Good morning, and welcome to the MoSys Fourth Quarter 2013 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded today, Friday, February 7, 2014. I'd now like to turn the call to Beverly Twing of Shelton Group Investors Relations. Beverly, please go ahead.

Thank you. 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 call, 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 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 integrated circuits; predictions concerning the growth of the company's business and future markets; and business prospects, strategies, objectives, expectations or beliefs. Forward-looking statements made during this call are subject to risks and uncertainties that could cause actual results to differ materially from those projected. Additional information concerning factors that could cause actual results to differ materially from any forward-looking statements made during this call are contained in the company's most recent reports on Form 10-K and Form 10-Q filed with the Securities and Exchange Commission, in particular in the section titled Risk Factors, and in other reports that the company files from time to time with the Securities and Exchange Commission. MoSys undertakes no obligation to publicly update any forward-looking statement for any reason, except as required by law, even as new information becomes available or other events occur in the future. Thank you for your attention. I will now turn the call over to Len Perham, Chief Executive Officer of MoSys. Please go ahead, Len.

Thank you, Bev. Good morning, everyone. I'll begin today's call with a few highlights, and then provide more details on our 2013 accomplishments, turn the meeting over to Jim, who will then review our fourth quarter and full year financial results prior to opening the call to your questions. 2013 was a pivotal year for MoSys, and we made measurably good, strong progress on several fronts. Specifically, we secured multiple new design wins for our Bandwidth Engine IC product families and are shipping early production into a number of projects at multiple customer locations. In fact, we have now approved between 10 and 15 system-level schematics that are delivered to us by our confirmed customers for approval, in other words their system schematics. Nearly half of these approvals have been then generated in the last quarter. These are best thought of by you guys as confirmed customer wins. We are now seeing early production demand for Bandwidth ICs result -- Bandwidth Engine ICs, resulting in increasing unit shipments sequentially as well as year-over-year. And though the numbers are still modest, this progress is truly gratifying. It's moving us into the next stage of our development. We are not trying to win first designs here. We are, in fact, shipping early production into real systems being shipped to support real applications. Now we have to drive to ramp that business and make real progress toward a cash-flow-positive position and at long last starting to deliver increasing shareholder value. We introduced and secured initial design wins for our new family of LineSpeed 100G PHY solutions, and we completed a successful underwritten public equity offer to further fund the transition of our business model, finishing the year with over $50 million in cash on hand. With these accomplishments under our belt, I believe…

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. Now let's review our fourth quarter financial results. Total revenue was $1 million, consistent with the third quarter of 2013 and compared with $1.6 million in the fourth quarter of 2012. Licensing and other revenue for the fourth quarter was $0.2 million compared with $0.1 million in the third quarter of 2013 and $0.2 million in the fourth quarter of 2012. As we have mentioned on previous calls, licensing and other revenue is comprised of revenue recognition from legacy IP agreements, as we complete final deliveries and provide related maintenance and support services, as well as revenue from sales of our IC products. Our IP licensing revenue continues to taper off and is being partially offset by increasing revenue from our IC products. Fourth quarter IC revenues increased over the prior quarter and represented the majority of licensing and other revenue. Royalty revenue for the fourth quarter of 2013 was $0.8 million, consistent with the previous quarter and compared with $1.4 million for the fourth quarter of 2012. The year-over-year decrease in royalty revenue was primarily due to a decrease in shipments by fabless semiconductor companies that incorporate our licensed IP. Our royalty revenue is derived from our legacy IP business, and the visibility of this future revenue stream…

[Operator Instructions] First question is from the line of Gary Mobley.

I don't have all the variables in place to make this assumption, but I'm assuming that Bandwidth Engine sales in the fourth quarter had a negative gross margin. I'm just wondering if you could speak to the reason for that and give us any details as to what sort of inefficiencies might lie there in the supply chain.

Yes, I mean, I think we're obviously still at early stages right now, as Len said, with early production. And we did have some inventory reserves. We decided to reserve some units that needed a firmware upgrade. And frankly, our team is pushed pretty hard right now between Bandwidth Engine 1 production, as Len said, completing the qual with Bandwidth Engine 2. We also had lower yield on one fab lot. And we have yet to invest in some of the -- upgrading some of the testing processes, Quad-side handler, things like that, et cetera. So with these early volumes were getting hit on some of those items.

I would add to that, Gary, that at this stage and level of I'll call it manufacturing, there's engineering all over the place. So there's -- it's difficult to make sense on a cost basis at this time. Bandwidth Engine 1 does not have the cost-down capability of Bandwidth Engine 2, so, we will -- and we probably talked about that a number of times. But we have the ability to directly and dramatically affect costs as the volumes increases. And I wouldn't make too much of the fact that costs don't make sense right now. We're just getting out of the block and getting started.

Okay. Len, did you say you expect to have a second source named by the end of the first quarter?

Actually, to be very precise about what I said, I expect to have a document that is very satisfactory to me and to the -- to my partners, and my partners both in and out of the company, that we could sign within the quarter. And whether or not we sign it within the quarter, it will probably be just a matter of the urgency to sign it. It isn't impacting the business too much, but we've been working hard on it. We still think it's something that we should do, and we're making very good progress to come into a place that's mutually acceptable for both parties.

Okay. I'm assuming most of your revenue at this in time is all Bandwidth Engine 1, and it's with some of your Japanese OEM partners, Fujitsu, NEC and I think there's one other one. Could you talk about where they are at in offering this product or this type of line card to the customer? In other words, are sales being governed at this point in time merely from the fact that maybe they're offering your Bandwidth Engine as a line card upgrade to the system at this point in time?

Well, it's a little hard for me to know for sure what my customers are doing, but I can tell you this much, that the majority of the Bandwidth Engine 1 customers all have won contracts 1 year, 2 years ago with a DoCoMo or NTT or I guess it's KDDI. And they are -- I don't believe this is an option. I think it's going out in new systems to serve contracts. They wanted to upgrade systems or implement new systems some 18 to 24 months ago.

The next question is from the line of Jeff Schreiner.

Jim, when are you going to start beginning to build and carry inventory for initial Bandwidth Engine shipments on your balance sheet?

Yes, we've already obviously got some inventory right now in the other asset line. I think we'll see that picking up in the -- here in this first quarter into the second. Right now, we're on -- I think we've got our customers looking out 3 months just conservatively. So we've got some additional fab lots on order right now. But I don't see that picking up until -- where we have to purchase that inventory until a little bit later this quarter.

Okay. And you've talked about -- obviously, there's been reserves due to accounting and whatnot. There's also, it sounds like, some inventory reserves based on your answer to the last question. When are we going to start seeing the initial contribution or broken out revenues of Bandwidth Engine during calendar year '14?

I think you're likely to see it in the first quarter. On the 2 sets of reserves, let me take the -- just on the inventory reserve. That was fairly modest, and it was just concluded by the team on some of the units the firmware upgrade was -- would be difficult to do, so we're leaving them as they are. We actually then sold a few, and we're expecting to -- or are hopeful to sell a few more of these units. But it was just being prudent to reserve them at this stage, and we're talking kind of tens of thousands of dollars worth of products. And as Len said, we're still early stage, so no measure of future activity. On the sales reserve, we actually did bring some of that into the top line in the fourth quarter. As we're seeing more time -- the passage of time is key, and our tail kind of dropping -- the tail coming out. And we're also -- saw significant progress from the customers as far as the incoming questions to us, the pickup in these early production orders and frankly even the -- while still -- our caveat, while still small relative to where we're at, even the pickup in backlog during the month of January. So we brought some of those in. And as I see those orders pick up, I expect we'll bring more of those reserves in. Right now, I'm not disclosing that number, but call it the couple of hundreds of thousands of dollars at this stage, tied up on the balance sheet.

So Jeff, I would add to that, that basically, Jim's financial behavior toward some reserves is just prudent financial accounting and behavior, and we have no reason to anticipate any returns or any -- we don't see any customer problems out there in the field. And so it's just basically bringing up a new product line and being sensible in setting aside a reserve until it makes sense. And then you'll take that reserve down to some small multiple of what your anticipated return rate is, which is going to be reasonably low.

I would just chime in further. Thank you, Len, for the clarifications. I don't anticipate anywhere near that level of reserve or any sales revenue reserve on Bandwidth Engine 2.

Okay. And then just for clarification, Len, you talked about design win momentum in calendar year '13, and you talked about coming in at the high end of -- you previously had talked about maybe 10 to 15 design wins. So should we assume that you captured 15 design wins during calendar year '13?

It's reasonably good that I -- reasonably good to assume. I wouldn't tell you a number I didn't feel extraordinarily confident about.

Okay. And then a final question.

And I didn't -- Jeff, Jeff, and I didn't say it on the call this morning, but I don't have any problem saying that by the end of 2014, I would expect that we would see a -- very likely a near doubling or even better of -- more design wins. And that at that point in time, somewhere out there, we won't talk about design wins anymore, it'll be time that we'll be talking about how do we get these design wins into production and how fast do they turn on and how do we make it quicker so that we start reflecting the -- changing design win conversations over to revenue ramp, margin and so on and so forth.

Yes, looking forward to that. Just one last question for me, then I'll step out of the queue. You talked about initial design engagements for LineSpeed. How quickly can design engagements turn into revenues for LineSpeed?

So LineSpeed is competing with -- it's trying to serve an application that other companies serve currently, such notable and good companies as Broadcom or Infi, et cetera. So the fact is, we're coming in and we aren't going to try to take the position that you ought to get rid of them and design us in, but we think that you ought to take a look at how good our products are and start sending a good percentage of the business our way. And if it takes, say, 18 to 24 months to get a Bandwidth Engine 1 from when you want it to when the guy is shipping his line cards, and a lot of that has to do with this new, innovative serial interface that he's employing in order to make his next-generation performance, we won't have to go over that hurdle with the LineSpeed products. So I think, where 18 to 24 months is not unreasonable from a design win to seeing it ramp in Bandwidth Engine 1, maybe I should say it's 4 or 5 quarters for LineSpeed products. So that would tell you that we might see a little bit of revenue this year. We should probably have a very strong year from a design win point of view for LineSpeed products. And it's not out of the question that we would have some partnerships if we hit our -- what I consider to be the high end of our expectations, which is really best-of-breed type stuff. We might form some other kind of relationships where for -- with serial high-speed, what John [ph] likes to call the density of traffic you can achieve on a wireline, we could enter into 1 or 2 extraordinary relationships that aren't forecasted in any numbers. But getting the products from a design win into production can probably be 4 to 5 quarters as opposed to 6 to 8.

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

You mentioned that you'll start to perhaps break out Bandwidth Engine revenues from your sort of licensing and other revenue bucket. As we look at that sort of Bandwidth Engine revenue stream, what is kind of the milestone for that? Are you thinking $0.5 million in revenues, $1 million in revenues? What kind of sort of milestones do you internally feel would be appropriate to break out Bandwidth Engine revenues specifically?

Actually, my attitude, Krishna, is it should be somewhere around the $150 million a quarter. But I don't think the board will go along with that. Anyway, Jim, what do you think?

And I'm glad you brought this up, Krishna, because I'm not sure I fully touched on that piece of Jeff's question this morning. I certainly expect in the first quarter that integrated circuit sales will be broken out in our financials. You may even see it in the 10-K that we're going to file for the year end of 2013. I've been sitting on a draft of that from my team. But certainly, in the first quarter, you'll see a breakout of integrated circuit sales. I do not expect that we'll report any breakout of components by product, so I wouldn't be looking forward to that. But certainly, in the first quarter of 2014 will be the time to report integrated circuit sales and have that be a separate line item. It's -- it won't be driven by, frankly, a number amount, et cetera, at that stage. Certainly, as I said in my comments, it's -- there's a very modest licensing in other, $0.2 million, and the vast majority of that was integrated circuit sales. So certainly, with our lower revenue base at this stage, integrated circuit sales will be material in the first quarter. So no specific dollar amount. The first quarter of '14 will be the time.

Okay. And then I'm assuming that all of revenues for Bandwidth Engine in 2014 will be BE1. Or will -- could there potentially be some production revenues for BE2 late in the year?

I think we have said that BE1 would be the primary revenue driver in 2014. And certainly, in the early stages, it's going to be that. But to us, our Tier 1 customers are moving quite fast with some of these platforms, and I think we will see a fair contribution of revenue from BE2 perhaps in the last 2 quarters or the last quarter. It -- BE2 is -- there's a lot of energy behind getting some of these systems into production by the customers that have adopted one or the other of those 3 solutions.

Okay. And then for the top-tier OEM where you have multiple platforms designed in with BE2, when you have a top-tier OEM, can you [indiscernible] for us the potential revenue opportunity either on sort of a platform -- or what could sort of a typical revenue opportunity for a top-tier OEM adopting BE2?

It's very early for me to forecast that. I've told -- at meetings, I've been asked that question and said in the early days of building these very advanced serial networking memories, people are asking for quotations of up to 0.5 million units a year, which would be a -- that would a -- that would the very, very high end. I think a lot of the FPGA-based designs are anywhere from $5 million to $30 million a year, maybe $5 million to $20 million a year when they're running in full production. And so it's difficult for us to forecast that yet. But -- so it's -- when you look at the type of opportunities that are at the high end where the -- where people are designing custom SoCs and so forth, and I mentioned maybe not strongly enough that I would think that the first half a dozen wins for our Bandwidth Engine 3 will probably all be in that area, those are going to go into mainstream switching and routing systems with a -- with quite huge numbers of line cards. So that business can run $25 million or more per year per win, I would imagine.

Great. And then on BE3, you talked about some of the design highlights for BE3. It's faster, lower power, more efficient, more intelligent. What type of intelligence does it have? And so does it address other opportunities within the line cards such as search engine, TCAM? Can you talk about sort of the other functions that it addresses and perhaps the increased opportunity there in terms of revenues, taking over some other functions?

Well, it's a bit early for us to say too much about it since it's not completely out of design yet. And we -- and I -- although I expect that it will bring one of the -- it'll be a family of products, and I would think probably the -- some of the high-end members of the family will come out first. Probably for this morning, all I'll say is that when you take a look at having your packet processor -- processing engine requiring faster and faster and more and more accesses to the header processing memory, that what we've tried to do is allow you to perform more operations per access so that, let's say, you can do twice as many operations for the same number of accesses, so you'd halve the load on that critical interface. You drop the traffic, drop the power, drop the requirement for pins and so on and so forth. And we've come up with some unique and innovative ways to be able to solve problems inside of the Bandwidth Engine itself. I would think our marketing and applications guys will have more and more to say about that at technical meetings. But for this morning, I think I'll just leave it that we can essentially accomplish more operations per access, and we can relieve the heavy traffic that the packet processing engine is trying to send across that critical interface.

Thank you. I'd now like to turn the call over to Mr. Perham for some closing remarks. Please go ahead, sir.

So gentlemen, a while back, we had a conversation about moving MoSys away from an IP model and bringing it back to being a fabless semiconductor company. And then we told you folks, our precious shareholders and owners, that we were going to build these unique serial I/O networking memories that were going to become the new paradigm in how to solve the problems of bandwidth utilization and bandwidth availability and the very high access rates to memory. And what we've said today is pretty much like that movie a few years ago, the Field of Dreams. If you build it, they will come. Well, I'm pleased to tell you this morning that they've come. They came in 2013. And having said that, much remains to be done. Now it's how fast can we ramp up, how fast can we get through bring-up problems, how fast we can get new platforms going. But in 2013, we aren't wondering if they're going to come. They're coming now. And we anticipate a very strong booking this year, booking year, and it's looking very good across a wide front, and that includes LineSpeed and -- as well as the Bandwidth Engine. And I mentioned earlier on this call that by the end of this year, I think we'll be talking about how do we -- you'll be asking us questions about what do you do about margin and why isn't margin better here and better there, and we'll be fighting with all the problems now of getting costs out. So third point that I mentioned is by reducing customer system bring-up time, we enable the -- ourselves and our customer to have the opportunity to grow their revenue earlier and more quickly, and that's exactly what I was just talking about in my…

Thank you, sir. Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a good day.