Gsi Technology Inc Q3 FY2023 Earnings Call

Greetings, and welcome to GSI Technology Inc. Third Quarter Fiscal Year 2023 Results. 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.

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, and interest in our radiation-hardened and radiation-tolerant products. While customer order patterns 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 resulted in a 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 expenses, primarily related to differences in the level of quarterly adjustments to contingent consideration and severance expenses related to recent layoffs. To ensure success and align our resources with the Company's goals, we announced several cost-reduction initiatives 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 to streamline processes 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 right-size 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 schedule to see the first win by late summer. In that case, we could test the Gemini-2 chip by 2024. If everything goes accordingly, we could have a second table fixed back to early last calendar year. In parallel, once we have achieved that, the software team can start developing the API and the library for Gemini-2. Keep in mind that it took considerable time in the Gemini-1 development 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 currently an area of intense focus. We have a full build of the library deployed and used by customers, and one research institute has been able to rely on the library solely for their projects. Our GRA library is developed for SAR applications, and we have completed a POC project with IAI/Elta. 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 a POC project for our own print similarity search project that requires very high accuracy and low latency. The improved GSI library is perfectly suited for this application. On the competitor front, we have completed competitor analysis that customers are using to program APU with CPU. We are in the process of completing a competitor to allow customers to run API applications and their library in person. Currently, the competitor solution 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, Didier.

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 LiDA board to a 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.

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 a gross margin of approximately 49% to 51%. Operator, at this point, we would like to open the call to Q&A.

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

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

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.

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

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.

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

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

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

Great, thank you, Kurt.

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

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

So we're set up.

Yes, go ahead.

I'm sorry, can you rephrase your question?

Sorry 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?

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 algorithms 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 where 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 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, 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 for encryption applications. 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.

That's excellent. Yes, it's really good to hear you can move forward confidently and check off more boxes. As for your question, I know you're curious about the broader prospect, not necessarily in the near term. I noticed that Amazon Prime Air has launched their first test sites for their delivery drone program, and I recall that the original leader of that program was an adviser. I'm interested in whether there is still potential for mobile data management in relation to autonomous vehicles, drones, and small flying vehicles for both commercial and personal transportation.

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 in the Gemini-2 chip. And so now we can rid ourselves of that large FPGA. 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.

Yes, all right. Yes, because I'm thinking about that and there's like next-step prospects kind of thinking about the sensitivity of timing and business relationships, especially these advanced fields that are requiring a lot of R&D and may engender kind of a commitment from these large companies that are developing their programs and the component companies and how they're 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 for 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 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.

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. As we've discussed in the past, that's not the application we're focused on. We're focused on similarity research. There are obviously other applications or computation-intensive that our solution lends itself well. Because of the way we've architected our part, where we actually do the processing and the search in place as opposed to having to fetch data and rewrite data, we have that technology protected, and we haven't seen anybody try to do that at this point. We have carved out a niche in similarity search. 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.

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

Thanks, Luke.

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

Good day to everyone there. George Gaspar 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 stock options were held by the employees that you've let go?

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 option shares outstanding.

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

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

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?

Gasper, I can follow up with you later. I don’t have all the information available at the moment, but I can get it for you if necessary. Regarding stock-based compensation expenses, we've maintained a consistent level for several years, and I don't anticipate a significant increase. It will likely remain around the same amount.

Okay. The stock issuance is important to stabilize your total expense structure. We should expect that it will remain around the last quarter's figure of $654,000.

I would say so.

Okay.

That isn't shares that we've issued; it's simply the assumed value of the options granted to employees. The accounting rules require us to assign a value to these option grants and then expense them over time.

Is there a specific cost structure linked to the gross margin decline you're experiencing this quarter? Have recent employee departures or reduced sales as mentioned in your release contributed to this decline? Additionally, how does the cost structure for the development of Gemini-2 compare to what you experienced in the previous quarters with Gemini-1?

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.

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 do you envision that it's still going to take more time into 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?

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.

I see. Okay. And have you been affected negatively by 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?

No, not at all.

I think it's taken a long time to make progress with Gemini-1 and 2. There's a need for things to really start moving forward, especially with the decline in the chip industry generally. It seems that what has happened over the last few quarters could position you well to capitalize on opportunities and advance the business you've been trying to develop over the past year. Can you provide any insights on that?

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.

What I'm saying is that although the business has declined, there are opportunities to expand into a broader customer base as you advance into the Gemini-2 area. The industry needs to recover from its current downturn. However, with new offerings forthcoming, GSI might be able to gain some momentum due to the industry's struggles. If you are nearing the launch of the innovations you've been developing in Gemini-2, it is reasonable for shareholders to expect a revenue turnaround beyond the current quarter.

Yes, we expect a recovery by the middle of the year regarding revenues based on feedback from customers. We need to keep progressing with the APU, continue our development with researchers on government applications, and keep moving forward. It's an ongoing process.

I see. Okay.

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 leaps and bounds better than the Gemini-1. We are pretty confident that will create the market leader for the area we are in.

I see. Okay. Thank you very much.

Thanks, George.

Thanks, George.

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

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.

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