Gsi Technology Inc Q1 FY2023 Earnings Call

Ladies and gentlemen, thank you for standing by. Welcome to GSI Technology’s First Quarter Fiscal 2023 Results Conference Call. Before we begin today’s call, the company has requested that I read the following Safe Harbor statements. The matters discussed in this conference call may include forward-looking statements regarding future events and the future performance of GSI Technology that involve risks and uncertainties that could cause actual results to differ materially from those anticipated. These risks and uncertainties are described in the company’s Form 10-K filed with the Securities and Exchange Commission. Additionally, I have also been asked to advise you that this conference call is being recorded today, July 28, 2022, at the request of GSI Technology. Hosting the call today is Lee-Lean Shu, the company’s Chairman, President, and Chief Executive Officer. With him are Douglas Schirle, Chief Financial Officer, and Didier Lasserre, Vice President of Sales. I would now like to turn the conference over to Mr. Shu. Please go ahead, sir.

Good afternoon and thank you for joining us to review our fiscal 2023 first quarter financial results. Our legacy SRAM business, with its stable revenue and cash generation, continues to fund our APU hardware and software R&D. In the first quarter of fiscal 2023, we delivered a year-over-year increase of 12% in gross profit on modest revenue growth. Our gross margin retention at 60.2% was related to the product mix in the quarter. As a result, we reduced our operating loss from the same quarter a year ago and narrowed our net loss for the first quarter. At the end of the quarter, we have cash, cash equivalents, and short-term investments of $41.5 million. The foundation provided by our historical SRAM business supports the next phase of growth at GSI with the APU business. We have further growth opportunities from our Radiation Hardened and Radiation Tolerant SRAM products. We were expected to receive a Radiation Hardened SRAM order from a prime contractor in the June quarter; however, there has been a delay due to a request for additional specification review. We now expect this order to ship in the second quarter of fiscal year 2023. Didier will provide more detail on this announcement in his comments. The team continued to advance APU opportunities on several fronts. We expect to launch Searchium.ai, our SaaS platform, to be available for alpha users this quarter to address a growing segment of customers interested in a cloud-only solution. The SaaS platform is delivered as a subscription service and features GSI servers with our leaderboard. Searchium.ai accelerates Elasticsearch and OpenSearch workloads. This approach provides an economic solution for businesses scaling to large capacity, including bidding factor datasets without losing accuracy. Searchium.ai also offers fast vector search, providing high-speed, accurate searches of large vectorized text, image, video, and audio databases. The platform uses a simple API integration into a customer’s workflow, enabling rapid deployment and use. The search market is rapidly growing, as evidenced by the success and growth of Elasticsearch.com, which enhances search capabilities with real-time log analysis and visualization and supports high-volume queries. Working with large data tables, where speed is crucial, our SaaS offering can provide increased speed and scalability without losing accuracy. We are excited about making Searchium.ai generally available to all customers, which is currently scheduled to occur by the end of calendar 2022. In July, we released the first version of the full stack compiler for the APU product called the AO Python compiler. This release is a combination of 18 months of effort that created a high-efficiency AO Python compiler for development on cores for host processors, embedded processors, and APU processing arrays. This breakthrough development brings AO Python, which provides the familiarity and the programming environment benefits of Python with the speed of C, to the development of real-time big data AI applications supported by the APU. The AO Python compiler currently supports low-level library costs and intermediate development for algorithm acceleration available to select customers. It has also been shifted to external companies and is being used internally to migrate previous C libraries within GSI for the APU. GSI will increase application library migration to the AO Python compiler over the next quarters. We currently intend to add convolution libraries, image processing, SAR, and general high-level application core development by mid-calendar 2023. Currently, we have numerous early-stage APU projects that are in the initial discussions phase. Several of the large opportunities have arisen from our first-place win in the MoSAIC challenge, where our software performed the fastest and most accurately at various distances and under diverse lighting conditions using images from real-time HD video sourced. This capability has many applications in the large global security market. Utilizing our military and defense business context, we are leveraging the exposure this accomplishment has brought to GSI. Additionally, one of the MoSAIC Challenge sponsors was the Merage Institute, an organization committed to promoting economic growth between Israel and the U.S. One function of the Institute is to facilitate business development, resulting in several valuable new connections to engage with new companies regarding the Gemini platform. Another outcome of the MoSAIC Challenge was an extended scope of our existing SAR project with Elta/MAFAT. This project is advancing, and we are preparing for the final integrations. The POC with Elta is funding the SAR imaging processor system based on our APU technology. We currently anticipate shipping three APU servers with these components to Elta by mid-calendar 2023. The NIE funds from Elta are being used to develop an exclusive perpetual license for the Fast Track projection algorithm. This agreement with Elta will allow GSI to sell SAR system products containing the algorithm. We intend to pursue the entire SAR market with this product. In fiscal year 2022, we increased customer engagement for the APU and made contact in new market segments. We are in the early stages of working with numerous POCs and expect to further our engagement. In fiscal year 2023, we began building the team we need to initiate the Gemini project and manage the process of moving customers through the pipeline from proof of concept to design win and shipping products. We have a roadmap for the APU, and the next generation of Gemini is on track. The design of Gemini-II has been finalized, and we are at the final presentation layout stage. We are on target for taking out by the end of the calendar year. Gemini-II is a highly integrated product that offers great improvements over Gemini-I. It will improve speed and performance by over 8x, with 8x more internal embedded memory, reducing costs compared to the current level and greatly expanding our addressable market. We currently expect to have the first units for Gemini-II ready by calendar Q2 next year. GSI shareholders have been asking for accountability and transparency. I want to assure our shareholders that I understand your frustration, and as the largest shareholder, I share it. Many people on my team are also large shareholders, some of whom have worked with me for decades. I have a sense of urgency to deliver on our goals and create a market for the APU that I know is possible. I welcome open dialogue with our shareholders and value your input. My intention is to make fiscal year 2023 the turning point for this company by building a meaningful pipeline for the APU and closing new business for our groundbreaking technology. Now I will hand the call over to Didier, who will discuss our business performance further. Please go ahead, Didier.

Thank you, Lee-Lean. Let me start with an update on our Radiation-Hardened or Rad-Hard SRAM business. We shipped four prototypes to three separate Rad-Hard customers in the last fiscal year. All the customers are currently testing these systems that require chips to withstand harsh conditions. As Lee-Lean mentioned, we expected another Rad-Hard prototype order in the first fiscal quarter. The release of the purchase order from this prime contractor was delayed to this current quarter. We have the parts ready to ship, so once we have the order, the parts will ship. This prototype order could potentially be the same revenue magnitude of all of our Radiation Hardened orders in the last fiscal year. As a reminder, Rad-Hard is a high-growth profit product for us. If a few of these prototypes move into production, it could add incrementally to fiscal years 2023 and 2024 revenues. Let me switch now to customer and product breakdowns for the quarter. In the first fiscal quarter of fiscal 2023, sales to Nokia were $1.3 million or 14.7% of net revenues compared to $3.8 million or 42% of net revenues in the same period a year ago and $2.0 million or 23.1% of net revenues in the prior quarter. First quarter fiscal 2022 net revenues included orders for buffer stock shipped to Nokia amounting to approximately $1.0 million that were made in anticipation of continued market tightness. Military defense sales were 22.3% of first-quarter shipments compared to 20.0% of shipments in the comparable period a year ago and 22.3% of shipments in the prior quarter. SigmaQuad sales were 44.8% of first quarter shipments compared to 63.6% in the first quarter of fiscal 2022 and 47.6% for the previous quarter. Lastly, I want to comment on the current supply chain situation. We moved the majority of our chip substrate suppliers out of China last year to limit the potential delays caused by any COVID-related lockdowns in China. We are actively addressing supply chain variances that could potentially impact our order fulfillment, but the situation remains fluid. Overall, most of the cost increases from our suppliers were successfully passed on to our customers in December of 2021. We are closely watching costs and evaluating if we need to change prices in the future. GSI and the industry as a whole are constrained by the availability of FPGAs. Since we use FPGAs on our leaderboards, we could potentially be constrained if we receive a large order for an APU platform. However, we are confident that we can fulfill orders we have in hand and for the upcoming quarters for SRAM customers, and we are optimistic that we have sufficient capacity to meet this demand. I’d now like to turn the call over to Doug. Go ahead, Doug.

Thank you, Didier. GSI reported a net loss of $4 million or $0.16 per diluted share on net revenues of $8.9 million for the first quarter of fiscal 2023, compared to a net loss of $4.2 million or $0.17 per diluted share and net revenues of $8.8 million in the first quarter of fiscal 2022, and a net loss of $3 million or $0.12 per diluted share on net revenues of $8.7 million for the fourth quarter of fiscal 2022. Gross margin in the first quarter of fiscal 2023 was 60.2% compared to 54.4% in the prior year quarter and 58.6% in the preceding fourth quarter. Improvement in gross margin was primarily due to changes in product mix sold in the quarter compared to prior periods. Total operating expenses in the first quarter of fiscal 2023 were $9.3 million compared to $9.1 million in the first quarter of fiscal 2022 and $8.1 million in the prior quarter. Research and development expenses were $6.6 million compared to $6.1 million in the prior year period and $6.5 million in the prior quarter. Selling, general, and administrative expenses were $2.7 million in the quarter ended June 30, 2022, compared to $3 million for the previous year quarter and $1.5 million in the previous quarter. First quarter fiscal 2023 operating loss was $3.9 million compared to $4.4 million in the prior year period and $2.9 million in the prior quarter. First quarter fiscal 2023 net loss included interest and other expenses of $26,000 and a tax provision of $60,000 compared to interest and other expenses of $20,000 and a tax benefit of $172,000 in the prior year. In the preceding fourth quarter, net loss included interest and other expenses of $47,000 and a tax provision of $21,000. Total first quarter pre-tax stock-based compensation expense was $638,000 compared to $823,000 in the comparable quarter a year ago and $714,000 in the prior quarter. At June 30, 2022, the company had $41.5 million in cash, cash equivalents, and short-term investments, and $875,000 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 $44.8 million as of June 30, 2022, compared to $45.8 million at March 31, 2022, with no debt. As of June 30, 2022, stockholders’ equity was $61.3 million compared to $64.5 million as of the fiscal year ended March 31, 2022. Our current expectations for the second fiscal quarter are net revenues in the range of $8.5 million to $9.5 million with a gross margin of approximately 61% to 63%. We have maintained an attractive balance sheet with a surplus of cash and no debt.

At this point, we will open the call to Q&A.

Hi, thanks for taking my call. I’ve got some questions about the transition of Gemini-1 in Slide 2. I’m wondering if there will be any inefficiencies there with the software retention for Gemini-I? So you all have currently been reporting on building the software foundation for that. Will there be any need for migration for Gemini-2 and will servers have to be replaced for the customers that currently have the concept servers or the ones that you’re going to be seeing between now and Gemini-2?

Yes, we need to migrate the software library from Gemini-1 to Gemini-2. The good thing is we already have a learning curve, so I anticipate it will be much smoother making the software migration from 1 to 2.

So you’d be using similar templates to be able to retain some of the integral code there?

Well, I think that the learning curve will be there. But I think the detailed implementation, because the circuit is different, will require a strong implementation to fully utilize Gemini-2.

Okay. I appreciate the transparency you mentioned in the call about your outlook and development updates. I certainly appreciate it, and I see that you’ve got a lot of traction. So yes, we share your reasons that these exciting developments are of interest to us and other shareholders. Have you thought about releasing a roadmap for the Gemini project to post on your website publicly?

Are you talking about Gemini-2?

Yes, comprehensively the overall Gemini project.

Yes. I guess we don’t have it at this moment, but we can look into it.

That would be nice for networking purposes. You mentioned that production might have limitations, the overall capacity to produce those FPGAs. What kind of scalability do you have for the initial alpha customer base for Elasticsearch? Will you be saturated with that or, if you open it up to the public, will you be able to bring in larger customers? Companies like Snowflake or other database providers have proprietary processing; how will sales of products work for your first launch?

So let me answer the beginning of that question. We have already installed some servers in our Sunnyvale facility, our Israeli facility, and also at a third-party CoreSite location. That hardware has already been installed for the upcoming OpenSearch engagement we have, and it can also be used for Elasticsearch. We have additional hardware in-house, along with the raw components, such as FPGAs, to build up a certain amount. We have FPGAs on order, and while we don’t have unlimited material on hand at this point, we do have enough for alpha and beta customers for sure, and even to add more to our data centers. However, if something large were to break, we would certainly have lead time issues in supplying that hardware, which is the essence of that comment.

Do you have any information about the model for revenue for Elasticsearch during the initial rollout? Will that be subscription or a-la-carte?

Yes, we are still working on that, and we haven’t released any revenue forecast at this point.

My last question is about the CHIPS Act that is moving through Congress right now. Do you anticipate benefiting from any of that, perhaps in terms of development incentives?

Yes. I don’t see the direct benefit, but overall, it will lead to more funding for the industry and government projects. We are actively looking for SCIR, so indirectly I believe we will benefit from it. Did that answer your question?

Yes, certainly. It seems to influence more the demand side than your overall supply side. I was also wondering, I didn’t catch the name of the Israel-U.S. collaboration organization that is facilitating some of your engagements.

I’m sorry, can you repeat that? You’re cutting out. It’s hard for us to understand.

Yes, my apologies. It was mentioned that there is an Israeli collaboration facilitation organization you are working with, and I didn’t catch the name.

Yes, it’s the Merage Institute. The last challenge we participated in, the MoSAIC challenge, was sponsored by a few entities, including the DoD and MAFAT. The Merage Institute, due to our win in that challenge, invited the VP of our APU division in Israel to a two-week seminar with other Merage Institute members. This opened access to many high-level meetings with influential customers who could be using APU. It’s early in the process since the Merage competition was just this year, but we’ve already seen movement on potential POCs based on that relationship.

It’s great to see you all retaining those relationships. I appreciate all your efforts. Congratulations on the development.

Thanks.

At this time, there appear to be no more questions. I would like to now turn the call back over to Mr. Shu for closing remarks.

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

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