GSI Technology, Inc. (GSIT) Q3 2016 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the 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 the future events and future performance of GSI Technology that involve risk 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 like to now turn the conference over to Mr. Shu. Please go ahead, sir.

Good afternoon, everyone, and thank you for joining us. Today, we reported third quarter net revenue of $12.9 million that came in within the range of guidance that we had provided earlier in the quarter. As the prior quarters, our gross margin came in above our operating model at 49.4%, fueled by a continuing favorable mix of higher-margin products. As in prior quarters, we continued to see slowness in the telecommunications and the networking market and continued weak sales in Asia. Litigation-related 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 connection with the preparation for and conduct of the trial of a commercial and trade secret lawsuit against United Memories, Inc. and Integrated Silicon Solutions, Inc. As previously reported, the trial began on October 26, 2015, and concluded on November 25, 2015, with mixed results. The trial of this case is now concluded and we anticipated substantially reduced legal expenses in coming quarters. This lengthy litigation has also constituted a major distraction for our management team, and this conclusion will allow the team to focus its attention on the future growth and profitability of the company by maintaining our leadership position in the high-speed SRAM segment, expanding into the low-latency DRAM space as the shipments of our LLDRAMs increase and developing the associative computing technology we acquired from MikaMonu during the third quarter. We see greatly expanded opportunities in big data, computer vision and cyber security as we develop products utilizing this new IP. Regarding MikaMonu, we see greatly expanded opportunities in big data, computer vision and the cyber security with this new IP. With the vast amount of data being generated and the increasing demand for faster processing of that data, existing systems that move data back and forth between processors and the memory are no longer adequate. Memory bus speeds are simply not keeping up with the CPU speeds, and this is causing a bottleneck at the IO between the CPU and the memory. Our newly acquired in-place associative computing technology addresses this issue by changing the concept of computing from serial data processing where data is moved back and forth from the processor to the memory to parallel data processing, computation and search directly in the main processing array. This new computing model will greatly expedite computation and response time in big data applications. Fast response times are also needed in the computer vision market. For example, in the automotive market, advanced driver assistance systems require a tremendous amount of image processing to be accomplished in real time. Our massively parallel computing technology is well suited to address this need. Clearly, we are very excited about this transaction as we believe that GSI's state-of-art circuit design expertise will enable the development of high-quality associative processor, incorporating patented in-place associative computing technology and algorithms. We believe that the consolidation of these technologies will create a new category of computing products that will dramatically increase our target markets and customer bases over the coming years. Initial products are expected to be introduced in late 2017, and the acquisition is expected to be accretive to GSI Technology's net income in fiscal 2019. With that, I will now turn the call over to Doug.

We reported a net loss of $819,000 or $0.04 per diluted share on net revenues of $12.9 million for the third quarter fiscal 2016 compared to net income of $148,000 or $0.01 per diluted share on net revenues $14.2 million in the third quarter of fiscal 2015 and a net loss of $347,000 or $0.02 per diluted share on 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 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 third quarter pre-tax 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 $1.1 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 third quarter of fiscal 2015. Our Board of Directors has authorized us to repurchase and manage with 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 the 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 December 31, 2015, we repurchased 239,508 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 (sic) [ $4.4 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 of fiscal 2016. 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 third -- in the fourth quarter. Operator, at this point, we'll open the call for Q&A.

[Operator Instructions] We'll take our first question from Chip Saye 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? Are you talking about the...

I remember listening on the Needham conference, and maybe there was one before that, LD Micro maybe. And there was a lot of discussion about opportunities in the military space. And following 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 2 different topics. So we'll talk about the first one, which is the drop in the military this past quarter. So that's associated with the space sens program. So we talked about the space sens program that we had won sometime back, and there were 3 installments in the shipments. There were -- was one of the installments in the September quarter, but there was not 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 that will be the final installment based off of the initial award of the space sens program. Looks like there could be some follow-on with this program going forward, but as of now that would conclude the contract and the purchase order for space sens. 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 market space in the fact that we wanted to start going after the rad hard business in the space and 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 tests 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 next -- actually, until March of this year, so about another 5, 6 weeks before that happens. But we certainly have a few customers that are already anticipating our very high-density devices that they can't get in the market space. So this is -- that's certainly an area that we're focused on going forward.

Okay. And can you talk a second about Cisco, where, say, Cisco revenues are down year-over-year, but they seem to have -- is the same as the prior quarter. Can you just talk about anything on the front there with Cisco?

So as we've kind of discussed in the past, Cisco has taken a strategy to embed their SRAM into their ASICs. And so a lot of the new boxes or routers and switches they're coming out with don't have the SRAM content they had in the past. And so it's -- so what we're seeing now is just the decrease in the sales of their older systems, and it's not being replaced by the newer system. So if you look at our current product line right now again, it's -- Cisco has made a conscious decision to embed the SRAM into their ASICs.

Okay. And lastly, I guess, your 10-Q isn't out yet. But any changes in net working 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-Lean also mentioned it today, the MikaMonu 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's led to the decrease in cash. Going forward, we hope and expect that all the legal activities are behind us and 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 spending money on litigation-related legal fees at this point. It will also improve the P&L. Those expenses that have been causing losses will be off the P&L.

[Operator Instructions] We'll now move on to Kurt Caramanidis with Carl M. Hennig, Inc.

Lee-Lean, I'm wondering if you've looked into doing something like Michael Dell did with Dell computer into taking -- putting a group together to take the company private with where the price is 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 are looking at that. But as we always mentioned, we do have the repurchase fund. We buy back from the market, and as you know, we also have the repurchase of a $35 million just not long ago.

$25 million.

$25 million.

[indiscernible]

Yes. I guess, I'm just kind of reflecting on the deal we didn't take. We would probably be about 100% higher right now and that's a tough one to swallow. That's the stock of the company that was looking to acquire has overdoubled, and we're now almost the same price as that company. And just -- 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, the -- we don't believe that the funding was there.

Okay. I guess we'll 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 amazing. But otherwise, outlook looks interesting with that acquisition, but share price is very disappointing. But appreciate you taking the call.

We'll now move on to our next question, George Gaspar.

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 put forward to lift that off? And what's the timing going forward? What can -- when can we expect something positive to come out of that move that you've made?

Well, let me make a few comments, and Didier can chime in. In terms of the cash cost of this, we've already hired the key person at MikaMonu, and we've hired in addition to him 4 other additional software developers. So we're looking at cash expenditures of -- in the, I don't know, $300,000 or so per quarter range. So it's not a significant impact on our cash position. Most of the activity will be taking place with existing design resources that we have here at GSI Technology at this point. And the product is currently going through definition, and we're anticipating that towards the latter part of calendar 2017 that we have the first product available for customers to look at.

Yes. I'll take a step further than that. So right now we're actually having the conversations with the customers, and we're focusing currently on the major big data guys who have been very responsive and have given us great feedback. And certainly, they're very enthusiastic about the technology. We've also -- have 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 will -- we should have that definition done by the end of this quarter as our target. In the meantime, we're putting together a FPGA demo eval board, if you want to call it, that will be available sometime in late summer for the customers, so they can start doing some of their software projects around that. And so it will be a good representation of what people do. Obviously, it 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. Doug mentioned we're looking at sometime at the end of 2017 to actually have devices. I'm not sure it'll be ready for the customers yet, but certainly, we'll have some kind of silicon sometime end of 2017 time frame. So the milestones for now is the definition, which will be end of this quarter. Then, the eval boards will be later on in the summertime, and at that point, hopefully, we have some engagement discussions that we'll be able to share with you folks.

And a couple more quick ones. The legal cost reduction, I don't know if you've thrown out an estimate that might run through 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 of once the trial is completed, there's motions and paperwork that needs to be filed with the court. And right now unless there's appeal, that's all we're anticipating at this point.

Right, okay. And then back on the technology question. I think I brought this up before, mentioned it along the way at a previous call. The field amplifier market associated with the fuel lines that the cable companies have in 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 to 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 -- we - I understand personally that this is going to bust out big in 6 months to a year.

Well, I think that's a new term that we heard of, yes. But anyway, I think we probably can look into it. You've mentioned the field amplifier, right?

Yes, field amplifiers.

Okay, okay. We'll look into it.

But George, if it's going to be busting in the next 6 months, it would -- certainly would take a lot longer to get something to address that market. And right now we actually -- our -- unless we hire a team, our teams right now are really focused on making this in-place associative processor a success. We certainly want to get to market as soon as possible with that device.

[Operator Instructions] We'll now move on to Anthony Cambeiro with Anthology Capital.

I'm just curious if you guys can talk about MOSY and the bandwidth engine 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, in both on LLDRAM and the Bandwidth Engine?

Sure. So start with the Bandwidth Engine. So I'm going to obviously talk about Bandwidth Engine, too, because that's the product that's available today. The BE3 is not available yet. So the BE2, we've actually had obviously a lot of discussion with customers. Some of them are follow-on to existing MoSys customers who wanted a second source. But many of the conversations are actually new customers that had never met with MoSys. And in fact, in the quarter we're in now we will have our first -- we've actually booked our first 2 orders for the Bandwidth Engine 2 from 2 new companies. It certainly is prototype quantities, but it's an indication that it's going forward. The -- as far as going forward, we still -- it's still a new product. The cost model is still very in which we need to work on with MoSys to get that cost model down for this to really be a product that's going to take off in the future. But the -- certainly, the response from the customer base has been very positive, and we certainly have commitments from customers to use the technology. That was -- what was the second part of the question?

LLDRAM.

LLDRAM, the LLDRAM, we're still getting more design wins. They tend to be more on the smaller side right now. There was one particularly large opportunity that we've been working on for a while. There were some qualification issues, and so we're in the process of working with those customer now to figure out what the issue was. It's a little early to anticipate when that might be resolved, but it's certainly an active program between us and the customer. So that could certainly 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 at this point.

And I'd reiterate the previous one or the other people on the call's question about taking the company private. I think, with the stock at $3.48 and the opportunities for the management team to create a value for shareholders in the past that didn't go through. I think it's imperative that you guys be there buy back stock individually in the open markets and see some insider buys. 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.

There are no further questions in the queue at this time. I'd 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 you in May when we will report our fiscal fourth quarter 2016 results.

That does conclude today's conference. Thank you for your participation, and you may now disconnect.