Earnings Call Transcript - GSIT Q3 2021

Operator, Operator

Ladies and gentlemen, thank you for standing by. Welcome to GSI Technology's Third Quarter Fiscal 2021 Results Conference Call for the Quarter Ended December 31, 2020. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. At that time, we will provide instructions for those interested in entering the queue for the Q&A. 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 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, January 28, 2021, 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.

Lee-Lean Shu, Chairman, President, and CEO

Good afternoon, and thank you for joining the call today to review our third quarter 2021 financial results. As I look back at 2020, and where we were a year ago, I am pleased with our progress. GSI entered the first quarter of calendar year 2021 with the Gemini APU launch in progress. Our team is building new relationships with customers in many sectors where the APU can deliver radical performance improvement in search applications. We have engaged a PR firm to build awareness and improve our evolutionary technologies' feasibility. Feedback has been good. And we are encouraged by the reception to Gemini. The next step is to allow customers access to the system. This time last year, we had prepared a testing and training facility at our Sunnyvale, California headquarters. Unfortunately, COVID has made this option unavailable, and instead of bringing groups into our facility, we have had to pivot. The result is that there will be a more one-on-one approach. Our cloud-based APU testing servers are now up and running in both of our facilities, in Israel and in Sunnyvale. These servers allow customers to remotely load their databases onto the APU and test the device's performance with their proprietary data and applications. I am pleased that we can now interact with our prospective customers and give them access to evaluate Gemini. The remote process is less efficient than our original workshop setup, but it is the best option we have under the circumstances. As I stated on our last earnings call, our software capability makes the APU highly effective for view applications. Software enhancements continue to improve the device's performance, and we have successfully doubled, in some cases tripled, the system performance on response time. Next month, we will release the compiler stack for Python, a critical step for growing the APU ecosystem. We plan to follow with the compiler stack for C++ later this year. GSI has built an exceptional software team, as evidenced by their superlative work to win first place in the Israeli Ministry of Defense MAFAT Challenge. The challenge's goal was to completely grow the potential of advanced data science measures to improve the Israeli Ministry of Defense's current data products. The challenge was to distinguish between humans and animals in radar signal segments with the greatest accuracy. This was a complex challenge for the GSI team, who had no prior experience in radar systems or signals. When their initial research from very few reference levels worked, it was clear that this challenge required unique solutions. Leveraging the algorithms we have developed on other search projects, we developed an algorithm to train a CNN model to best predict the outcome. As a result of winning the MAFAT challenge, MAFAT has introduced GSI to key Israeli aerospace and defense companies for several defense projects, as well as providing opportunities to work with the market to grow several computation projects employing all APU. We are pursuing a new opportunity with the development of Elasticsearch. Elasticsearch is a popular open-source full-text search engine that can search many types of documents. Elasticsearch recently added dense vector that determines the document's relevance, which is the new addition on top of semantic search. Semantic search allows for a better understanding of the searcher's intent and provides better quality search results than traditional keyword search. However, the lack of a scalable approximate nearest neighbor solution in Elasticsearch that can leverage the dense vector field has created an opportunity for GSI. Since many companies already use Elasticsearch, supporting ANN in Elasticsearch could be valuable, especially a high-performance Elasticsearch solution that scales to a billion-scale vector technology search. In response, we developed an Elastic ANN plugin, fully paves the way for building scalable semantic vector technology search using Elasticsearch. Continuous improvement is also occurring. We will finalize the higher performance Gemini-I APU and complete qualification in the second quarter of this calendar year. This will be the Gemini-I season that we take to market. Our ultimate goal in 2021 is to win design from new customers for Gemini-I in all top search categories, aerospace and defense, big data, e-commerce, top discovery, and facial recognition. For the next generation APU, Gemini-II, we anticipate finishing the design in the second half of 2021 and taking it to the market by year-end. We plan to launch Gemini-II in late calendar 2022 with orders of magnitude performance and cost improvements over Gemini-I. The go-to-market timeline has been extended due to the COVID-19 pandemic, but we continue to progress the technology and build awareness. Our team has done an outstanding job on many fronts, and I greatly appreciate their hard work. I want to thank you, our fellow shareholders, for your continued support. Now, I hand the call over to Didier, who will discuss our business performance and give further details. Please go ahead, Didier.

Didier Lasserre, VP of Sales

Thank you, Lee-Lean. As Lee-Lean just explained, in addition to a novel architecture, the APU has a strong software offering. GSI's software expertise combined with the high-performance APU hardware solution is a competitive advantage versus AI solutions that are typically siloed in either software or hardware. We plan to offer the compiler and the libraries with the device, and depending on the application, we may also sell the API and the algorithms. Our software allows us to improve device performance for various applications without altering the hardware. As a reminder, our software offerings include: one, applications, which are integrations for specific market applications like Biovia for drug discovery, facial recognition, image processing, and Hash Cap for password recovery; two, machine learning algorithms, which allow users to develop neural network algorithms to enhance APU applications; three, APIs, which are application interfaces for specific application acceleration by developers; and lastly, our compiler stack, which is the stack for algorithm conversion, framework support, and simplified low-level code generation. Our first compiler stack will focus on Python. Shifting to the sales breakdown for the third quarter of fiscal 2021, sales to Nokia were $2.8 million or 42% of net revenues compared to $2.6 million or 26.3% of revenues in the same period a year ago, and $3.4 million or 51.7% of net revenues in the prior quarter. Military defense sales were 26% of third quarter shipments compared to 18.9% of shipments in the comparable period a year ago and 26.9% of shipments in the prior quarter. SigmaQuad sales were 62% of third quarter shipments compared to 62% in the third quarter of fiscal 2020 and 65.4% in the prior quarter. We are uncertain in 2021 regarding the business challenges related to COVID-19 prescriptions and when they will subside. As a result, we are not able to have the face-to-face meetings, which are critical to our military and defense sales for the radiation-hardened SRAMs. In addition, we are not able to offer a highly productive in-house training workshop, which slows the pace of the sales process for Gemini. That said, we are seeing progress with our target customers and are looking forward to aligning remote access to our APU data centers for customer testing. I'd now like to hand the call over to Doug. Doug, please go ahead.

Douglas Schirle, CFO

Thank you, Didier. We reported a net loss of $5.2 million or $0.22 per diluted share on net revenues of $6.8 million for the third quarter of fiscal 2021, compared to 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, and a net loss of $5.2 million or $0.22 per diluted share on net revenues of $6.7 million for the second quarter of fiscal 2021. Gross margin was 47.3% compared to 60.2% in the prior year period and 46.7% in the preceding second quarter. The change in gross margin was primarily due to changes in product mix sold in the three periods. Total operating expenses in the third quarter of fiscal 2021 were $8.3 million compared to $10.8 million in the third quarter of fiscal 2020 and $8.3 million in the prior quarter. Research and development expenses were $5.7 million compared to $8.2 million in the prior year period and $5.7 million in the prior quarter. The increase in R&D expenses for the third quarter of fiscal 2020 reflected a charge of $2.7 million for purchased intellectual property that is being incorporated in the next generation of our Gemini chips. Selling, general, and administrative expenses were $2.6 million in the quarter ended December 31, 2020, compared to $2.6 million in the prior year quarter and $2.6 million in the previous quarter. The third quarter fiscal 2021 operating loss was $5.2 million compared to $4.7 million in the prior year period and an operating loss of $5.2 million in the prior quarter. The third quarter fiscal 2021 net loss included interest and other income of $25,000 and a tax provision of $90,000 compared to $207,000 in interest and other income and a tax provision of $84,000 for the same period a year ago. In the preceding second quarter, the net loss included interest and other expense net $16,000 and a tax provision of $62,000. Total third quarter pre-tax stock-based compensation expense was $693,000 compared to $629,000 in the comparable quarter a year ago and $653,000 in the prior quarter. At December 31, 2020, the company had $52.3 million in cash, cash equivalents, and short-term investments, and $10.1 million in long-term investments, compared to $66.6 million in cash, cash equivalents, and short-term investments, and $4.1 million in long-term investments at March 31, 2020. Working capital was $54.4 million as of December 31, 2020 versus $70.9 million at March 31, 2020 with no debt. Stockholders' equity as of December 31, 2020, was $78.5 million compared to $89.6 million as of fiscal year ended March 31, 2020. For the upcoming fourth quarter of fiscal year 2021, our current expectations are net revenues in the range of $6.8 million to $7.8 million with gross margin of approximately 48% to 50%.

Operator, Operator

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

Kurt Caramanidis, Analyst

Hey, guys. Are you still on lockdown, or have you recently reopened after the inauguration in California?

Lee-Lean Shu, Chairman, President, and CEO

No, we still work from home.

Kurt Caramanidis, Analyst

Still lockdown?

Lee-Lean Shu, Chairman, President, and CEO

Yes, probably until summer.

Kurt Caramanidis, Analyst

Until summer?

Lee-Lean Shu, Chairman, President, and CEO

Yes. The way things are going here, I've been very surprised that we didn't come back to work until closer to summertime, but I think everyone is working pretty efficiently. The Gemini-II design is progressing. I've gone through a year-end audit and several quarter reviews without even seeing the auditors, so it works, it's not as efficient, but it does work.

Kurt Caramanidis, Analyst

Well, I guess it's still going to be and still a problem through the summer. I was just curious when that might. And then, facial recognition, has that been banned yet or what's the current status of that? I know that was a big part of things, and then there were superior companies getting out. I don't know what the government's position now is, if we want to stop there, or what can you say about facial recognition now?

Didier Lasserre, VP of Sales

So, we're still moving ahead with it, because again, there are many sectors in facial recognition. Some of the potential customers, when I say 'Folks,' are in niche markets under facial recognition. One of them was working on facial recognition for things like conferences, for entering arenas like football arenas. So, there are a lot of different segments that fall under facial recognition. So, I haven't heard of any ban, and we're certainly moving forward under those types of niche applications.

Kurt Caramanidis, Analyst

Okay. Are you thinking it will take 12 to 18 months before we see revenue from the first one, and then later for the second?

Didier Lasserre, VP of Sales

You're talking Gemini-I and Gemini-II?

Kurt Caramanidis, Analyst

Yes.

Didier Lasserre, VP of Sales

Yes. So Gemini-I, we'll see some certainly in the first half of this year; we'll see some demo boards being purchased still in the first-half. It's not clear again. We're still on the designing phase at this point. So, it's not clear what kind of volume we'll see in the second half of this year yet. It's too early for us to project. As far as Gemini-II, it's going to be a while. As Lee-Lean mentioned, we will see a tape out at earliest at the end of this year, which means we'll see first silicon sometime in the first or second quarter, I should say, of 2022. And then there's a debug process. So, I don't see us having a fully functional part on that until sometime in 2023.

Kurt Caramanidis, Analyst

Yes. I didn't see a mention of the 600 megahertz, but are you working on it? Will that be for 400 to 600? Where does that stand?

Lee-Lean Shu, Chairman, President, and CEO

Yes, yes, yes. We are still moving forward with new silicon, and new silicon is much improved, both in performance and functionality, and also the manufacturing yield. So we're going to take this one to the production.

Kurt Caramanidis, Analyst

Okay, great. So, final thing, I'm seeing a lot of shortages in silicon, price increases in chips. What affect does that, if any, have on you guys' net? It just seems like everything is tight right now.

Douglas Schirle, CFO

You're correct, everything is tight. So we actually did see some of the tightness late last year already and were able to address some of it. As you mentioned, some of our costs have gone up. And certainly, the lead times have gone out. And so we plan accordingly. So we've put in some material, and so far it affected some revenue, but as you could see by this last quarter and the quarter we've just guided to, we're still managing to grow slightly. And as far as the price increase, we are going through that process now. Unfortunately, with our costs going up we have to also increase our retail to the customers, and so that's happening now.

Kurt Caramanidis, Analyst

Okay, great. Thanks, guys.

Douglas Schirle, CFO

Thanks, Kurt.

Operator, Operator

Thank you. That concludes the question-and-answer session. Mr. Shu, I will now turn the conference back over to you for any additional or closing remarks.

Lee-Lean Shu, Chairman, President, and CEO

Thank you all for joining us today, and we look forward to speaking with you again when we are ready for our fourth quarter fiscal 2021 results. Thank you.

Operator, Operator

Thank you. That does conclude today's conference. We do thank you for your participation. Have an excellent day.