Good afternoon and welcome to the MoSys Third Quarter 2015 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, Wednesday, November 4, 2015. I would now like to turn the call over to Beverly Twing of Shelton Group Investor Relations. Ma’am, please go ahead.

Thank you, Amanda. Good morning –- good afternoon, everybody. 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 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 technologies, 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 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, CEO of MoSys. Please go ahead, Len.

Thank you, Bev. Good afternoon, everyone and thank you for joining us. On today’s call I intend to review our progress winning new designs in the third quarter and year-to-date, the status of our customer’s journey toward into a production status, and the progress our new product development is making both for Bandwidth Engine and LineSpeed product families. Following my remarks, Jim will discuss our financial results and then we’ll open the call to questions from you folks. The third quarter was extremely gratifying in terms of design wins, as it represented our highest design-win quarter to date. With three quarters behind us, we now expect to substantially beat our goal of doubling design wins year-over-year. On the revenue front we're also seeing customer orders and back log increasing as our earliest design wins are starting to ramp into production. From an operational point of view it’s very satisfying. On the technical front in quarter three, we taped out BE3 and will receive packaged silicon next week, as we continue to make progress towards our goal of sampling this new product family in early quarter one of 2016. We also introduced our newest products in the LineSpeed family, sample and to sell to customers and secured a few new design wins. Taking a look at this quarter’s record setting number of design wins reveals that we have now won more than 40 new design wins so far this year and have as yet one quarter left to complete. These new wins are primarily driven by our Bandwidth Engine products, in particular Bandwidth Engine 2. Bandwidth Engine 2 wins this quarter included six new line cards designed with our Tier-1 customer where our architectural footprint is expanding significantly. We also secured wins with two new customers as well as several re-use…

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 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 third-quarter financial results. Total revenue was $1 million, comparable with the previous quarter and compared with $1.1 million in the third quarter of 2014. Product revenue from the sale of our integrated circuits was $0.6 million in the third quarter of 2015 compared with $0.5 million in the previous quarter and $0.4 million in the year-ago period. Royalty and other revenue for the third quarter of 2015 was $0.5 million, consistent with the previous quarter and compared with $0.7 million in the year-ago period. Royalty and other revenues primarily comprised of royalties received from semiconductor customers whose products include our IP. GAAP gross margin was 22% in the quarter compared with 43% last quarter and 61% in the year-ago quarter. The sequential decrease in gross margin was due primarily to a $0.2 million reserve recorded in the third quarter to cost of goods sold for slow-moving Bandwidth Engine 1 inventory. During the quarter, we made significant progress in reducing production costs for our Bandwidth Engine 2 products, including wafer pricing reductions and reduced back-end test costs as we reduced test times and invested in new testing hardware. We expect to begin realizing lower cost of goods sold on Bandwidth Engine 2 products, which we will begin…

Thank you. [Operator Instructions]. And our first question comes from the line of Gary Mobley from Benchmark. Your line is open. Please go ahead.

Hi, guys. Good afternoon. Sounds like you guys are out of the office today. Hopefully you can hear me alright. I realize the quarter was probably quite busy for everybody at the company, although it didn't really materialize in strong revenue. But related to that, I was hoping that you could confirm sort of a unit quantity that was shipped in the third quarter, whether or not it was around 5,000 or 6,000 Bandwidth Engine units, and do you have any additional visibility versus your past visibility as to the degree to which Bandwidth Engine 2 or Bandwidth Engine 1 unit shipments may increase in Q4?

So I'll take a shot at that, Jim, and you can add. Basically, Gary, if you take whatever our revenue was and divide it by 120 – say, divide it by 150 and then divide it by 100 that -- one of those – that somewhere in there would be the unit selling price of units last quarter and that would tell you what the volume of shipments were. Having made that statement on it I mentioned on my part of the call that, period-to-period this past year, the unit -- the number of units as well as the revenue represented by those units on the backlog has gone up at the beginning of every period. And we have some indications that it's going to continue on up into 2016. So we think we've come past the turning point. So without breaking it down into exact units, perhaps I've given you the capability of doing a quick computation for yourself. Further, I would just add to something Jim said because he’s been reminding me about this on a period-to-period basis for a while now. I think the last half of the fourth quarter, the units that will move through our back end should move to the back end at a gross margin somewhere a little bit north of 20%, 25% gross margin because we shut down the line sort of and switched it over to a new flow, in this most recently completed quarter that we're talking about today. And that is why revenue may have been a little bit depressed. But we should make up for it in the fourth quarter, I think. So as we go out of the -- today's quarters, say the last few lots, I'm going to say that we should be doing it at somewhere, like I say 20%, 25% gross margin, and then as we go through the first quarter of next year, as we go through the second half of that quarter, we should be moving to something north of 30%, maybe slightly south of 40% gross margin. More importantly, we have prayed now, so that if I should get out in March and I'm running at 35%, 36%, 37%, 38% gross margin, I'm going to know exactly where the low-hanging fruit is. So to your question earlier about, a few times about gross margin, a number of the -- we've really switched the process we now are or are in the process of ramping, in some cases expanding, buying more burn-in board sockets and so on and so forth, and we have a very good path to getting our gross margin in line. And I think I've given you the keys to figuring out what our unit shipments were. I hope I answered your question, Gary.

Sure. Sure. And extending your comment, is it still the company's long-term goal to have gross margin in the range of 60% to 65% for the BE family?

The answer to that question is we want to be north of 60%, and 65%, that is north of 60%. You can see now that we've prated it and that you can see where we're going to have to address things like wafer costs, piece-part costs, getting stuff, more mass produced, more units at a time out of the oven, shorten up the burn-in cycles, etc., etc. But this product family has great value. It's especially the Bandwidth Engine, a family is very unique and very important in the problems it solves. So yes, our objective is that we would have a 60% gross margin product family and that the P&L would reflect that.

Okay. The way I understand it is that your volumes are really -- your volume shipments are really going to be determined by the timing of one particular Tier-1 router OEM turning on what has been so far multiple designs for various products that they intend to ship. And I know you haven't had much visibility, demand visibility from that particular customer in the past, but has that changed at all? Do you have better visibility as to the volume production shipments of some of those designs?

No, I mentioned on the call it's very hard to predict two things. One is what do they forecast as the total success of a line card that we're blessed with being on? And what do they forecast revenue for that will be and will it be a blue bird? And then the second thing is how fast will it be accepted and how fast will it ramp? So we can't see that very well, but you said one thing I'd like to correct. I believe that sometime in the second quarter of next year we're going to go past a 100 design wins for Bandwidth Engine family and that is not a trivial number. And we aren't really dependent on any one customer. Jim or I mentioned that we've started to see our first wins in systems that are heavily software-defined networking capable. We're starting to get used for high-definition video streams. We have found that there are certain areas that were very, very important and we serve -- that we're very, very good at such thing as handling high-speed statistics or maintaining, in some cases, excess control lists. And in the -- when we're out there at a 100 different design wins across, say by that time, 2015, to say 25, maybe 28 customers something like that. We're going to be generating some significant revenue. And I won't try to speculate what the biggest -- what customer will be the most performance, but we won't be -- such as when we started NetLogic for a long time, 65% of the business was Cisco. It won't be like that in this case. We're much more spread across a number of customers.

Okay. Last question from me and I'll jump in the queue. Reading to Bandwidth Engine 3, I appreciate the fact that part or at least some of the three parts have been taped out, if not all, correct me if I'm wrong there. And you mentioned some packaged silicon you expect back from your foundry, presumably TSMC, in the next week or so. Based on sort of the simulation software ecosystem that you've been building the parts with, designing the parts with, what is the likelihood of the packaged silicon coming back with any sort of flaw?

Well, if I had Tom Riordan in here – Tom, who's a Valley icon in a few ways, if I had Tom sitting here beside me I think he would tell me that between us, mostly driven by him. We have done a higher level of verification on this product than probably anything we've ever done before. And either one of us in our prior lives, and we think that we're in pretty good shape here. We never had to do any major design to BE2 and BE1, and we're vastly more familiar with BE3 as a result of having done BE1 and BE2. So we remain optimistic that these are going to come back and after some suitable characterization and verification, we'll be able to drop them into reference boards and ship them to customers. And that we're very optimistic as well that we're going to marry up well within MPS400 because an enormous amount of work was done and on both sides of the aisle there were extremely bright people that spent an enormous amount of time making sure they handshake -- the parts handshake in a very nice way.

Okay, alright. Well, I appreciate the comments, guys, and best of luck. Thanks.

Thank you. Thank you, Gary.

Thank you. Our next question comes from Krishna Shankar from ROTH Capital. Your line is open. Please go ahead.

Yes. Len and Jim, congratulations on the new design win momentum. With regards to the new customers that you have design wins this quarter, can you sort of give us a little more color on the types of customers they are, are they in telecom, networking, cloud security, can you sort of give us some sense for what types of customers they are and what the cadence for their ramps might be for BE2?

Well, we think that we're still doing a great deal of stuff inside of the network itself on the -- at the edges and in the core. Certainly we've had great success sitting on the edge of the data center and some of the leading-edge suppliers of security appliances. We've seen our partner that's in the data center itself starting to consider cutting and pasting that is now that he understands our part and the switchover costs have been overcome. He's looking at using it in more places. We -- I haven't looked too much at the size of the company that where we've won some orders where he’s using it for transporting, I'm going to call it data streams that’s either high-definition video. But he is certainly a significant player in that space. So I can't give you much better answer than that. I think it's fairly widely-spread from the user edge all the way through to the data center and back, but probably the most heavily utilized place is from the edge of the data center to the IP edge, something like that, Krishna.

Okay. And then with regard to the revenue ramp, you did mention that backlog every quarter continued to increase. Would you anticipate sequential revenue growth in Q4 and -- I know that you don't really give guidance, but if you could give us some sense for what the growth characteristic might be for revenue in Q4? And then in the 2016, is it a more second-half 2016 kind of revenue ramp or do you see visibility on revenues picking up early in 2016?

So Jim, why don't you start off with that one? I think you live with those models more than I do.

Sure. As you said, Krishna, we don't provide guidance. But that said, looking to the fourth quarter and the comments I made regarding inventory spend, etc., I would look for recognizing the absolute dollars are still small as we're just beginning the production ramps. Nonetheless, the percentage increase will be very significant. And we'd be looking to break the million dollar total in the fourth quarter and continue growing in through 2016, and we're currently working on our forecast scrubbing that, and we do get more and more data right now kind of coming in. But still the backlog kind of runs out four months or so. These contract manufacturers, in particular, I think as Len may have said on this call, our Tier-1 is using I think three or so. They don't want to give you much forecast beyond what you need to for the short run, etc. But particularly looking to the second half of '16, I think we'll see more designs turning on, in particular kind of starting in the mid -- middle of 2016 with our data center and data center security wins that we first won back in the fourth quarter of 2014. And then no, I don't think we declared them today but there's a couple more pending with one of those guys, and I think we'd look to those to really start to contribute in the second half of 2016. I'd also note with those guys that the orders -- even albeit still for prototyping on orders kind of maybe in the 100 quantity, they're coming from the contract manufacturers, which to me, is always a good sign that they're progressing and it's already offsite being built. I think with regard to another driver that we didn't see this year, we had hoped for more LineSpeed contribution that's been slower. And as Len talked about we have a number of engagements and design-ins there. But I think we'll wait till more of the second half of that of next year to really see that making a bigger contribution.

So Krishna, I would add to what Jim just said that we don't have to turn much business to make the fourth quarter. Now I'm not trying to put ourselves in a position so that you guys tell Jim you're looking for traditional guidance going forward, but certainly, in the fourth quarter we don't have to turn much to make the business. And I can't see at what percentage of the first quarter is already booked, and because we're small and every order can be a percentage, a measurable percentage it's too erratic to be sure yet. So I can't -- I wouldn't venture to say what percentage of the first quarter is on the backlog already, but the fact of the matter is we're evenly positioned for this quarter and barring any unforeseen surprises, it'll be up.

Great, and so Len, you have now line of sight to revenue for LineSpeed in 2016 and can you talk about where this new Flex product family for LineSpeed fits in with what you already have in terms of design wins?

I'm not quite sure I understood that question. Would you ask me that again, Krishna?

I just wanted to get some sense for revenues in LineSpeed with the existing products that you already have. And then just a few weeks ago, you introduced a new product line, I wanted to get a sense for what the new product -- the LineSpeed Flex Family is targeting versus what you've had before?

So basically, I'll talk a little bit, then I'm going to let Jim talk about looking out into 2016 and what might happen with the LineSpeed. The products that we announced, we've announced a number of products that go into the optical module where we think that we had retimers and gearboxes that are very, very low power, that run at speeds to support this generation of equipment, next-generation as well perhaps. And we are very excited about some of the successes we've seen in that product. And then the Flex Family is intended to serve both the line card and the back plane and I think in its -- and they have a lot of unique features as Forward Error Correction and Multi-Link Gearboxing and so on and so forth. And we are, I think we've announced a number of these products now fit optimally on the line card itself, and we have future announcements coming in that area, as well as future announcements coming where we might be looking at stuff that goes across the back plane.

Okay. And Jim in terms of revenue contribution from LineSpeed, still a relatively small contribution in 2016 compared to Bandwidth Engine?

Yes. I mean when I look out to 2016, it's certainly Bandwidth Engine versus LineSpeed. Its 80% to 90% Bandwidth Engine versus 10% to 20% for LineSpeed. Now while LineSpeed can certainly designs can turn on faster, but given that's a newer product I'd be on the more conservative side on that.

Okay. And then my final question was you folks mentioned exploring other sort of strategic financing options. Can you give us a little more color on that? You had mentioned talking to other strategic partners, licensing strategies, can you give us a sense for what types of strategic financing options you're exploring and where they stand in terms of coming to fruition?

Yes, let me address that and then Jim can fill in if I miss something. So we have talked on this call or at meetings we've attended that we have spent a lot of time looking at how we might collaborate with our partners on future product development. And nothing get's worth reporting on today's call has come of that, so we hadn't said anything. Jim and I or mostly me, I guess, because I'm heading out next week, we're both looking very, very hard at other alternatives for financing and we don't have anything important to say yet which is why we chose to be cautious in our remarks today. We, as in just to summarize what I just said, to date we have not come up with anything that's worth talking about in terms of collaborating on future product development which was something that looked pretty promising but just didn't -- we just couldn't avail ourselves of it. It wasn't good for both parties. And we're looking at a number of other alternatives for financing and unfortunately don't have anything to say today. But suffice it to say and Jim said in his remarks it's -- the guys in the company who are running the operations and Jim and I are paying attention to the balance sheet, and we're focused at this very intensely and hope to have something meaningful to say in a not-too-distant future.

Okay. Thank you.

Thank you. At this time, I'd like to turn the call back over to Len Perham for any closing remarks.

I only have one remark for today. I want to thank you guys for tuning in and listening to us. Many of you have heard me say along the way on this journey with MoSys that we're a publicly-traded venture capital start-up. I'd like to tell you that when I started the journey I didn't expect it would be typical of all the other journeys I've made where it would take longer and cost more, but it has, and it is. And I'd just like to say that I was upside today because the operational progress is good. I made a comment that maybe before the end of the first half of next year we might see as many as 100 plus a few, minus a few, BE design wins. That's not trivial, and that's the basis of growing a really healthy and prosperous company. As I say, it's taken longer and its cost a bit more and I can't say anything other than that's the reality of it. But the company's operationally in a strong place and we're enthusiastic about getting the company to where it's generating shareholder value on a quarter-to-quarter basis. I appreciate you for calling in and listening to us today, and Jim and I look forward to talking to each of you or all of you in the very, very near future. Thank you very, very much.

Ladies and gentlemen, thank you for your participation. This does conclude the conference call. You may now disconnect. Everyone have a good day.