GSI Technology, Inc. (GSIT) Q4 2018 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the GSI Technology’s Fourth Quarter Fiscal 2018 Results 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 been asked to advise you that this conference call is being recorded today, May 3, 2018, 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 call over to Mr. Shu. Please go ahead.

Good afternoon, everyone, and thank you for joining us. Today, we report fiscal fourth quarter net revenue of $11.2 million and a gross margin of 56.2%, above the guidance that we provided earlier in the fourth quarter. Net revenue in the quarter increased both sequentially and year-over-year. A decline in net sales to our primary telecommunications and the networking market compared to prior quarter was offset by the increase in military and the defense sales, which carry a higher gross margin. Doug will provide additional detail on our financial results in his comments. During the fourth quarter, we remain primarily focused on our 2 new products, namely, our SigmaQuad radiation-hardened, or RadHard, SRAM products, targeted at aerospace and the defense applications and our patented in-place associative computing technology, or APU, for artificial intelligence application. We currently anticipate initial shipments of the RadHard products in the December quarter of 2018. In our discussion with customers, there has been significant interest shown for our new SRAM products that we are calling rad-powered. Our RadHard SRAMs are designed for aerospace applications and the higher elevation satellite and the missiles in very harsh, high temperature and the pressure environments. Due to their ability to tolerate these extreme conditions, this product carry extremely high ASP and the gross margin. By comparison, rad-powered chip could be used in lower elevation, aerospace and the military applications, where the chip design would not require as robust a configuration. This product will have a similar gross margin profile as compared to the RadHard line with low ASPs, which make them attractive for lower-cost applications. We anticipate having the initial orders for the rad-powered product line in the second half of calendar 2018. Overall, we are essentially tracking to the milestones we have previously laid out for the development of our APU. We are completing the table and have been conducting quality checks in preparation for releasing older designs to the fab. We anticipate having the first package parts to test over the summer. In the meantime, we are marketing our highly innovative AI technology to a broad base of industry experts and end market customers across multiple industry and the potential applications, including recommender systems, Natural Language Processing, security and the video applications. Recently, we add a new member to our AI team, who will support our AI marketing with white papers and the building alliance in the academic community. We currently hold 17 U.S. patents and a number of pending patents for our APU in the U.S., China and the Korea. We remain confident that we will execute to our primary business objective of bringing our new RadHard and the rad-powered SRAMs to market and commercializing our APU in fiscal 2019, which we anticipate will broaden our customer base, increase revenue and improve profitability in fiscal 2019 and beyond.

For the fiscal year ended March 31, 2018, we reported net loss of $4.5 million or $0.21 per diluted share. Our net revenues of $42.6 million compared to a net loss of $115,000 or $0.01 per diluted share on net revenues of $48.2 million in the fiscal year ended March 31, 2017. Gross margin was 52.6% compared to 54.8% in the prior year. Total operating expenses were $26.9 million in fiscal 2018 and essentially unchanged from fiscal 2017. Research and development expenses were $17 million in fiscal 2018 compared to $15.8 million in the prior fiscal year. And selling, general and administrative expenses were $9.9 million compared to $11.1 million in fiscal 2017. We reported net income of $265,000 or $0.01 per diluted share on net revenues of $11.2 million for the fourth quarter of fiscal 2018 compared to a net loss of $1.3 million or $0.07 per diluted share on net revenues of $10.4 million in the fourth quarter of fiscal 2017 and a net loss of $1.5 million or $0.07 per diluted share on net revenues of $11.1 million in the third quarter of fiscal 2018 ended December 31, 2017. Gross margin was 56.2% compared to 56.4% in the prior year period and 51% on the preceding third quarter. As a reminder, in the prior quarter, gross margin was negatively impacted by product mix and an increase in reserves resulting from the write-down in the value of excess inventory. Fourth quarter fiscal 2018 operating loss was $111,000 compared to operating loss of $1 million in the prior quarter and an operating loss of $1.5 million a year ago. On December 22, 2017, the Tax Cuts and Jobs Act was signed into law, significantly impacting several sections of the Internal Revenue Code. This legislation resulted in a net tax provision in fiscal 2018 in the amount of $367,000 for the deemed repatriation of foreign earnings. Total operating expenses in the fourth quarter of fiscal 2018 were $6.4 million compared to $7.4 million in the fourth quarter of fiscal 2017 and $6.7 million in the preceding third quarter. Research and development expenses were $4.3 million in the fourth quarter of fiscal 2018 compared to $4.2 million in the prior year period and $4.2 million in the preceding third quarter. Selling, general and administrative expenses were $2.1 million compared to $3.2 million in the quarter ended March 31, 2017, and down sequentially from $2.5 million in the preceding quarter. Total fourth quarter pretax stock-based compensation expense was $549,000 compared to $535,000 in the prior quarter and $518,000 in the comparable quarter a year ago. Sales to Nokia were $4.1 million or 36.8% of net revenues during the fourth quarter of fiscal 2018 compared to $3.9 million or 34.7% of net revenues in the prior quarter and $4.2 million or 40% of net revenues in the same period a year ago. Fourth quarter direct and indirect sales to Cisco Systems were $379,000 or 3.4% of net revenues compared to $565,000 or 5.1% of net revenues in the prior quarter and $745,000 or 7.2% of net revenues in the same period a year ago. Military/defense sales were 29.5% of fourth quarter fiscal 2018 shipments compared to 20.7% in the prior quarter and 24.3% in the comparable period a year ago. SigmaQuad sales were 45% of fourth quarter fiscal 2018 shipments compared to 54.5% in the prior quarter and 53% in the fourth quarter of fiscal 2017. At March 31, 2018, we had $58.4 million in cash, cash equivalents and short-term investments and $7.9 million in long-term investments compared to $49.9 million in cash, cash equivalents and short-term investments and $12.9 million in long-term investments at March 31, 2017. Looking forward to the first quarter of fiscal 2019, we currently expect net revenues to be in the range of $10 million to $11 million. We expect gross margin of approximately 52% to 54% in the first quarter. Operating expenses in the first quarter of fiscal 2019 are expected to be approximately $8.5 million and include mass expenses related to our initial APU product. Operator, at this point, we’ll open the call to Q&A.

[Operator Instructions] We’ll take our first question from Jeff Bernstein with Cowen. Please go ahead.

A couple of questions for you. I think you mentioned something about additional APU designs. I don’t know whether they’re derivatives or variance or whatever, so if you could just talk about what’s going on there. And then I had a follow-up.

There are no derivatives at this time. So we’re coming out with the first device that we mentioned all along. Certainly, we plan on having a road map using this technology that will get us into other applications, hopefully into more of the IoT applications. But certainly, at this time, there is no derivative we’re working on, we’re adding on. As Lee-Lean and Doug mentioned, we’re finishing up our current APU design.

Got you. So the reference was really to potential design tweaks for another spin of the silicon?

It would be more than a tweak. I mean, again, we’re looking at a road map for future products using this type of technology.

Got you. Understood, and then the other question just on networking side. I don’t think you guys do an appreciable amount of business with Huawei or ZTE, but I think there might be some indirect sales. So just wondering if you could quantify that a little bit. And then any feeling for what the impact of the ZTE band might be, if anything? Would you expect your other customers to pick up share or anything?

So ZTE and Huawei are both customers of ours. They certainly have become smaller customers over the years. ZTE, as you mentioned, we’re no longer allowed to ship to. Last year, they attributed about $300,000 of our revenues. So not a big chunk. Huawei’s a little bigger, but they’ve certainly shrunk over time. Let me see here, last year, they were about $0.5 million. But they’ve been trending closer to about $400,000, $400,000-or-so, again, not a huge hit for us, if something were to happen there as well.

[Operator Instructions] We’ll take our next question from Kurt Caramanidis with Carl M. Hennig. Please go ahead.

I had a couple of questions. One, is data mining still a somewhat significant target for the APU?

It certainly will be a target. As we’ve mentioned though, where we see our largest advantages, by far, are in the recommender systems and visual search. So that’s where we’re going to spend our efforts initially with the demo boards and the eval boards. But those other markets, like I said, the data mining and what have you will certainly be targets as well.

Okay. And when, so do you think, or like August, you would have some product in some of these customers’ hands to be test driving, for lack of a better term?

Well, I think we are getting our package of products over the summer, and I think we will spend quite a bit amount of time to categorize the product before we can ship it to a customer. But saying that, I think it’s possible we can have a product in our customers’ hands by fourth quarter.

Okay. And they would just be trying it out? I mean, obviously, you’d have to work through some bugs or something?

No, we have to develop a software or library for customers, well, first of all, we have to do the training and the benchmark, that kind of thing and have a customer have training course with a customer. And actually, we do build up the training center in our facility. So we can have a customer come in for training and then have a hardware for them to check it out.

Okay, okay. So there’s a little bit more to it. Just a thought. We’ve got, with what your cash position is, I mean, the market cap is, let’s say, $90 million, $95 million net of cash with your base business, maybe it’s selling at 2x sales net of cash of your base business with good margin. It appears as though the stock is not pricing any success whatsoever in the APU or the RadHard based on valuation. Any thoughts on that?

Well, the stock has taken a little bit of a hit recently. But I think it’s more an indication of what is happening, not just to GSI but the entire market. I look every day, and things I’m tracking on my phone, I see a lot of red, not much green. Yes, we believe we’re worth more than where we are today. But it’s kind of hard to control what happens out in the market all of the time.

Yes. I hear you. It’s just kind of interesting we’re getting late in the game and the chips have been weak and that kind of thing, but it’s kind of interesting.

And it appears there are no further questions at this time. I’d like to turn the conference call back over to Lee-Lean for any additional comments.

Thank you all for joining us. We look forward to speaking with you again when we report our first quarter fiscal 2019 results. Also, we will be presenting at LD Micro Invitational in Los Angeles in June 5. Thank you.

And that concludes today’s conference call. We thank you all for your participation. And you may now disconnect.