GSI Technology, Inc. (GSIT) Q2 2016 Earnings Report, Transcript and Summary

Ladies and gentlemen thank you for standing-by. Welcome to GSI Technology's Second Quarter Fiscal 2016 Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. [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, October 29, 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.

Good afternoon everyone and thank you for joining us. Today we had reported second quarter net revenue of $13.6 million that came in within the range of guidance that we had provided earlier in the quarter. And as in the prior quarters our gross margin came in well above our guidance and the well above our operating model at 50.9% fueled by a continuing very favorable mix of higher margin products. Litigation related expense in the second quarter was $1.6 million down from $2.5 million in the previous quarter and up from $1.5 million in the second period a year ago. As you know all project litigation with Cypress Semiconductor was setup in May. So the litigation related expenses in the second quarter were primarily associated with the pending commercial and trade secret lawsuit in which we are the plaintiff. Trailing the case begins this week. As in prior quarters we continue to see slowness in the telecommunication and the networking markets and continued weak sales in Asia. Looking forward to the remainder of the fiscal 2016, we expect to maintain our leadership position in the high speed asset segments. And we look forward to expanding into the low-latency DRAM space as shipments of our LLDRAMs increased throughout the year. With that, I will now turn the call over to Douglas.

We reported net loss of $347,000 or $0.02 per diluted share on net revenues of $13.6 million for the second quarter of fiscal 2016 compared to net loss of $950,000 or $0.04 per diluted share and net revenues of $13.3 million in the second quarter of fiscal 2015 and a net loss of $917,000 or $0.04 per diluted share on net revenues of $14 million in the first quarter of fiscal 2016 ended June 30, 2015. Gross margin was 50.9% compared to 45.7% in the prior year period and 52% from the preceding first quarter. Second quarter fiscal 2016 operating loss was $297,000 compared to the operating loss of $1 million in the prior quarter and an operating loss of $1 million a year ago. Total operating expenses in the second quarter of fiscal 2016 were $7.2 million compared to $7.1 million in the second quarter of fiscal 2015 and $8.3 million in the preceding first quarter. Research and development expenses were $2.9 million compared to $2.9 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 slightly year-over-year to $4.3 million compared to $4.2 million in the prior - in the quarter ended September 30, 2015. But down sequentially from $5.3 million in the preceding quarter. Total second quarter pretax stock-based compensation expense was $498,000 compared to $474,000 in the prior quarter and $571,000 in the comparable quarter a year ago. Depreciation and amortization expense was $318,000 for the second quarter. Sales to Alcatel-Lucent were 3.5 million, or 25.6% of net revenues during the second quarter compared to 4.5 million or 32.1% of net revenues in the prior quarter and 3.2 million or 24% of net revenues in the same period a year ago. Second quarter direct and indirect sales to Cisco Systems were 1.1 million or 7.9% of net revenues compared to 1.3 million or 9.5% of net revenues in the prior quarter and 1.9 million or 14.2% of net revenues in the same period a year ago. Military/defense sales were 24.7% of shipments compared to 19.4% of shipments in the prior quarter and 21.6% of shipments in the comparable period a year ago. SigmaQuad sales were 54.2% of shipments compared to 51.9% in the prior quarter and 38.1% in the second quarter of fiscal 2015. Our Board of Directors has authorized us to repurchase at management discretion shares of our common stock. 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 120,776 shares at an average cost of $5.14 per share for a total cost of $621,000. To-date we have repurchased a total of 9,306,938 shares at an average cost of $5.33 per share at a total cost of 50 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 September 30, 2015, management was authorized to repurchase additional shares of our common stock with a value of up to 5.4 million under the repurchase program. At September 30, 2015, the company had 60.4 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 93.6 million. Accounts payable at September 30, 2015 was 3.7 million compared to 4.5 million at June 30, 2015. Net inventory was 8.6 million at September 30, 2015, down from 8.7 million at June 30, 2015. Inventory turns at September 30, 2015 was 3.1 times compared to 3.1 times at June 30, 2015. Looking forward to the third quarter, we currently expect net revenues to be in the range of 12.5 million to 13.5 million, with gross margin of approximately 48% to 50%. We expect litigation related expense of approximately 2.5 million in the third quarter. Operator at this point we’ll open the call for Q&A.

Thank you. [Operator Instructions]. And we’ll take our first question from Kurt Caramanidis with Carl M. Hennig, Incorporated. Please go ahead.

Hi guys. Just wondering what is the orderly going forward in the lawsuits monetarily? We’re spending millions of dollars I'm just wondering what the outcome could be?

Well it’s basically related to trade debt IP, trade secrets and so on. We are looking for damages potentially legal fees. It could be significant number. We are not talking about what that number is but the trial is currently going on. It started earlier this week. Both continued throughout the next several weeks into November and we will see where we end up.

So that's when we find out if we win and what the award would be at the end of the trial?

Yes.

It's the confidence level - what's the confidence level?

We'd rather really rather not talk about that.

Okay, that's fine. What did Baird give for a value of the company when you said Baird did review the value of the company and that was higher than what that offer had come in at, right now I guess the markets got 19 million net of cash and long-term investments. What did they come up with?

They do multiple analysis and I'm not going to tell you what the number was, but it was significantly more than where the offer stood at. Which in time was $5.04.

Yeah. So did you run out of that old buyback is that what the new 5 million was for?

No, it's the same program. It's still continuing. It's not a new program and it's an existing program that we started back I believe in November 2008 or so.

Yeah, I mean that 5 million was just added it at September 30.

No, it's continuing. It's the balance remaining. Originally we had they're total of about 55 million this been approved by the board, enough of that 55 million those 5.4 million remaining as of the September 30th.

Okay. I'm just trying to figure out how were - what the value is significantly higher than what it was and nobody is seeing that have you thought of looking for offers higher to sell the company we're 4 years now, just checking my charts looking back 4 years ago below we were 4 years ago and I'm just at a loss of how were the price of the stack is right now.

Well we do have cash in the balance sheet and as we said before we continue to look at opportunities to return value to our shareholders and we are currently doing that there are things that we are looking at. But nothing that we can talk about at this time.

Okay. Is the SigmaQuad that was supposed to be a significant product fairly in our next quarter, is that another quarter from now the new fastest on the market? I know we talked about last quarter I guess maybe was another quarter out or...

No, the SigmaQuad, it's an interesting family and right now it actually grew at 54% of our business. But there is the fourth generation device and the fourth generation device which is going to be the fastest in the market as you mentioned is there we've actually sent some of the customers for qualification. So it's very early in the process. It's actually not just a simple upgrade from our current family. The type are the second generation type II or the third generation type III, it's a different pin out, different functionalities that requires a new board and so that's we are looking is for the new boards going forward. So we do have a few customers that are interested some have already taken the product for qualification purposes.

Okay. One final thought, did any of the new board members buy any stock? You have two new board members, is that right?

Yes, they'd like to, but unfortunately during our most recent open window the attorneys wouldn't let anyone buy. I think most of the officer shared you side feel the stock is undervalued and we'd all like to been able to buy stock. But we have a fairly tight trading window which that is only open during the middle month in the quarter. And because of things we are going on that timeframe, the attorney advise us, it would be best not to buy shares at the time.

So this quarter we could expect that?

Depending on the situation in the month of November yes it's possible.

Okay, thank you.

Thank you.

Thanks Kurt.

[Operator Instructions] We go next to Chip Se [ph] with AWH Capital.

Hello Didier this is question for you. Can you talk about the end markets because we've been trying to track the telco market for a while and we're starting to see other companies have some increase in their demand for their products so switches routers et cetera such as it relates to 40G 100G and I just want to see it if you can talk about those markets it's been what four plus years or more since this market has grown. And can you just talk about that.

Great. So we have to look at not just the market but how they're implemented there as well. And what I mean is so we're starting to see some strength certainly this quarter as Doug mentioned Alcatel was down first. But what we're seeing going forward is some of the forecast again they are just forecast but the forecast we're seeing from Alcatel and some of the markets you've just mentioned are up. So we anticipate again just based on the forecast that that will be up. Now Cisco on the other hand as you've been seeing has been continually going down. But again it's not because of the end market it's just the way that they have chosen to develop and design their products. So if you look at the SRAM usage at Cisco overtime it'd gone down just because of the way they designed it. So it's unfortunately there is not always a direct correlation with how the end markets are doing because it's also depends on how customer implement their solution. But to answer your question we do see some certainly in the folks that have actively use SRAMs and their designs going forward we do see some more optimistic forecast going into calendar 2016, but there will be some areas like Cisco that just won't recover just based on for the way that they've designed their systems.

Okay thanks for that. That's helpful. I have another question, as it relates to the lawsuit. So we finished with Cypress, this is a trade secret lawsuit from a few years ago, and we're now actually going into trial now. Are you guys are spending a lot of money on this every quarter over the last couple of quarters and then going back a few years. What - can you talk about what the end goal is? What could you possibly get out of this? I think it would be helpful for investors who see this spend every quarter on litigation expenses. I know the Cypress deal is finished, but here we are after Cypress and we're still spending 1.6, 2.5. What can we get out of this, I mean where is this going and I mean just give us some numbers, give us something to go on.

I think we already answered those questions to the best of our ability at this point. We're in trial right now and I don't think it's the right decision to be talking a lot about that today. We're probably have more say few weeks from now as we see how the trials progresses.

Okay, well. Please follow-up on that and have press release or let investors know this is a meaningful, this is a result we were hoping for or this is not what we're hoping for and just give us more guidance around what the outcome is. It's frustrating.

No we certainly we'll do that.

Okay. Thank you.

[Operator Instructions]. And at this time, there are no more questions from the phone audience. So I'd like to turn the conference back over to your presenters for any additional and or closing remarks.

Thank you all for joining us. We look forward to speaking with you in January when we will report our fiscal third quarter 2016 results. Good day.

Ladies and gentlemen, this does conclude today's call. Thank you for your participation.