Earnings Call Transcript - GSIT Q1 2025

Operator, Operator

Ladies and gentlemen, thank you for standing by. Welcome to the GSI Technology's First Quarter Fiscal 2025 Results Conference Call. At this time, all participants are in a listen-only-mode. Later, we will conduct a question-and-answer session. At this time, we will provide instructions for those interested in entering the queue for 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 involves risks and uncertainties that would 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 25, 2024 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 call over to Mr. Shu. Please go ahead, sir.

Lee-Lean Shu, CEO

Good day, everyone, and welcome to our first quarter FY 2025 earnings call. Let's start with the Q1 results. Our first quarter revenue of $4.7 million was within our guidance range despite lower SigmaQuad sales and low sales to our military prime contractors. Additionally, the mix of products we saw affected our gross margin, causing gross margin to come in at the low end of our guidance range. Right now, our team is focused on generating new revenue from our Gemini-I APU to address the expected decline in our legacy SRAM business. Our main goal this year is to launch a new business line with Gemini-I and secure more SBIR contracts with Gemini-II. This will help us reverse the revenue decline, achieve financial stability, and augment our return to growth when we bring Gemini-II online. Let me explain how we are working towards this goal. We are preparing to launch our new GXL platform for Fast Vector Search, built on Gemini-I, which will be available as cloud-based or on-prem solutions. Our groundbreaking technology significantly reduces the time needed to create and update large fixed databases, increasingly using generative AI and e-commerce, providing a critical advantage for companies that rely on timely data updates. Didier will provide more detail on this. Additionally, we are expanding our pipeline of different small business innovation research or SBIR proposals for the Gemini-I APU. These contracts can range from $75,000 to over $2 million, with typical repayment over 9 to 18 months. So far, we are around Phase I and Phase II SBIR contracts where we are meeting our milestones and are on track to complete them in calendar 2025. Didier will expand further on these SBIR opportunities in his comments. We are also on track to begin customer sampling of Gemini-II software in early calendar 2025. The chip has been successfully mounted onto a board allowing our software team to work with it. Our goal is to finalize the firmware and complete the software library by December 2024. We have uncovered issues with the first silicon, but the good news is that there are workarounds for all of those to continue firmware and software development without much change. Thanks to our success in working with the chip at multiple levels. We are actively seeking a strategic partner to scale resources, funding, and expertise for future development. To increase our chances of successful engagement, the team is preparing to demonstrate more than a tenfold improvement in 1-bit and 2-bit processing with Gemini-II. We aim to validate this concept by the December quarter with the 1-bit and 2-bit computing memory demo. Successfully showcasing this breakthrough will enable us to have a more productive discussion with potential strategic partners. As I stated earlier, we are diligently working to launch and monetize the Gemini-I and II platforms. We are preparing to launch the GXL platform to establish a recurring revenue stream in the Fast Vector Search market. In addition, we are actively writing multiple SBIR proposals to build a pipeline of future revenue streams and offset the remaining development costs of Gemini-II. With these unique computing memory capabilities, our computing memory APU promises to deliver essential power and time-saving solutions to the rapidly expanding AI market. Now I'll hand the call over to Didier, who will discuss our business development and sales activities. Please go ahead, Didier.

Didier Lasserre, Vice President of Sales

Thank you, Lee-Lean. I want to expand on two topics that Lee-Lean highlighted: the pending launch of GXL and the building of our SBIR pipeline. Let's start with the Fast Vector Search and our new platform for this market called GXL. First, let me explain the problem GXL solves and why it's important. The size of vector bases is growing fast, especially with generative AI and vector similarity search for e-commerce. Many of these databases use the HNSW algorithm to build indexes because it provides quick and accurate search results. However, building an HNSW index takes a long time, which is a problem for databases needing fast and accurate information. One way to fix this is by speeding up the calculations needed to build or refresh the index by running them in parallel. These calculations take most of the time, so making them faster is crucial. Our in-compute-memory APU technology is designed for this. It enables massive parallel processing, solving the slow index building issue. The APU processes data directly in memory at the bit level with millions of bit processors working simultaneously. This means it can handle large amounts of data quickly, reducing the index build time by about 85% compared to traditional CPU-based solutions. The three main benefits of our GXL solution are scalability, it provides fast access to information for generative AI and e-commerce recommendations even as these applications grow to billions of vectors. The second benefit is lower operational cost by using computational resources for less time, especially in cloud computing, where costs are billed hourly; it saves money. And the last benefit is faster updates. New products can be added or deleted into the index more quickly in e-commerce applications, leading to timely recommendations and increased revenue opportunities. We recently published a white paper and a blog on Medium about efficient HNSW indexing. Be sure to check those out for more information. The GXL platform is being prepared for launch, and we aim to begin connecting with the vector database companies that we have identified and then expand to larger e-commerce players. Switching to the build-out of our SBIR pipeline and our focus on landing these Phase I and Phase II contracts from the Department of Defense, we view this strategy as a highly efficient and effective way of increasing awareness of GSI's APU within the DoD. These SBIR awards validate our statements regarding the APU's performance and benefits with many large divisions within the DoD and can bring a significant multiplier effect for future opportunities, as many of these applications will have dual use for defense and commercial. This is why we have focused resources on submitting proposals and then prioritizing the execution of these contracts. We are working on a Phase I contract with the Air Force worth $1.1 million, which we started in 2023 and are now over 25% complete. Additionally, we have a Phase II SBIR contract with a Space Development Agency valued at $1.25 million, and we are over 50% complete on this project. We recently secured a new Phase I SBIR with one of the largest divisions of the DoD, with a value up to $250,000. We will give more details on this latest win once the contract is signed. We are currently preparing several other SBIR proposals, adding up to a total pipeline of $6 million. Our next submission will be for a Phase II SAR space-level onboard contract worth $1.25 million. In addition to SBIRs, we have initiated the process of seeking additional government funding to enhance the resources we could dedicate to further developing Gemini-II. This funding will enable us to expand the Gemini-II product line by creating a version for advanced edge AI applications. On a final note regarding APU opportunities, we sold a Gemini-1 LiDAR card to a major aerospace and defense contractor who will evaluate this technology for various undisclosed applications. We shipped the card in the June quarter, and the purchase order also provides GSI software training in the September quarter. Although these sales generate minor revenue, this opportunity is valuable for engaging with this prominent contractor. We are excited to see this customer using our technology. Regarding the two SAR processes we've mentioned in previous calls, one is on hold as we finalize some documentation with that customer. The other is looking to expand the scope of our services that we can provide in different areas of their operation where they could possibly use the APU. Our team is actively investigating how to accelerate the delivery of these additional services. Now let me switch to the first quarter's customer and product breakdown. In the first quarter of fiscal 2025, sales to Nokia were $998,000 or 21.4% of net revenues compared to $1.9 million or 33.5% of net revenues in the same period a year ago and $694,000 or 13.5% of revenues in the prior quarter. Military/defense sales were 31.9% of first quarter shipments compared to 33.8% of shipments in the comparable period a year ago and 35.5% of shipments in the prior quarter. SigmaQuad sales were 36.3% of first quarter shipments compared to 58.6% in the first quarter of fiscal 2024 and 42.4% in the prior quarter. Regarding our SRAM business outlook, while our largest customer has announced some business challenges, our current expectations for orders from them remain stable for the remainder of the calendar year. Several other SRAM customers are currently managing their inventory levels, and we anticipate they will resume placing orders before the end of the calendar year. Additionally, we believe that the customers who were previously reducing their use of SRAMs have now stabilized. I'd now like to hand the call over to Doug. Doug, go ahead, please.

Douglas Schirle, CFO

Thank you, Didier. The company reported net revenues of $4.7 million for the first quarter of fiscal 2025 compared to $5.6 million for the first quarter of fiscal 2024 and $5.2 million for the fourth quarter of fiscal 2024. The decline in revenue was due to lower SigmaQuad sales and lower sales to our military prime contractors. Gross margin was 46.3% in the first quarter of fiscal 2025 compared to 54.9% in the first quarter of fiscal 2024 and 51.6% in the fourth quarter of fiscal 2024. The decrease in gross margin in the first quarter of fiscal 2025 was primarily due to product mix and the effect of lower revenue on the fixed costs and our cost of revenues. Total operating expenses in the first quarter of fiscal 2025 were $6.8 million compared to $8.2 million in the first quarter of fiscal 2024 and $7.2 million in the prior quarter. Research and development expenses were $4.2 million compared to $5.2 million in the prior period and $4.8 million in the prior quarter. Selling, general and administrative expenses were $2.6 million in the quarter ended June 30, 2024, compared to $3 million in the prior year quarter and $2.4 million in the previous quarter. First quarter fiscal 2025 operating loss was $4.7 million compared to an operating loss of $5.1 million in the prior year period and an operating loss of $4.5 million in the prior quarter. First quarter fiscal 2025 net income included interest and other income of $55,000 and a tax provision of $57,000 compared to $80,000 in interest and other income and a tax provision of $51,000 for the same period a year ago. In the preceding fourth quarter, net loss included other income of $108,000 and a tax benefit of $85,000. Net income in the first quarter of fiscal 2025 was $1.1 million or $0.04 per diluted share, reflecting a one-time gain of $5.7 million on the sale and leaseback transaction related to the sale of the company's headquarters compared to a net loss of $5.1 million or $0.21 per diluted share for the first quarter of fiscal 2024 and a net loss of $4.3 million or $0.17 per diluted share for the fourth quarter of fiscal 2024. Total first quarter pretax stock-based compensation expense was $658,000 compared to $820,000 in the comparable quarter a year ago and $693,000 in the prior quarter. At June 30, 2024, the company had $21.8 million of cash and cash equivalents compared to $14.4 million at March 31, 2024. Working capital was $25.7 million as of June 30, 2024, compared to $19.1 million at March 31, 2024. Stockholders' equity as of June 30, 2024, was $38 million compared to $36 million as of the fiscal year ended March 31, 2024. During our fourth quarter earnings call in May, we announced that the company had initiated a comprehensive strategic review and established a special committee of the Board to evaluate various strategic alternatives. We have engaged Needham & Company as our strategic financial adviser to assist in this process. Currently, we are in discussions regarding potential strategic opportunities and are encouraged by the direction of these preliminary discussions.

Operator, Operator

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

Unidentified Analyst, Analyst

Hi. I'm wondering if you could provide a brief overview of the cost benefits and considerations regarding potential leasing or sale or taking a more diverse route, which it seems like you are laying out in this call, as well as the potential for a key partnership. If you could succinctly describe your current leading direction on all those prospects, I would appreciate it. Thanks.

Didier Lasserre, Vice President of Sales

What exactly are you asking? Are you asking how we decided to sell the building?

Unidentified Analyst, Analyst

Oh, no, not the building. I'm referring to the GPU or the APU. Sorry, the Gemini APU project. Since the last call and prior calls here, we're building up to hopefully a decision on a route for funding and development to progress into Gemini-III. I just wondered if you had a succinct way of describing your current leading prospects for either major funding or leasing of that technology.

Lee-Lean Shu, CEO

Yes. We have continued discussions on Gemini-III with hyperscalers and HBM vendors, but the key is really that we need to demonstrate our GPU APU capability on the 1-bit and 2-bit processing. So that's why we are focused on doing that, and we want to prove it on the G-II by the end of the calendar year.

Didier Lasserre, Vice President of Sales

Yes. So there's definitely interest, but they'd like to see the capabilities of the parts, where we can show them some benchmarks. So we're working on that now.

Unidentified Analyst, Analyst

Okay. Excellent. That's the only question. Thanks.

Didier Lasserre, Vice President of Sales

Thanks, Luke.

Unidentified Analyst, Analyst

Hi, guys. Can you tell me, with these benchmarks, have you validated these benchmarks in-house and now do you need to formalize the process for outside clients and start showing them? Do you already have answers to these questions that are coming down the pipeline?

Lee-Lean Shu, CEO

Yes. We have a calculation, but it's just a line calculation. Right now, we are trying to get G-II working so we can run the actual device. That's what we are doing basically, right now.

Didier Lasserre, Vice President of Sales

Yes. We're actually working with the first silicon, and the first silicon has turned out to be very solid for initial silicon. As we've mentioned before, there are no major bugs, nothing that we can't work around. Right now, we are accessing the part. They've been mounted on board and trying to gather as much data and information as we can working with what we have.

Douglas Schirle, CFO

Right. In order to be able to run those benchmarks, we just need all of the algorithms and the libraries on the software side completed. On the hardware side, as Lee-Lean said earlier, there have been no bugs that are showstoppers at this point, and it’s just a matter of getting those libraries completed so we can run those benchmarks.

Unidentified Analyst, Analyst

And in those libraries and algorithms, what are the less critical pinch points?

Douglas Schirle, CFO

Well, it's just different, right? With the hardware, you have a lot of moving parts and you have a lot of potential bugs. With the software and the libraries, it's just time. It's being done by our Israeli facility, and it's just a matter of time to complete those libraries.

Unidentified Analyst, Analyst

And if I could just extend one more question about, okay, let's say you achieve all this. What does the market look like? How large is the market potential within your channels? And what's the gross margin? I mean, might the hyperscalers buy hundreds or thousands of a $30,000 system? What should that look like?

Douglas Schirle, CFO

Sure. So Gemini-II is a little different going to market than Gemini-I. With Gemini-I, we have some cloud-based usage models, and then we also sold some board/systems. Gemini-II is a little different. Some of the models we're looking at will be cloud-based usage revenue. We will be selling some boards and systems, but we also have the opportunity to sell actual chips. So with Gemini-I, a chip sale was not viable. With Gemini-II, there's not that restriction. Depending on the customer, they may want to buy a chip, a board, or a server that has multiple boards. In some of our revenue streams, it will be, as I said, cloud-based revenue.

Lee-Lean Shu, CEO

Yes. The Gemini-II is targeting the high-performance computing market. We are not targeting it at a cloud basis. The high-performance computing market, as I reported in my research, is currently a mid-$20 billion market in 2024 and is growing at mid-20 to mid-30% depending on the source. So I think it's a rapidly growing market, and that's where we are targeting.

Unidentified Analyst, Analyst

Okay. Great. Thank you very much.

Didier Lasserre, Vice President of Sales

Thanks, Michael.

Unidentified Analyst, Analyst

Yes. Can you give us an update on the radiation hardened programs? Have there been any developments in the last quarter, and what do you see for the next 1, 2, or 3 years?

Didier Lasserre, Vice President of Sales

Sure. We shipped a prototype order this past quarter to a customer actually out of Europe. So that's going to be subject to further ongoing testing. There are still some active programs that we have submitted samples for over the last couple of years, and so those are just waiting to go into production. There are a few others that we're still targeting. Hard to say; we've always said that we're looking for a kind of $10 million a year run rate. And again, we talked about gross margins being above 90% on this product. We're still saying that in the years ahead. It's just been a much slower process than we had ever anticipated.

Unidentified Analyst, Analyst

And I think you mentioned a few quarters ago that you didn't have any components in space. Has that changed? What's the status?

Didier Lasserre, Vice President of Sales

No, we don't have any components in space yet. So yes, you’re referring to heritage. We're waiting for some of these launches. We're also looking for opportunities to possibly get some parts into space just to prove they work in those environments. All the testing we've done simulating those environments has been on Earth. We are looking for a mechanism now to try to get the parts up so we can have that official heritage stamp on our parts.

Unidentified Analyst, Analyst

Okay. And then back to APU. So you're still expecting a second spin to occur. When would you expect that back?

Didier Lasserre, Vice President of Sales

Yes, but we're not actively spinning the part yet. As we discussed, the first silicon looks very solid. There are some minor bugs, but they've all had software workarounds at this point. As we continue to finish up these libraries and algorithms, we'll be able to determine whether or not there are any other bugs. Once that's done, then we'll do the spin. So as of now, we're holding off on any spin until we can identify any other minor bugs.

Unidentified Analyst, Analyst

So I can read into that strategic alternatives do not require a partner to be able to see a second spin for you to know what you have so far, correct?

Didier Lasserre, Vice President of Sales

Correct. Yes. The strategic partnership is more for the next-generation part and also to expand our business in general, but we won't need that for just the second spin. That's correct.

Unidentified Analyst, Analyst

Okay. Thank you. Yes. Have you identified any possible companies that are interested in licensing your technology?

Didier Lasserre, Vice President of Sales

So we are actually working with a major networking telecom customer that is looking at our technology to incorporate some of the IP into their ASIC. These conversations have been ongoing for some time and it seems to be progressing. We started these conversations before we had Gemini-II, and obviously, Gemini-I was what they were looking for, but now they are interested in Gemini-II technology. Once we get some benchmarks, that will facilitate progress even faster.

Unidentified Analyst, Analyst

Okay, good. Are there any other companies out there, competitors interested in acquiring the company as it stands right now?

Didier Lasserre, Vice President of Sales

Well, we've been having a lot of discussions with Needham and things are encouraging, but there's nothing to report at this time.

Unidentified Analyst, Analyst

Okay. Thank you very much.

Didier Lasserre, Vice President of Sales

Thanks, Robert.

Operator, Operator

It appears that there are no further questions at this time. I would now like to turn the floor back over to Mr. Shu for closing comments.

Lee-Lean Shu, CEO

Thank you all for joining us. We look forward to speaking with you again when we report our second quarter fiscal 2025 results. Thank you.

Operator, Operator

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