GSI Technology, Inc. (NASDAQ:GSIT) Q3 2023 Earnings Conference Call January 26, 2023 4:30 PM ET

Company Participants

Lee-Lean Shu - Chairman, President and CEO
Didier Lasserre - VP of Sales
Douglas Schirle - CFO

Conference Call Participants

Operator

Greetings, and welcome to GSI Technology Inc. Third Quarter Fiscal Year 2023 Results. [Operator Instructions] As a reminder this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Lee-Lean Shu, Chairman, President and Chief Executive Officer. Thank you, Mr. Shu. You may begin.

Lee-Lean Shu

Good afternoon, and thank you for joining us to review our fiscal third quarter 2023 financial results.

Third quarter revenue of $6.4 million was within guidance but at the lower end. Revenue growth was impacted this quarter by the uncertain outlook for the global economy. Despite this, we continue to see demand for our SRAM products, a interest in our radiation hardened and radiation tolerant products.

While customer order patents are variable right now, these fluctuations are related to economy and external factors, not changes in the market requirements for our products. Despite the lower revenue in the quarter, increased sales of higher-margin products, resulting gross margin of 57.5% exceeding the high-end of our guidance range.

While research and development costs declined sequentially, we saw an increase in selling, general and administrative expense, primarily related difference in the level of quarterly adjustments to contingent consideration and the severance expense related to recent layoffs.

To ensure success and align our resources with the Company's goals, we announced several cost-reduction initiatives as at the end of November 2022. The executive team took a comprehensive approach to identify and implement our expense reduction measures, which included a thorough review of all expenses and was streamline process and improve operational efficiency.

We have two objectives with this strategy, one to reduce our cash burn; and two, to align our resources around developing the APU. We are on track to achieve $7 million in savings on an annualized basis to target cost reductions. These measures aim to rightsize our operation and precisely manage spending to increase efficiency and focus our resources on advancing the proprietary APU technology.

Let me update you on where we are today with APU hardware and software. The hardware development team is on track to take out Gemini-2 in the first half of this calendar year, which puts us on the schedule to see the first win by late summer. In that case, we could test the Gemini-2 chip by ['24]. If everything goes accordingly, we could have a second table to fix back to early last calendar year.

In parallel, once we have achieved that the software team can use, they will start developing the API and the library for Gemini-2. Keep in mind that it took [indiscernible] in the Gemini-1 and forth to increase the EU and speed.

Gemini-2 has 8x memory density over Gemini-1 and has 30x cost performance improvements. Gemini-2 can greatly enhance our market push of APU technology and provide further substantial savings in power and mono server footprint while enabling large-scale real-time search and HPC workloads.

Software for Gemini-1 is an area of intense focus currently. We have a full build up [TV MAU] library deployed and used by customers and one research institute has been able to rely on library based only for their projects. Our GRA library is developed for SAR applications, and we have completed a POC project with IAI/Elta [indiscernible]. The Elta is also evaluating a GPU solution to benchmark against the APU. We could see some initial sales once the APU performance is proven favorable.

In the meantime, we are marketing the SAR solution to other customers. We have recently improved our GSI library for similarity search applications. We are engaging with a large corporation for the POC project for our own print similarity search project that requires very high accuracy and a low latency. The improved GSI library is perfectly suited for this application.

On the competitor front, we have completed C competitor that customers are using to program APU with [CPU]. We are in the process of completing [indiscernible] competitor to allow customers to run API application and their library in person. Currently, [indiscernible] is still in internal use and will be released for general use in July.

Now I will hand the call over to Didier, who will discuss our business performance. Please go ahead, Didi.

Didier Lasserre

Thank you, Lee-Lean Shu.

Let me switch now to customer and product breakdown for the third quarter. In the third quarter of fiscal 2023, sales to Nokia were $1.3 million or 20.0% of net revenues compared to $1.9 million or 24.0% of revenues in the same period a year ago, and $1.2 million or 13.6% of net revenues in the prior quarter.

Military defense sales were 26.2% of third quarter shipments compared to 27.1% of shipments in the comparable period a year ago and 22.4% of shipments in the prior quarter. SigmaQuad sales were 45.2% of third quarter shipments compared to 40.5% in the third quarter of fiscal 2022 and 58.1% in the prior quarter.

Regarding increased production costs, we are evaluating where we can pass on the increased wafer prices that TSMC announced last year, which became effective starting January of this year. Gemini-1 hardware is now market-ready. We have two board configurations, the leading E which is in production and the leader S, which is an SSD form factor Board and is being finalized today. In the third quarter, we shipped one LiDAboard to potential SAR customer, and we shipped one [LiDA-e] server to a research institute that will explore Gemini-1 for encryption applications.

I'd now like to hand the call over to Doug. Doug, go ahead, please.

Douglas Schirle

Thank you, Didier.

We reported a net loss of $4.8 million or $0.20 per diluted share on net revenues of $6.4 million for the third quarter of fiscal 2023 compared to a net loss of $4.6 million or $0.19 per diluted share and net revenues of $8.1 million for the third quarter of fiscal 2022 and a net loss of $3.2 million or $0.13 per diluted share on net revenues of $9 million for the second quarter of fiscal 2023. Gross margin was 57.5% compared to 55.3% in the prior year period and 62.6% in the preceding second quarter. The changes in gross margin were primarily due to changes in product mix sold in the three periods.

Total operating expenses in the third quarter of fiscal 2023 were $8.5 million compared to $9 million in the third quarter of fiscal 2022 and $8.8 million in the prior quarter. Research and development expenses were $5.5 million compared to $6.2 million in the prior year period and $6.4 million in the prior quarter.

Selling, general and administrative expenses were $3 million in the quarter ended December 31, 2022, compared to $2.8 million in the prior year quarter and $2.4 million in the previous quarter. Third quarter fiscal 2023 operating loss was $4.8 million compared to $4.5 million in the prior year period and an operating loss of $3.2 million in the prior quarter.

Third quarter fiscal 2023 net loss included net interest and other income of $61,000 and a tax provision of $84,000 compared to $15,000 in net interest and other income and a tax provision of $64,000 for the same period a year ago.

In the preceding second quarter, net loss included net interest and other income of $14,000 and a tax provision of $37,000. Total third quarter pretax stock-based compensation expense was $654,000 compared to $740,000 in the comparable quarter a year ago and $661,000 in the prior quarter.

At December 31, 2022, we had $35.2 million in cash, cash equivalents and short-term investments and $0 in long-term investments compared to $44 million in cash, cash equivalents and short-term investments and $3.3 million in long-term investments at March 31, 2022. Working capital was $39.2 million as of December 31, 2022, versus $45.8 million at March 31, 2022, with no debt. Stockholders' equity as of December 31, 2022, was $54.8 million compared to $64.5 million as of the fiscal year ended March 31, 2022.

Regarding our outlook for the upcoming fiscal fourth quarter, we anticipate net revenues in the range of $5 million to $5.6 million, with gross margin of approximately 49% to 51%.

Operator, at this point, we would like to open the call to Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question will come from [Kurt Terriman Dennis with Carl Heing, Inc.] Please proceed with your question.

Unidentified Analyst

Hi, guys. What are you thinking cash burn looks like maybe out kind of looking out this year with the revenues now being looking quite a bit lower, per quarter may be?

Douglas Schirle

Well, we were looking at somewhere around over $13 million a year and the cost cutting will save us about $7 million a year. So we'll be better off than we were a year ago I believe.

Unidentified Analyst

I mean is it going to be like $4 million or $5 million a quarter?

Douglas Schirle

Oh no, no, no. I think we'll probably be something less than $12 million or $13 million over $13 million that we were previously seeing for the year.

Unidentified Analyst

Okay. Is the sale leaseback and option for the building or is that been looked into as you - other measures?

Douglas Schirle

It's something that we looked at, and it's something that we can consider for the future.

Unidentified Analyst

Okay, sounds good. Well, good luck, hopefully something with the APU comes through here in the next few quarters for number one.

Douglas Schirle

Great, thank you, Kurt.

Operator

And our next question is from Luke Bowen, who's a Private Investor. Please proceed with your question.

Unidentified Analyst

Hi, wondering if you have come across any new application ideas and just generally, which APU applications are you most excited about and this kind of been in context?

Lee-Lean Shu

So we're set up.

Unidentified Analyst

Yes go ahead.

Didier Lasserre

I'm sorry, can you rephrase your question.

Unidentified Analyst

Sorry yes. Yes, I was going to clarify that maybe in the context of, as you've all been exploring your technology and exploring marketing channels going to conferences like the Buzzwords Conference, just wondering if anything new has arisen or yes light bulbs getting brighter?

Didier Lasserre

Right, so right now, we're focused on the SAR, as Lee-Lean mentioned so that's - we've done a POC, and we've obtained some very nice algorithm to go along with our hardware. So the benchmarking we've done against CPUs and GPUs are very promising for us, both on a performance level, a power level and a form factor level, which is important depending on where they deploy some of these systems. And so that's one area that we've started - well, not started, but we've been contacting all the SAR players, both on a commercial level and on a government level.

As far as - I'm sorry, the other market is the fast vector search is something that we have already put in a plug and we've talked about in the past. Since then, there are a few other applications that we've had customers come to us with. One of them we - I mentioned in my script, which was one of the boards or systems, I should say, it was a server that we shipped last quarter was for encryption application. And there are a few others that have recently come up. I'm a little early to talk about them just because we haven't gone through the process of seeing what our advantage is yet. But there are, certainly no lack of different applications for the Gemini chip.

Unidentified Analyst

That's excellent. Yes, it's really good to hear you can be able to move forward confidently yes checking off more boxes. Okay, that kind of I think discharge is one of the other question, because I know you're - well, I guess, I'll just throw it out there as a general prospect, not necessarily for the yes the near term - not near-term, but I saw that Amazon Prime Air launched their first test sites for their delivery drone program, [indiscernible] adviser was the original leader of that program? Yes, so just curious if that could be looking at mobile data and autonomous vehicles, drones, vehicles, yes like small flying vehicles for commercial transportation and personal transportation. I wonder if you're still seeing that as a potential field for coordinate managing mobile data like that.

Didier Lasserre

So we are, but more for the Gemini-2 chip. And the reason I say that is, if you're familiar with our solution, our Gemini-1 chip goes on a leaderboard, as I mentioned. And the leaderboard for the Gemini-1 has an FPGA on there that has certain functionality that is critical for our solution. With Gemini-2, we take that functionality that's on the FPGA, and we put it with - in the Gemini-2 chip. And so now we can rid ourselves of that large FPGA.

And so some of the applications you're talking about power and form factor being smaller is more important. And so being able to rid ourselves of that FPGA will allow us to pursue those markets that were really a bit too challenging for our Gemini-1 chip.

Unidentified Analyst

Yes, all right. Yes, because I'm thinking about that and there's like next step prospects is kind of thinking about the sensitivity of timing and business relationships, especially these advanced fields that are requiring a lot of R&D and my engender kind of a commitment from these large companies that are developing their programs and the component companies and how they're yes say, making systems on chips that are highly customized and requiring a lot of investment? They hope to get something back on and just trying to think about how they might approach or how you might approach that relationship in terms of holding the place and for the future development and not having to directly compete with all these - like inefficiently developed system on chips toe-to-toe? But rather kind of for them to anticipate being able to adopt your hardware and even your software and to kind of have that in mind as they develop these programs. Yes kind of wondering if that's something that you are seeing in terms of a one to two-year development plan as you talk to potential clients?

Didier Lasserre

So I want to make sure - I'm not sure I fully understood your question. But as far as custom silicon and system on chips and everything out there - most everything has really been geared towards the training portion of the market. And as we've discussed in the past, that's not the application we're focused on. We're focused on similar research. And there are obviously other applications or computation and intensive that our solution, lends itself well.

And because of the way we've architected our part where we actually do the processing and the search in place as opposed to having effective data and rewrite data. We - that technology we have is PAM protected, and we haven't seen anybody try to do that at this point. And so, we have carved out a niche in the similarity search. And so as far as other silicon coming in or other SoCs, it's really, like I said, most of the solutions we've seen have really been geared around trying to make the training faster.

Unidentified Analyst

All right, yes I understand it. Yes thanks for answering and excited you all have gotten just confirmation after confirmation keep rolling.

Didier Lasserre

Thanks Luke.

Operator

Our next question is from George Gaspar, who's a Private Investor. Please proceed with your question.

Unidentified Analyst

Good day to everyone there. George Gasper here, could you relate a little bit more detail about how many employees you have now versus when you started to disengage employment? And how does that relate? What - how many total people have left? And what is your employment number now? And could you give us an idea of the - how much of the stack - how many shares of stock were helped by the employees that you've left go?

Lee-Lean Shu

So we had approximately a little over 180 in total. Now we're down to like right around 165 or so. The paper that left, I don't recall the exact number of options that were canceled upon them leaving, but it wasn't a significant number. I mean, we still have about, I want to say maybe about 8.5 million or so option shares outstanding.

Unidentified Analyst

And say that again, there are - how many shares are outstanding to employees?

Lee-Lean Shu

I want to say it's about 8.5 million cars of shares that have been grounded.

Unidentified Analyst

8.5 million, and then the $654,000 of base - tax-based stock issuance in this recent quarter. How does - that stack up in terms of the total expense for employees non-cash and then cash?

Douglas Schirle

Gasper, I can get back to you offline. I don't have all that information in front of me right now, but I can get it for if you need it. But the stock-based compensation expenses is -- we've been running around that level for several years, and I don't see it going up significantly. It will probably be a similar number.

Unidentified Analyst

Okay. But obviously, this is -- the stock-based -- stock issuance is important to stabilize your total expense structure. And we have to assume that, that's going to stay in that range of the last quarter, would you say that $654,000.

Douglas Schirle

I would say so.

Unidentified Analyst

Okay.

Douglas Schirle

And that isn't -- that's not shares that we've issued. That's just assumed value of the options that we've granted to employees. The accounting rules require us to place the value on the option grants and then expense them over a period of time.

Unidentified Analyst

Right. Okay. And then this $654,000 is rated as an expense in terms of your operation on a quarterly basis, correct? In other words --

Douglas Schirle

We record that in the -- we record that in the income statement every quarter. It's a noncash expense.

Unidentified Analyst

It's a noncash expense? Okay. Yes. All right. Okay. And the gross margin decline that you're looking at for the current quarter. Is there some cost structure associated with that in terms of employees that recently have left or other things that are going on, what you're looking at less sales that you've expressed in your release today so that obviously could easily have an effect on the gross margin decline. But is there something else going on in terms of the cost structure associated with further development of Gemini-2 relative to other quarters. What -- how does it -- what's the comparison in terms of cost structure relative to what you've done on Gemini-1 and now you're doing in Gemini-2.

Douglas Schirle

Well, Lee-Lean can talk about your last question, but -- in terms of the gross margin, the layoffs really didn't impact it that much. Most of the layoffs other than a couple of $100,000 are all in operating expenses, not cost of goods sold. The gross margin is lower because the revenue is lower, and we still have fixed overhead expenses that need to be covered by the margin on sales. So that's why the gross margin number is down. The product mix is still a good product mix with good margins associated with each shipment.

Unidentified Analyst

I see. Okay. Now last question would be back on the progress being made in Gemini-2. This has taken a long time for the company to really generate customers giving you orders and expanding what they are going to use it for. Do you feel like you're very close now in that by the end of the current quarter, say, the end of March, that you'll be able to actually have orders in Gemini for Gemini-2 going forward or is -- or do you envision that it's still going to take more time into the -- in the June quarter or the September quarter. Can you kind of give us an idea of what you're thinking about in terms of really starting to spin out some revenue stream here?

Douglas Schirle

Yes. So at this point, we're still seeding the market and building the pipeline. As I mentioned, we shipped a couple of systems last quarter. We're anticipating to ship a few more, and it's building that pipeline now. And so we don't have any production orders at this point. It's still building that pipeline.

Unidentified Analyst

I see. Okay. And have you been affected negatively on the tremendous storm conditions in California from the middle of the state up. Has that created any kind of problem for you to deal with?

Douglas Schirle

No, not at all.

Unidentified Analyst

Okay. All right. Okay. Well, I think that this has taken a long time in terms of years to get this action going forward on to Gemini-1 and into 2. And if something's got to really start to happen here in terms of getting -- and the interesting thing is that with this decline that is being seen in your business, generally speaking, I mean when I say your business, I mean, the general business associated with the chips, it would seem like what has been happening in the last couple of three quarters generally for the industry, would really put you in a position to take advantage of really getting up on track and going with some business that would be developed from what you've been trying to accomplish in, say, the last year. Can you say anything about that?

Douglas Schirle

I'm not sure we follow the trend of thought there. I mean, certainly, we've had the general slowdown in our legacy business, and we're continuing to pursue the new products, but I'm not sure we followed that your trend of thought there.

Unidentified Analyst

Okay. Well, what I'm just saying is that with the business having fallen off and trying to see ways of taking advantage of moving into a broader customer base as you're starting to move forward into the Gemini-2 area that may be the fact that the industry has got to come out of this decline that it's experiencing. But with you having something new to bring to the market that we -- it would be possible for GSI to really take advantage of maybe some momentum because of what's happened in the industry going downward and that if you're really getting close now to introducing innovations that you've been working on in Gemini-2, I would think that the shareholders of your company should be certainly looking forward to a turnaround in revenue stream beyond the first quarter -- beyond this current quarter.

Douglas Schirle

Exactly, yes. Yes, we do anticipate -- even in the legacy, we anticipate a bounce back by the middle of the year as far as the revenues go based off of input from customers. And again, it's just we need to continue the process with the APU, continue the development we're doing with researchers with the government applications and continue to just move forward. It's a process.

Unidentified Analyst

I see, okay.

Lee-Lean Shu

In the marketplace, we are in. We see the Gemini-1 has a better solution than all the competing products. And the Gemini-2 is the least and bounds better than the Gemini-1. And we are pretty confident that will create the market leader for the -- in the area we are in.

Unidentified Analyst

I see. Okay. Thank you very much.

Douglas Schirle

Thanks George.

Didier Lasserre

Thanks George.

Operator

[Operator Instructions] As there are no further questions at this time, I would like to turn the floor back over to management for closing comments.

Lee-Lean Shu

Thank you all for joining us. We look forward to speaking with you again when we report our fourth quarter and full year fiscal 2023 results. Thank you.

Operator

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.