015. On a non-GAAP basis, the net loss for the third quarter of 2016 was $4 million or $0.06 per share, which excluded stock-based compensation and amortization expenses of $0.7 million. This compares with the non-GAAP net loss of $5.4 million or $0.08 per share in the previous quarter, and a loss of $9.3 million or $0.14 per share in the year ago period. Net loss per share for the third quarter of 2016 on GAAP and non-GAAP basis computed using approximately 66.1 million weighted average shares outstanding.

Now, turning to the balance sheet, as of September 30, 2016, our cash and cash equivalents and investments balance was $12.8 million, compared with $16.5 million at June 30, 2016. Cash burn in the third quarter decreased to approximately $3.8 million compared with a cash burn of $4.4 million in the second quarter of 2016. We remain committed to minimizing cash spend as we await the majority of our customer designs to ramp to production.

In the third quarter, the first semiannual interest payment due under our outstanding convertible notes was made in kind with the issuance of an additional note to the note holders. The newly issued convertible note has a principal amount of approximately $0.3 million and has terms identical to the outstanding notes, including a $0.90 conversion price.

As of September 30, 2016, the Company had total shares outstanding of 66.3 million. During the third quarter, the Company completed its option exchange program for its employees, which excluded the CEO and non-employees, including members of the Board. The Company accepted for cancellation eligible options to purchase an aggregate of 4.6 million shares of common stock and issued replacement options covering approximately 3.3 million shares of common stock, representing approximately a 2% decrease in future dilution. The replacement options have an exercise price of $0.72 per share invested over three years.

As of September 30, 2016, our worldwide headcount was 64 employees compared with 66 as of June 30, 2016 with the majority of our employees in applications, engineering, and operations.

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

Operator: (Operator Instructions) Our first question comes from the line of Gary Mobley from Benchmark. Your line is open.

Len, as you look at what you think will be your top three customers or what you would have thought to have been your top three customers, sitting here today in the 11th month of 2016, could you talk about the fits and starts that you're looking at with respect to these customers and the timing of the production ramp, and what you're expecting over the coming months from these top three customers?

So basically rather than talk about customers, let me talk about market spaces. So for a number of years, we've been focused very hard on network infrastructure and while you're focused on that, there are other market segments started to emerge and are in fact growing very rapidly when each has significant players. One would be the driving need for ever faster and more capable internet security appliances that sit on the edge of the datacenter and the other is being in the datacenter itself. As the datacenter expands now and begins to look like a little ever -- getting ever large cloud, if you will, and my personal opinion is the expanding datacenter, i.e., will suddenly be called the cloud and it probably will consume what was known three or four years ago as the network infrastructure.

So looking at those changes, I think that we will continue to see a fair number. We haven't had very many, like next to zero of the design wins canceled and go away. So I expect that our network infrastructure customers are going to -- the wins from 2013, 2014, 2015, 2016 are going to go into production and we're forecasting that to happen. At the same time, starting in 2014, we started winning designs in the IP security appliance area and I think those are going to do very well. We mentioned on this call that some of them have gone from a few tens of units a quarter to a few hundred units a quarter to now releasing a significant number of products for shipment every week, and we're very gratified about that.

I mentioned on this call the -- and the datacenter market is forecasted by the outside world, if you will, the pundits, to be growing at 20%, 25% a year for the foreseeable future. And lo and behold, we find out that Programmable Search Engine can really serve us in some really valuable purposes for designs of equipment going into both the white box as well as next generation datacenter applications, and applications that are always in the direction of the cloud.

Calling it a software enabled integrated circuit is very accurate. It has four times the density of the TCAM and if you look down the road to what will be the likely next generation priority, it would be both faster and still having enormously more capacity than traditional TCAM. It's not encumbered by any possibilities of IP infringement and it's looking at an existing market of several hundred million dollars where it brings equal speed, much more capacity, and an enormously improved feature set.

The idea that our customer or his customer can write his own very secure algorithm into these cores is of extreme value and of great interest to the customer base. So getting finally to your question, I think that our infrastructure wins will go into production. I don't know if they'll hit the high end of our customer's forecast because there's a lot of dynamics out in their space. The IP security appliance guys where we've done very, very well. I'm going to say 20% to 25% of design wins history to date are up from that space. They're going to do very well and we can see that the repeat business is there. They're looking at next generation systems across a wide front and finally, in the last four months or so, probably 80% of our customer applications help has gone to serving people doing stuff or investigating the possibility of using our products in the datacenter.

So I think we'll see the datacenter and the IP security clients become a more dynamic, faster growing business for us and I think we'll see all of our network infrastructure wins go into production and I'm not able to tell whether it will hit the high end or the medium end, or the low end of our customer's forecasted growth rates, if you will.

I hope I answered your question, Gary.

Okay. Let me ask a more direct follow-on. I know your lead customers -- one of your lead customers has been going through an M&A transaction. I think they were acquired just this quarter. Under the new structure, do you foresee any changes in the design win funnel from that particular customer?

If I'm anticipating you correctly, I don't see any change in that. I think our customer -- our combined customers now -- is going to bring out his existing product family with the possibility of using our parts and I think he's looking at next generation stuff. And I'd like that we're working shoulder to shoulder with him on that as well.

I haven't -- there's M&A going on across the entire integrated circuit space, but the fact of the matter is, to date, other than the list of potential customers or suppliers to build the materials is changing on a period basis, I can't see that's played badly for a small company with some very innovative products and I can't see that a particular M&A action has caused us to lose some opportunity.

So I say it hasn't been a bad thing for us and perhaps it has customers more interested in doing business with us because they'd like some opportunity to have multiple sources on their bill of materials. And some of these large conglomerates no longer want to do business with anybody other than the top three or four companies that they serve.

Okay. Jim, I know I ask this question every quarter and finally, I can say congratulations on the gross margin improvement and I'm just curious what came to fruition with respect to transforming the gross margin and could you speak to the sustainability of that gross margin improvement?

So I'll start it and then turn it over to Jim. I remember our conversations well. This will be the third or fourth quarter you've brought up the gross margin and I've taken a position that it would just straighten itself out. IC shipments year-over-year re going to very likely more than double and probably substantially more than that next week. To a guy like myself that grew up building integrated circuits, it's still noise level compared to what it's going to be and the ability to amortize more and more units across your fixed cost, or amortize your fixed cost across more and more units is going to drive it down even further.

We were running a lot of R&D programs in the back end and now, we've got a -- the ISO 9000 flows are all set in place. Things are pretty well ironed out. Once you get it ironed out then people go back and they start taking the cost out of it. So what we're really just seeing is with very low volumes, I think IC gross margins had hopped into the 45%, 48%, 49%. We know that if we match our -- the marketing demand for the Bandwidth Engine family exactly to the output, if you will, so that the distribution of products coming off the line is exactly equal to the demand in terms of power and speed that we can pick up some more. Because in the middle of developing our Bandwidth Engines, our foundry made a change that resulted in our products running faster than we had anticipated or wanted.

So we run -- sometimes we're running some distribution faster than any market demand. And when we go after our final mass set, and we haven't forecasted that just yet, when we do that I'm going to say we're going to pick up -- we will pick up another 10 points of gross margin. So we'll be up in the high 50s, low 60s. And so there's nothing surprising about this. If you had the opportunity to just see the numbers as they exist in the company, it would make total sense to you, Gary.

So from the IC point of view, that's my comment and Jim may want to add to it from an overall company point of view.

I think you covered it well, Len. It's, frankly, Gary, just a result of our cost reductions, improved yields. We had started to see these a couple of quarters ago but obviously, under GAAP, when you reduce your standard cost you need to amortize the difference in over time and that's in our case a couple quarters through our, frankly, low turns at these revenue levels. So now, we're seeing the full benefit.

I do see that as sustainable and particularly if we can keep up. We had a modest amount of prototyping shipments of PSE in the third quarter, with pre-production prototyping units at sort of a higher price, and that will change when we bring PSE to -- have a production qualified in some time in first quarter of 2017. But to the extent though that we can keep that up, that will certainly help the margin in the short run. But I definitely see it as sustainable and improving quarter-over-quarter going forward.

Thanks guys. That's it for me.

Thank you. Our next question comes from the line of [Lee Yi] from [Lehmans] Foundation. Your line is open. Please check your mute button. We're not getting an audio from your line. Last call for [Lee Yi] from Lehman's Foundation. We are not getting --

Hi, can you hear me now?

Loud and clear, thank you. Loud and clear.

I'm trying to understand the relationship between your backlog and your design wins. I'm trying to understand that relationship and may I define your backlog as when your design wins actually go into production? Is that a good way to understand what the word -- what backlog means?

What actually happens is if you win a design in the data communications or the telecommunications area, from the time you win that design, the customer will probably take two years to build the equipment he's going to sell to a service provider or somebody of that ilk and then from -- and so -- and if anything -- and then from the time -- two years later, you might start sending him units because now he's prototyping his systems and putting them out for trial tests, to pass trials at his customers. So you'll see -- and he'll count on very fast turns out of your factory, if you will, because he's not looking for much volume.

So orders will come and they'll be filled. Then he'll come along and he'll start to -- he'll say, okay, I'm going to go to the next step now and he'll maybe start ordering a few hundred a quarter. And he's still prototyping and he's out winning designs and winning orders from the service providers, if you will, and he's filling his channel.

And then one day, if he's a big guy, he's completely -- he understand what he thinks his market opportunity is and he's got a bunch of wins, and he's got a significant channel. So now, he'll place a big order on you and he'll give you some projected run rate and you'll have some agreement on -- let's say that he wants to have 10,000 units a year, as an example. He'll probably ask you to carry inventory that can support 20% overage to that and he may place a large order, annual buy on you, or he may negotiate with you to have just in time and give you some forecast and release on a monthly basis,.

So what your backlog will look like will depend on how he goes about doing that, but I think probably I've answered your question, sir.

Great, so the backlog is defined as when the actual design win kicks in, when that customer is starting to build his product and he's starting to order from you, he still could be prototyping. But the backorder, as you say, could get up to like 10,000 units per year, for example. And may I ask you, how much -- how valuable, or what is the actual numerical amount of your back order at this particular moment? How big is it?

We wouldn't have any reason to disclose that. I don't think anybody would and that's -- I've explained to you how it works and we have forecasts right now form some of the designs I've just mentioned a few minutes ago are staring to ramp up now. And we're running at a run rate with these guys and it's quite -- if you think that I mentioned there was a few hundred a quarter and then maybe a few hundred a month, and now you can expect as they go about filling the channel, it's probably being ordered in some fairly significant number of units per week.

But as far as our backlog is concerned that wouldn't be anything for us to be talking about.

Okay, you have said in the past and to this day you have not lost any of your design wins to date. Nobody has pulled back yet any of their previous design wins. Is that correct?

Actually, we've had a customer on a rare occasion say that they want to upgrade performance and maybe move from a Bandwidth Engine 2 to a Bandwidth Engine 3 or even in one or two cases, to move up to a Programmable Search Engine because it allows them to enrich their feature set. With Bandwidth Engine products, if you win the design and you're on the schematic, it's a proprietary pin out and it's a proprietary function.

So it's very unlikely that you lose those. Now, on previous calls, I've talked about the fact that with LineSpeed, we're trying to build products that optimize the capacity and the density of traffic to move across the wireline. We're competing with people that are also in the business and may or may not have the same pin count. And in that case (inaudible) might put together a half a dozen different boards in his shop and look at equivalent products from ourselves, from Semtech, from Broadcom..

And then at the end, he may select them based on price. He may select based on some performance feature that where one guy's looks better than the other. So there is -- in the initial design win, it's moved to another position on the schematic. There is going to be some losses and I had mentioned that in prior quarters if you had the opportunity to be on the line. And I expect that that will go forward.

The Programmable Search Engine, which is just now the new recently announced family, it is pretty unique too in that it's a function that isn't -- hasn't got any monolithic second source. As we win designs there and we get approved on the schematic, it's unlikely that we're going to get displaced. Now, some years ago, we won a bunch of designs offshore from the United States and we think our customer didn't do very well in field trials with the service provider he was dealing with. And so they didn't ever go to much volume and he didn't -- as he tried to recover from that, in some cases he switched from Bandwidth Engine 1 to Bandwidth Engine 2 and it slowed down his ability to get to market. And he missed his forecast and we missed ours a result of that as well.

So that's sort of the dynamics of the business, our products, the world they sit in, sir.

Okay. And will you have to go to market to raise some more cash or are you comfortable with the current burn rate and even with the slowdown of some of the design wins turning into cash?

Sitting here with $12.8 million at the end of September, it's likely we will need additional capital. Certainly, we're monitoring customer ramps, et cetera and with the ramp, obviously, we do expect the burn to diminish over time and certainly be significantly lower in 2017 compared with 2016. But certainly, part of the dynamic is customers wanting to see a stronger balance sheet on our side.

Right now, we are very focused on strategic kind of non-dilutive transactions. We have a few of those in play, certainly nothing we were ready to talk about in the script, but we're working through those and we'd like to see some mix of strategic non-dilutive with some of our -- at least one of our larger partners, working with them. And then probably some additional financing on top of that.

Okay. Thank you. Do you still have 85 design wins in the pipeline there? Is it near 100 by now?

The sales funnel, yes, I would say it's in the range of 100 design wins.

Jim answered the question. One, Jim addressed the sales funnel so I would say the sales funnel, which is stuff that we're trying to win that might be somewhere between imminent to be won or lost, to stuff that's going to take anywhere from a quarter to three quarters. The sales funnel activity is very high right now and it's very gratifying. And it's high for Bandwidth Engine2. It's very high for the LineSpeed elements, especially some of our LineSpeed elements have features on the IO that aren't widely available for others, so it makes them unique and valuable to the people who need those features.

As I mentioned, particularly the Programmable Search Engine is also generating a fair bit of excitement. Now, having said that, we won something in the area of -- I want to say probably over 100 design wins history to date now and I mentioned this morning that some of the wins from the third and fourth quarter of 2014 are now starting to ramp up. And we had a very strong fourth quarter in 2014 and so -- and now, we should expect to start seeing the wins in 2015 start to ramp up.

So yes, the majority of those design wins are there and we can complain about the fact that I'm sure the customer is not happy either that it's taking longer for him to ramp than we had forecasted or perhaps that he forecasted. But they for the most part haven't gone away, sir.

Thank you very much. I'm done.

Thank you. Ladies and gentlemen, that now concludes our question and answer session for today. I would like to turn the call back over to management for closing remarks.

So I just have four comments this morning. One, there's a considerable number of historical design wins that should start ramping quarter-to-quarter in 2017. We're seeing some of that happen right now and it's needless to say very gratifying. So I just wanted to come back to that in the summary. Secondly, the Programmable Search Engine as of -- we have found that it can solve some major challenges that our customers or potential customers face for products they want to bring out in the datacenter or into the cloud segment. And that is very gratifying. Those spaces are growing in excess of 20% a year and there's enormous drive to get into the market in a hurry and so -- and you really needed to be in that space. And it looks like we're there with a very good solution that offers features and benefits not widely available from others. So we're optimistic that we're going to do well with that product in that space.

And thirdly, we didn't say it this morning and it's probably obviously, but we will double our integrated circuit revenue, and double -- or even a little bit better than that hopefully -- our integrated circuit shipments in 2016, and it's reflected in the back end flows working out to be a little smoother and gross margins moving up into the middle to high 40s and with some obvious ways that we can get it up another 10 or 15 points. And, we should expect that we're going to do better than that in 2017. We're anticipating that and looking for signs that it can happen.

And finally, I just want to thank you guys for the time and attention you've given us this morning and we look forward to giving you an update again in the near future and we'll continue to try to do our best to drive shareholder value here. Thank you very, very much. Bye.

Ladies and gentlemen, thank you again for your participation in today's conference. This now concludes the program and you may all disconnect at this time. Everyone have a great day.