GSI Technology, Inc. (GSIT) Q1 2016 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to GSI Technology's First Quarter Fiscal 2016 Results Conference Call. At this time, all participants are in a listen-only mode. [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, July 30, 2015 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. Today, we reported first quarter net revenue of $14.0 million that came in at the high end of the range of guidance that we have provided early in the quarter and in the prior quarters. Our gross margin came in well above our guidance and well above our operating model at 52%, fueled by a continuing very favorable mix of higher margin products. Litigation-related expenses in the first quarter was $2.5 million, down from $3.5 million in the previous quarter and up from $1.8 million in the same period a year ago. The litigation related expenses again was primarily associated with the patent infringement and antitrust litigation involving Cypress Semiconductor and the pending commercial and trade secret lawsuit in which we are the plaintiff. Our projected litigation with Cypress was settled in May, so we will no longer be incurring expenses related to those cases. However, we expect that legal expenses related to the pending commercial and trade secret litigation will be substantial over the next two quarters as activity lurks up in anticipation of trial currently scheduled for October 2015. Excluding the impact of litigation-related expenses, our bottom line for the first quarter could have been net income of $1.6 million rather than a $900,000 net loss. As in prior quarters, we continue to see slowness in the telecommunications and the networking markets and continued weak sales in Asia. Looking forward to the remainder of fiscal 2016, we expect to maintain our leadership position in the high speed SRAM segment, and we look forward to expanding into the low-latency DRAM space as shipments of our LLDRAMs increase throughout the year. With that I now turn over the call over to Doug.

We reported a net loss of $900,000 or $0.04 per diluted share on net revenues of $14 million for the first quarter of fiscal 2016 compared to net loss of $1.4 million or $0.05 per diluted share on net revenues of $12.9 million in the first quarter of fiscal 2015 and a net loss of $2.7 million or $0.12 per diluted share on net revenues of $13.1 million in the prior quarter ended March 31, 2015. Gross margin was 52% compared to 45.9% in the prior year period and 49.6% in the preceding fourth quarter. First quarter fiscal 2016 operating loss was $1 million, compared to an operating loss of $2.9 million in the prior quarter and an operating loss of $1.5 million a year ago. Total operating expenses in the first quarter of fiscal 2016 were $8.3 million, compared to $7.4 million in the first quarter of fiscal 2015 and $9.3 million in the preceding fourth quarter. Research and development expenses were $3 million, compared to $3.1 million in the prior year period and $3 million in the preceding quarter. Selling, general and administrative expenses, which include litigation-related expenses, were up year-over-year to $5.3 million compared to $4.3 million in the quarter ended June 30, 2014, and down sequentially from $6.3 million in the preceding quarter. Total first quarter pre-tax stock-based compensation expense was $474,000 compared to $544,000 in the prior quarter and $573,000 in the comparable quarter a year ago. Depreciation and amortization expense was $333,000 for the first quarter. Sales to Alcatel-Lucent were $4.5 million, 32.1% of net revenues during the first quarter compared to $3.6 million or 27.4% of net revenues in the prior quarter and $3.2 million or 24.6% of net revenues in the same period a year ago. First quarter direct and indirect sales to Cisco Systems were $1.3 million or 9.5% of net revenues compared to $1.4 million or 10% of net revenues in the prior quarter and $1.8 million or 14.3% of net revenues in the same period a year ago. Military/defense sales were 19.4% of shipments compared to 17.9% of shipments in the prior quarter and 15.2% of shipments in the comparable period a year ago. SigmaQuad sales were 51.9% of shipments compared to 44.7% in the prior quarter and 43% in the first 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 may be 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 June 30, 2015, we repurchased 457,630 shares at an average cost of $5.36 per share for a total cost of $2.5 million. At June 30, 2015, management was authorized to repurchase additional shares of our common stock with a value of up to $6 million under the repurchase program. At June 30, 2015, the Company had $58.5 million in cash, cash equivalents and short-term investments, $17.5 million in long-term investments, $68.2 million in working capital, no debt, and stockholders' equity of $93.8 million. Accounts payable at June 30, 2015 was $4.5 million compared to $3 million at March 31, 2015. Net inventory was $8.7 million at June 30, 2015, up from $8.4 million at March 31, 2015. Inventory turns at June 30, 2015 and March 31, 2015 were 3.1 times. Looking forward to the second quarter, we currently expect net revenues in the range of $13.5 million to $14.5 million, with gross margin of approximately 48% to 50%. Operator, at this point, we’ll open the call to Q&A.

Thank you. [Operator Instructions] Our first question comes from Rajvindra Gill from Needham & Company.

Hi, this is Josh Buchalter in for Rajvi, thanks for taking my question and congratulation on the solid quarter. Obviously there is a big jump up in gross margin quarter-over-quarter and then your guidance was back to previous levels for next quarter. Can you really talk about some puts and takes within the current quarter and the guidance, you mentioned product mix but anymore color would be helpful? Thank you.

Two things are driving that this quarter. Alcatel-Lucent business was very high this quarter; it was a record quarter for us with them and a lot of the business there is self-sourced and its’ a very high ASP, margin product. And secondly, we had some military business with Lockheed during the quarter that was new this quarter. But some of those too is probably greater dollar amount than we would normally expect in the quarter and that contributed to the mix being significantly higher gross margin that what we’d typically expect. We expect some of the Lockheed business to continue next quarter. Alcatel was very high this quarter on the self-sourced product and we are not expecting it to be that high next quarter.

And also in the quarter, we have some of our high margin SQ3 products that are designed into a couple of military programs, and both those programs had a buy in the June quarter, which we do anticipate in the September quarter.

Okay, thank you, it’s very helpful. And then regarding the litigation expense, with the October pending trial date, I mean, how should we think about the magnitude of these expenses versus the ones recently occurred? Thank you.

We really don’t know what is going to be this quarter, potentially it could be a couple of million dollars but it really depends on how close we get to trial, it is scheduled in October. The court has amended a mediation session next week, which we will be attending and if things can be worked out, maybe we won’t incur that but if there is no resolution at that point or soon after than we could potentially incur a couple of million dollars this quarter.

Okay, thank you and thanks for taking my questions.

Thank you.

We’ll hear next from Kurt Caramanidis with Carl M. Hennig, Inc.

Hi, guys. Anything, any color around any acquisitions that you may be looking to make, are we close on anything, any color around that?

There are some things that we’re looking at, but there is nothing that we can report at this time. We have looked at several things over the past year, nothing has worked out at this point but we are actively looking.

Okay. But nothing close enough to be potentially happening is what you’re kind of saying?

At this point, that’s correct.

And then, either I missed it or was there a response to that second GigOptix offer?

There is nothing to disclose at this point. Yeah, I don’t know they would really call an offer, it was more in the line for proposal but at this point there is nothing to disclose.

Okay. I guess I just had read where we’ll look at this and get back to, it was a couple of months ago, and I just had -- I don’t know if I missed it something. And this new SigmaQuad, is that just kind of an updated version or is that something of a -- that’s going to make a difference and if so, when might that happen?

When you say this new SigmaQuad --

The one that I think it’s 40% less power and 25% faster, the one that was just the other day.

Right. I guess you’re talking about the news release that just came out. So, we have actually two family that we’ve announced in the last few weeks and one is, a follow-on of what we’re doing now, which is today, the revenues have come from the Type 2, 2 Plus, and Type 3 and so, we announced the 288 megabit. So, that’s the industry-leading density, which will be alone at in the market space. I believe you’re also talking about the 144 megabit Type 4. That’s the next generation family that will be much lower power and also much higher performance. And so those are -- have both been announced. So, we’ve started sampling both and there will be a design-in period. So, it will take depending on the family couple of quarters before we see any revenue with either of those families. But yeah, to answer your question, they are going to higher margin than the current products.

Okay. And just kind of looking around the sector, it seems as though many of the network telco service stocks are doing quite well. Business seems to have maybe fall off Q1 and Q2, but there is kind of an uplift. Am I missing something there or can you add any color to that?

If you look at our top customers, we -- in that market segment, we have Alcatel, Cisco, Huawei, ZTE are really our top four in that segment. Alcatel, we had our largest quarter ever with them. So, certainly we did well there. The Alcatel -- I’m sorry, the Huawei and ZTE have been down recently. I mean, there are certainly some -- it’s tough to get any visibility right now with what’s going on there. Certainly, the Chinese government controls a lot of the spend there and right now it’s not clear what’s happening, but certainly those two have been down for us recently. And then of course, Cisco, which has historically been our customer up until couple of years ago, they had gone with a new strategy to embed as much SRAM and TCAM into their ASICs as possible. So, certainly what we’re seeing there is the usage of SRAMs or their SRAM TAM I should say has decreased significantly over the years. So, though Cisco maybe doing well as a company, the programs that we’re in are more legacy and getting older with the newer programs using less and less SRAM.

Okay. Thanks for taking the call.

Our next question is from Anthony Cambeiro with Anthology Capital.

Hi, guys. I came on a little late. I was curious if you could update on how DRAM is ramping. I’ll just ask them all and then you can take them. LLDRAM and then if you’re seeing any market share or socket opportunities with what’s going on between ISSI and Cypress potentially merging if anything, they’re bringing up there and then if you could comment at all about MoSys and your relationship with them and remind us all what that is and if you truly do have kind of a call option based on that relationship on kind of a 30% to 50% given the second source nature, 30% to 50% of their adjustable market down the road should something be created there? Thanks.

Okay. So, let me try to hit the first question. So, LLDRAM was flat. It was about 3% of our revenues. We do have a new customer that’s going to be kicking in this quarter although that is significantly large one but it should hopefully push that number north. So, we’re starting to get some more design wins in that market. So, right now, again, it was flat or anticipating it will be up next quarter. The other question was okay, can we get the MoSys, if I remember that question. So, the MoSys relationship as we’ve discussed as a second source on their Bandwidth Engine 2 and Bandwidth Engine 2. We certainly have obviously been working with customers. Both customers that MoSys has been contacting in the past and also new customers have not been contacted. And so, there is actually quite a lot of momentum there. It is a brand new completely new design for all of our customers. And so, in that respect, it will be a longer design cycle. But certainly the interest level for this type of [indiscernible] is high. And the last question I believe was the ISSI-Cypress, what’s going on. So, first of all, obviously it looks like for now the Chinese consortium called Uphill has one bidding. It looks like at this point Cypress has bowed out and it still going through all the regulatory case [ph] and so I’d just point there is nothing that’s falling out. I emphasize still running as a normal company and so we have not seen anything, it’s certainly too early to discuss with me to be coming up to the – until that transition or transaction, I should say is done.

Okay. If I can go back on MoSys just real quick, so is it fair to assume though that kind of the market opportunity that they have going forward from Bandwidth Engine 2 and 3, GSI given the second source kind of has a call option on 30% to 50% or whatever that adjustable market is likely to be assuming your second sources between 30% to 50% market share.

Yes, that market share will be high. The way that – certainly, the way that we have structured it, my guess is, it acts as an agreement because it obviously doesn’t limit market share, but for us, it would probably be more like 30%, just the way that the royalty structure is set. So it’s probably closer to 30%.

All right. And so you know that they have higher enterprise value despite having almost no revenues today than GSI does, and we have an call option on 30%, whatever their potential revenue is, it’s mindboggling. Okay, that’s great. If I can ask one additional or maybe two additional questions. One is I get that there is obviously no good blood between GSI and Cypress, but if they are not going to win ISSI and given you guys have kind of settled some of your legal stuffs, and given the scale, sub-scale issues that we face, I mean, could you comment on the hypothetical level of Cypress-GSI acquisition and the benefits that would accrue to something like that? Not saying you guys would want to do it, but can’t deny that there would be some synergies. If you look at it on a gross profit less R&D and you do a multiple of that, GSI should be trading and they can buy it $8 and it is greatly accretive.

Well, there has been no discussions.

I didn’t think there were.

There is a lot of product overlap, so they are a number one competitor and we see them more than everybody and a lot of the products that we have, they already have.

Okay. And then the final one is, looking to the extent that you are potentially considering an acquisition of some kind, could you – I don’t know that I am in favor of it, I guess, we would have to see what it is, it seem too many times companies buy a technology and paying gargantuan price to revenues and then not paying out. So maybe kind of give us some framework for how you’re thinking about to the extent you’re looking to buy business as opposed to do a management buyout or do some, say, a 7-gig proposal. Can you kind of help us understand a little bit more about what you would be looking for, anything that we could go on?

So we are being very conservative in our approach to acquisitions. As you know, we have done one in the past, the Sony SRAM division and that was widely successful for us. So we are being conservative, we are looking for something that either is currently profitable or will be profitable fairly soon as we don’t want it to be a drag on R&D. If we are looking at anything that would take a little longer to profitability then it needs to be something that has great potential. So I mean, I can’t tell you more than that, but I am hoping that kind of gives you an idea of what our mind set is.

That is helpful. I mean, is it – would it be memory related or I mean, do you view your core competencies and your distribution and relationship with customers such that you’re – it may not be memory type related, I mean, it could be some other kind of technology that goes into telecommunications.

Exactly, and as you said, it could be something outside of memories.

Thanks, guys and good luck.

[Operator Instructions] It appears there are no further questions at this time.

Thank you all for joining us. We look forward to speaking with you in October when we will report our fiscal second quarter 2016. Thank you.

This concludes today’s conference. Thank you for your participation.