Good day, ladies and gentlemen, and welcome to the Q1 2014 MoSys Inc. earnings conference call. My name is Mark, and I'll be your operator for today. (Operator Instructions) I would now like to turn the conference over to your host for today, Beverly Twing. Please proceed.

Thank you. 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 ICs, 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 Mr. Len Perham, Chief Executive Officer of MoSys. Please go ahead, Len.

Thank you, Bev. Good morning, everyone. I'll begin today's call with a few highlights, and then provide more details on our first quarter accomplishments; turn it over to Jim, who will review first quarter financial results prior to us opening the call to your questions. So getting started. Simply stated, 2014 is off to a good start. We won multiple new designs with customers in Japan, China and U.S. during this quarter, primarily for various members of Bandwidth Engine 2 family. These design wins serving burst, access and/or intelligent offload applications illustrate the breadth of system-level challenges the Bandwidth Engine family addresses or to look at it another way, the number of functions on the board, this uniquely architected networking memory is capable of competing for. These new design wins came from a combination of new customers and as well existing customers, sending their next projects our way. We are very gratified by that. We substantially increased the total unit shipped, albeit still a small number at this point in our life, but we did substantially increase the total number of unit shipped quarter-over-quarter, shipping nearly as many units in the quarter -- I'm sorry, shipping as many units in the quarter as we shipped in all of 2013. We are very gratified by this upturn in shipments. However, there are a few observations I would like to make regarding this current situation. One, we are witnessing the early turn on of the Bandwidth Engine 1 design wins we were awarded in Asia in 2012. And though it's gratifying to see these shipments increasing in units and dollars, it is not a significant revenue inflection point we were still looking for. I want us to be cautious and not have our expectations too high. We also see the first Bandwidth…

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 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. In addition, starting with the first quarter of 2014, we will be reporting our IC product revenue separately from our IP licensing and royalty revenue, which will be reported as a combined amount. Prior period amounts have been reclassified to conform to this presentation. Now, let's review our first quarter financial results. Total revenue was $1.3 million compared with $1 million in the fourth quarter of 2013 and $1.3 million in the first quarter of 2013. Product revenue from the sale of our integrated circuits was $0.6 million in the first quarter of 2014 compared with $0.2 million in the previous quarter, reflecting increased shipments of our IC products. First quarter 2014 product revenues reflected a $0.15 million reversal of sales reserves recorded in prior periods. Royalty and other revenue for the first quarter of 2014 was $0.8 million consistent with the fourth quarter of 2013. Royalty and other revenues primarily comprised of royalties received from semiconductor customers, whose products include our IP as well as small amounts of revenue generated from maintenance and support services related to legacy IP license agreements. GAAP gross margin for the first quarter of 2014 was 57% compared with 78% in the prior quarter and 99% in year-ago quarter. The sequential and year-over-year…

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

Jim, for clarification, how much was the revenue reversal on IC sales in the quarter?

Approximately $150,000.

So in the quarter you shipped, I am guessing somewhere between 7,000 and 8,000 BE1 units. I'm just hoping that you will indicate where those shipments are going in, for what type of application? And I guess ultimately, I am curious to know what the potential volumes are for B Engine 1 as 2014 unfolds and as we transition the sales of BE2?

So basically, we're shipping those units into line cards that are going into new edge routers. I don't think there is any in records, mostly edge routers, Garry. And in terms of the size of that business, we speculated that those various design wins might have knocked to somewhere between maybe as much as $10 million a year or maybe even $15 million a year over time. The various customers that we're doing that business with have awarded us quite a few more platforms over time now. And so I think the business that we can do in that theater is considerably more than that. And I think that these -- you can make a rough estimate of what we might ship into that market by just the way, we just did that last computation, just roughly figuring that the units are $100 each and compute what's going on.

I would just also add to Len's comments, Gary, obviously we are on sell-through accounting. So necessarily shipments and revenue recognition, there will be timing differences, particularly with our BE1 customers. In Japan, we go through distributors. So there is some time lag between when we recognized revenue and when we ship and some times that can obviously crossover a quarter.

Len, you've been pretty confident that you'll have a second source lined up, confident for a couple of quarters now, that you'll see some to come to fruition. I'm just hoping you could share with us what the impedance has been so far and how close, potentially in regard to concluding such an arrangement?

It's easier to sell your house today, if you're willing to give it away. So basically we had a fair bit of progress on some very major relationships to get down the road with both BE2 and BE3. And anybody that was trying to negotiate being our partner in a alternative source was negotiating from a point, a very strong point, when we were a long ways from having that big relationships with potential customers become perfected We're now getting close and closer to these things being real. And we've gone from interesting candidates to be our partner, that are waiting for us to call them, to them saying when we can be get this done. So one was all good things have to come at the right window of time, so that everybody can see the value provided by the other parties. And I guess if there is a second thing for me, I struggled a long time, I'm obviously not a particular fan of second sources that just provide their customer with the opportunity to thrash your prices. Although, over time now and working on a bilateral relationship, I've convinced myself that what we're looking at now can be very, very good game changing for all parties involved. And I'm enthusiastic. And I made that off-handed comment this morning that it's not so much of a negotiation now, perhaps maybe it's a logistics thing. So the point in time when this is right for everyone is perhaps upon us or very nearby.

Correct me if I'm wrong, but the reason that you didn't show much gross profit for the Bandwidth Engine 1 IC sales was the need to standardize the backend test and assembly, but once that's completed, would you still anticipate gross margins for BE1 to be in the 50% to 60% range and that for BE2 to be north of 60%?

Actually I'm going to let Jim comment too after I make a short comment. BE1, there is still a lot of noise level, the volumes are low enough that you're rattling around inside of these offshore assembly houses and so on and so forth. You're not getting very good attention and you're not able to negotiate very good pricing, because your volumes are just not very high yet. So there is a fair bit to be done there. Now, having said that in terms of the amount of effort that we'll put into BE2 versus BE1 or BE1 versus BE2, the BE1 will probably not win many designs after the end of this year, and that's being gracious that you've factored BE2 as three distinct integrated circuit solutions for the three different options I've mentioned earlier. It's a very, very desirable and it gets targeted by the user. So I would tell you that you have reason to expect that the Bandwidth Engine family is going to be a 60%-plus gross margin product. To breakout BE1 from BE2 from BE3 from whatever we do next is probably a bit too much detail. Now, having said that BE1 will not in my opinion, be as easy to get the same gross margin, now that there's BE2 for a lot of reasons, including the die size is bigger and et cetera. But also because of the fact that we have now, me running the meetings -- have been meeting with our suppliers and just starting to talk very serious, now we've got engineering flows, I want to see the cost out of this right now. So Jim, you may want to add to that.

I think your answer is very comprehensive Len, and I think I would say with Bandwidth Engine 1 it will be a challenge to get the margins above kind of below 50% range. I don't see anywhere near 60% for Bandwidth Engine 1 given what Len talked about the die size et cetera. But certainly Bandwidth Engine 2, and as Len mentioned in his comments on the call, we see a much longer design cycle and lifecycle for Bandwidth Engine 2 looking forward for design wins et cetera. So we'll be putting more emphasis on that here in 2014.

I guess I would add to that Garry, that just I've said, we could see a little chaos in, what we'd say, next couple of quarters about margin and cost. But I intend to have this well underway by the end of this calendar year in terms of getting efficiency and effectiveness into the Bandwidth Engine backend flows. So for people that watch our window, we're not talking about a five-year project here we're talking about turning this thing around in the next few months and getting it where we wanted it to be.

Your next question comes from the line of Krishna Shankar from ROTH Capital.

Len, you mentioned that you've got additional new design wins for Bandwidth Engine 2 at both existing and new customers. Can you give us a flavor for these customized and the types of applications? And what kind of milestones do these design wins that you already have, what things need to happen before you start to see production orders from these Bandwidth Engine 2 customers?

So in the early going, I'm just going to talk about BE2 here, Krishna, in the early going, I'd say the first few months after we or maybe a quarter-and-a-half or so after we had the Bandwidth Engine 2 family available. We saw a lot of people using it for very, very for burst applications, where packet processing engine suite couldn't handle the incoming information. So it dumped it into Bandwidth Engines and it could burse back out whenever there was a space in the traffic flow that would enable you to do that. And we saw being it used for us some access, but we didn't see anybody getting too interested in intelligent offload, where you suddenly push so higher that you find out your packet processing engine suite can't keep up. So now when we come to product applications that we've seen today, well, I mentioned on the call I kind of shoved it in there as a statement, it was in my prepared remarks, that the MSR820, the intelligent offload product has in fact made some -- covered some real ground here recently. And people are running that thing in and around 6 billion accesses per second now. And they're talking about the latest and most advanced FPGAs they'll get their hands in dominating, doing the heavy lifting in these packet processing engines, and they're finding that they can increase the efficiency of the packet processing engine by starting to really think about offloading things. And we have a lot more people talking to us about that now. So now having said that, let's just skip ahead, they're long ways ahead, so now we have Bandwidth Engine 3 coming. And while Bandwidth Engine 2 provided intelligent offload, it's what I call, hardwired intelligent offload. There is certain functions we allow you to offload. And those are the only ones you can offload. And I forgot if it's Slide 6 or 7 or 8, but there is a number that you can take advantage of, if it's good for you. And as I mentioned, they're now being used. However, when you start talking about BE3, you have the ability to consider inserting your own algorithm into a special place in that chip and being able to be rather innovative in what you offload and how you offload it and what you can achieve by doing that. And when we started talking about BE3 some 18 months or 24 months ago, customers talked about just using the hardwired part and never exploring the options to really be innovative about optimizing their system behavior. And I think we've moved past that now too. There's people looking at innovating and what can be done and solved with something that's powerful as a Bandwidth Engine 3. So I hope I've answered your question.

And then in terms of design wins, the additional design wins with existing Tier 1 and Tier 2 customers, can you give us some flavor for the additional Bandwidth Engine 2 design wins?

Well, so far most of the design wins we have are Tier 1 guy, our BE2. And if I may have missed a part of your question, and in fact we didn't announce on this call, and I probably would consider it significant enough to share with you guys that we signed up a totally new Tier 1 guy, we did not said at this call. So we're going into new high-end platforms that are FPGA based, as number of the design. Some of them are previous customers and some are new customers. I'm going to say that in almost all cases it's in either in IP Edge or Data Center Edge. It was a very good quarter in terms of strategic important design wins.

Your next question comes from the line of Jeff Schreiner from Feltl and Company.

I guess, would like to just start-off with what were the total design wins in the March quarter?

Well, we've said that we were going to try to double over last year. And I would go so far as to say that the first quarter will support that achievement. So we specifically didn't bother to mention it. I don't remember if we counted any LineSpeed wins at the quarter or not, but it may just have been all Bandwidth Engine. But we're on track to meet our goal. I think the end of last year we said we would had a four times to five times increase from '12 over '13, and could optimistically close to double in this year. And that if we did that, that's a huge number of design wins. And I would say after what I'll consider to be kind of a -- first quarter is usually a little bit sleepy, but we are on schedule to meet our goals and objectives, yes.

And then, given some of your comments, it seems, Len, maybe that due to those topics and BE1 revenue contribution ramped during calendar year '14. Has something occurred with the product ramps there or what you're hearing from customers that let you to be a little bit more bearish I would say in terms of what may happen with BE1 in '14?

No. Actually that's not the case. I think I got a little carried away with myself last quarter, and I don't mind, and that was the last quarter, I said that in the period of 2014, we might see you guys getting less and less interested in look into design wins and more and more interested in looking at the increasing revenue and the increasing amount of margin per incremental dollar or more revenue and so on. And I think that was a bit impetuous of me that we should recognize that we are just really doing well at winning designs. We are doing very, very well at proliferating new products that people want. And that we're going to see that inflection point in revenue before you know it. And it's probably the toughest thing for a guy in my chair to call as when these guys turn on. I think that Bandwidth Engine 1, in those designs that we won early in Asia, they're all being pushed very hard. It's typical of every company I've ever been with, we're fighting and clawing to get 12 months visibility into their demands, because right now they're just calling on Thursday for delivery on Friday. And so we're trying to get them out of the engineering mode into the manufacturing mode as well. I think BE1 will be what BE1 was supposed to be. And I have no reason to think that BE2 isn't going to meet all of our expectations as well. So now, to your point though, bearish, I'm not bearishing at least. I can't see when my next round of design wins are going to release into early on volume. And I said on this call here a little earlier, Jeff, that lot of these guys that are listening right now, been partnering with me for long time and I've been really straight up with them. And I can't see that inflection point, but I can tell you good things are happening and its coming.

Talking about kind of BE1, BE2, what's the mix maybe. Can you give us, we're now in the April, I know you just answered that you have difficulty normally in inflection points, when it come to the customer product shipments. But what are you guys kind of looking at internally in terms of the mix between BE1 and BE2 in calendar '14?

So in calendar '14, Jim would argue with me on occasions, I've said that I thought BE2 could probably match up to BE1, but that may not be the case. It maybe that BE1 is going to represent anywhere from, I don't know, 60% to even its highest maybe 70% of all the Bandwidth Engine sales. And BE2 will make up the balance. It could be that we see -- we're surprised that we see some orders coming, because the people, among the next round of the design wins, they'll start getting release to just some pretty large equipment companies. And so we maybe pleasantly surprised. But for this morning, I would say, that I think BE1 will be greater than 50%, BE2 will be nearly the balance. And I say nearly the balance because I think we'll see some small, but growing shipments of LineSpeed. It won't amount to too much revenue in '14, but it will set a good trend for what we're going to go in '15. And I think we might, there's a very slight chance that we will show some reference boards or something on BE3. But it's a little early whether that will be the fourth quarter or the first quarter.

And final question from me. Jim, just coming back to your commentary about gross margin levels for the products. Given what we saw in the first quarter for cost of sales, expecting maybe that there is some improvement quarter-over-quarter as you move through the year, when do you get to recognize actual 50% gross margin for BE1?

At this stage, certainly it's going to take us more than a quarter or two. So ideally I'd be looking towards the fourth quarter of this year, first quarter of next conservatively.

And Jeff, I'd like to add to what Jim said. I think usually Jim has floored me down. Right now, we are in the second quarter, and we'll report to you guys what the second quarter did in the third quarter, and we'll report to you in the first quarter what we did in the fourth quarter. So I think that in terms of when we report to you guys that where we are, it could be the second quarter of next year. There's lots to be done to get to 50. It's a combination of driving cost down, moving to from in some case from single-site to double site to four site or more testing. And you might get some of the stuff done and turned on, but you won't report it, you won't see the results of it for a quarter, because as you can imagine in your mind that -- so I would say, Jim could be a little more conservative, I think it will be, I'm guessing, we'll start to see real gain into the first quarter But we'll see measurable progress this year, so that our partners, which are the guys on the phone calls here we'll see that we're making real progress.

Your next question comes from the line of Kevin Cassidy from Stifel.

Do you have any design wins that are waiting for the second source? And what magnitude would that be?

No design wins that are waiting for the second source. Up until now, it has not been a problem. And I can't look at anything and say that if we had the second source in place, we would have booked another order somewhere. But I do think that the second source provides a whole new channel with a huge amount of excitement, because of the enthusiasm of the partner. But we don't have anybody to hold them back and I don't know that I've had anybody holding off on an order. So we've should have been allowed this grace period to try to get the best possible arrangement for all people involved.

And have you mostly been working with semiconductor companies or is it even system-level companies that are interested in second sourcing?

No, for the most time we've -- my interest was in a company that had been in the semiconductor business for a while, that was on the AVL of all the top 10 potential customers that my products might sell to, so that he has a channel that's more mature and seasoned than mine. We may open up some channels. And we've mentioned in the past that the BE3 behaves like a coprocessor and you could kit it together with a very advanced FPGA or uniquely architected NPU. We might setup a channel like that or we could even private-label a partner to another partner, let him put it through his channel. And we may have mentioned from time to time that we would treat that guy like a distributor and paying the commission on sales. But the particular thing we talked about right now, this would be a bilateral sourcing and even involved some co-development of products, I think.

And we'd now like to turn the call back over to Len Perham for closing remarks.

I don't have many closing remarks today. The only thing I have to say this morning is 2013 was a very good year for the company. We projected that 2014 would be more or the same. I think the next few quarters, Jim and I will be telling you about a lot of things, that increasing design wins, some things getting released in the production and cost being driven down. We're going through kind of a maturation period now. And then, one day we'll get on this call together and we'll realize that, hey, look at this, this thing is really choking up now. So we're kind of going through the necessary space between creating products, finding that there are people that really like them and are going to use them and wanted to explore it into reality. We're in between those two events. I have nothing else for today. I really do appreciate you guys getting on the call and listening to me. And we look forward to talking you again in the near future. Thanks very, very much. Bye now.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You many now disconnect. And have a great day.