GSI Technology, Inc. (GSIT) Q1 2019 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and thank you for standing by. Welcome to GSI Technology's First Quarter Fiscal 2019 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, July 26, 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’d now like to turn the conference over to Mr. Shu. Please go ahead, sir.

Good afternoon, everyone, and thank you for joining us today. I'm pleased to announce our first quarter 2019 results. Net revenue for the quarter were $11.3 million, above the range of guidance provided on our last meeting -- last earning call and up sequentially, but (inaudible) year-over-year. Doug will provide additional details on our financial results in his comments. We remain on track with product development and marketing efforts for our newest market segments. In fiscal 2019, we anticipate revenue contribution from our high performance SigmaQuad radiation-hardened products, which will begin shipping in the fourth quarter of calendar 2018. Our SigmaQuad radiation-hardened, or RadHard, and radiation-tolerant, or rad-tolerant, is a product of (inaudible) aerospace and defense applications. Radiation-hardened SRAM will be used in extreme high temperature, high atmosphere applications, where special type processing and ceramic packaging is required. This application will require long multi-year time horizon. Rad-tolerant chip will be used in applications with slightly less severe conditions, lower orbit satellites and shorter-duration applications. Also, we are very excited to announce delivery of the initial design of our patented in-place associative computing technology, or APU, to our foundry partner in Taiwan. We expect to have silicon samples of the APU chip later in calendar 2018 and anticipate commercializing our initial AI product in calendar 2019. This event caps almost 3 years of investment and dedicated efforts from our Sunnyvale and Israeli teams. Depending on the work we did, dividing the first round of silicon, we plan to begin providing sample to our target customers before calendar year-end. Our plan is to have a market-ready APU both in calendar 2019. We have a unique advantage with our APU architecture for massive parallel data processing that improves computation, search and response time in critical big data applications, including machine learning and deep convolutional neural networks, computer vision and cyber security. We remain confident that we will (inaudible) to our primary business objective of bringing our new RadHard SRAM to market and commercializing our APU, which we anticipate will broaden our customer base, increase revenue and improve profitability in fiscal 2019 and beyond.

We reported a net loss of $1.6 million, or $0.08 per diluted share, on net revenues of $11.3 million for the first quarter of fiscal 2019 compared to net loss of $1.5 million, or $0.07 per diluted share, on net revenues of $10.7 million in the first quarter of fiscal 2018 and net income of $265,000, or $0.01 per diluted share, on net revenues of $11.2 million in the fourth quarter of fiscal 2018. Gross margin was 51.4% compared to 52.4% in the prior year period and 56.2% in the preceding fourth quarter. In the quarter, gross margins were negatively impacted by an increase in reserves resulting from a write-down in the value of excess inventory on product we stockpiled when an assembly vendor was no longer supporting the product line, for which we still have forecasted sales. Unfortunately, sales for this product have not met our previous forecast. This is a unique situation with this particular product, as we have not stockpiled other product lines and are comfortable with current inventory liability. Our first quarter of fiscal 2019 operating loss was $1.7 million compared to an operating loss of $111,000 in the prior quarter and an operating loss of $1.5 million a year ago. Total operating expenses in the first quarter of fiscal 2019 were $7.4 million compared to $7.1 million in the first quarter of fiscal 2018 and $6.4 million in the preceding fourth quarter. Research and development expenses were $4.9 million compared to $4.3 million in the prior year period and $4.3 million in the preceding quarter. R&D in the quarter were slightly higher primarily due to expenses related to finalizing the APU design as expected. Selling, general and administrative expenses were $2.6 million in the quarter ended June 30, 2018, compared to $2.8 million in the prior year quarter ended June 30, 2017, and up sequentially from $2.1 million in the preceding quarter. Total first quarter pretax stock-based compensation expense was $542,000 compared to $549,000 in the prior quarter and $478,000 in the comparable quarter a year ago. In the first quarter of fiscal 2019, sales to Nokia were $5.2 million, or 46.5% of net revenues, compared to $4.1 million, or 36.7% of net revenues, in the prior quarter and $4.5 million, or 42.3% of net revenues, in the same period a year ago. Military/defense sales were 19.7% of shipments compared to 29.5% of shipments in the prior quarter and 24.5% of shipments in the comparable period a year ago. SigmaQuad sales were 59.7% of shipments compared to 45% in the prior quarter and 51.1% in the first quarter of fiscal 2018. At June 30, 2018, we had $52.6 million in cash, cash equivalents and short-term investments, $11.9 million long-term investments and $59.6 million in working capital with no debt. Looking forward to the second quarter of fiscal 2019, we currently expect net revenues to be in the range of $11.5 million to $12.3 million. We expect gross margin of approximately 57% to 59% in the second quarter. Operating expenses in the second quarter of fiscal 2019 are expected to be approximately $8.6 million and will include mask expenses related to our initial APU product. Operator, we're ready for questions.

[Operator Instructions] And we'll go first to Kurt Caramanidis with Carl M. Hennig.

Congratulations, guys. That's a big accomplishment getting the tape-out. So that's pretty exciting news. Question for you. How is that developing? Are you looking at that as a solo where you put your chips in? Or you're going to -- is this something that can be utilized with other companies? Or can you add a little color on that?

So yes, it can be used in lots of different ways. I mean, it can be used as a replacement for chips that are currently on the market space. It can -- and depending on the application, it can also be used to complement existing CPUs and GPU components out there as well. If you look at the initial offerings we had, we'll be offering cards. And we'll offer parts individually if needed, but we see that the initial interest will be in a card. On the card, we'll have the first initial, and we'll have 2 APUs on there with a system controller and a PCIe chip and some -- and a little bit of a DRAM memory as well on there. So depending on the customer and the application there, you can take either these cards or they can take the parts individually.

Okay, great. And then RadHard, is that order still the same as you thought a quarter ago? Is it looking better? Any color on that? And then also, how does next year with rad-tolerant, rad-hard? Are you getting any indications of interest for some consistency?

So we'll start with the first part of your question. So the order, which we don't have here yet, but certainly, the requirement looks to be what we've talked about. Initially, part of it was going to be in the December quarter and part of it was going to be in the March quarter. Right now, the December quarter will be tight. The customer we're dealing with has the funding for this program, and they're getting their team together and getting up and running. And it's going to be close on whether they'll be able to take parts by the end of December or not. It's still not clear. There's a chance it could be December. There's a chance it may fall into January, February. If it falls into January or February, that just means the March quarter will be bigger than we had originally forecasted internally. As far as the long term on the program, the rad-tolerant is new. We've just announced it a quarter or so ago. So we didn't anticipate any orders this year, but we anticipate there certainly being demand for it next year. As far as the rad-hard, as I mentioned, we do have this one identified program for sure that will be either end of this year or beginning of next year and then there are some follow-ons. So we certainly anticipate next year to have growth in the rad-tolerant and then our first shipments in -- I'm sorry, growth in the rad-hard and our first shipment in the rad-tolerant.

Okay, great. Just a thought, you've got the buyback that's open and my take anyway is the market isn't giving any thought to the APU or the rad-hard. And if it's all now starting to come together here, I would strongly consider reinstituting that buyback anywhere close to the current price if things do develop. That would look to be a very attractive use of capital.

Yes, we agree the value of the company is higher than where we are today. And we are considering that -- or we'll consider that. We still have about $4.4 million that the board has previously approved that can be spent.

Yes, definitely. And then are you -- is it about 8 weeks that you get the chip back? Is that still right?

It will be a little longer than 8 weeks before we see the wafers and then we still need to assemble it. So I would say, it's going to be closer 10 to 12 weeks before we have assembled parts in our hands.

Okay. So maybe next conference call?

It will be right about that time exactly.

We'll go next to Jeff Bernstein with Cowen.

Just a couple of questions for you. One, the nice rebound in Nokia, I think, had been a little bit of an inventory accumulation there and then maybe a work off. Are we at kind of a run rate right now that you're comfortable with for Nokia? Or just give us some insight into what's going on there?

So we've had the bounce back and a little extra. So as you mentioned, there was some time a few quarters back that they were running through some inventory that has gone -- that's been done. In fact, last quarter was kind of that run rate. This quarter and next quarter is going to be a little higher than the normal run rate. And I think part of that has to do with additional business that Nokia has received due to some of the ZTE sections.

Got you. Okay. And just curious a little bit about the mix where mil/defense was down sequentially pretty good, but actually the SigmaQuad was really strong. Can you just kind of talk us through that a little bit?

It's -- the military sector in the March quarter had a last-time buy on an old dye (inaudible). Some of the military applications is difficult for them to do new dye qualification, so they went back and did a last-time buy. So last quarter was a bit inflate -- let's say, last quarter -- sorry, the March quarter was a bit inflated on that. So that's why you see it was down quarter-over-quarter for past quarter. I -- long-term that market segment is still healthy for us. It can be lumpy at times, which we've experienced in the past, but it's -- certainly, this past quarter is not an indication of any long-term softness.

Got you. Great. And just on the APU. So from a chip design standpoint, this is not any kind of bleeding edge technology in terms of line width and it's memory with a little bit of logic kind of thing, right? So this should be fairly straightforward that what we get back working silicon, right, unless something really unusual happens.

Yes. I think the design is fairly new, I mean, the concept-wise, and the implementation, I think, is fairly due. I mean, if ideal, we can get the first working silicon. But normally, I think we are -- internally, we are expecting we need to give up the chip and I think that's very normal in the first kind of -- first design of this kind of a magnitude.

So we are expecting -- we are hoping that we have something that we can play with and potentially show our customers. But we'll see how it works out. They did go through an exhaustive couple of months or so of reviewing the design and actually found a couple of bugs that they fixed during that time frame. So hopefully, we have a reasonable chance of having something that wiggles and that we can work with.

Yes, maybe just coming back. In terms of processing technology, I think yes, as you say, it's not the super leading edge technology. So it's pretty comfortable for us from the processing technology point of view, but we still need to work on the design.

Okay. And then just talk about the software ecosphere development because it sounds like that's going to be equally important?

Yes. That's what the team in Israel has been. We've built up the team. It's up to 29 now?

23.

\23. So 23 folks over there in Israel, and that's what they're working on. They're on the libraries and the algorithms required to support the different applications and markets. So that's their full dedication. The hardware design was done 100% here in the United States in California.

[Operator Instructions] We'll go next to Aman Gulani with B. Riley FBR.

The first one, can you remind us how the Nokia sales fit into the SigmaQuad sales data you provide? Is Nokia buying additional products besides the SigmaQuad-III?

They are. But that's certainly by far the largest percentage of the revenue. And they buy a magnitude of products from us quantity-wise and partner-wise. But if you look at the volume itself and the revenues, the majority of it is from the SQ-III.

Got it. Okay. And regarding the APU, are there any changes to your assessment on the TAM? And how quickly can you address it in calendar '19?

So we're starting in the markets or the applications, I should say, that lend well to our advantage, and that's visual search. That's initially where we're going to be spending a lot of efforts is on visual search, and [indiscernible] translates into e-commerce. Recently, we've also had some inroads, and we're having some collaboration with the pharmaceutical industry for drug manufacturing. So that's another area that kind of uses the search and the similar research advantage that we have. So those are 2 areas that we'll be focusing initially in 2019.

We'll go next to Brian Swift with Sutter Securities.

The first part of my question was answered, that is 10 to 12 weeks is when you expect to have your first silicon. The second part would be, I know you had some elaborate amount of time for testing on your tape-out version. What do you anticipate amount of time you'll need to test this before you be in a position or whether you can sample it with some of your key customers?

Yes. I think at this point before seeing the first silicon, it is really hard to speculate. I think we really have to wait about a year and evaluate the first silicon and then comment on it.

I guess, question alone will take us to evaluate the first silicon...

To determine how good it's working.

Well, I would say, probably -- 6 months probably is a reasonable expectation for the product for customer can start looking at it. And it probably doesn't mean it can be the production volume. But at least people can start play with -- even though you may have some bugs, but it depends on programming and people probably can loop along the bug and work on them.

[Operator Instructions] And with no further questions in queue, I'd like to turn the call back to management for any additional or closing remarks.

Thank you all for joining us. We look forward to speaking with you again when we report our second quarter fiscal 2019 results.