GSI Technology, Inc. (GSIT) CEO Lee-Lean Shu on Q3 2022 Results - Earnings Call Transcript

Jan. 28, 2022 1:16 AM ETGSI Technology, Inc. (GSIT)
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GSI Technology, Inc. (NASDAQ:GSIT) Q3 2022 Results Earnings Conference Call January 28, 2022 4:30 PM ET

Company Participants

Lee-Lean Shu – Co-Founder, President, CEO & Chairman

Didier Lasserre – VP, Sales

Douglas Schirle – CFO

Conference Call Participants

Jeffrey Bernstein – Cowen

Operator

Ladies and gentlemen, thank you for standing by. Welcome to GSI Technology's Third Quarter Fiscal 2022 results conference call. 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. It's 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 27th, 2022, 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

Good afternoon and thank you for joining us to review our Fiscal Third Quarter 2022 Financial Results. Our third quarter revenue grew year-over-year by 19% due to increased order from SRAM customer base, including network and telecom, military and the defense, as well as automotive, medical and test and measurement sectors. The increase in orders from other customers offset a lower order from Nokia in the quarter. Gross margin improved by 800 basis points year-over-year reflecting our ability to manage our near-term supply chain challenges, and increased of cost. Our lead loss narrowed year-over-year by 12% and we ended the quarter with $48.1 million cash, cash equivalent, and a shorter investment.

We continue to prioritize the allocation of our capital on R&D for the APU, which includes the software and the API development for Gemini-I in the table for Gemini-2. The software development team continue to extend our library of algorithms and the API for all target applications in search. In February, we plan to release our Compilers stack, and Didier will provide an overview of this in his section. At the end of calendar 2021, we announced that GSI was among the leaders in the Billion-Scale Approximate Nearest Neighbor Search (ANNS) Challenge. We were encouraged by this outcome. The results showed that the APU technology and the software performed on-par with prominent industry leaders in AI, all with a much broader resource than GSI. Contests such -- contests teach us a lot of our 3D to further develop APU and how we can improve our performance. Contest like beginning and end market challenge are also effective ways to launch GSI profile in our industry and with potential customers.

This contest parlor, all these capabilities, increase awareness of our APU unique value propositions. Last year, our first place week in the [Indiscernible] challenge, resolving our introduction to IAI / Elta. who engage with GSI to develop a SAR image processing acceleration system using the APU and our software. The Elta is found in the R&D to build the SAR system based on APU technology. The Elta will grant an exclusive perpetual license, all the fast SAR algorithm to GSI to allow GSI to sell a SAR system, including the algorithm to other customers. Assuming that the POC is successful, Elta will deploy the system in volume. The GSI team continues to build a pipeline of customer engagement and increase our POC activity for the APU. In addition to Elta SAR project, we are in discussions with several organizations to engage in POC for variety of user cases for search application we are test -- we are targeting all current POC engagements include indexing medical image and text, encrypted communication, and natural language processing.

The prime contractor is interested in testing of all for military and defense applications. And we have a couple more agency considering the APU for object detection and the facial recognition. We anticipate that a portion of this POC will move to design wins, eventually to production. A few years back, once we had a Gemini-I chip available for testing, we made a strategic decision to pursue search instead of the training and influenced markets well level already large, well-funded competitors. The APU performed significant better in search applications, and we decided to target our resource to develop that market. This has proven to be a good decision. Because we are now seeing the search may ultimately be a large end market. We recognized that the APU, who worked very efficiently, with a trained database to rapidly search and deliver results, with low-latency, low-power consumption, and a scalable configuration. Accuracy, a smaller footprint, lowering the total cost of ownership, [Indiscernible] space ready chip and reducing power consumption. A key differentiator for the APU. We've remained committed to our strategy and dedicating our capital to deliver the best technology for the live recording search market. Supply chain constraints continue to impact our order fulfillment.

While there has been some improvement, the situation remains fluid. We have passed on some of the price increase and have factor in the [Indiscernible] But we do not expect significant relief from this concern before the end of year 2022. We have increased our operation focus on managing the supply chain to fulfill orders that we have in-hand for the upcoming quarters that will provide our outlook for the fourth quarter in the prepared comments.

This year will be a crucial year to proving all the feasibility of all groundbreaking APU technology. Our less important milestones are the release of the Compiler Stack in February. This release shows a sale customer adoption of our ground breaking technology taken [Indiscernible], lower end up as AI capacity and the print debt capacity -- capability to spend along servers and age. We are in early stage engaging with customers who recognize the APU potential for their applications. The Compiler Stack should help us grow our path run. It is an exciting time for GSI and our team is focused to achieving our goals for current customer engagement while continuing to build our pipeline new opportunities. Now I will hand the call over to Didier who will discuss our business performance further. Please go ahead, Didier.

Didier Lasserre

Thank you. Lee-Lean. As lean stated, we have new customer engagements in multiple applications ranging from e-commerce to military and defense for various use cases. In our approach to the search market, we are pursuing opportunities that align with the applications we feel the APU is best suited. Right now, our team is seeding the field and we fully expect that some of this will bear fruit. Our approach to supporting these customer engagements depends on the end - users' needs. For some, we loan them a board to demo. Others have access to our Sunnyvale data center to run their models, and then some have purchased some boards. Each of these engagements target unique market applications and the ultimate size of each opportunity may vary. Since many are in the early stages of development, it is challenging to measure. But that said, they are all of sufficient size to merit allocating our resources. Today, we are working with universities with unique applications, with broad market opportunities, and we also have prime contractors that could eventually turn into large orders and a government agency evaluating for the APU for border security.

There's also an e-commerce company looking at the APU for natural language processing. You can see why we're excited about these engagements, as they could potentially develop into customers and growth markets. Our objectives are to make the POC s as successful as possible for each entity, expecting a portion to move to design wins and eventually to production. As part of the GSI developing a strategy for the AI and HPC or High Performance Computing acceleration market, we will soon be releasing an APU Compiler Stack. This release will deliver the environment for software and AI developers to write full applications using C for our Leda-E and Leda-S PCIe boards. The release will include example applications and training materials. Customers that need a specific use case algorithm can edit our large collection of vector library functions and write their own -- or write their own APU fragments in Python using our low level Belexstag product.

Achieving the APU Compiler Stack milestone should accelerate customer adoption and is one of the most important steps in front of us to move the APU to the next level. As I said earlier, the GSI team has been busy creating APIs for search workloads like image indexing, object recognition, natural language processing, as well as HPC workloads in the enterprise, and real-time applications like SAR, ATR, and signal classification at the edge. We have documented that the AP technology can offer enterprise AI capacity in an edge stand alone and server in support of that migration. The APU compiler stack is a powerful tool for researchers and developers that promises to significantly expand the market applications for our non-Von-Neumann processor.

To help build a pipeline, GSI will introduce a series of training seminars to support the customization of our APIs for specific applications. The APU technology is available in a PCIe board for enterprise and edge server applications, capable of searching tens of millions of vectors per board. The platform is highly scalable, allowing us to connect unlimited boards installed in servers. The hardware capability can also function as a cloud-based software-as-a-service for open search and elastic search acceleration. Once we launch the Compiler Stack, we plan to provide more detail in the press release. Let me switch now to the customer and product breakdown for the third quarter. In the third quarter of Fiscal 2022, sales to Nokia are $1.9 million or 24% of revenues compared to $2.8 million or 42% of revenues, in the same period a year ago, and $1.9 million or 23.8% of net revenues in the prior quarter.

Military defense sales were 27.1% of third quarter shipments compared to 26.0% of shipments in the comparable period a year ago, and 27.4% of shipments in the prior quarter. SigmaQuad sales were 40.5% of third quarter shipments, compared to 62% in the third quarter of fiscal 2021, and 52.4% in the prior quarter. In closing, as Lean mentioned, we have ongoing challenges with supply chain constraints, with substrate lead times out more than a year. Overall, the impact of increased wafer prices, assembly labor costs, rising substrate prices, and expediting charges has led us to raise prices to all of our customers in December. I'd now like to hand the call over to Doug. Doug, go ahead, please.

Douglas Schirle

Thank you, Didier. We reported a net loss of $4.6 million or $0.19 per diluted share on net revenues of $8.1 million for the third quarter of Fiscal 2022, compared to 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, and a net loss of $4.6 million or $0.19 per diluted share on net revenues of $7.8 million for the second quarter of Fiscal 2022. Gross margin was 55.3% compared to 47.3% In the prior-year period, and 53.6% in the preceding second quarter. The changes in gross margin were primarily due to changes in product mix sold for the three periods. Total operating expenses in the third quarter of fiscal 2022, were $9 million compared to $8.3 million in the third quarter of Fiscal 2021 and $8.7 million in the prior quarter. Research and Development expenses were $6.2 million compared to $5.7 million in the prior-year period, and $5.9 million in the prior quarter. Selling general and administrative expenses were $2.8 million in the second -- quarter end of December 31, 2021, compared to $2.6 million in the prior-year quarter, and $2.8 million in the previous quarter.

Third Quarter, fiscal 2022, operating loss was $4.5 million compared to $5.2 million in the prior-year period, and $4.5 million in the prior quarter. Third quarter, fiscal 2022 net loss included net interest and other expense of $15 thousand and a tax provision of $64 thousand compared to $25 thousand net interest and other income, and a tax provision of $90,000 for the same period a year ago. In the preceding second quarter, net loss included interest and other expense of $8,000 and a tax provision of $42,000. Total third quarter pre-tax stock based compensation expense was $740,000 compared to $693 in the comparable quarter a year ago and $716,000 in the prior quarter. At December 31st, 2021, we had $48.1 million in cash, cash equivalents, and short-term investments, and $3.4 million in long-term investments compared to $54 million in cash, cash equivalents, and short-term investments, and $5.8 million in long-term investments at March 31st, 2021.

With no debt, working capital was $49.9 million as of December 31, 2021 versus $56 million at March 31st, 2021. As of December 31st, 2021, stockholder’s equity was $66.8 million compared to $75.6 million, as of the end of fiscal year March 31, 2021. Supply chain constraints have impacted our ability to fill all of our orders. Where there has been some improvement, the situation remains fluid. And we do not expect significant relief from these constraints before the end of calendar year 2022. Given these constraints, current expectations for the upcoming fiscal fourth quarter, our net revenues in the range of $7.5 million to $8.5 million with gross margin of approximately 54% to 56%. Operator, at this point, we'll open the call to Q&A.

Question-and-Answer Session

Operator

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions]. One moment, please, while we poll for questions. Our first question comes from the line of Jeffrey Bernstein with Cowen. You may proceed with your questions.

Jeffrey Bernstein

Hi guys. In terms of the orders that you have not been able to fulfill, are those gone, do those go to someone else, or is that backlog that's building up?

Didier Lasserre

The majority of it is backlogged -- is built up. I mean, certainly some of them where we have multiple sources may have gone. With that said it's not -- it's a very small percentage of our business, and majority of it is sitting there and will be fulfilled later.

Jeffrey Bernstein

Got you. Okay. And then can you just give us a quick update on the Rad-Tolerant efforts?

Didier Lasserre

Sure. So the Rad-Tolerant, we spoke in the past, we've had some shipments out. In fact, on some Rad-Hard as well. And so some of those we are in the prototype stages. We're waiting for them to do their testing. It takes some amount of time. What we didn't discuss, is in this quarter, we actually booked another prototype for actually a Rad-Hard device. So we have a Rad-Hard on the books now that will ship hopefully this quarter. And again, it's for prototyping, for a satellite that will go into production in a couple of years. So we're starting to still see some prototyping. As we mentioned, the past -- the Rad-Hard still is a bit of a challenge because some of the meetings we still can't have. But the Rad-Tolerant we're still seeing, certainly, traction. there.

Jeffrey Bernstein

Okay. And then there was the issue of actually getting some of these parts into space before some people would look at using them. Where are we on getting a ride?

A – Didier Lasserre

Right. Exactly. So that's called heritage. So once you get heritage, which is proving that your parts work in space, it certainly makes our job with most customers very easy. In fact, we've had several customers have said that they're going to wait for heritage before they move forward. Some of the parts that we shipped in, I want to say summer of last year, it was late summer, maybe calendar third quarter. Those were going to be our first parts that can get into space. Those are being put on the satellites being assembled now so we're hoping it's launched sometime this year, and we certainly don't have control when that happens. We are following up with that customer often and right now it's sometime in calendar 2022 that will be in space. If you recall, that was a demo system for possible constellation in the future, but that would give us our first heritage and we're hoping that's this year.

Jeffrey Bernstein

All right, thanks.

Operator

[Operator Instruction] Okay, at this time, I'm not seeing any more questions. I'd like to pass it back over to Mr. Shu for closing remarks.

Lee-Lean Shu

Thank you all for joining us. We look forward to speaking with you again. When we're waiting for our fourth quarter and full-year fiscal 2022 results. Thank you.

Operator

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation and have a great day.

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