MoSys, Inc. (NASDAQ:MOSY) Q2 2016 Earnings Conference Call July 29, 2016 8:30 AM ET
Beverly Twing - Shelton Investor Group
Len Perham - CEO
Jim Sullivan - CFO
Gary Mobley - Benchmark
Alex Silverman - Special Situations
Good morning, and welcome to the MoSys Second Quarter 2016 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, July 29, 2016.
I would like to introduce your host for today’s conference Beverly Twing of Shelton Investor Group. Please, go ahead.
Thank you, Jamie. Good morning, everyone. Joining me today on today’s call are Len Perham, MoSys’ President and Chief Executive Officer; and Jim Sullivan, Chief Financial Officer.
Before we begin today's discussion, I would like to remind everyone, this conference call will contain forward-looking statements based on certain assumptions and expectations of future events that are subject to risks and uncertainties. Such statements are made in reliance upon the Safe Harbor provisions of Section 27A of the Securities Act of 1933 and Section 21E of the Securities & Exchange Act of 1934, which include, but are not limited to, benefits and performance expected from use of the Company’s ICs and embedded memory, and interface technology; expectations concerning the Company’s execution and results, product development, achievement of IC design wins, timing of shipments of the company’s IC, predictions concerning the growth of the company’s business and future markets and business prospects, strategies, objectives, expectations, or beliefs.
Forward-looking statements made during this call are subject to the risks and uncertainties that could cause actual results to differ materially from those projected. Additional information concerning factors that could cause actual results to differ materially from any forward-looking statements made during this call are contained in the company’s most recent report on Form 10-K filed with Securities and Exchange Commission, in particular in the section titled risk factors, and in other reports that the company files from time to time with the Securities & Exchange Commission.
MoSys undertakes no obligation to publicly update any forward-looking statement for any reason except as required by law, even if new information becomes available or other events occur in the future. Thank you for your attention.
I will now turn the call over to Len Perham, CEO of MoSys. Please go ahead, Sir.
Good morning everyone, thank you, Bev. Thank you all for joining us today. On today’s call. During the call I’ll review our second quarter with an emphasis on progress toward ramping revenue in the near term, while expanding our design win pipeline and sales funnel to drive future revenue growth. Following my remarks, Jim will discuss our financial results and then we’ll open the call for your questions.
I’m pleased to begin by noting that the second quarter marked us six consecutive quarter of increased product revenue. During the first six months of this year, we’ve already exceeded the total number of ICs shipped in 2015. I would like to see the ramp steeper up into the right, but we’re moving in the direction we forecasted and we’re toward heading in the right directions, like this I can get there faster.
Driving this increase, is the continue benefit we accrues from our early Bandwidth Engine 2 design wins as they ramp towards volume production. This ramp is been driven by various early on set design wins, including those with their Tier 1 network infrastructure customer and partner. We also made considerable progress during the quarter with our new products. Including the shipment of the prototype quantities of our new recently announced programmable search engine. It’s a derivative off the family of Bandwidth Engine 3. This customers target is next generation data center systems I think. Additionally, we shipped early production orders to various line speed users, as well as the same time supply and prototypes qualities to multiple other design wins.
I expect our revenue and shipment volumes will continue to gain momentum in the second half of this year, as additional design-wins primarily for BW2, that we turn on and ramp in a direction of full production. Further we expect the rosters customers stating to ramp up the demand on us will grow, as first 2014 designed wins are released to manufacturing and a month later they went through 2015’s version [ph] and so on.
Turning to design wins, we saw activity pick up in the second quarter as the general market softness we experienced in the first quarter appeared to ease. As a result both our existing customers and cost and prospective customers began to increase their product development activities again, resulting in additional design wins and related other activities for the company.
I noted in quarter two we secured our first programmable search engine designs and the development towards the system going to the market is advancing quickly, the customers boards are built utilizing prototype delivery. We’re working hand-in-hand with this customer in an effort to get his products to market as expeditiously as possible and wining these designs as well as achieving product delivery so quickly after launching PSE in quarter one is a significant achievement from MoSys.
I really do need to credit and commend our development team, our sales and marketing teams for this unusually short go-to-market ramp. Congratulations and thank you team, thank you one and all. We also recorded multiple new Bandwidth Engine and line speed design wins in quarter two with the Bandwidth Engine representing the majority of these wins.
Our growing pipeline’s design win opportunities and expanding product portfolio positions us for a significant number of additional wins before year end. We’ve been targeting at the outside of year, a 40% in wins over 2015, however based on progress through the first half 2016, I think it’s more realistic that total designs will track more closely to 2015. Which will still equate to an excess the 50 new design wins.
Needless to say 50 or more new design wins would represent a good opportunity for a solid growth in revenue. When and if they’re all released into production by our potential customers.
Moreover we are on pace meet our goal of securing eight or more new customers in 2016. Our second quarter wins including additional BE2 design win with our Tier 1 customer, reflecting a continued expansion of our footprint with this worldwide provider to the networking infrastructure market. We have a close relationship with this customer and through this collaboration we continue to identify new applications for additional design win opportunities.
We are more and more often seeing new applications emerging as markets move to higher data rates and start to experience the same memory bandwidth and access challenges that come with aggregating 100 gig and higher data-flows. Some of these applications including IP security appliances, video monitoring and high performance data center line cards -- let me read that sentence again.
We are more and more often seeing new applications emerging as markets move to higher data rates and started to experience the same memory bandwidth and access challenges that come with aggregating 100 gig and higher data-flows. Some of these applications include IP security appliances, video monitoring and high performance data center line cards.
Generally speaking we are seeing expanded opportunities across all of our products, it appears that the vary solution we are offer are increasingly synergistic with the needs of our customers and potential customers as they struggle with the performance requirements of their next generation networking equipment. Our Bandwidth Engine, LinesSpeed and PSE products can used in combination within the same customer designs, that is on the same line card for example.
BE2 and BE3 have already proven the work quality together, and with the addiction of our programmable search engine family to these offerings we expect the opportunities for side-by-side design wins to multiply. For example every 100 gig line card needs a re-timer and/or gearbox functionality on board and as well several solutions on that board have to be solved by one type or another high performance networking memory, which opens up the big opportunity for our Bandwidth Engine products.
As current customer engagements for our Programmable Search Engine, BE3 and LineSpeed products mature we would except to secure additional new design wins which add incremental revenue to our expanding revenue base.
A little bit on market trends. The technical requirements to new designs continue to trend favorably for the company. The demand for more memory Bandwidth, lower latency, higher access rates to enable increased processing per packet, such as 25 gig Ethernet and requirements for more intelligence and programmability in a broader range of applications continue to increase in devices supporting and networking, security, data center and cloud markets.
In fact we are seeing the integration time for BE2 shortening for a number of important reasons. Switch over cost and switch over risks have gone down, that is less risky is perceived in the adoption of the serial memory now than previous year or previous couple of years in the past. People are more familiar with it now.
Two, fewer feasible options are available to the customers, or potential customers to achieve the pin count and board space budgets they need while providing the required performance levels in their systems. And finally our echo system and our ability to support our customers and partners is continually improving. These factors have helped to drive even more interest and initiate more customer engagement across our entire product portfolio.
Turning now to a few products specific updates. As I mentioned earlier Bandwidth Engine 1 and 2 ICs are shipping to customers moving into production with Bandwidth Engine 3 being the largest in both unit quantity shipped and total design win counts. Some of our 2014 wins in Japan have been slow getting into production due to design upgrades or other changes we’re required to meet. They are customer system level specifications.
All though these changes caused delays in reaching production and delayed revenue to MoSys, their supplier, it is important to note that all these wins are still viable and active. None of them are been cancel, we’ve not been told that something has gone by the Board and it’s too late to be successful with our customers’ end customers. They are still alive and just moving a little slower then we like.
Interest in our Bandwidth Engine 3 devices continues to build as we move towards its full release to production. Customized for buffer and/or access and statistic functionality the BE3 630 and BE3 830 are tracking interest for use in both current 100 gig and next generation 400 gig systems. We’re closely working with Mellanox, they work to further develop the market for easy chips and PS network processors for which our customized BE3 V30 makes an excellent companionship. Over time this relationships holds a potential for us to expand our BE3 footprint into other applications and into next generations, networking systems.
BE3 can be used in 10 to 15 and/or 20 to 25 gig applications and therefore is good fit for both the existing and the new FPJ families from Xilinx and Altera. We’re guiding our new programmable search engine product line, following our successful launch of this product in the first quarter as we had mentioned, we’ve already secured initial design wins and we’ve already shipped prototype in quantities. This product uses the segment for structure of IO infrastructure as Bandwidth Engine 3 family from an interface prospective, but has a different architecture and it has customizable capabilities that enable the customer to program there on function. Such as for example an algorithmic version of the TCAM and/or you might want enable some specialized search.
We are very excited about the programmable search engine, it’s potential to expand our revenue opportunities, additionally it should lead us to new applications that up until now, we may not have recognized to understand. About LineSpeed we continue to gain increasing momentum for our LineSpeed products in terms and design wins, product development and customer engagements. We completed sample delivers of the latest long reach devices in the second quarter and are achieving operability with multiple customers and partners for our LineSpeed Flex family.
Opportunities for LineSpeed Flex are expanding with the growth in the re-timer requirements for Ethernet switches, line cards and intelligent processing applications supporting 25 gig and a 100 gig capability. The data center inter connect, wide area networking router and router applications in the telecom space. Our devices also support innovated features and higher data rates for optical transport networks and fiber channel at 25 gig and above.
Furthermore the LineSpeed ICs are well suited for modular solutions that require specialized high end features. Sampling activity for our LineSpeed Flux devices is increasing and we’re targeting production lease of multiple other devices throughout the second half of this year and into the next.
My summary of the second quarter is quite simple. The second quarter started out a bit slowly but ended with increased revenue, multiple new design wins and the addition of new customers. As well as what appears to be an improving market environment, our design opportunity pipeline that appeared less clear at the end of quarter has solidified consider from then to the second quarter, so we’re optimistic for a strong second half on the design win front. I believe considering the actual results from the first half that we are recently well positioned for continued revenue growth and should be striving to achieve our full year revenue goal. Well of courses this achievement continues to be dependent on our customers meeting their system release dates for their production ramps and the market’s adoption of their next generation systems.
Our early Bandwidth Engine 2 designs are ramping into production at an accelerating rate and the market opportunities and customer engagement from Bandwidth Engine 3, the Programmable Search Engine and LineSpeed product family is continues to increase. I am looking forward to this quarter it's off to a pretty good start and I look forward to giving you our update on our progress at the end of the third quarter. This concludes my prepared remarks I'll turn this call over to Jim for review our financials and following this we will some take questions and we will close the call with few comments. Thank you very much for your time and your attention. Jim?
Thank you Len, 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, amortization of reported intangible assets and restructuring charges. These non-GAAP financial measures and a reconciliation of the differences between them and comparable GAAP measures are presented in our press release and related current report on Form 8-K, which was filed with the Securities and Exchange Commission today and can be found at the Investor Relations section of our website.
Turning now to our second quarter 2016 results, total revenue was $1.6 million compared with $1.5 million in the first quarter of 2016 and $1 million in the second quarter of 2015. Product revenue from the sale of our integrated circuits with $1.3 million in the second quarter, compared with $1.1 million in the first quarter of 2016 and $0.5 million in the prior year quarter.
IC sales increased to 79% of total revenue in the second quarter compared with 77% in the previous quarter. As Len mentioned IC revenues was primarily driven by ramp in production of our Bandwidth Engine 2 design wins to our Tier 1 and other customers. In addition we recorded initial revenue from prototype shipments of our Programmable Search Engine ICs as well as initial LineSpeed production and prototype units.
Royalty and other revenue for the second quarter of 2016 was $0.3 million consistent with the previous quarter and compared with $0.5 million in the year ago period. Royalty and other revenue is primarily comprised of royalties received from semiconductor customers whose products include our IP.
GAAP gross margin was 41% in the second quarter consistent with the previous quarter and compared with 43% in the year-ago quarter. In terms of our operating expenses for the second quarter, total operating expenses on the GAAP basis decreased sequentially to $6.5 million this compared with $7.4 million in the previous quarter and $7.3 million in the year-ago period. The sequential decrease in the operating expenses reflected our first quarter restructuring and the benefits of our cost reduction initiatives as well as lower backend cost primarily related to Bandwidth Engine 3.
Second quarter operating expenses include the $0.7 million of expense related to subtle take out for our LineSpeed Flex products. Also the second quarter of 2016 included stock base compensation and amortization expenses as $0.6 million consistent with the previous quarter and compared with $0.8 million in the second quarter of 2015.
Research and development expenses in the second quarter decreased sequentially and year-over-year to $4.9 million and compared with $5.2 million in the first quarter of 2016, and $5.8 million in the year-ago period. Second quarter research and development expenses reflected lower backend cost personal expenses and stock base compensations which were partially offset by the one we should take out.
Selling, general and administrative expenses for the second quarter were $1.6 million compared with $1.5 million in the previous quarter and consistent with the year-ago period. On a non-GAAP basis total operating expenses for the second quarter of 2016 were $5.9 million, which excludes amortization of intangible assets and stock-based compensation expenses. This compared with $6.1 million in the previous quarter and $6.5 million in the year-ago period.
We continue to target non-GAAP expenses of approximate $5 million per quarter, in the second half of 2016, excluding any tape-out shuttle or significant back end expenses. On a GAAP basis, net loss for the second quarter of 2016 was $6 million or $0.09 per share compared with a net loss of $6.9 million or $0.10 per share in the prior quarter and a net loss of $6.9 million or $0.11 per share for the second quarter of 2015.
On a non-GAAP basis, the net loss for the second quarter of 2016 was $5.4 million or $0.08 per share which excluded stock-based compensation and amortization expenses of $0.6 million, this compared with a non-GAAP net loss of $5.6 million or $0.08 per share in the previous quarter and a loss of $6.1 million or $0.09 per share in the year ago period. Net loss per share for the second quarter of 2016 on a GAAP and non-GAAP basis was computed using approximately 66 million weighted average shares outstanding.
Now, turning to the balance sheet. At June 30, 2016, our cash investment balance was $16.5 million, compared with $20.9 million at March 31, 2016. Cash burn in the second quarter was approximately $4.4 million and reflex a significant sequential reduction as compared with cash burn of $7.2 million in the first quarter of 2016. Our restructuring and other cost reduction activities have positioned us to continue reducing our expenses and cash burn over the coming quarters, especially when combined with our expected growth and product revenue and improved gross margins. We remain committed to minimizing cash spend while our revenue ramp continues to gain momentum.
In the third quarter the Company intends to pay the interest due on the convertible notes in-kind through the issuance of an identical convertible notes. As of June 30, 2016, our worldwide headcount with 66 employees, compared with 69 as of March 31, 2016 with a majority of our employees in applications, engineering and operations.
This concludes my prepared remarks. At this time, we would like to open the call for Question and Answer session. Operator?
[Operator Instructions] And our first question comes from Gary Mobley with Benchmark. Your line is open.
Jim as a point of clarification, would you say no-GAAP OpEx will approximate for two remaining quarters of the year?
Approximately $5 million.
That it gets down from $6.5 million just in Q2.
Well in Q2 that’s 6.5 was the GAAP number, the non-GAAP OpEx in Q2 was about 5.8 and we had that shuttled, which was just over 600k so we would been around 5.2 [ph].
Okay, alright I’m going to ask the question I ask every quarter, and that is about gross margin. I know you had some supply chain inefficiencies in particular on the back end and, it was my understanding that you were working through those issues, but it’s not evident in the Q2 gross margins. So if you can just give us some explanation on the front that’ll be helpful?
So basically Gary, when you look at the gross margin we reported it’s a combination of BE1, BE2 and some LineSpeed products, the Bandwidth Engine 2 which is our work horse is moving up into the right recently well. We received the number of new lots in from our foundry this quarter one of them had some problems and we don’t know if they should credit it or not, there has been no change made yet, we can't tell. So that pulls it down a little bit.
Jim, I haven’t talked to Jim about this yet, but I talked to our operations guidance that next quarter I’m going to take a look at just breaking out BE2 so that you can see just BE2 and how it's doing because I knew you are going to ask me this question.
Some of the BE1 material we bonus back in I think had a negative effect on it for one reason or the other Jim and I have been so busy, we haven’t got together on this yet. We have one loss that I'd would like to think that our foundry might credit to us, but right now it's in the numbers. So that coupled with the fact that we’re still not running very many lots, so I am feeling reasonably good about our gross margin in terms of where the operations are and how smooth the backend works.
When we can buy a higher production level mass set for BE2 that we haven’t expanded the resources for yet, and that will give us somewhere between 10 and 13 to 14 points of gross margin. So where I think we may belong somewhere to -- in BE2 with small and medium level volumes that maybe 45% to 50% or 51%, 52%, 53% gross margin. That would give us the opportunity to get somewhere above that -- substantially above that. So it was very clear and I just got to look at it knowing you’d ask me the question. I am going to see if I can’t break it out differently next quarter, I'll have to see if Jim will help me do that.
One thing I didn’t hear you mentioned in your prepared remarks was the status of some type of strategic relationship which make some type of investment and/or revenue capture opportunity, so if you could just give us any update on that fund?
So we are working right now it was a three to five companies on this and couple of them are well down the road, but there is nothing to report yet this morning. It isn’t like that we expanded all of them, I would say it’s operating at a higher levels than at any time before. So that’s coupled with the facts that BE3 and the Programmable Search Engine have some features and capabilities that looks like it’s a very supportive of next generation system.
So we are talking to the who’s-who of the market sectors that we serve. We didn’t have anything finished so we didn’t put it into our prepared remarks this morning, but I'd like you to know that Jim and I are spending a good significant percentage of our time on it and it’s come down over a fair way.
Last question from me, obviously you haven’t been working at this for six plus years to generate a million dollars a quarter in public revenue and you have to be somewhat optimistic to coming into work each day and whatnot, but -- so the question I’m leading to is where do we stand with respect to the revenue ramp at your one strategic customer and what’s the potential be in and why you haven’t quite fully tapped into that potential at this point of time?
So basically I think the biggest lesson that I'll probably take for the balance of my life is, I was at a lunching here three months ago with Mark Andreessen and her made the comment that you have really be thoughtful about things now because in the new world anything you want to create takes 10 years. It didn’t take 10 years and we did IDT and it didn’t take -- it took probably seven or eight year, when we did that net logic.
I am just amazed that the customer is -- I’ll call it, issues that he deals with or the seeming slowness with which we got to full release. There is no question that’s taking longer and I would say that -- and we don’t say much about this either and we don’t say much about procedure, we really don’t have simply one strategic customer anymore. We really serve network infrastructure and we have one of the top players here and we serve the IP securities appliance business, we have several top players there and we made good progress into the data center and I just mentioned in past this morning that the Programmable Search Engine and it’s applications in the early going seemed to be into the data center where there is a pretty exciting amount of growth projected. And we have major customers in all three of those areas.
But I can’t dispute with you that I would have projected that we would ramp faster and I would -- you got to my closing remarks, we are ramping revenue up into the right, and we’ve been talking to our top customers and they’re either back to us and projecting a recently good second half, or they haven’t got back to us yet. But I have to confess that, I would have expected that we could see these products ramp faster than they have, and Andreessen made a good point at lunch when he said, now a days you have to plan for ten years, because that what it takes.
Thank you. And our next question comes from Alex Silverman with Special Situations. Your line is now open.
Actually my question was asked and answered. Thank you.
And I'm showing no further questions at this time and I would like to turn the call back over to Len Perham for closing remarks.
Yes Gary help me to make my first point and that is that as we pointed out, we’ve been ramping both units and revenue the last few quarters. And I mentioned in my remarks earlier that I would like to see it’s steeper. We’re dealing with the top players in the market segments that we serve, but I sure as hell would like to see it be ramping faster, so that’s my first closing remarks.
The second is, that most of our applications in customer support right now is going to BE 3 and Programmable Search Engine applications and that’s very, very exciting and the reason I think is because as we’ve said over the years the type of performance and the features sets that our products have are very suitable for advancing and further advancing high performance systems that our customers might want to build. So we seem to have a family that’s in the right place to solve important problems for the next few generations of high performance equipment.
Now that said it isn’t that BE 3 and the Programmable Search Engine is going to Bandwidth Engine 2, it’s doing very, very well too and the BE 3 and 2 don’t compete each other, one doesn’t eat the other, if you will. And I would take is the BE 2 will be the main player in our sales flow and the main player are getting released into production well into the future at least through ’17, I think.
So BE 3 as a Programmable Search Engines is exciting, because of the level of interest, but BE 2 will still remain the work horse. So we have a good number of products, that is going to be generating revenue.
That’s all I had to say for today. We really appreciate you, you guys coming listening to us and we have a lot going on here with extraordinary activities, the questions guy who was Gary’s last question and nothing to report today, but perhaps in the near future. I want to thank you again for listening to us and we look forward to talking to you next quarter. Thank you everyone.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone, have a great day.
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