GSI Technology (NASDAQ:GSIT)
Q4 2013 Earnings Call
May 02, 2013 4:30 pm ET
Lee-Lean Shu - Co-Founder, Chairman, Chief Executive Officer and President
Douglas M. Schirle - Chief Financial Officer and Principal Accounting Officer
Didier Lasserre - Vice President of Sales
Patrick Tenney - Emrose Capital LLC
Ladies and gentlemen, thank you for standing by. Welcome to the GSI Technology's Fourth Quarter and Year-End Fiscal 2013 Conference Call. [Operator Instructions] 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, May 2, 2013, 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.
Good afternoon, everyone, and thank you for joining us. Due primarily to lower-than-expected sales to Cisco Systems, which was $3.9 million compared to $6.5 million in the prior quarter, today, we reported fourth quarter net revenue of $15.7 million compared to our earlier estimate of $15.6 million to $16.6 million. Although this was a soft quarter for us, fourth quarter gross margin of 46% was better than expected and we're above our guidance of approximately 43% due to improved product mix. For the year, we reported net revenue of $66 million and diluted earnings per share of $0.14, down from fiscal 2012 when we reported net revenues of $82.5 million and diluted earnings per share of $0.23.
Some of the top off in net revenues can be attributed to the pending ITC investigation initiated in response to a complaint by Cypress Semiconductor, which has occupied the other [ph] since the summer of 2011 and which since the later part of fiscal 2012 has affected net revenue on a quarterly basis.
The bottom line has also suffered although not as much as in the prior fiscal year, as we continue to incur significant legal expenses related to the ITC litigation. Legal expenses related to our litigation was $3.0 million in fiscal 2013 compared to $9.4 million in fiscal 2012. However, I am optimistic that we will see for next year first quarter earnings release, we will not be able to report that the ITC litigation is behind us.
As previously announced on October 25, 2012, Chief Administrative, Judge Charles E. Bullock, issued his initial determination in which he found that our SRAM devices and products containing them do not infringe the 4 patents asserted against GSI and others in the ITC and that Cypress had failed to establish the requisite domestic industry that practice those patents.
That determination, as well as a supplemental determination finding the asserting patents not to be invalid, are currently under review by the full commission. The target day for concluding the ITC investigation is June 25, 2013.
We believe that Judge Bullock's initial determination of non-infringement was correct and then it will be upheld by the full commission. We look forward to a successful conclusion of the ITC litigation.
In addition to ITC proceedings, a lawsuit alleged infringement by GSI products of 5 separate patents, including 3 of the 4 patents asserted in the ITC complaint, is currently pending in the United States District Court for the District of Minnesota. Their case has been stayed pending the conclusion of the ITC proceedings.
Just yesterday, Cypress filed yet another lawsuit alleging infringement of 5 additional patents in the United States District Court for the Northern District of California. Like the Minnesota case, the new complaint seek unspecific damage for the past infringement and a permanent injunction against future infringements.
We have just received a copy of the new complaint and have begun our investigation of Cypress' latest claim. As we have demonstrated, over the past 2 years, we are committed to defend this type of litigation vigorously. We will comment further once we have completed our preliminary review of Cypress' claims. We note, however, that the timing of the most recent filing would appear to signal Cypress' lack of confidence in the outcome of the ITC proceeding and the pending Minnesota case, and the impact of potential GSI victories on its strategy of intimidating our customers through the distraction of litigation.
Legal expenses could again, become substantial depending on the final outcome of the ITC proceeding and how the 2 federal case proceeds. Whatever the outcome of the patent litigation with Cypress, we will continue to incur legal expenses as we pursue our antitrust lawsuit against Cypress in which we have alleged that Cypress has conspired to monopolize the market for high-performance SRAMs.
We have never shied away from competing with Cypress on the basis of technology and performance, nor have we shied away from aggressively countering their baseless complaint before the ITC. Asserting their misleading and defamatory statements surrounding the ITC complaint has presented a challenge of a different sort, it is clear that, to some extent, they have succeeded in intimidating existing and prospective GSI customers. Sales have been adversely affected and regaining that lost business will take time.
That said, we are excited about our pending relationship with major telecom vendors like Huawei and Appsolution. We continue to believe that we have the most advanced technology in SRAM market and that ultimately, we will be successful competing with Cypress and all other competitors on the basis of our superior technology and the product performance.
With that, I will now turn the call over to Doug.
Douglas M. Schirle
The quarter ended March 31, 2013, was our 38th consecutive profitable quarter. We reported net income of $950,000 or $0.03 per diluted share and net revenues of $15.7 million for our fourth fiscal quarter ended March 31, 2013, compared to net income of $800,000 or $0.03 per diluted share and net revenues of $18.7 million in the comparable period a year ago.
In the prior quarter ended December 31, 2012, we earned $844,000 or $0.03 per diluted share, and net revenues of $17.5 million. For the year, we reported net income of $3.8 million or $0.14 per diluted share and net revenues of $66 million compared to net income of $6.7 million or $0.22 per diluted share and net revenues of $82.5 million in the fiscal year ended March 31, 2012. Gross margin was 43.3% compared to 44.4% in the prior year.
Fourth quarter direct and indirect sales to Cisco Systems were $3.9 million or 24.8% of net revenues compared to $6.5 million or 37% of net revenues in the prior quarter, and $6 million or 32.1% of net revenues in the same period a year ago. We believe the decline in sales to Cisco was due to interim corrections and softness in demand for the products and do not reflect a decline in our market share.
Military/defense sales were 12.7% of shipments compared to 11% of shipments in the prior quarter, and 11.1% of shipments in the comparable period a year ago. SigmaQuad sales were 38.9% of shipments compared to 33.7% in the prior quarter and 38.3% in the fourth quarter of fiscal 2012.
Fourth quarter fiscal 2013 operating income was $439,000 or 2.8% of net revenues compared to $595,000 or 3.4% of net revenues in the prior quarter, and an operating loss of $83,000 a year ago. Total operating expenses were $6.8 million compared to $6.7 million in the prior quarter and $8.7 million a year ago. Research and development expenses of $2.9 million were unchanged from prior quarter and slightly higher than the $2.7 million reported a year ago.
Selling, general and administrative expenses were $3.9 million compared to $3.9 million -- $6.1 million in the fourth quarter of fiscal 2012. Included in SG&A during these periods were respectively: $1.2 million, $1.1 million, and $3.7 million in litigation-related expenses.
Total fourth quarter pretax stock-based compensation expense was $589,000 compared to $565,000 in the prior quarter and $539,000 in the comparable quarter a year ago. For the full year period, total pretax stock-based compensation was $2.3 million in fiscal 2013, compared to $2.1 million in fiscal 2012.
At March 31, 2013, we had $67.3 million in cash, cash equivalents and short-term investments, $35.5 million in long-term investments, $86.6 million working capital, no debt and stockholders' equity of $132.2 million. Accounts payable at March 31, 2013, was $3.8 million compared to $5.5 million at March 31, 2012.
Net inventory was $13.8 million at March 31, 2013, down from $16.7 million at March 31, 2012. Inventory turns at March 31, 2013, were 2.4x compared to 2.4x at March 31, 2012. Depreciation and amortization expense was $2.4 million in fiscal 2013.
We currently expect net revenues in the first quarter of fiscal 2014 to be in the range of $15 million to $16 million with gross margin of approximately 43%. We also expect ongoing legal expenses related to the patent litigation and antitrust litigation will continue to affect our operating income and our bottom line. These expenses are difficult to forecast but we currently estimate that they will be approximately $2 million in the first quarter. Operating expenses in total are expected to be 5 -- approximately $7.5 million.
Operator, at this point, we'll open the call to Q&A.
[Operator Instructions] And at this time, I'm showing no questions. [Operator Instructions] Gentlemen, I am showing that we have no questions at this time.
I do apologize. It looks like we do have a questioner. We'll hear from Brad Hathaway with Far View Capital management.
I was just wondering if you could talk a little more about some of, I guess, the pressure that the Cypress and the ITC has been putting on your customers and how that kind of impacted revenues over the most recent quarter. And whether you -- how you expect that to change post the ITC determination in June.
So there's different levels of pressures that our customers have been under. There is the highest level are the customers that were included in the litigation. So there were 11 or so customers that were actually called as co-defendants along with GSI in this process. So obviously they felt the most pressure. Some of those customers signed some agreements with Cypress to relieve themselves of this litigation and certainly, from what we understand, the agreements were based off of the outcome of the case. Some of the other customers didn't get involved and then certainly, they continued on with normal business practices. So certainly the pressure from those folks, they're obviously waiting for the final determination on June 25.
The rest of the customers that weren't directly involved in the litigation, it was more of just the Cypress propaganda machine that was going to each of those customers and trying to put the scare tactic into them, telling the doom and gloom how we were going to be out of business. So certainly we've dealt with those on individual basis and the customers feel certainly much better after we've spoken to them. And after then the initial determination that came out in October of last year, they feel much, much better to the point where most of those companies are now going forward with either quals or di reso, or what have you, that they may have been hesitant on in the past. So in that respect, each customer's been a little different depending on how close they are to the center of the litigation.
As far as recovery, certainly the customers are involved in the discussions we've had. The ones that were, again, directly involved in the case, are -- we're not happy they were dragged into this in the first place, but they were named as defendants or respondents. So there's certainly -- my guess is we'll be taking actions to give GSI more market share when this is all over, obviously, with the final determination in our favor. I can't discuss, certainly, conversations we've had but you could imagine that they're not very happy to be a participant in this litigation.
Okay. And order of magnitude, can you give me an idea of how material the customers who actually included in the litigation were? How material they were to your revenue kind of before all this happened?
They are certainly our top customers. So if you look at the list, Cisco was on the list; they're our #1 customer. Alcatel was on the list; they're our #2 customer. Certainly, all the major telco guys are on the list. So yes, I mean, they certainly, they being Cypress, certainly were trying to put pressure on our top customers when they went through this. So it's very material, which is why Lee-Lean alluded a little earlier in his conversations that we have had some of our revenues affected due to this litigation. But again, we think we'll be getting that back going forward.
Great. And then switching gears. I mean, listening to you and few of your peers, it seems like there's a lot of hope around Samsung coming kind of maybe later this year. But it seems like it's been a little slower to ramp than people initially thought. Do you have any update on kind of what you've been seeing out in the market on that?
Yes, I do agree. I certainly -- I think it's been slower than we anticipated. I think we underestimated some of the factors that were involved in that transition. Number one is, the inventory that's in the channel, both just inventory in general and the Samsung inventory. I think a lot of folks put in some last-time buys and mostly, I think, they put it in just because they didn't have the resources at the time to actually call other suppliers. So they put in some last-time buyers or they're running with a single supplier now until they have time to go back and have suppliers.
With that said, we have had some customers come to us and start qualifications on what we know is Samsung business. So it's starting to come, certainly, not as quick as I think we and, certainly, everybody else in the industry would've hoped, but there are some signs now from the activity we've seen that some of the Samsung business is starting to become available.
Question is, is it going to be to the level that Samsung was shipping in the past? My guess is, not. I'm sure there are some type of applications, whether they be military or automotive, where those customers, due to the complexity of the qualifications, would've done a last time, life time buy. And that's business that, I think, will never become available. But in general I think we will start seeing some of the Samsung business appearing going forward, probably in the second half of this year.
Okay. Great. It's good to hear that you have some qualifications or some kind of starting signs of that so far. And then finally guys, switching gears, to the -- is there any kind of more information or kind of overview you can give us on antitrust case that you filed against Cypress and kind of what that potentially could mean and kind of some of the time frames around that?
Douglas M. Schirle
Well, we won't go to into dollars, but I don't remember the exact date, but one of the key hurdles was the court to approve the case to move forward. Cypress, as in all these kind of antitrust cases, moved to have it dismissed and the judge handling the case actually felt that we had a good case and that this was exactly the situation those laws where put in place.
Now if we were to win, we'd have to prove damages. And I don't know what that will ultimately be, but it could be tens of millions into the hundreds and hundreds of millions of dollars as they are trebled. So it could be a potential significant liability for Cypress if, in fact, we do win this case.
Okay, but it's a long -- it's relatively long process, through all that? [indiscernible]
Douglas M. Schirle
Yes, at this point I don't think it would go to trial until probably sometime in the middle of the next calendar year.
Okay. Excellent. Hopefully next time we speak, the ITC overhang will be lifted and you can get back to being a more normal business.
We hope so too. Yes.
We'll hear next from Anthony Cambeiro with Anthology Capital.
One of the questions I had was regarding the commentary that some folks have had about DRAM taking sockets from SRAM. And I was just wondering if you could comment on where that tends to be. I know we at, I believe, we play at the very, very high end of the market. And so that -- is that where DRAM is replacing or is it more on the low-end side of things?
No, it's definitely on the low-end. So if you look at the high end, we're talking about transaction rates and low latencies, and that's just something that the DRAM doesn't cover. If you look at the DDR-II kind of DRAM, there in the 40, 55, now it's like a latency type of area. And then even if you look at the RL, LLDRAM, they are down in -- certainly, on the type II, they're down in the 15. And if you go even to the RL III, it's just sub 10 [ph]. If you're looking at our early latencies, it's sub 5. So I mean, certainly, it's is a different category of products.
I mean, on a cost per bid base, certainly, the DRAM looks more attractive. But for the type of applications that we address, if you're talking about table looks-up -- excuse me, table look-up and stats and so on, it needs the very low latency and high performance parts that we offer. So it doesn't affect that.
Great. And I didn't catch if you guys talked about it. But your LLDRAM product, any update there on design wins and/or when revenue might -- we might start to see some revenue?
Yes, we actually have what we feel as our final revision of the part and in some the -- actually, some of the quals have actually closed already because they were based off of samples that we gave earlier that were not affected by the small fixes we made to it, to the chips. So we actually do have design wins already and we are starting to see some small revenue. I mean, it's kind of the ramp up revenue. It's -- the easiest quals were the ones that were the new programs that haven't ramped yet, or ramping now. The other quals that we started, which are going to be more significant because it's production quantities right now, those ones take a little longer. Because, unfortunately, unlike a new qual, which you just throw it into the platform quickly, the current or run-rate type of business has to be -- you have to have samples on all the different platforms and all the different flavors before they sign off the full qual. And that's where we are now.
So we certainly have actually started 1 qual about 2 weeks ago, which will be our single largest socket that we've identified and from what we understand, it could take up to 2 quarters to do the qualification. So my guess is, it'll be sometime in fourth quarter before that qualification is closed. But in the meantime we are closing other quals.
Perfect. And then finally, I was just wondering if you could address the TAM and how you guys look at that. I know there's been some commentary from Cypress and others, the market buys is -- market's certainly come down. I'm just curious if you could break that out into the low end, mid and high end. And since we tend to play at the high end, what have you seen in terms of the total addressable market? I know cyclically, it will have some changes due to the telecom cycle and that sort of thing. But secularly, what do you see as the total addressable market at the high end where we tend to play?
So you're exactly right. I mean, cyclically, it's down a bit. I mean, historically, it's running, round numbers, $1 billion for the very fast SRAM market, which is certainly what we cover. There's another segment of the market, the slow SRAM, which we've never addressed. And that used to be a huge TAM and that's shrinking very, very quickly. I don't even know what it is anymore. It can't be very much. That certainly has been replaced by DRAM. But the very fast SRAM market that we address, like you said, is tied to telco, which has been slumping for the last year pluses, I'm sure you all know.
And so, what number is it at now? Hard to predict. It could be in the 750 to 850 kind of range. I know that, certainly, recently Cypress said that they thought the market was $600 million or $600 million change, but then they turned around in the same sentence and said that they're 40% market share and that it represents $400 million for them. So obviously, the math doesn't add up.
My guess is it's certainly north of $600 million, but south of $1 billion. And we are foreseeing a few signs that hopefully that this turns around with some of the telco recovery. But right now, I would say that $800 million is probably a better number for today's market.
[Operator Instructions] We'll take our next question from Patrick Tenney with Emrose Capital.
Patrick Tenney - Emrose Capital LLC
Can you give us an update on the Alcatel-Lucent core and its routing opportunity.
So certainly, that was 1 of the brighter spots for us this past quarter. Right now, the -- as you mentioned, it's the 7750 and the 7950 platforms over there. Those platforms use a proprietary FP-3 processor from Alcatel that uses our [indiscernible] memory and so they are starting to get more traction. I mean, it's been a slower ramp than we had all anticipated. We are starting to see some signs that going forward certainly from the forecasting we've been given that, that should start increasing in the calendar third and calendar fourth quarter of this year. This past quarter, it was a nice piece of our revenue, which helped explain the bump up in the gross revenues as well.
So the answer is, it's ramping slowly. Certainly not as fast as any of us have predicted, but it certainly looks like second half of this year, they've got some orders in place that will help drive that revenue.
And at this time, I show we have no further questions.
Thank you, all, for joining us. We look forward to speaking with you in July when we will report our first quarter results.
Ladies and gentlemen, this does conclude today's conference. We thank you for your participation. You may now disconnect.
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