Good morning, and welcome to the MoSys Second Quarter 2013 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded today, Friday, July 19, 2013. I would now like to turn the call to Beverly Twing of Shelton Group, Investor Relations. Beverly, please go ahead.

Thank you, Gary. Good morning, 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 that 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 the use of the company's embedded memory and interface technologies and ICs; expectations concerning the company's execution and results; expected benefits of the company's IC; product development; achievement of design wins and timing of shipments of the company's ICs; predictions concerning the growth of the company's business and future markets and business prospects, strategies, objectives, expectations or beliefs. Forward-looking statements made during this call are subject to risks and uncertainties that could cause actual results to differ materially from those projected. Additional information concerning factors that could cause actual results to differ materially from any forward-looking statements made during this call are contained in the company's most recent reports on Form 10-K and Form 10-Q filed with the Securities and Exchange Commission, in particular, in the section titled Risk Factors, and in other reports that the company files from time to time with the Securities and Exchange Commission. MoSys undertakes no obligation to publicly update any forward-looking statement for any reason, except as required by law, even as 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, Chief Executive Officer of MoSys. Please go ahead, Len.

Thank you, Bev, and good morning, everyone. I'll begin today's call with highlights and key accomplishments from the second quarter and then provide updates on our design and sales activity as well as product updates to the Bandwidth Engine and the LineSpeed product family. Jim will then review our second quarter financial results prior to opening the call for your questions. About our public offering. A significant highlight in the quarter was the completion of our $30 million public offering of common stock. Jim is going to provide you with more details. However, suffice it to say that we are pleased with the results of the effort, which reflected strong support from both new and our magnificent existing shareholders and investors. This transaction has greatly strengthened our balance sheet, provides us with the needed runway to execute the business plan and allows us to turn 100% of our focus now towards customer partnerships, design wins, product definition and development and the growing of our overall semiconductor business. A little bit about design win activity. Let me now turn to our design win activity for this quarter. But before I do, I want to revisit how we define the design win in order to ensure consistency with our internal management tracking process and better help our investors understand and follow that progress. We define a design win as the point at which a customer has made a commitment to build a board against the 6 schematic for his system. The design win is tracked by each onboard socket. We are -- I'm sorry, the design win is tracked by each onboard socket we are competing for and by the board or platform, as I have called it in the past, itself, which gives an indication of new customer traction and further…

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 and intangible asset amortization. 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 8-K, which was filed with the Securities and Exchange Commission today and can be found at the Investor Relations section of our website. Prior to discussing our financial results, I would like to first briefly address our IP business. We continue to record licensing and royalty revenue from ongoing SerDes and 1T-SRAM IP projects. However, our IP licensing and royalty revenue have declined as we have not been actively pursuing additional new licensing agreements since late 2011 and have been focusing on becoming a fabless semiconductor solution provider. We have substantially completed our obligations under these ongoing IP projects and our declining revenue reflects this business shift. Now let's review our second quarter financial results. Total revenue was $1.1 million, compared with $1.3 million for the first quarter of 2013 and $1.7 million for the second quarter of 2012. Licensing and other revenue for the second quarter was $0.1 million, consistent with the previous quarter, and compared with $0.6 million for the second quarter of 2012. Revenue attributable to shipments of our Bandwidth Engine and LineSpeed integrated circuits has been included in licensing and other revenue. Royalty revenue for the second quarter of 2013 was $1 million, compared with $1.1 million for both the previous quarter and the second quarter of 2012. The sequential decrease in royalty revenue was due primarily to a decrease in shipments by fabless semiconductor customers, which was…

[Operator Instructions] We have our first audio question coming from the line of Gary Mobley of Benchmark.

I wanted to push for a few more specifics on Bandwidth Engine and as well some of the economics on LineSpeed. With respect to Bandwidth Engine 2, I think, last quarter, you mentioned a Tier 1 design win. I'm wondering if you can officially count when additional Tier 1 design win for Bandwidth Engine 2, would you perhaps gained it during the second quarter?

I think last quarter, Gary, we referred to those as design-ins causing a bit of question probably in the minds of our listeners here. And it's safe to assume that those opportunities are now design wins.

So you have more than 1 design win, the official design win for Bandwidth Engine 2?

I think we said on the last call that we had seen a couple of opportunities come in, one followed closely by another, both multiple chips for boards. And I've said earlier this morning, the design win, we follow both the sockets, and it is multiple sockets per line card. And I think I mentioned on the call, there were 2 line cards. And I think you heard me correctly, I would list them both as design wins.

Okay. And on LineSpeed, could you share with us sort of the revenue model for that particular product line, what the ASPs are, what kind of unit potential there is for each specific router or switch line card? And then what the gross margin potential is for that product?

So that product, I think we have said that that product -- I'm going to speak to the gearbox. I don't think we've set the pricing up for the retimer yet, we've got a lot of talks here in marketing, with sampling, but let's just talk about the gearbox, and I think it, what I say, extends to the retimer in terms of the trends, maybe not the exact ASP, I think we believe that the gearbox should sell in the range of $150 to $200. We believe that the learning curve pricing might be a little steeper on that quarter-over-quarter because, in the case of the gearbox, there are other people supplying those kind of solutions, primarily in 5 Broadcom and maybe to a lesser degree, or to targeted customers maybe Avago. The margin for us on that part should be very strong because we built it in the 65-nanometer technology, so the cost of our mass sets and cost and the infrastructural cost, I'll call it a probably a half or less than the guy doing it in 40 and dramatically less if you had done it, the same element, in the 28. The critical thing about a gearbox is that you can, what I call, drive your -- drive a signal into a load. And for very short reach applications, you have to be able to drive into a 12-decibel load which, to me, means that you can drive through 12 decibels of loss and still have signal integrity and all the information is intact in your signal. For short reach applications, you are required to drive into a 15 DB load and maintain signal integrity. And we were very gratified that our first time out of the box, we are driving into something in the area…

Last question for me. Between the 2 different product families, Bandwidth Engine 2 and LineSpeed, which of those would you expect to break the $1 million per quarter revenue threshold first?

I think it's, of course, going to be the Bandwidth Engine because we've been working on it a lot longer and the served available market is substantially bigger. Again, there's opportunities for 10 or more of those parts per line card as well. And we should expect that the Bandwidth Engine's going to go through $1 million first, but we're going to be happy at how fast the LineSpeed device comes on as well.

[Operator Instructions] The next audio question comes from the line of Jeff Schreiner of Feltl.

I was just wondering, Len or Jim, if we could talk a little bit about when we should expect kind of this licensing revenue stream. It's gotten pretty low here to kind of fall off and conclude given the refocus on the Bandwidth Engine product line. And I'm trying to understand, is there going to be some recovery there from potential BE ramp or is there going to be maybe a little bit of a gap here as we move through the year with licensings possibly concluding before we see some of that initial BE contribution, product contribution?

So Jeff, I'll make a quick comment, then I'm going to let Jim talk to the subject a bit. In the last -- 2012, the 18 months or maybe 24 months, before we announced that we were going to take the company strongly in the direction of the integrated circuit business and become a fabless semicon company, we sold IP into applications where maybe we got some upfront prepaid royalty or something. But if the volume goes by a certain point, then some additional revenue would flow after that. It's hard for us to tell how successful our customers are going to be, but there is the opportunity that we will see revenue start coming our way. It won't -- it will never again be the size that it was when I got to the company a few years ago. But nonetheless, it isn't going to go to 0 for a while. And having said that, I think Jim watches that reasonably closely. Jim, you want to add something?

Yes. From the -- let me take the royalty, the biggest number, that will continue on, certainly for the next few years. It's tough to have visibility as to existing customers and how long their designs will remain in the market. Our largest royalty payer this past quarter, our foundry partner, has multiple part numbers using the technology and we just don't have a lot of visibility, but I expect that to continue for a while. As I talked about in previous calls, our other large payer for the part used in the Wii, we're starting to see that taper off and I expect that to continue. So the net of it is royalty will continue on a couple of years, but erode off gradually each year, based on life cycle of the products. And frankly, I don't see new royalties turning on. We probably only have maybe 1 or 2 arrangements out there where we could see new royalties turn on. On some of the other later contracts we had done, as we looked ahead to being in the fabless semi business, we started to take prepaid upfront cash to fund ourselves. So kind of forgave that future royalty stream in favor of upfront cash. With regard to licensing and other, and as I've said on the call, there is IC revenue in there. And I think as I've said on previous calls, right now we do have a pretty reasonable sales return reserve against our IC revenue, just given the early stages of the product, which we're still holding on to be conservative. And obviously, at these low levels, it's really irrelevant. But at some point here, we will be taking that out and we'll start to see that component grow. And eventually, at some point in the future, when the time is right, the numbers are more meaningful. We'll break those out. That said, I think the licensing component, which right now is basically just some continued revenue recognition as we complete deliveries, final deliveries and more completing support, and as customers bring up their designs as well as maintenance obligations, I think we'll see that taper off throughout this year and then into probably 2014, and then, obviously, see the IC component in there grow. And then, eventually, you'll see that broken out in our financials.

Okay. And Len, you talked about kind of a customer count going out for Bandwidth Engine in your prepared remarks. What is the current customer count for Bandwidth Engine?

I don't have a chart in front of me, somewhere between probably 6 and 8 or something like that. And I said something about -- I've been heard to utter carelessly here, that maybe by the end of the fourth quarter, we should be thinking that our -- on our backlog of customer wins, we're talking something in the area of 12 to 14 customers. And maybe it'll be -- the high number could be the number of re-using my old-term platforms and that would mean multiple platforms in some customers. But we should look in forward enthusiastically the going out of this year with, I think, 10 or more real customers and probably a few more platforms in that sense, so we win more than 1 design. And I've long believed that after we win the first design in the company and they've gone through the switch over, I'll call it, aggravation of going to serial that they're going to use this across as many platforms as they can. And we're already seeing that with our early on customers that we've talked about for the last year or so. That once they master this and they bring something to the market, they like what they see and they put it across their -- they sort of standardized the platform. We'll see more of that too, Jeff.

And final question for me, appreciate your time, guys. Just, again, trying to just get some -- trying to quantify some of the statements in the prepared remarks. I think -- I apologize, Len, I don't have the exact words you used, but some commentary related to some reasonable expectations for growth or even better expectations for growth in calendar year '14. Can you just help us kind of quantify where you're getting that kind of conviction from?

Yes. Actually, we're working very closely with the early design wins we have. And we can see that they're starting to go from 10s per month to 100 per month, to multiple 100s per month. And we can see when they're going to start ramping. I believe I've heard from our guys now that we think that a couple of our customers may have systems out of their end-users now. So we're going to -- we said that sometime in the third quarter or the first quarter. So '14, we're going to see this stuff ramp up. And then I think they'll employ the -- as I said moments ago, they'll employ these platforms across other systems they're bringing out. And because it's already been well, I'll call, proven and integrated together with the other components that they use on their line card, the time to bring it up should be a little shorter. We're coming to a different place in the company's life now, it's very gratifying to me personally.

And the next question is from the line of Krishna Shankar of Roth Capital.

A couple of questions, you said that you expect significant ramp in revenues beginning in 2014. Do you see Bandwidth Engine 1 revenues ramping and being a significantly larger stream than BE2 over the next 12 months or will BE2 overtake BE1 rapidly?

I think, Jim and I have been -- and Jim's going have -- I'm quoting his information here. I think BE1 will be the largest source of integrated circuit revenue in 2014. And we've said right along, I think that in 2015, it's likely that BE2 will cross over. Also, we haven't said much about it in the past, but the Gen3 part is being -- and if you might recall, we have silicon to sample in the fourth quarter of 2010 and didn't book our first real design win until first quarter 2012 on Bandwidth Engine 1 because there was a lot of selling to the customer, a lot of missionary work to do. Bandwidth Engine 2 came out early in the middle of the first quarter of this year. And there were thousands of pieces already on the backlog that people wanted right now. And Gen3, we talked about, it's not going to tape out until sometime in mid first quarter. And that one isn't even out yet and people are all over it. So I think even -- we'll see that Gen3 is coming alive in the latter stages of maybe the second half of '15. But to your point, BE1 should be the largest single volume, I think, in '14. And I think 2 will cross over in '15 and there is just going to be of things going on, a lot of good things.

Okay. And then LineSpeed, I guess, in your prepared comments, you said that you had a couple of customer engagements on LineSpeed and can you talk about those applications, what you have now and what you plan to target with the new designs which are more optimized for short reach and long reach applications?

Actually -- I'm going to give you a good answer to the first part and not so good to the second because I'm not that familiar with the, what I'm calling, our wire line products. But let me say first that when we first turned on the Bandwidth Engine, we found that a couple of these add-on board makers, one in particular that was align with Xilinx and another one that -- another high-speed add-on optical networking card, I think it was marketed directly by Altera. And those guys continue to buy a reasonable number of parts from us and because we said there were very low volume, but allowed our partner, the packet processing engine guy being an FPGA on these 2 different cards, and it allowed them to showcase the performance of their chips in this application by taking advantage of the features and benefits of the Bandwidth Engine family. So when we came out with our LineSpeed gearbox here, we tracked down a couple of small companies that have very, very strong engineering and they have a reason to want to run a very, very high wireline speeds and we've already shipped them product, I think I mentioned that. And I don't think they're going to be a particularly high volume, but it's going to showcase our -- the performance and the value and competitiveness of our offering. And right behind that, we've got a couple of Tier 1 guys that are looking very, very hard at adopting the part as well. We -- because we're so new, we did miss out on the Tier 1 opportunity that, I think, we would have wanted, except that we didn't have all of our qualifications and characterization done. The part is quite exciting to some of the -- because of its ability to drive into a substantial load.

Okay, and then on Bandwidth Engine, I think you have said that when Tier 1 OEM is in volume production, the opportunity for each Tier 1 OEM design win could potentially be -- full volume production could be in a range of $10 million to $15 million in terms of their need for a product with the Bandwidth Engine on each platform or by customer. Can you just quantify the revenue opportunity potentially at each top-tier OEM and Bandwidth Engine is in full production, and then LineSpeed on top of that?

I'm not sure what you asked me. Why don't you ask that question one more time, Krishna?

So I think, I'm just trying to quantify the size of the revenue opportunity at each top-tier OEM, when Bandwidth Engine is in full production and then when LineSpeed is in full production. Just kind of revenue opportunity at each top-tier OEM assuming multiple design wins?

Yes. Certainly, if we win one of the major platforms at one of the top tier ones, there's no reason to think that isn't a $25 million to $30 million, $40 million opportunity per year, but that's when you win one of the top platforms. There is probably -- I'm guessing -- it's a top-tier -- the top guy's in it, 5 guys in it, in what we call Tier 1, that being Cisco and Juniper and ALU and Huawei and ZTE. They have platforms that are going to require $25 million, $30 million a year of this kind of a product and maybe even more. And they have other platforms that are going to generate just a few million dollars per year. So it isn't just that you win that 1 big platform, what you want to do is win as many as you can. And I commented that once a guy goes through the aggravation of adopting a serial interface and we think that sort of de facto GCI can be -- our GigaChip Interface can become sort of the standard because people are learning to use it and work with it. Then they're going to use it at more places across more platforms. So having said that, and I'm not able to predict what we might do at each one of the top Tier 1 guys, but I can tell you that we've talked about Jim, why don't you comment on what your model says about revenue in '15 and -- '14 and '15 and so forth?

Yes, I mean, certainly, folks maybe heard me make a comment with initially with Bandwidth Engine 1 and 2. Even in my model, I only assume, conservatively, that we have design wins at 2 of the top 5 that we've talked about. I think Bandwidth Engine 3 is where I assume we have additional traction with additional Tier 1 customers. And Len would say that's -- I'm being prudent as the CFO, I'm being conservative in my modeling and, obviously, looking at our runway and ramp. But that's what I kind of look at right now in our model. We've obviously had success with 1 and have design wins there. And certainly, John Monson and his team are working on gaining additional. And I can certainly say now, with the financing concluded last quarter, Len is practically spending pretty much all his time on customer activities and out there in customer and partner meetings, et cetera. So stay tuned for more to come on that front with regard to Tier 1, further Tier 1 activity.

So Jim, let's answer -- Krishna, just a minute, hold on. So Jim, a comment on where you -- what is the company going to burn for cash this year and where do you speculate it in your model that we might see cash flow positive?

With regard to this year, I think I've said previously, we'll burn in calendar '13, anywhere in the range of $15 million to $18 million. Putting aside the effects of the financing, the proceeds received in the second quarter we probably burned about $9.5 million in the first half. So I, obviously, we'll do better than that in the second half. But certainly, in worst case, I don't see us burning more than $18 million this year. With regard to being in the position where we can generate adequate integrated circuit revenue and to further dovetail back to Jeff's question earlier, let me even say IP revenue just went to 0 at some point, even sooner than later. We would need integrated circuit revenue with a conservative gross margin, probably in the range of $14 million or so a quarter. And we could see that potentially early 2015 is probably what I'd say right now.

So that's an expanded answer to your question, Krishna.

My final question, Len, can you talk about the recent announcement you had with Xilinx? And then also any updates you make care to provide both your ASIC partners and the merchant, the packet processor partners?

So Jim, when did we just announce regards the Xilinx's [indiscernible]?

Yes, alliance program.

We just joined their -- Xilinx's alliance program. It's a program that they operate internally. As you would probably expect, we're very, very close to both Xilinx and Altera because they both sell -- they sell a solution for packet processing engine applications. And we have a number of ongoing partnerships, if you will, with Altera, and we have a number Xilinx and we co-sell with one another. So this is just an ongoing collaboration of efforts to take care of the customer's system needs. Okay, then having said that, the third thing you suggested -- and we didn't say much on the call today, but we continue to collaborate with -- when we look at the very highest performance applications, something in 400 gig or higher, and we talked about what our future product Gen3 did today, we continue to collaborate very closely with them in -- with our -- because Gen3 is really exploiting what I'm going to call onboard intelligence, which we've been building more of into each succeeding Bandwidth Engine. And we can offload some of the work from the -- or help our customer offload some of the work -- its packet processing engine is not so good at doing over onto our coprocessors, if you will, if you want to call it that, Gen3. And the end result is you achieve substantially higher performance. And when you figured that the cost of the packet processing engine per unit area of silicon is probably 4x as greater than the cost of a very cleverly architected, high-speed coprocessor, it's not just a performance upgrade and a power savings, it's also a cost savings to move, to work to another place. And it allows him to think about getting a considerably more performance out of an existing system or so each generation of system, if you will. And actually, there is one gentleman on the call, I think, who has a they're in degree maybe more, but one guy that I -- I think he's probably smiling now. And basically, we -- it's important to realize that when you start talking about Gen3, you don't talk about accesses per second across that critical interface anymore from a packet processor to what I'll call the head of processing memory, which is BE. What we talk about now is operations per access so that by doing more than 1 operation each time, you cross that boundary, you start reducing the accesses for a given level of performance. It's a huge thing and it's -- we're talking over, Krishna, not just with some of the guys architecting the future very highest performance systems, but also with some of the generic NPU guys that supply alternative solutions, if they aren't their own internal ASIC. We think we're forming some long-term strategic partnerships now or working very hard on it.

That now concludes your question and answer session today. I'd now like to hand over back to Mr. Perham for any final comments.

Yes. I just have a couple of comments in closing. So for the folks on the call, still on the call, I come to work every day clear in my mind that I'm not at the end, I'm at the beginning. And so there's much to do, but the purpose of Jim and I's comments today was to make a clear point that we're making measurable progress. I believe that the company has gone over a tipping point. And this measurable progress is going to be more easily seen now as we go forward and we chat with you guys on a quarter-to-quarter basis. For a long time now, we've talked about solving system-level problems by creating differentiated integrated circuits. And soon now each quarter, we're going to be able to talk about the changing and improving financials, and I can't tell you how enthusiastic I look forward to that. It's been -- we really bit off a big undertaking by trying to do such a, I'm going to call it, powerful integrated circuit, a really serious contribution to system architecture. And it took us a while to get to where we are. So I'm enthusiastically looking forward to Jim telling you that the financials are moving up into the right now, and we're starting to meet or exceed our goals of getting the cash flow positive. I think we're genuinely making progress to the end goal of driving shareholder value. And I can't tell you how much I appreciate you guys that have been with me along the way in this journey. Today, it was intended that we would bring you guys a good message. And I hope we conveyed that. We're out rolling along over here. As I said, were at the beginning, there's a lot to do, but things are moving a little bit and it's just great. So thank you very, very much for the time this morning. And we look forward to talking to you all again soon.

Thank you very much, ladies and gentlemen. That now concludes the conference call for today. You may now disconnect. Thank you very much.