GSI Technology Inc (GSIT) 2016 Q3 法說會逐字稿

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 involves 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 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 third-quarter net revenue of $12.9 million that came in within the range of guidance that we have provided earlier in the quarter.

The prior quarters our gross margin came in above our operating margin at 49.4% fueled by a continuing favorable mix of higher-margin products.

As in prior quarters we've 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 2015 were $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 anticipate substantially reduced legal expenses in coming quarters.

This lengthy litigation has also constituted a major distraction for our management team and its 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 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 the test data existing systems that move data back and forth between processors and memory are no longer adequate.

Memory bus speeds are simply not keeping up with the CPU speeds and this is causing a bottleneck at I/O, beating 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 through parallel data processing, computations and search directly in the main processing array.

This new computing model will greatly expedite computation and the response time in big data applications.

Faster 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 imaging processing to be accomplished in real-time.

Our massive 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-the-art circuit design expertise will enable the development of high-quality associative processors 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 basis 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 of fiscal 2016 compared to net income of $148,000, or $0.01 per diluted share, our net revenues of $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 for the third quarter of fiscal 2016 were $7.9 million compared to $7.3 million in the third quarter of 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 pretax 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% 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 at management's 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 a 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 $4.4 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 fourth quarter.

Operator, at this point we will open the call to Q&A.

(Operator Instructions) Chip Saye, AWH Capital.

Thanks for taking the question.

I wonder if you could possibly talk about the opportunities that you're working on in the military business?

Could you be more specific?

Are you talking about --

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 two different topics.

So we'll talking about the first one which is the drop in the military this past quarter.

So that's associated with the space [SENSE] program.

So we talked about the space SENSE program that we had one sometime back and there were three installments in the shipments.

There 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 defense program.

It 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 SENSE.

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 and 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.

So that's certainly an area we've 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 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 actually until March of this year.

So about another five, six 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 and so that's certainly an area that we're focused on going forward.

Okay.

And can you talk a second about Cisco, Cisco revenues are down year over year but they seem to have the same as the prior quarter.

Can you just talk about anything on the front there at Cisco?

So as we've kind of discussed in the past, Cisco has taken a strategy to embed their SRAM to their ASICs.

And so a lot of the new boxes or routers and switches are coming out with don't have the SRAM content they had in the past.

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 if 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, is 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 from the quarter and we also repurchased $1 million worth of stock.

So that's what's led to the decrease in cash.

Going forward we hope and expect that all of the legal activities are behind us and we won't be pursuing anything on that front going forward at this point.

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.

And we will also improve the P&L.

Those expenses that have been causing losses will be off the P&L.

Well, thank you for taking the questions.

(Operator Instructions) Kurt Caramanidis, Carl M. Hennig Inc.

Hi there.

Thanks for taking the call.

Lee-Lean, I am wondering if you 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 mention we do have the repurchase of stock, we buy back from the market.

And as you know, we also have the repurchase of $35 million that's not long ago

The $25 million --

$25 million.

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 over doubled and we're now almost the same price as that company and 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 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 I appreciate you taking the call.

George Gaspar.

Hello?

Okay, can you hear me?

Thank you.

A 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?

When can we expect something positive to come out of that move that you've made?

Well let me make a few comments then 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 four other additional software developers.

So we're looking at cash expenditures of in the $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.

I'll take it 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 given us great feedback and certainly they are very enthusiastic about the technology.

We 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 would look like and we should have that definition done by the end of this quarter is 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 project around that.

And it will be a good representation of what the chip will do.

Obviously it will be, a 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.

As Doug mentioned we are looking at some time at the end of 2017 to actually have devices.

I'm not sure they'll be ready for the customers yet but certainly we'll have some kind of silicon sometime in the 2017 timeframe.

So the milestone 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.

Okay, thank you for that and a couple more quick ones.

The legal cost reduction, I don't know if you've thrown out an estimate that might run for 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 one's the trial is completed there is motions and paperwork that needs to be filed with the court.

And right now unless there is an appeal that is all we're anticipating at this point.

Okay.

And then back on the technology question and I think I've brought this up before, mentioned it along the way on a previous call, the sales 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 can come up with a way of providing some component of that bandwidth requirement that they are going to need?

I understand personally that this is going to bust out big in six months to a year.

Well I think (inaudible) we heard of a full year.

But anyway I think we probably can look into it.

You mentioned the field amplifier, right?

Field amplifiers.

Okay.

We look into it.

Okay.

Thank you.

But George, if it's going to be busting in the next six months it would certainly it would take us a lot longer to get something to address that market.

And right now we actually are unless we hire a team our teams right now are really focused on making this in-place associate processor a success.

We certainly want to get to market as soon as possible with that device.

Okay, well, that's good.

It sounds good.

Thank you.

(Operator Instructions) Anthony Cambeiro, Anthology Capital.

Hi, I'm just curious if you guys can talk about MoSys, the Bandwidth Engine and where things stand on that.

It seems like you've got several irons in the fire trying to address future technology way out while our business in LLDRAM and SRAM are kind of steady state I guess.

Can you talk about the opportunities there if any and both on LLDRAM, MoSys and the Bandwidth Engine?

Sure.

So start with the Bandwidth Engine.

So I'm going to obviously talk about Bandwidth Engine 2 because that's the only product that's available today.

The BE-3 is not available yet.

So the BE-2 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 two orders for the Bandwidth Engine 2 from two new companies.

It certainly is prototype quantities but it's an indication that it's going forward.

As far as going forward we still this is still new product, the cost model is still very high and 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 certainly the response from the customer base has been very positive and we certainly have commitments from customers to use the technology.

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 is 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 this 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 calls.

They just tend to be on the smaller end at this point.

All right, well thanks.

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 either buy back stock individually in the open market, 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.

Thank you.

As 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 2015 results.

Thank you.

That does conclude today's conference.

Thank you for your participation and you may now disconnect.