Earnings Call Transcript
Gsi Technology Inc (GSIT)
Earnings Call Transcript - GSIT Q1 2020
Operator, Operator
Ladies and gentlemen, thank you for standing by. Welcome to GSI Technology's First Quarter Fiscal 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 involve risks and uncertainties that could cause actual results to differ materially from those anticipated. The risk and uncertainties are described in the company's Form 10-K filed with the Securities and Exchange Commission. Additionally, I have been asked to advise you that this conference call is being recorded today, July 25, 2019, 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, CEO
Good afternoon, everyone, and thank you for joining us to review our first quarter 2020 financial results. On the heels of a strong performance in fiscal year 2019, the new year is off to a solid start. In the first quarter, we delivered year-over-year revenue growth of 15% and a sequential growth of 3%. We continue to see robust sales of our SRAM line, especially the SigmaQuad-IV category, our highest ASP and gross margin product. This has led to further gross margin improvement, with Q1 increasing almost 400 basis points over the year-ago period and 210 basis points over the prior quarter. As a result, we saw a reduction in our operating loss in the quarter compared to the fourth quarter of fiscal 2019. Cash generated from the strength of our core business is supporting our product roadmap and funding our ongoing R&D budget. Our R&D spending and engineering teams are focused on Gemini, our in-place associative computing technology. I'm pleased that we are on track with our norms. On our prior conference call, I stated that we anticipated delivery of our second silicon device from TSMC, which we received in May. Our AI team is pressing the device on the evaluation board and continuing to develop the software library and algorithms. In addition to the cheminformatics I mentioned on the May conference call, we successfully launched proof-of-concept of Gemini's capabilities in database analytics as well as facial recognition for targeted customers. In both cases, Gemini significantly exceeds the performance of the latest current systems and validates the capability with effective one-off solutions. We anticipate government payments later this year with fully functional Gemini chips in multiple CAST systems in these scale database applications. We will also perform testing and have made preparations for the release of Gemini in fiscal 2020. Today, our team of over 70 engineers based in Israel and the U.S. are focused solely on our ALU map. Our next milestone for Gemini is having the evaluation board ready for customer demonstrations, which we anticipate will begin in late summer or early fall. Once we have the production-ready board, we will conduct performance benchmarking tests to quantify Gemini's performance relative to competitive solutions. As we strive to reach milestones, we will gain further clarity on the timing of the launch of our AI product. This is an exciting time at GSI as we achieve milestones for Gemini and prepare for the first shipment of our radiation-hardened SRAM device. Didier will provide more details on the state of our RadHard further in a minute. The next stage of our company's evolution, with new products, solid financial results, and exciting new market opportunities, points to a promising future. I would like to thank my team for all their hard work and commitment to our vision. Now I'll hand the call to Didier, who will discuss our business performance in further detail. Please go ahead, Didier.
Didier Lasserre, Vice President of Sales
Thank you, Lee-Lean. Switching gears to our other new product category, we have made significant progress on our radiation-hardened SRAM. We successfully completed a series of critical testing. The RadHard continues to track for completion of our internal qualifications by the end of this year. The next step will be customer qualifications, putting us on track for initial shipments by calendar year-end of 2019. Looking at our sales breakdown, in the first quarter of fiscal 2020, sales to Nokia were $6.0 million or 45.7% of revenue compared to $5.2 million or 46.5% of revenue a year ago and $5.2 million or 41.1% of revenue in the prior quarter. We expect sales to Nokia to continue being strong for the remainder of the calendar year 2019. Military and defense sales were 21.0% of first-quarter shipments compared to 19.7% a year ago and 22.1% in the prior quarter. SigmaQuad continues to be our best-performing product category with sales of 67.9% of first quarter shipments compared to 59.7% last year and 57.4% in the preceding quarter. I'd like now to hand the call over to Doug. Go ahead, Doug.
Douglas Schirle, CFO
Thank you, Didier. For the first quarter of fiscal 2020, we reported a net loss of $125,000 or $0.01 per diluted share and net revenues of $13 million for the first quarter of fiscal 2020 compared to a net loss of $1.6 million or $0.08 per diluted share and net revenues of $11.3 million for the first quarter of fiscal 2019 and a net loss of $102,000 and $0.00 per diluted share and net revenues of $12.7 million in the fourth quarter of fiscal 2019. Gross margin was 63.3% compared to 51.4% in the prior year period and 61.3% in the preceding fourth quarter. Total operating expenses in the first quarter of fiscal 2020 were $8.5 million compared to $7.4 million from the first quarter of fiscal 2019 and $8.1 million in the preceding fourth quarter. Research and development expenses were $5.6 million compared to $4.9 million in the prior year period and $5.6 million in the preceding fourth quarter. Selling, general, and administrative expenses were $2.9 million in the quarter ended June 30, 2019, compared to $2.6 million in the prior year quarter ended June 30, 2018, and up sequentially from $2.6 million in the preceding fourth quarter. The first quarter fiscal 2020 operating loss was $229,000 compared to an operating loss of $1.7 million a year ago and an operating loss of $365,000 in the prior quarter. The first quarter fiscal 2020 net loss included interest and other income of $147,000 and a tax provision of $43,000 compared to $23,000 in interest and other income and a tax provision of $10,000 for the same period a year ago. In the preceding fourth quarter, the net loss included interest and other income of $186,000 and a tax benefit of $77,000. Total first quarter fiscal 2020 pretax stock-based compensation expense was $651,000 compared to $542,000 in the comparable quarter a year ago and $580,000 in the prior quarter. At June 30, we had $64.7 million in cash, cash equivalents, and short-term investments and $7.3 million in long-term investments compared to $61.8 million in cash, cash equivalents, and short-term investments and $9 million in long-term investments at the fiscal year ended March 31, 2019. For the upcoming second quarter of fiscal 2020, our current expectations are net revenues in the range of $11.6 million to $12.6 million, with gross margin of approximately 54% to 56%. Operator, at this point, we'll open the call to Q&A.
Kurt Caramanidis, Analyst
I missed that you did some other testing on facial recognition and something else. And how did those results look?
Didier Lasserre, Vice President of Sales
Yes, Kurt, it's Didier. That's correct. In the past, we've conducted a cheminformatics demonstration, and this time we focused on two different applications. The first was facial recognition, and the second involved database analytics, specifically for patent searches, where we look for words or sentences. The demonstrations were successful, particularly the database analytics, which utilized our first silicon Gemini 1. Although we faced some significant bugs with that chip, the demonstration surpassed our expectations. They are now awaiting the same test or demo with the second version of Gemini, which is performing much better. We have the chip ready, and we're currently assembling them on boards. We expect to conduct that demonstration again within a month or two.
Kurt Caramanidis, Analyst
Okay. Is that government-related on the facial recognition? Or...
Didier Lasserre, Vice President of Sales
No. The answer is the customer we're working with is not a government entity. They do have some varying customers as government entities, yes. But this is not the government directly.
Kurt Caramanidis, Analyst
Okay. For the Jefferies conference, do you think you'll have something to demonstrate? Or will it depend on how things progress?
Didier Lasserre, Vice President of Sales
Are you talking about ODSC West?
Kurt Caramanidis, Analyst
Well, the Jefferies conference you're going to be at in about a month.
Didier Lasserre, Vice President of Sales
So the Jefferies conference. No, I mean, we will not have any hardware with us if that's what you're asking. No. I mean as far as the timeline goes, again, they're putting the devices on the boards and running all the GNL, which is our libraries and algorithms. So they still have some work to do before we start doing the demos for the customer. As I mentioned, we're probably a month or 2 away from doing the demos with the second silicon device.
Kurt Caramanidis, Analyst
Okay. Am I correct in understanding that you are discussing the launch or release of Gemini in fiscal 2020? Based on the additional spending required, that suggests it would occur in calendar Q1 of 2020?
Lee-Lean Shu, CEO
Yes. Correct.
Kurt Caramanidis, Analyst
Okay. And does that mean that you've got people...
Lee-Lean Shu, CEO
I believe, in Q3 that we...
Kurt Caramanidis, Analyst
Go ahead.
Lee-Lean Shu, CEO
Yes. Go ahead, yes.
Kurt Caramanidis, Analyst
Well, so you will be talking with prospective customers between now and year-end and then you would expect you would be able to ship in calendar Q1 if all goes according to plan?
Lee-Lean Shu, CEO
Yes. I think, yes, for the prototype kind of quantity, yes, I think we will do that.
Kurt Caramanidis, Analyst
Okay. What is this extra IP that you're buying? Is that part of the original purchase of MikaMonu? Or is this something new? And what about that second generation? Is that coming along? I know that you’ve talked about it having a much wider use. How is that...
Douglas Schirle, CFO
I can provide an update on the development of the second generation of the product. The intellectual property we mentioned in the earnings release relates to a portion of the product development that we'll be acquiring rather than developing entirely in-house. We are purchasing some IP that can be integrated into the chip to speed up our timeline, similar to our approach with the first chip where we integrated some IP for around $600,000 to $700,000. However, this new chip is much more complex, with many more features and a more intricate development process. The IP we are acquiring this time is significantly more comprehensive and costly compared to what we obtained for the first chip.
Lee-Lean Shu, CEO
Yes, I think that what Doug mentioned is the IP that you referred to in our earnings report. Those are the IP we plan to put into our second Gemini product. The second Gemini product will have a lot more integration than the Gemini 1. Essentially, we will put all the system-controlling functions into the chip. So there's a lot more interface and IP for all the system-controlling functions we need to put into the chip. So that's a hard demo in itself.
Douglas Schirle, CFO
And this is not related to the MikaMonu acquisition at all.
Kurt Caramanidis, Analyst
Okay. That's what I thought. Yes, I just wanted clarification. Is that about a year behind or so, Gemini 1, let's call it?
Lee-Lean Shu, CEO
Probably more like 2 years behind.
Kurt Caramanidis, Analyst
Okay.
Didier Lasserre, Vice President of Sales
You're talking about the introduction of Gemini 2? Look, Kurt, just to be clear, you're talking about the introduction of Gemini 2?
Kurt Caramanidis, Analyst
Yes.
Didier Lasserre, Vice President of Sales
Yes. It's more like 2 years.
Douglas Schirle, CFO
2-year time frame from now.
Operator, Operator
We have our next question from Jeff Bernstein.
Jeffrey Bernstein, Analyst
Just a clarification and a question. Gemini 2, which I believe you referred to as Socrates earlier, is the same thing, correct?
Lee-Lean Shu, CEO
Okay. Yes, yes. We spend some time now to do the feasibility study, and Socrates is targeted for the AI training market. The feasibility study, along with customer synergy, made us feel it's much better to focus on product development along the search-demanding strategy. So basically, we are changing a little bit to come back to focus on the search market again. So that's why it's the Gemini 2.
Jeffrey Bernstein, Analyst
Got you. Okay. And then you talked about the facial recognition and patent database search. It sounds like you have software compilers out, and people can use off-the-shelf kind of software now and aim it at your chip? So is that a step down?
Didier Lasserre, Vice President of Sales
Yes. We refer to them as GNLs, which are the GSI libraries. We will develop generic libraries for specific functions, and there will also be individuals interested in creating their own. We will be conducting classes in California to teach these individuals how to write their own GNLs. Additionally, we are developing algorithms for certain applications to further enhance the hardware. In summary, there are multiple levels involved, including libraries and algorithms. We will write these ourselves, and we will also provide instruction for others who wish to create their own.
Jeffrey Bernstein, Analyst
Got it. Got you. Okay. And then the demos so far, any comments you would make about sort of power use and heat dissipation? Obviously, you talked about the speed kind of being there. But what about those elements?
Didier Lasserre, Vice President of Sales
It's difficult to assess that at this moment. We expect it to be significantly lower in power consumption. However, it's important to note that the demonstrations we’ve conducted so far have utilized the initial silicon, which has known flaws and bugs. Therefore, it will be more revealing to observe the results from the second silicon. While we still have a few minor bugs to address, they are not significant. In this regard, we should soon begin to see more meaningful benchmark results that will help us understand the chip's true performance. Consequently, we will gain a clearer perspective on its capabilities, allowing us to factor in power considerations as well.
Jeffrey Bernstein, Analyst
Got you. And then in Gemini 1, how much memory is there actually in that chip? And is that something that people care about? And does Gemini 2 have a higher memory? Or can you just talk about that?
Didier Lasserre, Vice President of Sales
Yes, there are different layers of memory within the chip. We have L1 memory, L2 memory, and the Main Memory Block, which is a unique feature for us. The main difference between Gemini 1 and Gemini 2 lies in L1 memory. Gemini 1 has about 96 megabits of L1 memory, while Gemini 2 will have approximately 750 megabits, which is a significant increase. Additionally, we're making the device physically smaller, allowing us to fit 32 cards into a 1U chassis. This change enables us to load data directly from the host to our chip without needing an L4 DDR DRAM for database loading. Thus, the key differences between Gemini 1 and Gemini 2 include the much higher speed of 1.6 gig, compared to the 800 megabits to 1 gig of Gemini 1, and the substantial increase in L1 memory.
Jeffrey Bernstein, Analyst
Got you. So you can distribute the work across many of these chips, and so the database size is not limited by the individual chip. It's how many cards are in the chassis, etc.
Didier Lasserre, Vice President of Sales
It's scalable, correct.
Operator, Operator
We now have our next question from Jim Roumell.
Jason Nelson, Analyst
I just wanted to get an update on the Weizmann Institute collaboration and how that's progressing. Is it segueing into something larger? Can you just kind of give a little color to that?
Didier Lasserre, Vice President of Sales
So they actually have on their premise our hardware with the first silicon device. That's what we demonstrated with them. It worked so well that they actually took it in-house, and they're using it to find new molecules as we speak. With that said, they are looking very forward to seeing the second silicon. When we have a built-up system, we're going to swap out the board they have now with the second silicon board. So they can continue their tests. As I mentioned, we did some bypassing in the first silicon demo just to get around the major flaws. We won't have to do that in this second silicon device. Therefore, they're certainly looking much more forward to that. But as of today, they're still using our first demo board to do their market research as we speak.
Jason Nelson, Analyst
Do you have any understanding of the process they followed before choosing the APU chip and what feedback you're receiving from their current use of it?
Didier Lasserre, Vice President of Sales
I'm not sure if I fully understand the question. They were using CPU boards in the past, which dominated this market. When you go through the process, we told them based on what they're doing with similarity search and using our device, what we could do for them. That's when they became interested. Obviously, initially, it was PowerPoint presentations, but once we got the first silicon into their hands, they realized there was certainly a huge performance improvement for them. Even with the buggy first silicon, they went from minutes for a search to seconds. And then once we give them the complete parts, it'll be milliseconds per search. Their initial design or system was using a CPU.
Operator, Operator
We have our next question from Ari Shusterman.
Ari Shusterman, Analyst
Ari taking the question for Raji Gill. I wanted to start by asking about the market opportunity for your Gemini chips. Have you seen any changes, and what is the difference? How do you expect it to grow in the next 5 years?
Didier Lasserre, Vice President of Sales
So this is an ever-evolving market. Every time you turn around, there's another application for some type of similarity search. As we mentioned, one of the two new opportunities we have in database analytics, specifically for patent searches, is something that is new for us. Nine months ago or a little bit before that, the cheminformatics was new to us. It seems that there's an ever-evolving need for similarity search. So as far as the TAM goes, we see it growing as these new opportunities arise.
Ari Shusterman, Analyst
All right. How has the macro environment affected your business, if at all?
Didier Lasserre, Vice President of Sales
I'm sorry, can you repeat the question?
Ari Shusterman, Analyst
Yes. So when it comes to macro uncertainty, has that impacted, I guess, Nokia's behavior or other customers' behavior, any impact to your business?
Didier Lasserre, Vice President of Sales
The fact that we're going to be offering a Gemini chip?
Ari Shusterman, Analyst
No. I was talking about just the macro uncertainty.
Douglas Schirle, CFO
Not sure what you're asking. You're talking about tariffs and all that or...
Ari Shusterman, Analyst
Correct.
Douglas Schirle, CFO
That has had no impact on us, at least in terms of our ability to ship product. Didier can talk about the customers, but we've thoroughly gone through the process with our attorneys looking at shipping in Asia. And because of our structure, there's no U.S.-based content in anything that's manufactured offshore and shipped offshore. So right now, as it stands, the tariff situation is not an issue for us.
Operator, Operator
We'll now take our next question from Jeff Bernstein.
Jeffrey Bernstein, Analyst
On the RadHard business, if you could give us any kind of update on customer interest there. And also, what's going on with the rad-tolerant parts?
Didier Lasserre, Vice President of Sales
Sure. Right now, we certainly are seeing plenty of interest in both RadHard and rad-tolerant. Most of the interest is longer-term, kicking in sometime 2020 and beyond. We certainly have the one customer we've talked about for some time that is more near-term. But as far as interest, the level is very high. In fact, many of the customers we're talking to are asking for larger-density devices in this market space just because no one has, and there's certainly a need for higher-density SRAM market. So as far as that goes, there won't be a shortage of customers in this market.
Operator, Operator
And we have our next question from Kurt Caramanidis.
Kurt Caramanidis, Analyst
Just one follow-up. Are you using the success with the Weizmann? Has that opened other doors to other drug companies?
Didier Lasserre, Vice President of Sales
The answer is yes. Certainly, we need to go through the demos. We're trying to engage with a couple of customers in each of the market spaces, but we're certainly resource-limited right now because there was some workarounds with the first silicon device. However, we're anticipating with the second silicon device, with fewer bugs, to be able to open up demonstrations. It's our anticipation some time around the October timeframe, we'll start doing sessions here within headquarters where we will have several boards set up in our data center at headquarters, and we'll be able to do both shallow dives and deep dives for interested customers. There has already been interest from both the commercial and government sides for participation in these initial teaching sessions. So yes, certainly, there's that interest.
Operator, Operator
It does not appear we have any further questions at this time. I would like to turn the conference back over to the speakers for any additional or closing remarks. Thank you.
Lee-Lean Shu, CEO
Yes. Thank you all for joining us. We look forward to speaking with you again when we report our fiscal 2020 results. Thank you.
Operator, Operator
Ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect.