Beverly Twing - Shelton Investor Group Len Perham - Chief Executive Officer Jim Sullivan - Chief Financial Officer.

Gary Mobley - Benchmark.

Welcome to the MoSys First Quarter 2018 Financial Results Conference Call. [Operator Instructions]. As a reminder, this conference call is being recorded today, Thursday, May 10, 2018. I would now like to turn the call over to Beverly Twing of Shelton Group Investor Relations. Beverly, please go ahead..

Thank you, Christy. Good afternoon, everyone. 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 & 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 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..

Good afternoon everyone and thank you for joining us today. We are pleased to be hosting a quarterly earnings conference call once again. Since 2017 we have been hard at work improving our financial situation including resizing our organization and bringing costs in-line with revenues.

These actions combined with customer growth in the ramping of earlier design wins in the production has resulted in most of us 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 by I will 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. So let me begin by highlighting a few notable first quarter financial metrics that reflect the continuation of the 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 a 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 [indiscernible] products with new and existing customers while our transition to profitability and reduced cash burn highlight the benefits of our restructuring and cost reduction efforts that were implemented over the past year for lower expenses and improved operational efficiency.

These financial results represent the product is much hard work by a very dedicated MoSys team especially the operations unit which is continued to support increased quarterly product shipments while improving manufacturing efficiencies and effectiveness.

Product shipments increased again in the first quarter of 2018 driven primarily by Bandwidth Engine 2 design wins one in earlier periods and now in or ramping into production. [Indiscernible] 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 timelines.

We truly appreciate and highly value the close relationship we have developed with our customers who have been very supportive of most especially during what was a challenge in 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 and 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 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 its entire platform similar to the success we've achieved with our other largest design win customers. This significant win further validates the value our Bandwidth Engine solution provides to customers next generation systems.

It is also a testament to the viability and long lifecycle 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 reinvigorate our sales and marketing efforts and have begun identifying many potential opportunities for our Bandwidth Engine ICs at both new and existing customers.

We have renewed design engagements across multiple market segments and we expect our sales office to benefit from increasing trend through higher data rates and more offloads which play through the strength of our product offerings. An example of this would be the growing trend of 100 gigabit 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 provide critically important capability to applications dealing with complex data or packet processing and the need for real time offload of computational operations that are very difficult for the CPU to deal with today's wire line feeds.

The importance of high random access rate to increase 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 and dual data rate SRAMs or high bandwidth memory DRAM memory to enable performance and somewhat simplified next generation high speed system design.

Operating with very fast random access speeds the real-time processing capabilities that the Bandwidth Engine family enables allows for the offload of complex computational 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 or our Bandwidth Engine and programmable search engine product families.

For example we recently announced a new Bandwidth Engine 3 products which have been optimized for applications operating at industrial temperature ranges from -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 had yet other design wins that we expected going to 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've 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 designed into typically have a long product life cycle, 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. 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 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 first quarter 2018 results. Total revenue increased approximately 11% 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 to 10 customers. This compared with product revenue of $3.5 million in 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 to revenue in the near term where we continue to ship initial preproduction unit volumes of our Bandwidth Engine's 3 devices and complete final shipments of our Bandwidth Engine 1 products.

Royalty and other revenue for the first quarter of 2018 was $0.5 million compared with $0.3 million for both the fourth quarter 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 and cleared our IP and $0.3 million of licensing revenue related to our LineSpeed product technology for which payment had been received in prior periods.

Our adoption of the new revenue recognition GAAP [ph] 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% in the year ago quarter.

The sequential increase in gross margin was due primarily to inventory reserves recorded in the fourth quarter of 2017, improved manufacturing efficiencies, higher licensing revenue and product mix. Product 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 stop based compensation and amortization expenses of $0.1 million compared with $0.2 million in the fourth quarter of 2017 sand $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 the 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 amortization of a tangible assets in stock based compensation. This compares of $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 $0.04 per diluted share compared with a net loss of $0.5 million or $0.07 per share in the prior quarter and a net loss of $4.4 million or $0.66 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 sustain profitability in the near future.

On the non-GAAP basis net income for the first quarter of 2018 was $0.5 million or $0.06 per diluted share which excluded stock based compensation and amortization expenses of $0.1 million. This compares with a non-GAAP net loss of $62,000 or $0.01 per share in the previous quarter and a loss of $4.2 million or $0.63 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 a condensed consolidated statement of operations excluding stock based compensation, restructuring and impairment charges, amortization of intangibles, interest expense, depreciation and a provision for income taxes. Now turning to the balance sheet.

At March 31, 2018 our cash, cash equivalents and investments balance with $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 wafer purchase 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 a financial perspective our first quarter results mark a good start towards 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 of 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 now open..

Let me extend my congratulations on reaching profitability. I know it's been a long road.

I want to start up 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 including 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 on 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 mass [ph] has lower gross margin so things like that that impact makes - 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 you know 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 remainder of 2008 [ph] subject to something an unusual issue, a very low yield, on a wafer something like that although that said we also have benefited in last couple of quarters not to put the jinx on us from better yields on our Bandwidth Engine 2 wafers..

Okay. 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 it may be at peak and so the question is now that you're profitable and close to being cash generative you know 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 Gary, so when we scaled the company we preserved the majority of our applications engineering capability and some of the software team necessary for the 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 the some of these Bandwidth Engine 3 designs might ramp a bit and we're seeing some further interest in the sales following Bandwidth Engine 3, but I think that for the foreseeable future the majority of the design win 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 offload computationally intensive functions and [indiscernible] CPU or MPU that are disadvantage trying to do what 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 and waiting to be win some designs and we're probably spending our R&D dollar maybe a bit more looking at Newmarket sectors we might serve.

I think we mentioned that we now have an industrial grade targets running I think 15 gigabits per second at industrial grade temperatures and though we're looking at applications where that's important and rather than what we 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 see some market segments that we could serve that are under-served 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?.

No your answer was spot on, Len. I think the other area where will - we invest as obviously whatever we can do to - this doesn't necessarily hit R&D to improve our gross margin, additional hardware, [indiscernible] things like that and we're starting to obviously see the benefits of as Gary pointed out with the improved GMs..

So my last question, you mentioned 10 customers, I'm assuming [indiscernible] networks was by far the biggest customer. Where they 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 AOL, Nokia and so certainly they were of significant size in terms of revenue percentage as well.

Also we mentioned that we had one very fairly significant design and you know careful look at what 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 rampage - the design win was just in the cycle to get there to release into production to be 18 to 24 months maybe a little bit less than that because it's been around for a little while and I don't know if we have any other customers that big and all, I think we have two that are significant over 10% and then then another four, five that make up the 85%..

Yes there is one other Japanese customers just over 10% so three in total and the two biggest..

Our next question is from [indiscernible]. Your line is now open..

So 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 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 high area of the market right now is 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 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.

You know network function virtualization or [indiscernible] new type just looking at 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 networking 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 our signal conditioning as a heads to the data center, it's a very new area and there's a lot of demand for it and it's probably moving faster.

So I think that would be the fastest growing area for us..

And then perhaps for Jim, the revenue guidance you gave. Can you remind us how you think about visibility and your back coverage in 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 you know 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 until the customers.

They've given us very good visibility out through 2018 and in some cases into early 2019. As I mentioned also and we have disclosed in our SEC filings we also decided to end the Bandwidth Engine 1, we were down two customers there. One of the customers transitioned to Bandwidth Engine 2 since he had designs already at using that part.

The other customer basically has taken an end of life order which you know I expect will ship through the end of March 2018. So right now our visibility is very good and you know operations team is just you know managing orders. As we look at the run rate business and what we see you know starting to turn on and get added.

In some cases you know we've seen the run rate from the contract manufacturers you know they try to wait till the last possible day to order product on a lead time and we've seen - they generally do that and 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 was up on the first and second day after the end of the quarter.

They hold on to that, long winded answer but net-net visibility is very good looking out..

Our next question is from [indiscernible]. Your line is now open..

If I can phrase this way respectfully the products that you've had have always been ahead of their time and is almost as if the feet have to catch up with the capabilities that you've.

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 is rumours of some of the competitors having not next generation products because they can't hit higher speeds you know any thoughts on that is that accurate or not?.

So I think the good news for us is that you know I had a sentence in my remarks here is that I just want 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 through the [indiscernible] world, it's a high speed real fine SRAM memory and that 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 turnery 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 mention today that the growing trend of 100 gigabits per second go under 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 profit it's a computer server, it's going to become more and more product prevalent and does 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 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 our - help provide solutions to new problems that have to do with the ever increasing speed of the wireline..

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 where we are. In relatively prioritized by importance as when we hung up there are five things going on around here intensely.

One and a huge number of the things that we could do operationally to improve our efficiency and effectiveness operationally have been done evidenced by our recently gratifying gross margins butt here 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 toward and execute on enlarging the total available market we serve or for that matter the certain available market we serve 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 and 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 do - 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 - 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 a market that's growing rapidly in a market where there is 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 going on 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. Operator 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..