GSI Technology, Inc. (NASDAQ:GSIT)
Q4 2015 Earnings Conference Call
January 28, 2016, 16:30 ET
Lee-Lean Shu - Chairman, President & CEO
Douglas Schirle - CFO
Didier Lasserre - VP, Sales
Kurt Caramanidis - Carl M. Hennig, Incorporated
Anthony Cambeiro - Anthology Capital
Welcome to GSI Technology's Third Quarter Fiscal 2016 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 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, 2016 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 is 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 joining us. Today we reported third quarter revenue of $12.9 million that came within the range of guidance that we have provided earlier in the quarter. The prior quarters of gross margin came in above over operating model at 49.4% filled by continuing favorable mix of higher margin products. In prior quarter we've continued to slowness in telecommunications and the networking markets and continued weak sales in Asia.
Litigation expenses in the third quarter of fiscal 2016 was $2.4 million up from $1.6 million in the previous quarter and up from $1.8 million in the same period a year ago. Litigation related expenses in the third quarter were incurred in the connection with the preparation [indiscernible] of commercial and trade secret lawsuit against United Memory Incorporated and Integrated Silicon Solutions Incorporated. As previously reported the trial began on October 26, 2015 and concluded on November 25th, 2015 with mix results.
The trial of this case is now concluded and we anticipated substantially reduce legal expenses in coming quarters. This lengthy litigation has also constituted a major distraction for our management team and this conclusion were allowed the team to focus it's attention on the future of growth and profitability of the company's by maintaining our leadership position in high speed asset segment.
Expanding into the low latency DRAM space [indiscernible] increase in developing the computing technology we acquired from [indiscernible] during the third quarter. We see quarterly expanding opportunities in big data, computer vision and cyber security as we develop products [indiscernible].
Regarding [indiscernible] we see expanded opportunities in big data, computer vision and the cyber security with this new IP with the fast data been generated and increasing demand for faster processing of data existing systems that move data back and forth between processors and the memory are no longer adequate. Memory are simply not keeping up with CPU speed and this is causing a bottleneck, between the CPU and the memory. Our new acquired in-place associative computing technology address this issue by changing the concept of computing from data processing where data is moved back and forth from the processor to the memory through a pair of data processing, computing and search directly in the main processing era. This new computing model will [indiscernible] computation and the response time big data applications.
Fast response times are also did in the computer vision market for example in the automotive market the best driver assistance systems require a tremendously amount of image processing to be accomplished in real time. Our massive parallel [ph] computing technology is well suited towards [indiscernible].
Clearly we’re very excited about this transaction as we believe that. GSI are circuit design expertise will enable the development of high quality processor incorporating patent in place associative computing technology and we believe the consolidation of these technologies will create a new category of computing products that will dramatically increase our target markets and customer basis over the coming years.
Initial products are expected to be introduced in late 2017 and acquisition is expected to be operative through GSI Technologies in fiscal 2019.
With that I will now turn the call over to Doug.
We reported a net loss of $819 million or $0.04 per diluted share and net revenues of 12.9 million for the third quarter of fiscal 2016 compared to net income of $148,000 or $0.01 per diluted share a net revenues of 14.2 million in the third quarter fiscal 2015 and net loss of $347,000 or $0.02 per diluted share or net revenues of 13.6 million in the second quarter of fiscal 2016 ended September 30, 2015.
Gross margin was 49.4% compared to 46.7% in the prior year period and 50.9% in the preceding second quarter. Third quarter fiscal 2016 operating loss was $1.6 million compared to an operating loss of $297,000 in the prior quarter and an operating loss of $654,000 a year ago. Total operating expenses in the third quarter of fiscal 2016 were $7.9 million compared to $7.3 million in the third quarter of fiscal 2015 and $7.2 million in the preceding second quarter.
Research and development expenses were $2.8 million compared to $2.9 million in the prior year period and $2.9 million in the preceding quarter. Selling, general and administrative expenses which include litigation related expenses were up year-over-year to $5.2 million compared to $4.5 million in the quarter ended December 31, 2015 and up sequentially from $4.3 million in the preceding quarter. Total second quarter pretax stock-based compensation expense was $414,000 compared to $498,000 in the prior quarter and $390,000 in the comparable quarter a year ago.
Depreciation and amortization expense was $385,000 for the third quarter. Sales to Alcatel-Lucent were 4.8 million, or 37.1% of net revenues during the third quarter compared to 3.5 million or 25.6% of net revenues in the prior quarter and 3.2 million or 22.8% of net revenues in the same period a year ago. Third quarter direct and indirect sales to Cisco Systems were 1.1 million or 8.9% of net revenues compared to 1.3 million or 7.9% of net revenues in the prior quarter and 2 million or 13.9% of net revenues in the same period a year ago.
Military/defense sales were 15.8% of shipments compared to 24.7% of shipments in the prior quarter and 24.3% of shipments in the comparable period a year ago. SigmaQuad sales were 54.9% of shipments compared to 54.2% in the prior quarter and 40.7% in the second quarter of fiscal 2015.
Our Board of Directors has authorized us to repurchase at management discretion shares of our common stock. On August 20, 2013 the Board increased the dollar value of shares that maybe repurchased by $10 million. Under the repurchase program, we may repurchase shares from time to time on the open market or in private transactions. The specific timing and amount of repurchases will be dependent on market conditions, securities law limitations and other factors. The repurchase program may be suspended or terminated at any time without prior notice.
During the quarter ended September 30, 2015, we repurchased 239,500 shares at an average cost of $4.21 per share for a total cost of $1 million. To-date we have repurchased a total of 9,546, 446 shares at an average cost of $5.30 per share for a total cost of $ 50.6 million including 3,846,153 shares acquired for purchase at a purchase price of $6.50 per share under modified Dutch auction self-tender offer completed in August 2014.
At December 31, 2015, management was authorized to repurchase additional shares of our common stock with a value of up to $4 million under the repurchase program.
At December 31, 2015, we had 50.1 million in cash, cash equivalents and short-term investments, and 15.5 million in long-term investments. Looking forward to the fourth quarter, we currently expect net revenues to be in the range of 12.2 million to 13.2 million. We expect gross margin of approximately 48% to 50% in the fourth quarter.
Operator at this point we’ll open the call to Q&A.
[Operator Instructions]. And we will take our first question from Chip Se [ph] with AWH Capital.
I wondered if you could possibly talk about the opportunities that you're working on the military business?
Can you be more specific?
I remember listening on the Needham conference and maybe there was a one before that LD Micro maybe and there was a lot of discussion about opportunities in the military space and falling up on that versus the quarter you just had in terms of the drop in the military business.
Right. So those are going to be two different topics. We will talk about the first one which is the drop in the military this past quarter. So that’s associated with the space sense [ph] program. We talked about the space sense program we had won some time back and there were three installments in the shipments. There was one of the installments in the September quarter but there was no one in the December quarter. So that’s the major of the fall there. We do have an installment that’s due this quarter and it will be the final installment based off the initial award of the space sense program.
It looks like there could be some fall on with this program going forward but as of now that would conclude the contract and the purchase order for space sense. So that’s the change from last quarter.
As far as the new opportunities what we were talking about is increasing our presence in the military markets in the fact that we want to start going after it's a hard business and the aerospace area that we have not participated in. And so that's certainly an area we actually have our devices right now going through all the radiation and stress testing that’s associated with that market. We were supposed to have actually one of the most important test that was supposed to happen in December but unfortunately the lab that does the test had to shut down their testers and so it's been postponed until March of this year, so about another 5, 6 weeks before that happens.
But we certainly a few customers that are already anticipating our very high density devices that they can't get into market space and so that’s certainly an area that we’re focused on going forward.
And can you talk a second about Cisco. say Cisco revenues are down year over year but they seem to have the same as a prior quarter. Can you talk about anything on the front there at Cisco?
So as we have kind of discussed in the past, Cisco has taken a strategy to embed their SRAM into the [indiscernible] and so a lot of the new boxes or routers and switches are coming out that don't have the SRAM content they had passed. And so what we’re seeing now is just the decrease in sales of their older systems, it's not being replaced by the newer system. So if you look at our current product line right now, again Cisco has made a conscious decision to embed the SRAM into their A6 [ph].
And lastly I guess you're 10Q isn't out yet, but any changes in networking capital that was impactful to the cash balance in the quarter?
Well the cash balance dropped around $10 million but as you recall we announced earlier in the third quarter and Lee [ph] also mentioned at the [indiscernible] acquisition. So that’s taken approximately $7.5 million off the balance sheet. In addition we paid a significant level of legal expenses in the quarter and we also repurchased $1 million worth of our stock. So that’s what led to the decrease in cash.
So going forward we hope and expect that all the legal activities are behind us and it won't be pursuing anything on that front going forward at this point. And that will significantly help the cash flow situation we won't be spending money on legal fees or we aren't anticipating money on litigation related legal fees at this point and it will also improve the P&L, those expenses that have been causing losses will be off the P&L.
[Operator Instructions]. We will now move on to Kurt Caramanidis with Carl M. Hennig, Incorporated.
I'm wondering if you've looked into doing something like Michael Dell did with Dell Computer into taking a putting a group together to take the company private with where were the prices and probably the shareholder base and the positive outlook you have for the next couple of years. Any commentary on that?
No I don't think we're looking at that but as we always mentioned we do have repurchase the fund -- we buyback from the market and as you know we also have the repurchase of $35 million just not long ago, $25 million.
I guess I'm just kind of reflecting on the deal we did indeed take we would probably be about 100% how you’re right now and that's a tough one to swallow, that's the stock of the company that was looking to acquire has over doubled and we're now almost the same price as that company and I'm just kind of scratching my head at that.
Yes. We did take a look at that the Board reviewed the situation but at the end of the day we don't believe the funding was there.
Okay. I guess we will know the confidence if we see the insider buying coming up here at this level and we're trading just over cash which is pretty young, pretty amazing. But otherwise outlook looks interesting with that acquisition but share prices is very disappointing, but appreciate taking the call.
And we will now move to our next question, George Casper [ph]. Mr. Casper are you on the line?
Question regarding the technology based acquisition that you made recently in Israel and you made some brief comment about it. Can you give us some markers as to what we can expect going forward? What kind of cost impact are you going to have to forward to lift that off and what's the timing going forward? When can we expect something positive to come out of that move that you’ve made?
Well let me make a few comments and then Didier CapEx chime in, in terms of the cash cost of this we've already hired the key person [indiscernible] and we have hired in addition to him for other additional software developer. So what we’re looking at cash expenditures in the $300,000 per quarter range. So it's not a significant impact on our cash position. Most of the activity we will be taking place with existing design resources that we have here just at GSI Technology at this point. And the product is currently going through definition and we’re anticipating that towards a lot of part of calendar 2017 that we have the first product available for customers to look at.
I will take a step further than that. So right now we’re actually having the conversations with the customers and we're focusing currently on major big data guys who have been very responsive and have given us great feedback and certainly they are very enthusiastic about the technology. We have also some of the cyber security folks in the talks as well. And as Doug mentioned we’re leading up to what the initial device will look like and we should have that definition done by the end of this quarter is our target.
In the meantime we're putting together a FPGA demo e-valve Board if you want to call it that will be available sometime in late summer for the customers so they can start some of their software projects around that and so it will be a good representation of what people will do obviously will be the FPGA version will be lower density and it will be lower performance but it will give a very good representation of what the technology is.
Dough, we're looking at some time at the end of 2017 to actually have devices, I'm not sure we will be waiting for the customers yet, but certainly we will have kind of silicon sometime end of 2017 time frame.
So the milestones for now is the definition which will be the end of this quarter than the e-valve board will later on in the summer time and at that point hopefully we have some engagement discussions that we will be able to share with you folks.
And couple more quick ones, the legal cost reduction I don’t know if you’ve thrown out an estimate that might run for the current quarter because the implication here is that the majority of it is gone. How will that comparison look relative to the past quarter? Can you give us a couple of numbers?
Yes, right now we’re looking at maybe in the $100,000 range or so. It's a matter -- once the trial was completed there's a motions and paperwork that needs to be filed with the court and right unless there is appeal that’s all we’re anticipating at this point.
And then back on a technology question I think I brought this up before mentioned it along the way at a previous call. The sealed amplifier market associated with the field lines that the cable companies have and wherever all over this country. There is a real deep problem that's emerging on these field amplifiers there's not enough bandwidth going back from the output.
And my question is is there any place for you to fit in with your technologies maybe do some R&D and see if you could come up with a way of providing some component of that bandwidth requirement that they're going to need? I understand personally that this is going to bust out big in six months to a year.
Well I think [Technical Difficulty] but anyway I think we probably can look into it. You mentioned the field amplifier?
Yes, field amplifiers.
We will look into it.
But George, if it's going to be busting in the next six months it would certainly would take fall at and get something to address that market and right now we actually unless we hire a team our teams right now are really focused on making this in-place associate processor success, so we surely want to get market as soon as possible with that device.
[Operator Instructions]. We will now move to Anthony Cambeiro with Anthology Capital.
I'm just curious if you guys can talk about Mosi [ph] and the bandwidth and where things stand on that, it seems like you got several irons in the fire trying to address future technology way out well our business in LLDRAM and SRAM kind of steady state I guess, can you kind of talk about the opportunities there if any both on LLDRAM and the bandwidth engine?
Sure. I will start with the bandwidth engine, I'm going to obviously talk about bandwidth engine two because it's parts are still available, the B3 is not available yet. So B2 we’ve actually had obviously a lot of discussion with customers. Some of them are follow on to existing -- customers who wanted a second source but many of the conversations were actually new customers that had never met with Mosis and in fact in the quarter we’re in now we will have our first -- we've actually booked our first two orders for the Bandwidth Engine 2 from two companies, it's really prototype quantity but it's an indication that it's going forward.
As far going forward, it's a still new product, the cost model is still very high which we need to work on with Mosis to get that cost model down for this to really be a product that’s going to take off in the future but certainly the response from the customer base they are very positive and we certainly have commitments from customers to use the technology. What was the second part of the question?
The LLDRAM, we’re still getting more design wins. They tend to be more in the smaller side right now. There is one particularly large opportunity that we've been working on for a while. There was some qualification issues and so we're in the process, we’re working with those customer now to figure out what the issue was. It's too early to anticipate when that might be resolved but it's certainly an active program between us and the customer.
So I think it certainly will be a large opportunity if we can figure out the technical aspects of that qualification but otherwise we’re still getting falls, they just tend to be on the smaller end of this point.
And I would reiterate the previous one of the other question about the taking the company private I think when the stock at 3.48 and the opportunity for demand it seem to have create a value for the shareholders in the past but didn’t go through I think it's imperative that you guys did a buyback stock individually and the open markets see some incentivized and given the ownership of the company by insiders it would not take much capital to buy out the rest of us at a significant premium and still be highly accretive to you as a management team. Thank you.
And there are no further questions at this time. I would like to turn the conference back over to our speakers for any additional or closing remarks.
Thank you all for joining us. We look forward to speaking with in May when we will report our fiscal first quarter 2016 results. Thank you.
And that does conclude today's conference. Thank you for your participation and you may now disconnect.