MoSys, Inc.
Q4 2014 Earnings Call Transcript

Published: 30 Jan 2015

[Operator:]

Good morning. And welcome to the MoSys Fourth Quarter 2014 Financial Results Conference Call. At this time, all participants are in a listen-only mode. At the conclusion of today’s conference call, instructions will be given for the question-and-answer session. [Operator Instructions] As a reminder, this conference call is being recorded today, Friday, January 30, 2015. I would now like to turn the call to Beverly Twing of Shelton Group Investor Relations. Beverly, please go ahead.

[Beverly Twing:]

Thank you. 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 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 performances expected from 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 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 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 Perham:]

Good morning, everyone. Thank you for joining us today. I'll begin today’s call with a review of our progress in 2014 and then address recent business highlights, provide some comments on our goals to 2015 and after that, Jim, will discuss our financial results. Then we will open the call to your questions. Let's begin with a quick look back at 2014. On the design front, we finished the year quite strongly as the fourth quarter was the best design win quarter we've ever had. Best design quarter we've ever had since we took the company back into the fabless semiconductor business. With this strong finish, we came very close to achieving our goal of doubling the number of design wins that secured in 2014 compared to the number of design wins secured in 2013, and finished the year with a total of approximately 25 additional design wins. It was quite an exciting finished to the year. On our last call I expressed concern about the industry slowdown in the telecommunications and networking markets, which had negatively impacted our design win activity. I was pleased to see the rebound in the fourth quarter, as our sales team closed a significant number of design wins that we had in some cases have been working on for a fair likely time. Sadly in a significant cost slowdown in the middle of the year, cost of scenario under the curve, cost us fair bit of money off of our balance sheet. However, indications are that those headwinds now behind us. While 2014 went well on the design win front. Unfortunately, we did not see the revenue ramp we’d expected. This is primarily result of program delays experienced by our initial BE-1 at customers, perhaps some of the resulting from the industry slowdown and the reduce capital expense spending by carriers during the last three quarters of 2014. In addition, we’d been hopeful that our earliest BE-2 customers will begin some early production before year end, but this was also pushed out into 2015. With the BE-2 projects, I am reasonably certain that the delays were primarily the result of carrier cutbacks and capital spending. I can’t be quite sure that would be one win. We continue to make progress on our product development roadmap, announcing BE-3 and introducing our low speed -- low LineSpeed, Low Power Retimer. This substantially expanded product portfolio allows us to access a greater served available market, which will directly result in an increase in market opportunities in 2015 and beyond. Let’s take a close look at our fourth quarter design win, which were largely for our Bandwidth Engine 2 family of products and included multiple new customers in the United States, as well as incremental wins with an existing customer, who continues to expand the use of our integrated circuits across a number of additional new platforms. All in all, these wins represented nine unique line cards with BE-2 serving approximately 15 different functions or applications on these line cards. For example, in one case, we have six Bandwidth Engine 2s per board. Our new BE-2 design wins represent a broader range of applications with no leading OEMs even better. Fourth quarter wins reflect a significant upturn in the number of wins we have garnered in United States. We believe the higher demand for our Bandwidth Engine solutions has been driven by the ever-increasing need for more performance in next-generation networking equipment. One of our earlier customers awarded us additional wins in quarter four and now has numerous functions where he is using the Bandwidth Engine and we have more opportunities with him in the funnel. This is a strong indicator of the power of the very expanded edge-end solutions we are offering for sale. As customer becomes more familiar with using Serial Memory solutions and his comfort level grows is much more likely that will become the solution of choice, solving the challenges that he faces in his new designs. In this case, we will always have the opportunity to win many more applications for boards, all good for us. To-date, most of our Bandwidth Engine design wins has been for header processing and oversubscription applications on line cards, in the carrier router or Ethernet space. In the fourth quarter, we secured two new customers targeting applications in the enterprise space, one at the edge of the data center and the other in the data center or in the cloud itself. These recent enterprise targeted design wins approximated 30% of our total 2014 wins and represented new traction both in high-speed security appliances and cloud applications. These are two new market segments that are large and the customers that we won there are major players in each of their respective markets. We have been working with one of these customers for more than a year and he finally concludes that he could not achieve his performance objectives without switching to serial memory and in fact switching to BE-2. Too much hard work and a great deal of tenacity, our sales force and applications team secured multiple design wins from this customer last quarter. We are proud of their work. We continue to believe that these new areas of application represent another high growth market segment for us, as we expand our data center and cloud footprint in 2015. It’s also a further proof that the adoption of serial memory solutions and our BE architecture is gaining momentum, as network speeds and performance requirements force systems companies to evaluate new ways to meet their design challenges. We believe these market trends are becoming increasingly favorable to us as next generation networks, could and big data applications, intrusion detection, and network security monitoring are all requiring high-speed signal integrity and intelligent traffic flow in order to achieve faster and more efficient performance. Many of these trends play directly to the strengths of the products we have created these past couple of years. We believe these market trends, combined with next generation system requirements, were major contributing factors in our overall design win successes during 2014. Currently, our very active sales funnel continues to expand and includes several projects already at the schematic review stage. This means we are nearing the point of conversion to actual design wins. While it is premature to conclude that these projects will become official design wins, we are very encouraged by the quality of the engagements, as several of ours top tier participants in the markets they serve and represent multiple potential design wins for both BE products and LineSpeed. We certainly did not drain the well in the fourth quarter and we anticipate that the first half of 2015 will be robust from a design win perspective. All in all, we are quite pleased with our recent design win activity and the expansion of our customer base into these new market segments. Some of which may have the potential to ramp into production faster than the carrier applications we more traditionally served. Throughout 2014, we focused strongly on supporting customers as they brought up and initiated field level trials of their systems, incorporating our Bandwidth Engine products. Needless to say, this new upgraded system is utilizing BE-1 or BE-2 or at various stages of being released. Specifically, on BE-1, in the first half of 2014, we saw an initial ramp in shipments, over 10,000 devices shipped. However, at that point, BE-1 shipment volumes tapered off significantly into the second half of 2014. And we do not yet have complete visibility as to when or if that project will resume ramping. Earlier I cited or we cited the industry slowdown and reductions in carrier capital spending expenditures as likely factors contributing to slowdown. We are not in the business of speculating on the status and performance and success of the trials of our customer systems at their customer shops; however I have been in this business for long time. In the past, I have seen cases where my customers had modified their systems in order to meet carrier requirements or to address new or different performance issues. From our perspective, we know there are no issues with the performance of our Bandwidth Engine products. Our customers continue to use them in their new system designs and they are more readily to use them now. They understand serial I/Os better. And all we can do is support these customers and deliver our products in a timely fashion. We continue to win designs for BE-2. These customers even had multiple wins with one of them in the most recent quarter. And if and when the customers transition to the next generation systems, I anticipate they will be using BE-2 or BE-3 or both. All that said, we expect continued rollout -- we expect a continued rollout of BE-1 base systems in 2015, at which time they could potentially begin generating unit shipments as previously predicted. Longer-term updated systems from these early BE-1 adopters built on BE-2 will deliver the predominant volume as they become available in the second half of 2015 and '16. Turning to BE-2, we expect this family of products to be the primary growth engine for shipments and revenue in 2015. Our early BE-2 wins continue to move forward, while we expect to see unit shipments meaningfully increase this year from some of these designs, ultimately the timing of the ramp to full production volumes remains in the hands of our customers and their end users. Some of these carrier platforms can take some time to ramp, and it is difficult for most of us to predict precisely how that ramp will occur. BE-2 represented the majority of units shipped in the second half of 2014, also accounted for most of our 2014 design wins and represents a good share of the design wins progress in our sales funnel. As we expected during 2014, BE-2 surpassed BE-1 both in new design win opportunities and in decaled design wins, which is favorable for us given BE-2’s high performance, broader range of applications, and higher ASPs. Also during 2014, we invested significant effort towards completing the development of Bandwidth Engine 3, which was first introduced a year ago. At this point, BE-3 is projected to tape out in the March-April timeframe. Though considerable work remains to be done on a BE-2 family of ICs, we expect to bring these products to market in the second half of 2015 and additionally, we expect BE-3 to win some designs in 2015. Rather than replacing BE-2, BE-3 will be sold alongside our current family of BE-2 products. The BE-3 family truly represents some meaningful increase in our product portfolio. BE-3 with its higher performance, expanded functionality, larger memory, and many new unique features targets applications BE-2 was unable to solve from either a performance point of view -- as well from a performance point of view or features point of view. Also during the year, we spent a great deal of time and effort working with our existing perspective partners to open new market opportunities for our ICs and further accelerate the adoption of our products. As a result, we recently announced the collaboration with EZchip semiconductor to provide a customized version of Bandwidth Engine 3 for its NPS family of C-programmable network processors. This BE-3 derivative product has been customized with improved performance on use and combination with NPS and has the potential to enable a substantial increase in system level performance. As you know, EZchip is a leader in high-performance data path processing solutions for networking with a very large market footprint. We’ve been working with EZchip and its exceptional development team for some time to maximize performance while minimizing pin count and power consumption in applications where our products sit side by side. We believe the combination of EZchip’s NPS coupled with a high-performance features of our bandwidth engine 3 architecture will deliver scalability and flexibility to network and data center equipment OEMs looking for enhanced performance while maintaining efficiency and power and board area. Performance in features can be scaled by adding one or more BE-3s in support of an EZchip NPS. Both BE-3 and NPS have been designed to address the challenges faced by OEMs as they attempt to deal with the ever increasing requirements for features, intelligence and capacities that range from 100s of gigabits to terabits per second. The combination of NPS and the customized BE-3 is targeted towards smart and secured terabit routers, switches and network appliances in carrier cloud and data center networks. At this point, it will be premature to speculate at what percentage of NPS designs, we’ll have a BE product sitting alongside of them. However, we are excited about the opportunity to work with EZchip. Given the design win and track record with leading network companies, we believe this relationship will provide us with significant new design win opportunities. And we expect to be sampling these products later this year. Turning to our LineSpeed product family. We now have three LineSpeed devices available to sell. The 100 Gig Multi-Mode Gearbox MSH310, the 100 Gig Retimer MSH210 and the newest addition our 100 Gig Low Power Retimer MSH110 designed for both optical modules and line card applications. The MSH110 which was announced late last year addressed its new market opportunities in both 100 gig optical and active copper modules. This leading edge product offers extremely low power dissipation, and applies to all market sizes and all optical reaches. Currently, the MSH100 is in an evaluation at multiple customers, where we have initiated a number of early engagements. We released the production tapeout of this product, including finalizing its feature set optimizing the product characteristics in the fourth quarter. Silicon is back. It’s in final test and characterization. Things are looking good. Subject to the conclusion of this testing, we may well record our first design wins in this very current quarter. In addition, we continue to make progress on our LineSpeed product roadmap and we fully expect to release additional products this year. The LineSpeed family of products is targeted for a broader range of feature-rich applications in line cards, modules and backplanes. I want say too much about these new -- these new product plans. Much of it is still in the stealth mode but I will say that there is demand within our customers for several of these uniquely featured products. Our team has been pushing hard to get these products through the development cycle and release into the market. I expect that we will introduce a fair number of new products this year. And I believe 2015 could well end up as a very strong year for LineSpeed in terms of both product introductions and design wins setting the stage for meaningful revenue generation in that product family in 2016. In summary, assuming introduction of BE-3 family products and the next generation of LineSpeed and including our Low Power Retimer, we anticipate having somewhere in the area of 3x increase in the number of products to sit in our sales portfolio by the end of 2015. In addition, these new products will also target multiple new applications resulting in a meaningful increase in our served available market. This increase in served available market should allow us to grow the company toward profitability and increase shareholder value at a faster rate. In closing, 2014 was a challenging year for us and other suppliers to the network communications industry. But we held to our course engaging with new and existing customers while continuing with the development of our next generation products. As a result, we were well position for the increased design win activity in the fourth quarter and slowly on track for future growth. This momentum enhanced by our recently announced collaboration with EZchip set the stage for an even more positive year for MoSys in 2015 and further validates the value of our technology and its long-term prospects to supporting the growth of the company. As you move forward into 2015, we’ll be focused on several key areas. And our investor should expect to see us striving to achieve among other objectives the following

[Jim Sullivan:]

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. As a reminder, we are reporting our IC product revenues separately from our IP licensing and royalty revenue, which is reported as a combined amount. Prior period amounts have been reclassified to conform with this presentation. Now let's review our fourth quarter financial results. Total revenue was $1.1 million, compared with $1.1 million in the third quarter of 2014 and $1 million in the fourth quarter of 2013. Product revenue from the sale of our integrated circuits was $0.3 million in the fourth quarter of 2014, compared with $0.4 million in the previous quarter and $0.2 million in the year ago period. Royalty and other revenue for the fourth quarter of 2014 was $0.8 million, compared with $0.7 million in the previous quarter and $0.8 million in the year ago period. Royalty and other revenues primarily comprised of royalties received from semiconductor customers as products include our IP, as well as small amounts of revenue generated from mainly support services related to legacy IP licensed agreements. GAAP gross margin increased to 76% from 61% in the third quarter of 2014 and compared with 78% in the year ago quarter. The sequential increase was due to a higher mix of royalty and other revenue, which carry higher gross margins. In terms of our operating expenses for the fourth quarter, total operating expenses on a GAAP basis for the fourth quarter of 2014 were $9.8 million, compared with $9.2 million in the previous quarter and $7.3 million in the fourth quarter of 2013. The increase resulted from higher R&D expenses. Total operating expenses also included $0.3 million of amortization of intangible assets and $1 million in stock-based compensation expense. Research and development expenses were $8.3 million, compared with $7.5 million in the previous quarter and $5.8 million in the fourth quarter of 2013. Fourth quarter R&D expense increased, as we continue to invest in the development of our next-generation LineSpeed and Bandwidth Engine products and included approximately $1.7 million of tape-out expenses, specifically related to further development of our LineSpeed product line. Additional tape-out activities anticipated in the coming quarters, as we continue to expand the Bandwidth Engine and LineSpeed product families. Selling, general and administrative expenses were $1.5 million, compared with $1.7 million in the previous quarter and $1.5 million in the year ago period. On a non-GAAP basis, total operating expenses for the fourth quarter of 2014 were $8.6 million compared with $7.9 million in the previous quarter and $6.1 million in the year ago period. On a GAAP basis, net loss for the fourth quarter of 2014 was $9 million or $0.18 per share, compared with a net loss of $8.5 million or $0.17 per share in the prior quarter, and a net loss of $6.5 million or $0.13 per share for the fourth quarter of 2013. On a non-GAAP basis, net loss for the fourth quarter of 2014 was $7.7 million, or $0.15 per share, which excluded intangible asset amortization and stock-based compensation expenses totaling $1.3 million, compared with a non-GAAP net loss of $7.2 million, or $0.14 per share in the previous quarter and a loss of $5.3 million, or $0.11 per share in the year ago period. Net loss per share for the fourth quarter of 2014 on a GAAP and non-GAAP basis was computed using approximately 49.8 million weighted average shares outstanding. Looking briefly at our results for the full year 2014, total revenue for 2014 increased 23% to $5.4 million compared with $4.4 million for 2013. Product revenue from the sale of our integrated circuits was $2.3 million for the full year 2014, compared with $0.4 million for 2013. Total royalty and other revenue was $3.1 million compared with $4 million for 2013. The year-over-year increase in IC sales was primarily due to increased shipments of our Bandwidth Engine ICs, while the decrease in royalty and other revenue reflects our transition away from IP licensing activity. Total GAAP operating expenses for the year were $35.8 million, compared with $28.9 million for 2013. Full year 2013 included a $0.6 million net gain from the sale of a portion of our SerDes IP. On a non-GAAP basis, total operating expenses for 2014 were $30.2 million compared with $24.2 million in 2013. The GAAP net loss for 2014 was $32.7 million, or $0.66 per share, compared with a net loss of $24.8 million or $0.55 per share in 2013. The non-GAAP net loss in 2014 was $27.1 million, or $0.55 per share, excluding stock-based compensation charges and acquisition-related intangible asset amortization charges totaling $5.6 million. This compares with a non-GAAP net loss in 2013 of $20.1 million, or $0.44 per share, excluding stock-based compensation and acquisition-related intangible asset amortization charges totaling $4.7 million. Earnings per share for 2014 on a GAAP and non-GAAP basis were computed using approximately 49.5 million weighted average shares outstanding. Now turning to the balance sheet, as of December 31, 2014, our cash and investments balance was $25.8 million compared with $33.7 million at September 30, 2014. As of December 31, 2014, we had 49.8 million total shares outstanding. Total headcount was 116 employees at December 31, 2014, consistent with the previous quarter. Of our total employee count, more than 80% are in applications, engineering and research and development, including 25 located in India compared with 26 in the previous quarter. This concludes my prepared remarks. At this time, we would like to open the call for the question-and-answer session. Operator?

[Operator:]

[Operator Instructions] Your first question comes from the line of Gary Mobley from Benchmark.

[Gary Mobley:]

Good morning, guys. Gary Mobley, Benchmark.

[Len Perham:]

Hey. Good morning.

[Gary Mobley:]

I want to start with some questions regarding the EZchip relationship. I’m wondering how deeply this relationship may run and will this -- will a customer ultimately have the choice of utilizing Bandwidth Engine 3 alongside EZchip's NPS or is this more of a pull along relationship whereby EZchip, EZchip's NPS, sort of pulls along design wins for MOSY?

[Len Perham:]

I’m not totally sure I understand the question Gary, but let me make an attempt to answer it. If I don’t, just come back with a question again. Basically, the press release indicates that there is a substantial increase in available Bandwidth, when NPS is supported by one or more than one Bandwidth Engine 3s. So the implication of that is, as the customer wants to go to higher and higher levels of performance, and he is talking of course in great debt with EZchip about this powerful processor, NPS or SoC then as they go up the performance level, there will come a time when they might add in a BE-3 or they may add in more than one. So it’s really that the customers going to be driving for some level of performance. And it’s going to get to the point that in order to achieve that level of performance, it’s better done by having one or more BE-3s running alongside NPS. So, I think that, as I see it, EZchip is negotiating a design win for their -- this very, very powerful, this revolutionary new network processor of theirs that they will just, in order to meet spec, they will incorporate this into the design. So to that end, we don’t intend to sell them the chip and have them resell. The partnership is that they would do a reference sell. We’ll be responsible with delivering the customer and maintain the quality and blah, blah, blah. But on the system -- in the system architecture, if you will, the [indiscernible] so that their performance goals can be achieved. They will have a great deal to do with it. So, consequently, I guess in summary I would say, the higher performance customers that use EZchip’s NPC are going to be driven in direction of using one or more Bandwidth Engines. And if you take a look at the history of that company, they are in the business of building superfast, super powerful stuff. And the majority of their big customers go to the highest levels of performance, which should bode well for us. So, hopefully, that answers your question.

[Gary Mobley:]

That was helpful. Thanks Len. How many versions of Bandwidth Engine 3 will there be ultimately? And how many of those versions will be taped out in March quarter, just trying to get a sense of the R&D in the March quarter?

[Len Perham:]

Actually, Bandwidth Engine 3, we only have to run one tape-out right now. And we would tell you, if you are talking to us and very likely EZchip would say the same thing that one of the powers of BE-3 is it’s capable of receiving a lot of intelligent offload. That is stuff that the packet processing engine is not so good at doing, you can send over and have it done at Bandwidth Engine 3. And it will implement the solution to minimize traffic across the critical interface. It’s a highly configurable part, configurable by the customer. So we have several products coming off from it. But the fact of the matter is it’s also configurable in the hands of a customer. So, I don’t -- in the foreseeable future, I don’t see any reason to tape out more than one part. But the part is very configurable to the needs of the end user.

[Gary Mobley:]

Okay. Now, I’m just curious to know as well, whether or not you have captured an additional Tier 1 customer during your design win activity in the fourth quarter?

[Len Perham:]

I think that there is a lot of stuff going around here with Tier 1s. But in my transcript this morning, I did not say anything about wanting another Tier 1. The activity level in the cell phone is probably at an all-time high and the fourth quarter was, as I said the best quarter we ever had but we didn’t announced another Tier 1 yet.

[Gary Mobley:]

All right. Very great. That’s it for me. Thanks, guys.

[Len Perham:]

I guess you’d might -- just go on a little further, Gary, even though I lost few moments earlier. It’s likely that the majority of the early-on business for NPS is going to be all Tier 1s, right so. And we haven’t -- in my transcript today I didn’t claim. I didn’t claim any design wins for BE-3 at this point. Next question, please.

[Operator:]

Your next question comes from the line of Krishna Shankar from Roth Capital. Please proceed.

[Krishna Shankar:]

Yes. Len and Jim, congratulations on the design win momentum. You referenced potential revenue ramp in the second half of 2015. Would these mainly be Bandwidth Engine 2 products? And can you give us some color on sort of the backlog or what kind of order activity you have from customers to support the possibility of a revenue ramp in the second half of the year?

[Len Perham:]

So, basically, it’s Bandwidth Engine 2 that’s going to be -- it’s going to be see in most of the -- driving the ramp in the second half of the year. Bandwidth Engine 1, there are some programs that should ramp up. But there is a lot of stuff going on. It’s been in design now -- design wins from 2000 -- early 2013 that are all BE-2. So I think it will be more BE-2 than anything else. Some of the opportunities at the edge of the data center are even in the cloud itself are tend to ramp sooner. So we may see a little bit of that in the last half the year as well and that’s BE-2. LineSpeed products had been out, been evaluated, there’s a lot of boards being designed. There is a lot of stuff going on involving our Lower Power Retimer. I think we'll see some of that as well. In terms of our backlog, I’ll let Jim comment on that as well, but coming out of the slow middle part 2014, our backlog is still not as high as I’d like it to be. But looking at how our customers progressing and what's going on, and trying to understand what happened to BE-1 and will it be more traditional with BE-2. We are forecasting that the second half of the year should start to see, what I probably called in my transcript and the beginning of a meaningful ramp of revenue. Jim do you want to comment?

[Jim Sullivan:]

No. I think you covered it very well and I’ll just comment what the BE-2 customers, well, as you said, we are not seeing the backlog we’d like just that. We are seeing the right steps as far as the orders coming in from their contract manufacturers rather than direct from the customer, which obviously, is evidence that they’re moving towards production and a key sign.

[Len Perham:]

The next question …

[Krishna Shankar:]

Just a one follow-up quickly, Len, on BE-3, your reference EZchip as a new strategic partnership and they do have some top tier OEM relationship. So can we assume that you are talking with some of their top OEM customers also and that could lead to some new engagements there?

[Len Perham:]

I would -- I believe that then some three-way meetings over the last 12 to 18 months, maybe even more. So occasionally we get together. Occasionally, there are customer deals we do separately. But we’ve been very, very collaborative with one another and we make sure that, we have every reason to world that takes superb care of the shared customer and occasionally we -- I believe those things to go on. So, yes, this has been going on for a long time. As the press release noted, the collaboration has been close and long and they’re very attractive.

[Krishna Shankar:]

Great. Thank you.

[Len Perham:]

Next question please.

[Operator:]

Your next question comes from the line of Quinn Bolton from Needham. Please proceed.

[Quinn Bolton:]

Hi, Len. Hi, Jim. I wanted to follow-up on Gary’s question about the EZchip relationship and we just curious, you’ve got the relationship now for their NPS network processor? Wondering if there is a reason why you’ve sort of selected or why NPS was the focus rather than some of their NP-4, NP-5 solutions? Are they sort of applications of NPS, just more applicable to Bandwidth Engine 3 or is there a reason why the NP-4, NP-5 family wasn’t targeted in that partnership?

[Len Perham:]

Well, Quinn, that’s -- fundamentally NP-4 is way back and there was no doubt define, design and out with the fix OI already in placed before Bandwidth Engine 3 was even probably defined. NP-5, we had a lot of chatting about that, but that was -- that design was way down the road. These designs are extremely sophisticated and EZchip diligently works on for a long time. So the first time when we intersected with each other, what we can do something was about -- around about NPS. Now -- so that’s one reason and other reason is that the end customer’s performances jacking up from 40-gigabit line cards, when we started the journey a few years ago. So now a lot of hundreds are coming into the production and there’s a lot of stuff we are drawing at to -- drawing board at 200, 400 and 800. And suddenly, the data centers decided, we mentioned that we want to design in the data center and the reason we’re getting into a data center is performance levels are jacking up in the data centers, so that access and latency is becoming more and more important. So, I think, the reason we converge to get an NPS is the end-user system requires the levels of performance that you can get with our joint solutions and looking back, these other designs are too far down the road. They would have had to stop, backup and start over to use as on NP-4 and probably, would have been the same with NP-5.

[Quinn Bolton:]

Got it. Understood. So it’s not -- perhaps maybe just as another way to ask question on that. On the NPS family, it doesn’t sound like it precludes you from being able to participate in that carrier Ethernet application that the NP-4 and NP-5 has historically targeted? Just it was a matter of timing when you started doing the design work and started to talking to EZchip that that intersected most closely with the NPS product family.

[Len Perham:]

Yeah. If I’m understanding you, that’s correct. And there is going to be -- really nobody ask the question about this morning but there is Bandwidth Engine 3 is going to fit together with our FPGA partners, Altera and Xilinx very well and that’s going to work because NP-3 is very, very powerful and as I call its intelligent offload feature is extremely useful. So you can expect very early on. There are going to be boards out for customers who look at working with the state of the Virtex or state of the Stratix or Aria whichever one is the appropriate part.

[Quinn Bolton:]

Got it. And then just to clarify, it sounds like your expectations for LineSpeed the Low Power Retime you may see or hope to see initial design wins as early as the end of Q1. I mean, if that’s the case, you think that some of that could actually start to ship by year end. So a much faster time to revenue than that you might see in the Bandwidth Engine family products.

[Len Perham:]

I don’t think we would see enormous amounts of revenue in the fourth quarter but I do think the time for ramping up in optical modules is shorter than ramping up on new generation of line card so the answer is yes. And that we’re prototyping a long time ago on the MSH110 and we went back and I think, we brought out maybe one new feature and we may have just -- optimize one or two of things, I can’t remember and we brought out a production mask sets and we’ve had that out now and that’s well along. We’ve got silicon package. It’s well along in characterization and we’re very excited about this part. It has a good chance to really solve some serious problems at the customer shop.

[Quinn Bolton:]

And just again to clarify that, the low time, sorry -- the Low Power Retimer, that target shorter reach applications either data center perhaps metro and so could intersect. I know there’s been a lot said in the market about some of the big carriers beginning or just about to announce their metro 100 gig awards. It sounds like this solution perhaps targets some of those metro in shorter reach applications?

[Len Perham:]

Actually, in the transcript I mentioned that the MSH110 is good for all optical reaches. It’s sure that when you start, talking about a Low Power Retimer and you’re in the optical module, you’re very short reach because everything is pretty compact in there and power is very critical. However, this part is very virtual, so it can operate outside of the optical module as well. And we are seeing some opportunities for it outside the optical modules. So that’s the comment I made in my remarks that it’s capable of serving all optical distances. It’s a very powerful part and the use in the optical module itself. It’s a very low power product. It appears to have a significant advantage of anything else out there.

[Quinn Bolton:]

Great. Thank you.

[Operator:]

Your next question comes from the line of Craig Hoagland from Anderson Hoagland. Please proceed.

[Craig Hoagland:]

Yeah. Congratulations on the design wins. It sounded like your plans for R&D spending in 2015 might be higher than they were 90 days ago?

[Len Perham:]

I think -- sorry, I thought you’ve finished.

[Craig Hoagland:]

If you could just comment on that and then maybe talk about the balance sheet and options for funding that activity through 2015?

[Jim Sullivan:]

Sure. I had said on the last quarterly call in response to the Q&A that we were all in a new product development. And as we also saw with the announcement this morning in the R&D expenses line, we’ve still got a heavy foot on the pedal here. Now let’s assume Bandwidth Engine tapes out, Bandwidth Engine 3 tapes out in March just to keep it simple. I expect that heavy foot to continue through the first quarter, and I’m saying too much Bandwidth Engine 3, mask set said is kind of in the $2 million range. I talked about spending $1.7 million or so on LineSpeed in the fourth quarter. So put Bandwidth Engine just north of that. So we are going to continue pretty heavy in the first quarter. However after that, we’ll be in position once that product is taped out, there won’t -- that I can see subject to customer feedback and success of our products would be what would drive anything, if we did say in additional tapeout to make a function change or do anything like that. But without that, there wouldn’t be any tapeouts for quite a well. And we’ll be in a position to dial back the cost and make adjustment as soon as the second quarter. So I think we can see R&D expending are coming down as we move out beyond the second quarter of 2015. From a balance sheet perspective, I will just round up and say we had $26 million of cash at the end of the year. Certainly, I am not happy with the burn in the fourth quarter or with what we’re going to have in the first quarter. But again, we’ve just got to keep the foot down and get these products out. As Len said, it’s going to be a meaningful increase in the portfolio and an increase in our served available market. And as well we have customers waiting for parts to evaluate and wins hopefully at hand once we deliver the parts. We’ve been -- I think I said in the last call, we’ve been creative in the past in bringing in cash as necessary. We are looking at some strategic non-dilutive transitions. We’ve had success on that front in the past, but these are always challenging to close, take a long time, etcetera. So we’ve some things on that front that we’re working. Till the paper is signed, they are never done. And should as necessary if we need to, we have our shelf available and up there. Certainly something if we want to exhaust the non-dilutive means first. And as we move out into the second half of the year, we’ll see the contribution from revenue that’s been lacking to-date.

[Craig Hoagland:]

That’s very helpful, Jim. Thank you.

[Len Perham:]

Next question please.

[Operator:]

I’d now like to hand it over to Mr. Perham for closing remarks.

[Len Perham:]

So I want to thank everybody for hopping on the call and letting us give you an update on our progress to-date this morning. And I just have a couple of things that I’d like to say. So first off, regarding the fourth quarter. I could be sitting here rejoicing and telling you repeatedly that the fourth quarter was a very strong quarter and that we feel very good about it and all that would be true. But if you would ask me a few years ago what I would expect the quarters would look like as we got to the state of the longer roadway to turning MoSys into a fabless semiconductor company. This is a kind of quarter I would have expected. So when I tell you and barring some unforeseen or worst case macroeconomic event or something that I don’t see this morning, I think the quarter we had should be replicated. It seems to me that the window of opportunity is now open and that means that our customers next generation systems are now quite challenging for him to try and figure out how to bring forth using traditional design technique. So that’s evidenced a little bit I think by the fact we are now in the cloud and we actually -- And of course, the security appliances are trying to do deep packet inspection on everything going into the cloud. So speeds are running very, very fast, so it didn’t surprise me that we won some opportunities and won some designs in both edge and in the cloud itself. So I feel very good about it, I want you to feel good about it, but it’s what I would have expected. I did not expect that real bad period in the second and third quarter of last year. Next point I would like to make is we’re significantly better positioned for 2015 than we were in 2014. In 2014 we’re talking about having designs out imminently, looking into what I couldn’t tell that time is going to be a very tough couple of summer quarters. Today we aren’t looking at getting designs out, designs are done, verifications either completed or near completed. And in some cases, we are characterizing silicon and others we’re in the final stages of verification and feeling good about where we are. So I’d just want to say the company is significantly better positioned coming into this year than last. Third point would be that I really appreciate your support and I appreciate your patience. We look forward to talking to you again the weeks and months ahead as we are going to be working at tails off to make 2015 all that it can be. On the fish are running you’d better have your net in the water and things are looking pretty good for us right now. So you can assume the nets are in the water. I thank you for listening. I appreciate the time you gave us and I look forward to seeing each and every one of you in the week and months ahead. Thank you, and good bye. Have a great day.

[Operator:]

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