Good day, and welcome to the MoSys Third Quarter 2014 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded today, Tuesday, November 4, 2014. I would now like to turn the call to Beverly Twing of Shelton Group Investor Relations. Beverly, please go ahead.

Thank you. Good afternoon, everyone. Joining me on today's call are Len Perham, MoSys' President and Chief Executive Officer; and Jim Sullivan, Chief Financial Officer. Before we begin today's discussion, I would like to remind everyone that this conference call will contain forward-looking statements based on certain assumptions and expectations of future events that are subject to risks and uncertainties. Such statements are made in reliance upon the Safe Harbor provisions of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which include, but are not limited to, benefits and 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 Len Perham, Chief Executive Officer of MoSys. Please go ahead, Len.

Thank you very much, Bev. Good afternoon, everyone. Thank you for joining us today. I'll begin our call with an overview of the recent highlights and activity, after which Jim will discuss our financial results and then we will open the call to your questions. During the quarter, we continued to make progress expanding our sales funnel activity and design win opportunities for both Bandwidth Engine and the LineSpeed product families. We also spent significant time on further developing alliances and partnerships to expand our market opportunities and to increase our presence with our products at the customers' desk. That being said, the third quarter was definitely more challenging than usual due to a difficult market environment. As has been widely reported by various other suppliers to the telecommunications and networking market sectors, it was a strong evidence of a slowdown these past few months. Although we recorded some new design wins in quarter 3, we did not enjoy the robust new design win activity I was anticipating and did not close as many design wins as had been expected. Furthermore, third quarter revenue and shipment volumes were impacted by the slowdown as carrier spending stalled and the rollout of next-generation systems appear to pause, pushing some system rollouts and ramp out a bit into the future. However, I am pleased to say that new design win activity has recently begun to get back on track. Field trials with customer release systems continue to go well. Although on a case-by-case basis, it's still taken longer than expected, which is not unusual, I supposed, in the carrier environment. And most notably, we continue to expect all of our line card design wins to advance as market conditions improve. To reiterate, none of our design wins have been canceled. Rather, they are…

Thank you, Len, and good afternoon, everyone. During the course of my comments, I will make several references to non-GAAP numbers. Unless otherwise indicated, each reference will be to an amount that excludes stock-based compensation expense and intangible asset amortization. These non-GAAP financial measures and the reconciliation of the differences between them and comparable GAAP measures are presented on 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 revenue separately for our IP licensing and royalty revenue, which is now being reported as a combined amount. Prior period amounts have been reclassified to conform to this presentation. Now let's review our third quarter financial results. Total revenue was $1.1 million compared with $1.8 million in the second quarter of 2014 and $1 million in the third quarter of 2013. For the first 9 months of 2014, revenue increased 24% to $4.2 million compared with $3.4 million for the same period in 2013. Product revenue from the sale of our integrated circuits was $0.4 million in the third quarter of 2014 compared with $1 million in the previous quarter and $0.1 million in the year-ago period. Although product revenue decreased sequentially in the third quarter, revenue from IC sales for the first 9 months of 2014 increased to $2 million compared with $0.2 million during the same period last year, representing initial ramping of our Bandwidth Engine products. Royalty and other revenue for the third quarter of 2014 was $0.7 million compared with $0.8 million in the previous quarter and $0.9 million in the year-ago period. Royalty and other revenue is primarily comprised of royalties received from semiconductor customers…

[Operator Instructions] And our first question comes from the line of Krishna Shankar from Roth Capital.

Len and Jim, given the sort of tough market conditions you saw in Q3, how did bookings trend through the quarter? Did you see a little bit of a pickup in bookings towards the end of the quarter? And what is kind of the outlook? Would you expect modest sequential total revenues? Or will we have to sort of look to Q1 of 2015 where you mentioned that you're seeing kind of a rebound in Bandwidth Engine 1 demand for shipments?

So basically, I would say that the recent activity in the sales funnel is perhaps the best it has been all year. It's -- I was quite surprised at how quiet it got for a few months in the third quarter. It really did concern me. And then we made a few comments today in the body of my comments that we've had serious visitors now from different areas: people that are basically serving the optical communications market, people that are concerned about next-generation security appliances, people that are running data centers faster than ever before. So we've -- we're very encouraged by what we're seeing. It's a bit -- I don't know if it's a perturbation or if it's a ramp that we can see continuing on. But for the time being up to including today, I would say that the activity is good or better than any time this year. So that's a -- and what was the second part of that question, Krishna?

I think the second part of Krishna's question, I'll take that, is just regarding kind of revenue outlook and whether we had seen the bookings come in subsequent to the quarter end. As has been our past practice, we're not in a position to give guidance. That said, nonetheless, I do usually make comments on that front. Based on where we sit right now, I would say the fourth quarter is from a flat to up perspective. We're not seeing the bookings and backlog that we had hoped since the end of the quarter, but there is still plenty of time left in the quarter. And again, I don't want to be overly conservative, but from where we sit right now, I'd say a flat to up for the fourth quarter.

Okay. And then the new design win that you mentioned, Len, in the press release, is that for a brand new customer for Bandwidth Engine? Or is that an addition of a new platform at an existing customer?

No. Actually, the 2 that I referenced would be new customers. Additionally, we had a few people that did evaluations, say, 6 to 9 months ago and decided that they would go with their traditional architectures. And in a couple of cases, after looking at it awhile, they've come back, and I believe that we could probably call them customers now, but we didn't today. There's a few more things they have to do in the way of placing orders and so forth and so on. But the examples I gave today were new customers. They weren't traditional customers placing another order.

Okay. And then turning to LineSpeed, sounds like you're getting good traction there with the new 100 Gb timer product. Since that sort of targets existing sockets, what's the revenue outlook for those types of parts over the next 6 to 12 months? It sounds like you have pretty good traction there.

So for the first time, we have a product, though, that's of short-reach product that's very, very low power retimer, if you will, and it fits the form factor. It fits into the optical modules. And in that world, the thing -- the most important thing is power, and I think we're a few hundred milliwatts lower than anything out there either in real physical parts or in data sheets. Consequently, we have referenced more the 4 or 5 of the top players in that business, people such as -- maybe such as, among others, maybe Sumitomo or Finisar or Oclaro or maybe JDSU, people of that ilk that are different than the people that we would call our Tier 1 guys in the infrastructure equipment business. So it's probably a little bit -- we would expect that if we start winning orders that we'd see some product going out the door in the second half of 2015. It wouldn't be too big in 2015, but it could be substantial in the $5 million or $10 million, I think, in '16, perhaps better. But the ramp is out a little bit to the middle of '15, maybe the last quarter of '15, something like that.

Okay. And then my final question, at the Linley Conference, you talked a little bit about Bandwidth Engine 3 and the intelligent core processing capabilities of that. Can you talk about where you stand in the design of that, the tape-out and what kind of customer traction or discussions you have on Bandwidth Engine 3?

Yes, so there are -- needless to say, our close partners, Altera and Xilinx, can get significant performance kick-ups, I think, using FPGAs for packet processing engines using our part. We're very encouraged that we can become a very strong partner when BE3 is available. And we've made note from time to time that in the case of BE3 that there's some SoC players, people that do either customer-specific or application-specific SoCs that are building the I/O into their -- on of the edge of their SoCs. And that's all going along fine and in some cases, there may be people that have already committed using these products and are just waiting for the availability. Regarding the tape-out, I think we said that we would like to see the tape maybe middle to later part of the first quarter. So it can end them first half of the second quarter, have to do some rail [ph] testing characterization. So we would have parts around here at the end of the second quarter right around midyear.

Our next question comes from the line of Gary Mobley from Benchmark.

It appears as though you still have a hard time generating gross profit on product sales. So I was hoping that maybe you can share with us your plan to improve the gross profit margin on those products when you can get to that targeted 60%, 65% gross margin level. And does the lack of gross profit on product sales thus far really had to do with accounting for tiny volumes or just now getting volume discounts on wafer pricing? Or do you really need to go down a couple process node shrinks to really get to the gross margin desired?

So Gary, basically I didn't say too much about our cost-cutting efforts on today's call because the volumes are low enough that you can't make any sensible comments about driving cost out of your back-end process, if you will. We've made quite a few changes that should allow the gross margins to start moving up. Up until now, most everything Jim ever reports on is Bandwidth Engine 1, which was a 65-nanometer solution, and Bandwidth Engine 2 is where most of the volume is going to go -- I don't know if it will cross over in '15, but Bandwidth Engine 2 is the beneficiary of a different processing node, and the dye is probably 40%, 45% smaller than BE1. I think that when we start running volume through there and it's sensible to talk about cost controls on -- beginning to have a manufacturing flow, if you will, that we'll quickly jump up into the 50s and into the low 60s. But I haven't changed my position on this being a 65% gross margin product. We -- I just didn't mention it today because when the volumes aren't -- we have some inventory coming into the quarter and it's just -- it wasn't sensible to talk about it. We just need to have a little bit more flow. But it isn't that we can't make 65%. We just need to have a few -- a little volume flowing for you to start seeing the gains.

Okay. In light of product revenue that seems to be in a bit of a hold pattern, what sort of steps have you taken to eliminate some of the OpEx and minimize some of the cash burn for the interim?

So right now, again, for the short term here, BE1 -- I'm sorry, BE3 and the next generation of LineSpeed products that are both line card and backplane, we're right at the edge of a tape-out or right at the edge of finishing verification. So we're not thinking too much in economies of scale. We're thinking about getting our stuff into the mass shop. But Jim and I have been looking -- or Jim's probably taking the lead more than I, and looking at what we can do to get our cost under control and both -- everything from can we cut labor expenses in some way? Or can we cut our CAD cost in some way. They're always the 2 big things in the fab with semiconductor company. But first things first, we need to be continuing to move in lockstep with our partners that are waiting for our chips to tie up against the side of theirs. So until we get that into a good, solid, safe place, we'll just drive forward.

Yes, I would just add, for the next 3 to 4 months, we're all in with the main bring to the market, the next set of LineSpeed products and then BE3. So there's not a lot of room right now without putting those programs at risk. And we do -- we are in a situation where we do have customers waiting for those and certainly with BE3 working with one primary processor partner and as Len said, close relationships with the FPGA guys as well. So it's something we don't want to do anything that puts us at risk. But kind of looking ahead at Q4 and then in Q1, as tape-outs hit, we will remain expense-challenged. And again, until we get down with an Engine 3 tape-out, we'll be in a better position.

The $1.3 million sequential increase in non-GAAP OpEx, was that a function of what you were just talking about, trying to get LineSpeed to market and work out any sort of design changes in the verification for BE3?

Yes, it was higher consulting and contracting expense, peak time CAD licenses. We had some prototype expenses related to some BE2 units and some -- related to some of the testing initiatives we have underway. So those were really the drivers there.

Okay. Last question for me relates to the adoption of BE1. I know that's basically been the main source of revenue up to this point. Perhaps you can share with us, to the best of your knowledge, what your customers' plans are for product releases based on BE1, why you saw a bit of a spike in the mid part of this year and why we're seeing a lull now and what gives you confidence that those Japanese OEMs can -- might start to come back to you and purchase in the first half of 2015? And that's it for me.

So I think that -- so we're doing very, very well in Japan where we've won designs at all the major divisions of the major players. And to me, they're all moving forward towards getting into production. And for the most part, they have contracts and they are going to deliver the contracts. I think one of the things that upset the market occurred at the ISP level. I think that -- I don't quite know what month it occurred in, but there's a lot been written now about the fact that AT&T took a very hard look at pricing. And I believe that right lockstep behind them was -- was NEC -- or I guess NTT, excuse me. And I think they -- there's been a lot of conversation about it with our customers. They've been very open talking to us about it, both the U.S.-based customers as well as the Asia-based customers. And I think when the big infrastructure providers clamped down, our customers all stop dead in their tracks and took a look at what they had to do to make sure their margins are okay. And I think that caused what we referred to in my comments today as a pause in what was going on. But I -- as far as I can tell, things are back on schedule. And if we just look at Japan expressly, if I had to guess, they go through a major budgeting cycle there at the end of March going into April. And I could see things getting back on track right about that time, which means we should start seeing some orders in the first part of the first quarter. But that's just speculative on my part. I don't know it for sure. But I can tell you, it was the aggressive position that some of the big ISP guys took about what they were going to pay for their capital that stopped everybody dead in their tracks.

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

Len, I'd like to talk about how deep is this current carrier spending freeze? And how does this one compare to the average lumpiness that we can see sometimes in carrier spending based on what you've seen in the past? It seems that this is affecting a broad spectrum of networking IC companies and across broad end markets. Is this something that could really slow things down for a couple quarters? Or is this just maybe a third quarter, fourth quarter event?

Well, I'd look at everything that I can get my hands on that -- anything written by people in their -- in your business, Jeff, and I've probably written -- read a hundred different analyst reports, and I've been to a fair number of supplier day meetings and talked to my customers and tried to talk to the ISP on the other side of them. And it seems to me that it -- the argument out there is it's a onetime event that the big ISPs came in and they restructured their pricing and therefore they -- when they -- or restructured what they were willing to pay for capital equipment and drove a very, very hard bargain. And most people are saying it's a onetime event and certainly, some of the people that we had as customers very -- we have very close relationships with, predominantly, they'll tell you that the largest market they serve is United States and the largest guy in that market is AT&T, right, and he was being particularly aggressive about his capital spending and -- but from what I can see, it's a onetime event and it's not going to be ongoing. And our customers look to be making adjustments and moving on, and that's why I say what I -- I'm very encouraged about the activity in the sales funnel, but I need to see it for a few months or even a couple of quarters to make sure that it truly is behind us now and we're moving on. So it's probably the best visibility I have, Jeff.

Okay. Could you just come back to discuss a little bit further regarding the tape-outs that were addressed through the press release? I'm assuming, are these BE2 products? And can you kind of talk about the average size of the potential deals when you say that there are customer's designs kind of waiting for them? What are the size of those customer designs? And is this now shipping a little bit later than you previously thought, if we talk about BE2 in the second half of '15?

So to make sure I'm -- first off, all the activities -- predominantly, all of the activity in the sales funnel is BE2. BE1 is one that's -- a fair number of designs -- most of those were in Asia. Most of the activity is BE2. We don't have much in the sales funnel that's BE3, but we know that if we had a half dozen reference boards right now that it would -- they would all be gone instantaneously. We know that our FPGA partners are just waiting to get their hands on the product so they can put it on the reference board and start showing it to customers and so on. So coming back to BE3 -- BE2, I'm going to have you expound on your -- expand on your question a little bit more, Jeff. BE2, make sure I understood, what is it you're asking me now?

I think Jeff is asking about the tape-outs. And I think specifically, Jeff, taking BE -- the Bandwidth Engine product line first, BE3 will tape-out hopefully around the midpoint of Q1 of 2015. During this current fourth quarter, we'll have tape-out activity on LineSpeed products, and we're not in a position -- we don't really want to comment further given the competitive nature of that market and things we're working on, et cetera. But the fourth quarter activity will be LineSpeed-based. The first quarter of '15 will be Bandwidth Engine 3. I think the next question was the statement whether it's in the press release or in the script regarding customers waiting for these products. And with regard to Bandwidth Engine 3, I think as we've said on most of these calls historically, and Len certainly reiterated in his comments, we've had great success where the processor -- our processor partner is an FPGA from either Altera or Xilinx. And not as -- to date, not as many -- not as much success where it's either a standard processor, whether it be an MPU or an ASSP or ASIC from a customer. And we're looking for BE3, obviously, to give us further traction with those types of designs, particularly given the processor relationships we have and working to get that part out. And certainly, ASIC and large MPU designs can be -- will generally be higher volume than traditional FPGA designs. And certainly, ASSP design, as you probably know better than me, can -- and with success on the platforms and full production could, to a supplier like us, be greater than $20 million in annual revenue after a couple of years of ramping. With regards to LineSpeed, we launched that -- the MSH110, the retimer, we announced it prior to that e-talk show and then demonstrated that they are -- as Len said in his comments, that specifically arose from customer discussions and feedback of truly, if you build this, I will come. And we continue to engage with those customers, primarily optical module players. And volumes in a couple hundred thousand units a year is what we've been quoting back and forth and haggling over pricing, which is positive that we've moved on to that, that stage with those prospective customers, but we still have more to do. But I think that -- let me stop there and see if Len has anything he wants to add or if that covered your question.

The LineSpeed products that we haven't taped out yet, Jeff, have some features and benefits sitting around on the I/O that are probably not widely available. And so consequently, we have some customers that we've spend a little time with over the last 6, 9 or 12 months, and we've come down the road together on this stuff. So they are waiting for the products and that would be -- and then just touching again, and it's redundant now, but BE3, I mean, the minute we have -- there's people waiting for that to get in to our reference board. There's a lot of activity, a lot of discussion now about 400 gigabit per second line cards. And I personally think that's definitely within reach comfortably for latest generation FPGAs supported by BE3 can have a go with that opportunity, so there's a lot of enthusiasm for that. Without us soliciting it, we've been reviewing our international business, and we see BE3 sitting on preliminary first-draft schematics, sitting alongside various FPGAs or in a few cases, sitting alongside of various SoCs.

Okay. Very helpful, gentlemen. Just one last question for me. Jim you typically talk in generalities about maybe what cash burn would be for an annualized basis. And I was wondering what you're thinking about for '14, and if you had some initial expectations for '15?

Yes, I mean, as I mentioned earlier, I believe a response to Krishna or Gary's comments, we are going to remain expense-challenged for the next quarter or so with this new product activity. And given how far we've come, we need to see these through and get them out there. And it is a case where we do have customers waiting for these new products, which has been the case, frankly, for every product we've done since BE1. When we look back at when we launched BE2 back in the spring of 2013, we were fortunate enough within a short period of time after that to be talking about our first Tier 1 win, et cetera. But back to your question, I see the burn up in the fourth quarter and kind of up in the first quarter of '15 when compared with the third quarter we just closed driven by these tape-out activities. That's really going to move the needle. That said, we closed the quarter still with almost $34 million in the bank, still a significant amount of cash. The lack of visibility with our early design win customers ramp and things slowing down certainly has created top line challenges, which are going to and have an -- at least for the next quarter or so will contribute to our burn rate and delay our ability to see an inflection point. We're going to closely monitor our cash balance and of course, review alternatives if necessary. I believe we've been creative in meeting our needs in the past and could do so again.

All right. Our next question comes from the line of Quinn Bolton from Needham Capital. N. Quinn Bolton - Needham & Company, LLC, Research Division: I just wanted to come back on the carrier pause and just to confirm on the Bandwidth Engine 1 delays. It sounded like those are really are all related to sort of this carrier spending pause that you're referencing in the script. I just want to make sure that you didn't see any major Bandwidth Engine 1 platforms canceled during that pause. And then I have a few follow-ups.

Actually, Quinn, we have not had any cancellations of any -- occasionally, we have something on the sales funnel that we don't win the order. But anything we call the design win has not gone away. So in Japan, some of those carriers sell extensively into the U.S. or in -- through the U.S. into the international market, and some of the things that were forecasted by them to take place got pushed out. They -- in the case of one of those companies, they actually talked about it. They came here to the U.S. and talked about what has happened to them, and so the answer to your question is it's just -- they're just sitting there and with not -- with most of them on their next-generation systems now going into -- looking into 2015, and they refer to us as the incumbent on the board. And I mean, we are in a very, very strong place in Japan. We've not lost any orders, none. N. Quinn Bolton - Needham & Company, LLC, Research Division: Okay. Good. Fine. And then just wanted to clarify on the Bandwidth Engine 2, I think you've said in the script that you expected initial volume in the second quarter, just want to confirm I heard that right. And then to ask, is that really sort of pre-production shipments for trial activity? Or do you think that's the actual production start for Bandwidth Engine 2 in the second quarter?

So basically, the early BE2 wins were our Tier 1 partner, and he too was affected by the slowdown. And again, we had the chance to talk very -- in a very high level, so that we'd understand what's going on. And we -- Jim made -- I think Jim made the comments, but I may have said it in the body of my comments too, I can't remember. But basically as nearly as we can tell that these Bandwidth Engine 2 wins at the Tier 1 guy, they should have started to tilt up into the right in the first quarter of '15 or maybe even some orders in the fourth quarter of '14. And in light of the current situation, I think we're going to -- Jim commented, or I did, that we'll see it happen maybe in the middle of the second quarter going into midyear. And when it happens, I think it will be them starting to fill their channel with hardware to see how that product is going to -- their product is going to sell. That's how I see it. I could be wrong, Quinn, but I think it will be the beginning of them taking these platforms into production. N. Quinn Bolton - Needham & Company, LLC, Research Division: Perfect. Great. And then just wanted to shift over to the LineSpeed application. It sounds like you're seeing some pretty good design activity on this shorter-reach retimer solution mostly with the optical module companies. Wondering if you could tell us what types of applications those are targeting. Is that really mostly data center applications? Is it more metro? And then a follow-up question on LineSpeed, are you seeing any applications outside of the optical modules perhaps for backplane or other types of line card solutions?

So basically, some time ago, we did what I'd call an out-of-the-box product where we just took a lot of input from customers, and we went off and we did a retimer that we decided that rather than go for how far we could push signal into -- or how big a dv load, that we would just go for a short reach or -- and that we would go for very, very low power and we would put it in a form factor that made it ideal for optical modules. And I believe we're seeing that in the enterprise, and I think we're seeing it in stuff that's sitting on the edge of the core and in the data center. I think John's pursuing business across the whole spectrum with that part. And that part is running roughly 30% lower in power than anything that we're aware of there, including data sheets. So now then we skip and say, "Okay. All right. So that was out-of-the-box thing." But that isn't when we talk about we have a new LineSpeed family coming after, new LineSpeed family addresses both the line card and also addresses the backplane. And again, we've got a pretty comprehensive feature set in that part and some of those features are not widely available. So consequently, we've got customers that want those features, so they're clamoring to get silicon. And so we have 2 different things going on here, Quinn. I think probably that can answer to your question. N. Quinn Bolton - Needham & Company, LLC, Research Division: It is. Sounds like just the extension or the broadening of the family of LineSpeed that resulted in the tape-out expenses you talked about in the fourth quarter?

Yes, that's correct.

Ladies and gentlemen, this concludes the question-and-answer portion of today's conference, and I'd now like to turn the call back over to Len Perham for closing remarks.

So because of the comprehensive set of questions you guys reeled out today, I only had 1 closing comment today. I just wanted to leave you with a thought and one of the guys has already asked me, and that is recent sales funnel activity is very encouraging, probably the best it's been all year and it includes a lot of opportunities and applications that we haven't seen before. And it also includes a few companies that were going to try to do it the traditional way and thought that they couldn't make the performance or couldn't make the power requirement or whatever. And we're pretty encouraged by what's going on right now and provided we're not being fooled by some blip followed by a Dell point again, which I personally don't think is going to happen. We should be able to have reasonably encouraging conversation with you folks at the end of the fourth quarter, and we look forward to talking to you then and I want to thank you for your time and attention today. That's -- I would like to have given you a lot better news, but this is the news from our side and we look forward to telling you better news next time we get together. Thank you.