Earnings Call Transcript - GSIT Q4 2020

Operator, Operator

Ladies and gentlemen, thank you for standing by. Welcome to the GSI Technology's Fourth Quarter and Fiscal Year 2020 Results Conference Call. Before we begin today's call, the company has requested that I read the following safe harbor statement. The matters discussed in this conference call may include forward-looking statements regarding future events and the future performance of GSI Technology that involves risks and uncertainties that could cause actual results to differ materially from those anticipated. These risks and uncertainties are described in the company's Forms 10-Q and 10-K filed with the Securities and Exchange Commission. Many of these risks are currently amplified by and will continue to be amplified by or in the future may be amplified by the COVID-19 global pandemic. Additionally, I have also been asked to advise you that this conference call is being recorded today, May 7, 2020, 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 and Didier Lasserre, Vice President of Sales. I would now like to turn the conference over to Mr. Shu. Please go ahead, sir.

Lee-Lean Shu, CEO

Good afternoon, and thank you for joining the call. Today, we will explain the status of our business in the current environment, provide an update on our APU products and report on our fourth quarter and full year fiscal 2020 financial results. Despite the uncertainty created by the COVID-19 global pandemic, we remain focused on our long-term strategy. The COVID-19 global pandemic has created unique circumstances for all our stakeholders. We have instituted many preventive measures and are regularly evaluating those measures and others as we continue to better understand the environment that we are and will be operating in. We are confident in GSI Technology's ability to succeed in these difficult times, given our strong financial position, our team's tremendous experience and knowledge, and our legacy business that provides funding for our new product lines. As of March 31, 2020, we had over $70 million in cash, cash equivalents and short-term and long-term investments with no debt. Outside of Taiwan, where there are low homeowner increases, the majority of our employees around the world are working from home. Our productivity has remained high, and we are moving forward on achieving our product milestones. I'm grateful for all of our employees' commitment to delivering excellence in product, service and support during these challenging times. In the fourth quarter, we completed the benchmarking of our initial APU product, Gemini-I. In early April, we published the benchmark results for Gemini-I in a billion-scale similarity search using the server containing 4 Gemini APU boards running at a rate of 400 megahertz. The results show that Gemini-I performs extremely fast, accurate searches on large datasets with a smaller footprint and lower power consumption for a much lower total cost of ownership. Gemini is high-performance in speed and accuracy with a lower total cost of ownership, and this is the significant distinguishment in today's search solutions. Real-time searches of large databases are increasingly a critical function for transforming business, scientific and governmental processes. The ability to embrace more extensive solutions and provide better performance at a lower cost will enable GSI to enter the new market with Gemini-I. There are many differentiators in the Gemini-I's architecture that create this enhanced performance. The primary differentiator is the memory sensing design that removes the limitation of serial processes. The Gemini APU-based machine trains the database into the memory and also serves as processors. This configuration allows the system to use fewer CPUs and GPUs, compressing computation speeds from tens of minutes to seconds, even microseconds, in numerous critical search applications. Another key differentiator is the number of ALUs or arithmetic logic units on the Gemini chip. A GPU typically has thousands of ALUs, and the CPU has about a dozen. Gemini-I has 2 million ALUs, allowing the APU to break down the query into a much more granular search. Lastly, the internal memory and the database loaded into the APU reduce search times and use less power to perform the computation. Scalability is another critical differentiator of the Gemini APU. For large databases that cannot fit in one APU chip, we can integrate multiple boards with many chips into the server. We can build servers with multiple Gemini boards to scale with the size of the database while retaining our performance and keeping power consumption low. Gemini-I's memory loaded with the entire database allows for extremely fast processing times. In some search situations, current solutions require a large number of extensive GPUs and CPUs to deliver performance at scale. The search market is growing, and these new solutions, such as the Gemini APU, deliver performance while keeping the total cost of ownership low. Finally, Gemini can serve the broader search market as a universal hardware solution and address many different, specific use cases with flexibility and customizable software. Our software library and algorithm contained in Gemini has unique search applications with multiple levels of custom programming from assembly code up to TensorFlow or PyTorch. There are many different applications for search, and we will continue to develop our solution to address more of these applications over time. Despite the unique current circumstances for all our stakeholders caused by the COVID-19 global pandemic, we remain focused on executing the multiple opportunities that lie ahead for GSI. That's the last extent of our progress on Gemini-I. The core business will be variable for the near term, as all products continue to be essential for military and defense, as well as telecommunications and networking customers. Doug will comment on our first fiscal quarter outlook in his prepared remarks. Now I will hand the call over to Didier, who will highlight the sales and marketing progress on Gemini-I and review our business segment performance. Please go ahead, Didier.

Didier Lasserre, VP of Sales

Thank you, Lee-Lean. I'm pleased to report that we are actively marketing Gemini. Our marketing team has created sales collateral to educate end users on all the unique performance characteristics and capabilities of Gemini-I. Outreach is now ongoing for facial recognition and drug discovery. We are preparing to engage with military and government customers for signal classification, object detection and cryptography. Due to current COVID-19 shelter-in-place and work-from-home restrictions, we are building remote cloud-based workshops. We plan to use these remote workshops for demonstrations of Gemini-I's functionality and conduct training with customers on our algorithms and software libraries. Let me share a couple of specific examples of Gemini-I's performance in two applications we are currently pursuing. I am very excited about Gemini's performance in facial recognition search. Our performance data shows prospective customers that the Gemini-I facial recognition search engine can process databases of up to 200 million faces with a single APU board. In these searches, Gemini-I is delivering highly accurate results while reducing query times from many minutes to fractions of a second, all with much lower power consumption and edge processing. Another exciting market we are currently developing is drug discovery. You may recall that in late 2018, we announced a collaboration with the Weizmann Institute in Israel on cheminformatics research. They were an early user of the beta Gemini APU solution. They saw markedly improved productivity with the APU's parallel processing technology with the ability to run multiple molecule queries at speeds that far exceed the CPU's search capability. Now, researchers at the Weizmann Institute are using newly installed boards containing the Gemini-I APU. Based on the premise that structurally similar molecules exhibit similar biological activities, scientists are researching structurally similar compounds to existing drugs that have been successful in treating diseases and finding viruses. With boards containing Gemini-I, Weizmann Institute researchers perform quicker searches using more queries in their database to find molecules with similar properties to their query molecules. The ultimate goal is to decrease the time needed to go from research to clinical trials. Shifting to our sales breakdown for the fourth quarter of fiscal 2020. Sales to Nokia were $2.4 million or 28.3% of net revenues compared to $5.2 million or 41.1% of revenues in the same period a year ago and $2.6 million or 26.3% of net revenues in the prior quarter. Nokia sales have been slower in recent quarters, which we expect to continue through the end of June. The situation is somewhat fluid and is subject to change, but at this time, Nokia's preliminary forecast shows an improvement in sales in the second half of calendar 2020. Military and defense sales were 30.9% of fourth quarter shipments compared to 22.1% a year ago and 18.9% in the prior quarter. SigmaQuad continues to be our best performing product category with sales of 44.7% of fourth quarter shipments compared to 57.4% in the fourth quarter of last year and 62% in the preceding third quarter.

Douglas Schirle, CFO

Thank you, Didier. For the fiscal year ended March 31, 2020, we reported a net loss of $10.3 million or $0.45 per diluted share, on net revenues of $43.3 million compared to net income of $163,000 or $0.01 per diluted share, on net revenues of $51.5 million in the fiscal year ended March 31, 2019. Gross margin for fiscal 2020 was 58.5% compared to 61.4% in the prior year. Total operating expenses were $36.1 million in fiscal 2020, an increase of 13.6% from $31.8 million in fiscal 2019. Research and development expenses were $25.2 million, compared to $21.4 million in the prior fiscal year; and selling, general and administrative expenses were $10.9 million compared to $10.5 million in fiscal 2019. The increase in research and development expenses was primarily due to the development of APU, the company's AI processor, including a charge of $2.7 million during the third quarter of fiscal 2020 for purchased intellectual property that is being incorporated into the next generation of Gemini chips. Fiscal 2020 operating loss was $10.8 million compared to an operating loss of $182,000 in the prior year. The increase in operating loss is primarily due to the decrease in revenue and gross profit and higher research and development expenses. Fiscal 2020 net loss included interest and other income of $712,000 and a tax provision of $247,000 compared to $450,000 in interest and other income and a tax provision of $105,000 a year ago. The company reported a net loss of $3.8 million or $0.16 per diluted share, on net revenues of $8.5 million for the fourth quarter of fiscal 2020, compared to a net loss of $102,000 or $0.00 per diluted share, on net revenues of $12.7 million for the fourth quarter of fiscal 2019, and a net loss of $4.6 million or $0.20 per diluted share, on net revenues of $10 million for the third quarter of fiscal 2020. Gross margin was 52.5% compared to 61.3% in the prior-year period and 60.2% in the preceding third quarter. The change in gross margin was primarily due to changes in the mix of products sold and the negative impact of manufacturing overhead on reduced revenues. Total operating expenses in the fourth quarter of fiscal 2020 were $8.4 million, compared to $8.1 million in the fourth quarter of fiscal 2019 and $10.8 million in the prior quarter. Research and development expenses were $5.6 million compared to $5.6 million in the prior-year period and $8.2 million in the prior quarter. The decrease in R&D expenses from the prior quarter reflects a charge of $2.7 million during the third quarter of fiscal 2020 for purchased intellectual property that we are incorporating into the next generation for our Gemini chips. Selling, general and administrative expenses were $2.8 million in the quarter ended March 31, 2020, compared to $2.6 million in the prior year and $2.6 million in the previous quarter. Fourth quarter fiscal 2020 operating loss was $3.9 million compared to an operating loss of $365,000 in the prior year period and an operating loss of $4.7 million in the prior quarter. Fourth quarter fiscal 2020 net loss included interest and other income of $148,000 and a tax provision of $65,000 compared to $186,000 in interest and other income and a tax benefit of $77,000 for the same period a year ago. In the preceding third quarter, net loss included interest and other income of $207,000 and a tax provision of $84,000. Total fourth quarter pre-tax stock-based compensation expense was $644,000, compared to $580,000 in the comparable quarter a year ago and $629,000 in the prior quarter. At March 31, 2020, we had $66.6 million in cash, cash equivalents and short-term investments and $4.1 million in long-term investments, compared to $61.8 million in cash, cash equivalents and short-term investments and $90 million in long-term investments at March 31, 2019. Working capital was $70.9 million as of March 31, 2020 versus $68.6 million at March 31, 2019 with no debt. Stockholders' equity as of March 31, 2020 was $89.6 million, compared to $93.2 million as of the fiscal year ended March 31, 2019. Fourth quarter results were within the range of guidance provided in our last earnings release for net revenues in the range of $8.5 million to $9.5 million with gross margin of approximately 50% to 52%. Our current expectations for the upcoming quarter are net revenues in a range of $7 million to $8.8 million with gross margin of approximately 48% to 52%. We've expanded our guidance range for the upcoming quarter to reflect the impact of possible changes in customer buying patterns and communication limitations related to shelter-in-place restrictions that require a significant number of our customer contacts to work from home. The disruption to the marketplace that we are currently experiencing is like anything we've ever had to deal with. While we continue to monitor the business metrics that we have historically used to predict our financial performance, we are uncertain as to whether these metrics will operate consistently with our historical experience.

Operator, Operator

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

Kurt Caramanidis, Analyst

Can you hear me?

Douglas Schirle, CFO

Yes Kurt, we can hear you.

Kurt Caramanidis, Analyst

Great. Okay. Weizmann, are they getting just some free chips and boards as a collaborator? Are they planning on needing to order any or how is that kind of going? Are they being your guinea pig to be able to sell to other places?

Didier Lasserre, VP of Sales

Yes, to both accounts. So we have loaned them in the past and we have given them the upgraded, new system recently, as we mentioned, and they plan on paying for that system.

Kurt Caramanidis, Analyst

Are they a less significant prospect compared to some of the larger pharmaceutical companies? It seems that this area is experiencing unprecedented growth, and I am curious about how you plan to promote your offerings or present to these pharmaceutical companies.

Didier Lasserre, VP of Sales

As I mentioned earlier, we have recently developed marketing materials in the last month. This includes a concise sales brief that summarizes key points and is organized by market segments. Currently, we have one for facial recognition and another for drug discovery, both of which we have shared publicly. Additionally, we have created more detailed presentations and technical write-ups, similar to white papers, for each of these market segments. We have been conducting some demonstrations and presentations based on the initial outreach using the one-page sales brief.

Kurt Caramanidis, Analyst

How are you feeling early on about those conversations or presentations?

Didier Lasserre, VP of Sales

Good. I mean, certainly, if you see some of the results that we put out, some of the benchmarking, everything looks really good. I mean, we're certainly early in the process. As I mentioned, we just received these documents within the last few weeks. So it's early in the process, but certainly, the results are what we expected. And so we're communicating that to the marketplace now. So I mean, so far, it's been good feedback.

Kurt Caramanidis, Analyst

Okay. And facial recognition, I would agree the results of what you're doing are extremely impressive. So I'm trying to game out how we might start getting some orders of some sort. The facial recognition looks extremely positive. Do you have some type of a partner there? And then how is that sales process? Have some of them already been aware? Or are you starting from scratch? How is that looking?

Didier Lasserre, VP of Sales

So we had 2 partners, which we sold one. One of them was having some financial difficulties, but the other one is still there. We're doing a POC with them right now based on their algorithms. And so that's going to take some time. And then beyond them, we're reaching out to other folks in this space to be able to give them presentations and more detailed white papers.

Kurt Caramanidis, Analyst

Is government part of that?

Didier Lasserre, VP of Sales

Government is part of that, yes.

Kurt Caramanidis, Analyst

Okay. One other thing and then I'll let someone else speak, but either Doug or probably Doug. I get questions about people selling stock and I try to explain that you all get paid in options, which come due, and often you're selling some stock to cover taxes or other expenses. Can you explain this? It sometimes seems like an overhang, and people wonder why there would be stock sales if things are looking good. Please provide some clarity about how options are part of your compensation and the mechanics involved. Most of the time, there's really not significant net selling; it's generally even or acquiring. Just add some details, as this seems to be confusing.

Douglas Schirle, CFO

Yes. So every employee at GSI Technology receives an option grant when they're hired. And those typically vest over a 4-year period, 25% per year. It's not monthly, it's annually. And that's true for executive officers. Subsequent to that, every year, we have Evergreen Grants, and everyone gets an Evergreen Grant on their anniversary or in the quarter just after the anniversary of the hire date. So those would vest over 4 years for employees and officers when they get theirs, they vest 4 years into the future. It's not a 4-year vest, so it's 100% cliff vest after 4 years. And all of these options have a 10-year life on them. And there are a number of people with options that are expiring. I think we're on May 10th. There are a lot more expiring in August. And a lot of times when you see officers selling shares, in many cases, they sell shares and use the net proceeds of those sales to buy additional shares. So from an officer perspective, most of the officers are acquiring shares, increasing their position in the company, not decreasing. We've also had some Directors who will also get option grants. They have also, over time, been acquiring some shares. So when you see people selling, it's really not because they want to sell, it's because they don't have a choice. They need the money to buy additional shares, which they typically have been using those proceeds to buy additional shares and other grants.

Kurt Caramanidis, Analyst

Great. I just needed to have that clarified, I think, just generally speaking, so I appreciate that.

Operator, Operator

There is a follow-up question from Kurt.

Kurt Caramanidis, Analyst

Sorry. I know today is crazy. There's multiple calls. So sometimes there's only 1 or 2 on the call, but I wanted to give somebody a chance if need be. Any update on Rad-Hard, just anything for the good of the order on getting heritage or any outlook out there?

Didier Lasserre, VP of Sales

We have completed the qualification for the 288 megabit, SQ-II+ family, which is the primary family we began with. Not only have we completed our internal qualification, but our partner has also achieved their V certification, and they are now QMLV certified. This allows us to offer QMLV equivalent devices. We have gathered all the data sheets, and we are still in the process of reviewing heritage and consulting with some team members. It's uncertain whether our initial orders will be for Rad-Hard or Rad-Tolerant, although we have some good opportunities in Rad-Tolerant. We're just waiting for the funding and orders to proceed. Regarding our SyncBurst NBT family and APU hardening, we conducted some preliminary testing last November with encouraging results. We hoped to return to the facility for more testing in April, but due to the ongoing COVID-19 situation, that is currently on hold. Therefore, adding new families is also on hold until we can access the facility again. Meanwhile, we continue to promote the qualified parts, and now it is just a matter of timing for the funding and when those will become a reality.

Kurt Caramanidis, Analyst

Okay. Great. And you did some training on APU, was it January before all this stuff hit?

Didier Lasserre, VP of Sales

It was last November.

Kurt Caramanidis, Analyst

Oh, I thought you didn't have anything at the office in your training facility there this year. I was thinking something was in January? With the people that you've contacted before, do you see any chance of indications of interest, some type of orders through the summer, too hard to tell. What's kind of your gut on that?

Didier Lasserre, VP of Sales

Yes, it's too difficult to predict. And I'll tell you what, I was having a conversation sometime back when somebody asked me, so when do you expect an order as I was talking about our Rad-Tolerant opportunity. And I said, I expect the order in the last third quarter because that's when it was supposed to come in. And so for me to make a prediction...

Kurt Caramanidis, Analyst

I'm sorry, I transitioned to discussing APU. I apologize for the confusion. I thought there was a training for APU in January at the headquarters or something similar. My question is specifically about APU. Are you seeing any signs of interest or potential purchase orders this summer from individuals who may have been following along? What is your impression of that? I apologize again for referring to APU instead of Rad-Tolerant.

Didier Lasserre, VP of Sales

I'm sorry. Yes, the APU training did occur in the first quarter, although I can't recall if it was in January or early February. You are right that we conducted the training for a government entity that purchased a board from us in December. Those discussions are ongoing. Additionally, we have joined SHREC, which allows us to collaborate with members who include PhDs and other professionals. We’re working together to enhance the APU by developing additional resources, including writing new libraries or algorithms, and making modifications to the FPGA on our APU board to utilize more of its capabilities. This initiative is focused on military and government applications and has been active over the last quarter.

Kurt Caramanidis, Analyst

So do you think this summer, it's possible to get some initial orders? Or how are you thinking about that?

Didier Lasserre, VP of Sales

Hard to predict, Kurt. I mean, I could say yes and it doesn't happen. It's just really hard to predict when it's going to happen, but certainly, as we mentioned in the conversation at the beginning, between signal classification, object detection, cryptography, there's a massive amount of interest for this type of technology in that government space.

Kurt Caramanidis, Analyst

Okay. Congratulations. I wasn't sure what the performance would be like, but from a general perspective, it certainly seems marketable. It all hinges on navigating the current environment. However, the performance metrics appear quite impressive. One question relates to overall costs. Regarding the pricing of the APU boards, will they still be cost-effective considering speed, power, and performance, or will you need to adjust the price from your initial estimate?

Didier Lasserre, VP of Sales

No. There's no reason for us to have any lower prices in any of our initial assessments.

Kurt Caramanidis, Analyst

Okay. Great guys. It's been a long road, and now we've got a pandemic. So work through that, and look forward to how this all pans out.

Operator, Operator

There are no further questions in the queue at this time.

Lee-Lean Shu, CEO

Thank you all for joining us. We look forward to speaking with you again when we deliver our first quarter fiscal 2021 results. Thank you.

Operator, Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.