Peraso Inc (PRSO) 2018 Q1 法說會逐字稿

Welcome to the MoSys First Quarter 2018 Financial Results Conference Call.

(Operator Instructions)

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

Joining me on today's call are Len Perham, MoSys' president and chief executive officer, and Jim Sullivan, Chief Financial Officer.

Before we begin today's discussion, I would like to remind everyone 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, product development, achievement of IC design wins, timing of shipments of the Company's IC, 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 report on Form 10-K filed with 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 & 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.

God afternoon, everyone, and thank you for joining us today. We are pleased to be hosting our quarterly earnings conference call once again. Since early 2017, we have been high at work improving our financial situation, including resizing our organization and bring costs in line with revenues with actions combines with customer growth in the ramping of earlier design within the production as it resulted in MoSys achieving GAAP profitability for the first quarter of 2018, which validates the progress we've made over these past several quarters.

Much like past calls, I'll start by highlighting the first quarter financials and then review the current status of our business, including design wins, the sales funnel, and product development. I will then turn the call over to Jim Sullivan to discuss our financial results in more detail and make a few comments regarding second quarter guidance. Following our remarks, we will open the call to questions.

Let me begin by highlighting a few notable first quarter financial metrics that reflect a continuation of a momentum first initiated during the second half of 2017. First, product revenue increased to $3.7 million in the first quarter, while total revenue increased 11% sequentially to $4.2 million, nearly doubling the revenue as compared with the first quarter of 2017.

Second, our IC, that is our product gross margin, improved to 57% from 41% in the previous quarter, contributing to an improvement in total gross margin to 62%. Third, total operating expenses decreased 9% sequentially. And lastly, we achieved GAAP profitability for the first quarter of 2018.

Our revenue growth since the beginning of 2017 demonstrates the ramping of our Bandwidth Engine products with new and existing customers, while a transition to profitability and reduced cash burn highlight the benefits of our restructuring and cost reduction efforts that we implemented over the past year to lower expenses and improve operational efficiencies.

These financial results represents the product of hard work by a very dedicated MoSys team, especially the operations unit, which has continued to support increased quarterly product shipment while improving manufacturing efficiencies and effectiveness. Product shipments increased again in the first quarter of 2018, driven primarily by Bandwidth Engine 2 design wins, won in earlier periods, and now in or ramping into production. Palo Alto Networks was our largest Bandwidth Engine customer in this first quarter of 2018.

Currently, we have enough visibility into our customer orders to expect a consistent revenue stream for the remainder of 2018, which positions us to achieve and likely exceed our 75% year-over-year growth rate objective. There may be some quarter-to-quarter variability based on customer production and ramping the timelines.

We truly appreciate and highly value the close relationships we have developed with our customers who have been very supportive of MoSys, especially during what was a challenging 2017 for this company.

During the quarter, we further expanded our Bandwidth Engine 2 design win base, securing a significant win with a major new customer, who serves the application delivery market segment. This customer provides cloud security solutions to ensure their customer's networks run smoothly, securely, and most efficiently.

We shipped initial units to this customer during the first quarter of 2018 and we expect the design win to follow an 18 to 24 months from development to full product release cycle that is typical for a design win in this market segment. We are optimistic that this initial win could result in additional future design win through this customer with Bandwidth Engine copied and pasted into applications across this customer's entire platform similar to the success we have achieved with our other largest design win customers.

This significant win further validates the value our Bandwidth Engine solution provides to customer's next generation systems. It is also a testament to the viability and long life cycle of our products as Bandwidth Engine 2 continues to win new designs, a trend we expect to continue for the foreseeable future.

During the quarter, we reinvigorated our sales and marketing efforts and have begun identifying many potential opportunities for our Bandwidth Engine ICs at both new and existing customers. We are -- we have renewed design engagements across multiple market segments and we expect our sales efforts to benefit from the increasing trend to higher data rates and more offloads, which played to the strength of our product offerings.

An example of this would be the growing trend of 100 gigabits per second data to the server. The very high random access rates and bandwidth common to the intelligent Bandwidth Engine and Programmable Search Engine product families provides critically important capabilities, applications dealing with complex data or packet processing and the need for real time offload of computational operations that is very difficult for the CPU to deal with at today's wireline speeds.

The importance of high random access rates have increased with a trend towards edge computing and packet processing at the compute server. Bandwidth Engine with its high random access rate and offload capabilities serves as a companion to slower access to drive data rate SRAMs or high bandwidth memory DRAM memory to enable performance and somewhat simplifying mixed generation high speed system design.

Operating with very fast random access speeds, the real time process and capabilities that the Bandwidth Engine family enables allows for the offload of complex computation challenges without inhibiting today's ever increasing wireline speeds.

In support of our sales and marketing efforts and to lay the groundwork for winning future designs, our product development team continues to work on additional derivatives of our Bandwidth Engine and Programmable Search Engine product families.

For example, we recently announced new Bandwidth Engine 3 products, which have been optimized for applications operating at industrial temperature ranges from 40 -- minus 40 degrees Centigrade to 85 degrees Centigrade. They require both high access rates and very efficient memory bandwidth utilization while operating under significantly more challenging environmental conditions.

In summary, our first quarter business and operational successes were gratifying and continued the momentum first initiated in mid-2017. Current Bandwidth Engine design wins continue to ramp and we have yet other design wins that we expect to go into production over the next 18 months. Also, we continue to identify new design win opportunities and grow our sales funnel. Product development activities continue and our financial profile is improving.

We have a solid base of design wins and customers, from which we expect to develop a consistent revenue stream to support our revenue growth and financial objectives for 2018. This, coupled with the fact that the products we have been design -- this coupled with the fact that the products we have been designed into typically have long product life cycles, leads us to forecast steady revenue streams over the next five plus years for our Bandwidth Engine design wins.

Furthermore, we remain committed to achieving additional success for our stakeholders while continuing to focus on improving our financial profile.

This concludes my prepared remarks for today. I will now hand the call over to Jim Sullivan for a review of our financial results and some second quarter guidance. Thank you very, very much for your time and attention. Jim?

Thank you, Len, and good afternoon everyone. It's good to be speaking with you today. 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 reported intangible assets, and restructuring chargers.

These non-GAAP financial measures and the reconciliation of the differences between them and comparable GAAP measures are presented in our press release and related current report on Form 8K, which was filed with the Securities and Exchange Commission today, and can be found at the Investor Relations section of our website.

Turning to our now -- turning now to our first quarter 2018 results. Total revenue increased approximately 11 percent sequentially to $4.2 million from $3.8 million in the fourth quarter of 2017 and a significant increase from the $1.2 million in the first quarter of 2017.

Product revenue from the sale of our Integrated Circuits was $3.7 million in the first quarter, driven primarily by shipments of our Bandwidth Engine devices up to 10 customers. This compared with product revenue of $3.5 million in the fourth quarter of 2017 and $1 million in the prior year quarter, marking an increase of almost 3x on a year-over-year basis.

Bandwidth Engine 2 will continue to be the most significant contributor of the revenue in the near term while we continue to ship initial pre-production unit volumes of our Bandwidth Engine 3 devices and complete final shipments of our Bandwidth Engine 1 products.

Royalty and other revenues for the first quarter of 2018 with $0.5 million compared with $0.3 million in both the fourth and first quarters of 2017. Royalty and other revenue in the first quarter of 2018 included $0.2 million of royalties received from semiconductor customers as products include our IP and $0.3 million of licensing revenue related to our LineSpeed product technology for which payments have been received in prior periods.

Our adoption of the new revenue recognition GAAP ASC 606 effective January 1, 2018 did not have a significant impact on our revenue for the quarter as the net effect was to reduce royalty revenue by approximately $10,000.

GAAP gross margin was 62% in the first quarter, compared with 45% in the prior quarter, and 50% a year ago -- in a year ago quarter. The sequential increase in gross margin was due primarily to inventory reserves reported in the fourth quarter of 2017, improved manufacturing efficiencies, higher licensing revenue, and product mix. Products gross margin specifically increased to 57% in the first quarter of 2018, compared with 41% in the fourth quarter of 2017.

In terms of our operating expenses for the first quarter, total operating expenses on a GAAP basis decreased to $2 million, compared with $2.2 million in the previous quarter and $4.8 million in the year ago period. The significant year-over-year decrease reflects the benefits from the restructuring and cost reduction initiatives we implemented in 2017.

First quarter operating expenses including stock-based compensation and amortization of $0.1 million compared with $0.2 million in the fourth quarter of 2017 and $0.2 million in the year ago period. Research and development expenses in the first quarter were $1 million compared with $0.9 million in the fourth quarter of 2017 and $3.5 million in a year ago period.

Selling, general and administrative or SG&A expenses for the first quarter of 2018 were $1 million, consistent with the previous quarter and compared with $1.3 million in the year ago period. We expect SG&A expenses to increase slightly in the second quarter of 2018 due to higher commission expense.

On a non-GAAP basis, total operating expenses for the first quarter of 2018 were $1.9 million, which excludes the amortization of the tangible assets and stock-based compensation. This compares with $1.8 million in the fourth quarter of 2017 and $4.6 million in the first quarter of 2017.

On a GAAP basis, net income for the first quarter of 2018 was $0.3 million or 4 cents per diluted shared, compared with a net loss of $0.5 million or 7 cents per share in the prior quarter and a net loss of $4.4 million or 66 cents per share for the first quarter of 2017. As Len mentioned, our overall financial and business improvements combined with our IC revenue ramp enabled the company to achieve profitability in the quarter and we remain well positioned to sustained profitability in the near future.

On a non-GAAP basis, net income for the first quarter of 2018 was $0.5 million or 6 cents per diluted share, which excluded stock-based compensation and amortization expenses of $0.1 million. This compares with the non-GAAP net loss of $62,000 or 1 cent per share in the previous quarter and the loss of $4.2 million or 63 cents per share in the year ago period. Diluted net income per share for the first quarter of 2018 on a GAAP and non-GAAP basis was computed using approximately $8.3 million weighted average shares outstanding.

Adjusted EBITDA for the first quarter of 2018 was a positive, $0.9 million, compared with a negative $3.8 million for the first quarter of 2017. MoSys defines adjusted EBITDA as GAAP net income (or loss) as reported on our condensed consolidated statements of operations, excluding stock-based compensation, restructuring the payment charges, amortization of intangibles, interest expense, depreciation, and our provision for income taxes.

Now, turning to the balance sheet. At March 31, 2018, our cash, cash equivalents, and investments balance was $3.5 million, compared with $3.9 million at December 31, 2017. Cash burn in the first quarter of 2018 was approximately $0.4 million and was primarily due to waiver purchases and application of customer pre-payments.

As our revenue continues to ramp and we continue to manage expenses, we continue to assess various opportunities to further strengthen our balance sheet. As of March 30, 2018, the company had 8.17 million total shares outstanding.

To summarize from our financial perspective, our first quarter results marked a good start toward achieving and exceeding our 2018 goals and objectives, including our target of 75% revenue growth over the last year. Our key customers and portfolio of design wins will continue to fuel revenue in 2018 and our renewed sales and marketing efforts are laying the groundwork for incremental wins at existing customers and new wins with multiple prospective customers for longer term growth.

In terms of second quarter guidance, we expect total net revenue to be in the range of $4.3 million to $4.5 million with non-GAAP operating expenses in the range of $2.2 million to $2.4 million.

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

(Operator Instructions).

Our first question is from Gary Mobley of Benchmark. Your line is open.

Hi guys, good afternoon. Let me extend my congratulations on reaching profitability. I know it's been a long road. I want to start off by asking about gross margins, looks like you had about 65% product gross margin in the first quarter and you mentioned the benefits in the inventory reserves. Can you specify how much of the benefit that was and then excluding the benefit, what kind of product gross margins are you looking at on a go forward basis?

Gary, thanks for the question and good to be speaking with you when the bottom line number doesn't have brackets around it, it has been a while. With regard to the gross margin, product gross margin specifically were 57% for the first quarter of 2018, which compared with 41% product gross margin for the fourth quarter of 2017. So as you point out, a sizable increase.

We incurred reserves in the fourth quarter of 2017 for products, so that caused a meaningful hit to gross margin in the fourth quarter and obviously those reserves did not recur in the first quarter of 2018. So that was a big driver. We also had some product mix changes.

In some cases, we are still shipping some LineSpeed technology which was off a shuttle rather than a full mask set, so it has lower gross margin, so things like that that impact mix. The first quarter of 2018 did benefit from some reserve reversal. Specifically, we had a fairly large quantity of Bandwidth Engine 1 product which we will end up, as time has played out, shipping in its entirety.

That probably benefited first quarter 2018 gross margin by maybe 2 percentage points. Going forward, we're trying to hold the line here at 55% product gross margins, it's kind of my guideline. That said, it can fluctuate a couple of percent either way as product mix moves around.

But certainly, I see nothing that would cause it to go below 50% at any point in the remainder of 2018 subject to something an unusual issue, a very low yield on a wafer something like that. Although that said, we also have benefited in the last couple of quarters not to put the jinx on us from better yields on our Bandwidth Engine 2 wafers.

OK. And after all the restructuring and right sizing relative to your revenue, your R&D expenses for the quarter was about a fifth or a quarter of what it was at its peak. So the question is now that you're profitable and close to being cash generative, once you get pass the prepayments, is there any consideration to accelerating the R&D investment for more robust product roadmap?

So, I will start off on that one Gary. So when we scaled the company we preserved the majority of our applications engineering capability and some of the software team necessary for uniquely programming the Programmable Search Engine.

Jim mentioned a couple of times and maybe I did as well but the -- by far the biggest selling Bandwidth Engine right now is Bandwidth Engine 2. Although, we've won some designs and we're seeing that maybe that we can see down the tunnel to where some of these Bandwidth Engine 3 designs might ramp a bit, and we're seeing some further interest in the sales funnel for Bandwidth Engine 3. But, I think that for the foreseeable future the majority of the design routes will continue to be Bandwidth Engine 2.

And it looks to me as though the need for very high speed access and the ability to go off to -- offload computationally intensive functions away from a CPU or MPU that are disadvantaged, trying to do it at wireline speeds, we'll start seeing more and more opportunities for Bandwidth Engine 3 and a programmable search engine over the next three or four or five quarters.

So for the time being, I don't have much of a reason to ramp up the R&D costs because the new products are sitting here, waiting to be -- win some designs. And we're probably spending our R&D dollar maybe a bit more looking at new market sectors we might serve. I think we mentioned that we now have an industrial grade part that's running I think 15 gigabits per second at industrial grade temperatures.

And we're looking at applications where that's important and rather than what you said about trying to do some complex new integrated circuit, we're going to take advantage of all the capability we have in place and see if we can't see some market segments that we could serve that are underserved by us right now. And you should expect to see more of that for the next couple of quarters in increasing R&D cost.

Jim, I don't know if you want to add to that.

No, your answer was spot on Len. I think the other area where we'll -- we invest is obviously whatever we can do to -- this doesn't necessarily hit R&D to improve our gross margin.

Yes, I'll mention that later.

And additional hardware and probe cards, things like that and we're starting to obviously see the benefits of as Gary pointed out with the improved GMs.

Back to you, Gary.

OK. So my last question, you mentioned 10 customers, I'm assuming Palo Alto Networks was by far the biggest customer. Were they be your only greater than 10% percent customer and do you have something on the horizon, some customer diversity or maybe more cylinders to maybe appease you Len, to start firing and drive further revenue growth?

So for sure we've mentioned from time to time that a very key customer is ALU Nokia, and so certainly they were of significant size in terms of revenue percentage as well. Also, we mentioned that we had one fairly significant design win and a careful look at my comments about that would say that it is a significantly large customer as well.

It's a customer in the size range of say Palo Alto and they are going to ramp -- they're just -- the design was just one in the cycle to get there, the release into production to be 18 to 24 months, maybe a little bit less than that. That's because the win has been around for a little while and I don't know if we have any other customers that are big and all. I think we have two that are significantly over 10% and then another four or five that make up 85%.

Yes, there is one other Japanese customer that's just over 10%, so three in total and the two biggest.

All right, that is it for me guys. Again, congratulations on the profitability.

Thank you Gary.

Thank you Gary.

Thank you. Our next question is from Suji Desilva of ROTH Capital. Your line is open.

Hi Len, hi Jim. Congratulations on the progress you'd been making here. So on the -- in the end market applications where you have content, can you talk about which ones you think Len or Jim have the best growth opportunity in the next 12 to 24 months so we can kind of rank order them?

Make sure I understood that question, please, say that again?

Sure. So the end market applications that you have a content in, which ones have the best growth opportunity in the next 12, 24 months?

It seems to me that a very hot area of the market right now that's enjoying significant growth is security appliances or anything that's conditioning data streams that are heading toward security appliances. And so I would think our customers that are serving that market are probably growing very robustly if they're successful and probably going to continue to grow robustly.

On the other hand it seems that the traditional network and some of our customers are in the traditional network providing the equipment for the traditional network. And it's -- that is probably in the last phases of all of the existing hardware having its performance optimized by the clever use of software, network function virtualization or one or another of a new type, just looking or some kind of algorithm to improve efficiency of the network hardware.

So, the hardware is evolving forward and has been evolving forward a bit slower. I think we're in the last phases of that because we think maybe the theoretical capability of the hardware maybe getting to maximum now and we'll start seeing it move forward. I think our customers that serve traditional network equipment requirements are doing well.

I believe they're having a good year, maybe even a little bit better than they thought but I think the people that are providing stuff into the security appliances and, I'll call it, signal conditioning as it heads to the data center, it's a very new area and there's a lot of -- there's a lot of demand for it and it's probably moving fast. So, I think that would be the fastest growing area for us.

OK, that's helpful color Len. And then perhaps for Jim, the revenue guidance you gave and -- can you remind us how you think about visibility and your backlog coverage into that and maybe for the full year how much -- how your visibility plays out into what you guys might be able to do the rest of the year? Thanks.

Yes. I mean currently our visibility is excellent. As Len mentioned in his comments, his prepared comments, our customers have been very supportive and led by our largest customers. So to provide visibility and in particular for us to manage our business and our cash flow because I've been in the situation here since last year where I have to basically buy wafers on 18-week lead times, pay for them upfront and then wait to bill the customers.

They've given us very good visibility out through 2018 and in some cases into early 2019. As I mentioned also when we have disclosed in our SEC filings, we also decided to end the light Bandwidth Engine. We were down to two -- down with Engine 1, I'm sorry, down with Engine - down with Engine 1. We were down to two customers there.

One of the customers transitioned to Bandwidth Engine 2 since he had designs already at that -- using that part. The other customer basically has taken an end of life order which I expect will ship through the end of March 2018. So right now, our visibility is very good and operations team is just managing orders. As we look at the run rate business and what we see starting to -- starting to turn on and get added.

In some cases, we've seen the run rate from the contract manufacturers. They try to wait until the last -- they wait for the last possible day to order product on a lead time. And we've seen -- yes, they generally do that and then they pull in and so far our team has done a great job of meeting that. And of course on the flipside when it comes to paying our invoices, it's amazing how much cash shows up on the first or the second day after the end of the quarter. They hold on to that but the long winded answer but net-net visibility is very good looking out.

Right. That was the question I had for now. Thanks guys.

Thank you ,Suji.

Thank you, Suji

Good speaking with you.

Thank you. Our next question is from Orin Hirschman of AIGH Investment Partners. Your line is open.

Hi, congratulations on the progress. If I could phrase it this way respectfully, the products that you had have always been ahead of their time and it's almost as if the speeds had to catch up with the capabilities that you have. So my first question on the product side is do we feel like the speeds have finally caught up to where there is an appreciation and strong need for your products and where there is less possibilities in terms of what else to use?

And on that same note part B of the question would be, there's rumors of some of the competitors not having next generation products because they can't hit higher speeds, any thoughts on that, is that accurate or not?

So, I think the good news for us is that -- I had a sentence in my remarks here that I just -- I'm going to flashback to you for just a second that -- and I said the importance of high random access rates will increase with the trend towards edge computing and packet processing at the compute server, and that's happening right now.

And the Bandwidth Engine family is fundamentally going to the old world. It's a high speed, real time SRAM memory and that it's a -- it has very low latency but much more important it has very, very high access rates.

So, you're able to offload high speed statistical computations or high speed searching or you can even use a programmable search engine to take some ternery CAM functions offline and work the whole problem inside of the programmable search engine and just access it once and send the answer back once and maybe do billions of computations over and what begins to look like a core processor.

I think as we go forward, we mentioned today that the growing trend of 100 gigabits per second go onto the server, that's just on its way to 200 and 400. It's going to get faster and faster. And as we get faster and faster, the need for very high access rates and the needs -- the trend towards edge computing and packet process gets it to computer server, It's going to become more and more product prevalent and this need to accelerate the hardware somehow which plays very strongly to people who have really high speed access and real time compute capabilities can play a role.

I think one of the things we didn't say much about today but when we're out talking to new and existing customers, we're also going to be looking at some new applications that are emerging on equipment. This may be still on the drawing board at our customers houses and maybe a few opportunities are going to open up along the way where we can get into -- help provide solutions to new problems that have to do with the ever increasing speed of the wireline.

Thanks so much.

Thank you. And that does conclude our Q&A session for today. I would like to turn the call back over to Mr. Len Perham for any further remarks.

So first off, I want to thank everyone for getting online today and letting us tell you our story and let you know where we are. And relatively prioritized by importance as when we hang up these five things going on around here intensely. One, there are a huge number of the things that have been done evidenced by our recently gratifying gross margins but there is maybe more to be done.

So, priority one around here is we're going to continue to look at cost efficiencies and find ways to take more cost out of the accretion of our product. And that's an ongoing thing and we will have some new goals and objectives there falling into place and we're starting to address that.

The next thing would be we need to investigate and then move forward and execute on enlarging the total available market we serve or for that matter the served available market itself. But, we need to be looking at applications that require industrial grade products, maybe we need to look at applications that can help the government or our military achieve some real time processing, some high speed acceleration on some project they've got.

Perhaps, there is some other markets in artificial intelligence where somebody would like to put a proprietary search algorithm or something into a programmable search engine. But, we're looking at not just enlarging our total available market but we're looking at areas where there's new applications we can serve with what appeared to us to be a very versatile product family that's still early in its life.

Point three, we need to expand the activity in our sales funnel. We got very, very quiet for a few quarters in 2017 because we were doing some tough housekeeping and pulling the team together and figuring out what we would -- how we would downsize the company to be -- continue to be a force to be reckoned with and yet get our costs in line with our revenues.

So now we're working -- a huge amount of work going on to generate more and more activity in the sales funnel. As I mentioned we had a very prestigious win this quarter as Jim mentioned it as well. It's a company of considerable size in the market that's growing rapidly in a market where they are a significant player but we need more of those.

The fourth goal is I've already said a couple times, we need to win more designs and finally we need to increase the revenue but we need to increase the revenue and at the same time see the gross margin grow up a bit, generate more cash, generate more profit. And so those are the things that are going to go on around here for the next short while of six months or so.

Maybe, we will have those done and then we'll talk about some more and some of these will continue on indefinitely because they are always important. But, I just want to let you know that that's what's going to be going on here when this call ends.

And I want to thank you for ringing in today and listening to us and giving us your time and we look forward to talking to you again sometime soon along the way to further success. Thank you very, very much. Bye now.

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