GSI Technology Inc (GSIT) 2021 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to GSI Technology's Third Quarter Fiscal 2021 Results Conference Call for the quarter ended December 31, 2020. (Operator Instructions)

Before we begin today's call, 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, January 28, 2021, 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, sir.

Good afternoon, and thank you for joining the call today to review our third quarter 2021 financial results. As I look back at 2020 and where we worked 1 year ago, I am pleased with our progress. GSI ended the first quarter of calendar year 2021 with the Gemini APU launch in progress. Our team is building new relationships with customers in many sectors where the APU can deliver radical performance improvement in search applications.

We have engaged a PR firm to build awareness and improve our revolutionary technologies visibility. Feedback has been good, and we are encouraged by the reception to Gemini. The next step is to allow customers access to the system. This time, last year, we had prepared a testing, enter new facility Sunnyville, California headquarters. Unfortunately, COVID has made this option unavailable. And instead of bringing group into our facility, we have had to pivot. The result is a remote one-on-one approach.

Our cloud-based APU testing servers are now up and running in both of our facilities in Israel and in Sunnyville. These servers allow customers to remotely (inaudible) database onto the APU and test the device performance with their proprietary data and applications.

I am pleased that we can now interact with our prospective customers and give them access to evaluate Gemini. The remote process is less efficient than our original workshop setup, but it's the best option we have under the circumstance.

But as stated on our last earnings call, our software capability makes the APU highly [addressable] to new applications. Software enhancements continue to improve the device's performance, and we have successfully doubled it, in some cases, tripled the system performance on response time. Next month, we will release the competitive spec for Python, a critical step for growing the APU ecosystem. We plan to follow with the competitive stack for C++ later this year.

GSI has built exceptional software team as evidenced by their superlative work to win first place in the Israeli Ministry of Defense market challenge. The challenge's goal was to [improve] the potential of advanced data science measure to improve the Israeli Ministry of Defense current data products. The challenge was to distinguish between humans and animals in radar signal segment with the greatest accuracy. This was a complex challenge for the GSI team, who has no prior experience in radar systems or signals.

When their initial research from very few [referenceable] work. It was clear that this challenge requires a unique solution. Leveraging the algorithms we have developed on other search projects, we developed an algorithm to try achieving the model to best predict the outcome. As a result of winning all the market challenge, MAFAT has introduced GSI to key Israeli aerospace and defense companies for several different projects as well as providing opportunities to work with MAFAT to explore several communication projects employing our APU.

We are pursuing a new opportunity with the development of Elasticsearch (inaudible). Elasticsearch is a popular open-source full-text search engine that can search many types of documents. Elasticsearch recently added (inaudible) factor that determines the document's relevance, [distribute addition over] to semantic search.

Semantic search allows for a better understanding of the searches intent and provide better quality search results than traditional keyword search. However, the lack of a scalable approximate nearest neighbor or ANN solution in Elasticsearch that can leverage the dense vector field has created an opportunity for GSI, since many companies already used Elasticsearch.

Supporting AAN in Elasticsearch could be valuable, especially a high-performance Elasticsearch solution that scales to a billion-scale vector technology search. In response, we developed an Elastic ANN plugin. Elastic's plugin as a way to enhance the core Elasticsearch functionality in a customizable manner. This plugin paves the way for billion-scale, semantic vector similarity search using Elasticsearch.

Continuous improvement is also occurring with our hardware. We will finalize the higher performance of Gemini-1 APU and Leda board and begin qualification in the second quarter of this calendar year. This will be the Gemini-1 system that we take to market. Our ultimate goal in 2021 is to win designs from new customers for Gemini-1 in our top search categories: aerospace and defense, big data and e-commerce, drug discovery and the facial recognition.

For the next-generation APU Gemini-II, we anticipate finishing the design in the second half of 2021 and taking all the MAFAT at year-end. We plan to launch Gemini-II in late calendar 2022, with orders of (inaudible) performance cost improvements over Gemini-1.

The go-to-market time line has been extended due to the COVID-19 pandemic, but we continue to progress the technology and build awareness. Our team has done an outstanding job on many fronts and I greatly appreciate their hard work.

I want to thank you, our fellow shareholders, for your continued support. Now I hand the call over to Didier, who will discuss our business performance in further details. Please go ahead.

Thank you, Lee-Lean. As Lee-Lean just explained, in addition to a novel architecture, APU has a strong software offering. GSI's software expertise, combined with the high-performance APU hardware solution, is a competitive advantage versus AI solutions that are typically siloed in either software or hardware. We plan to offer the compiler and the libraries with the device. And depending on the application, we may also sell the API and the algorithms.

Our software allows us to improve device performance for various applications without altering the hardware. As a reminder, our software offerings include: one, applications, which are integrations for specific market applications, like BIOVIA for drug discovery, facial recognition, image processing and Hashcat for password recovery; two, machine learning algorithms, which allows users to develop neural network algorithms to enhance APU applications; three, CPIs, which are application interfaces for specific application acceleration by developers; and then lastly, our compiler stack, which is the stack for algorithm conversion, framework support and simplified low-level cogeneration. Our first compiler stack will focus on Python.

Shifting to the sales breakdown for the third quarter of fiscal 2021, sales of Nokia were $2.8 million or 42% of net revenues compared to $2.6 million or 26.3% of revenues in the same period 1 year ago and $3.4 million or 51.7% of net revenues in the prior quarter.

Military defense sales were 26% of third quarter shipments compared to 18.9% of shipments in the comparable period a year ago and 26.9% of shipments in the prior quarter.

SigmaQuad sales were 62% of third quarter shipments compared to 62% in the third quarter of fiscal 2020 and 65.4% in the prior quarter. We were unsure -- I'm sorry, we are unsure in 2021, the business challenges related to COVID-19 restrictions when they will subside. As a result, we are not able to have the face-to-face meetings, which are critical to our military and defense sales for the radiation-hardened SRAMs. In addition, we are not able to offer our highly productive in-house training workshops, which slows the pace of the sales process for Gemini.

That said, we are seeing progress with our target customers and are looking forward to align remote access to our APU data centers for customer testing.

I'd now like to hand the call over to Doug. Doug, please go ahead.

Thank you, Didier. We reported a net loss of $5.2 million or $0.22 per diluted share on net revenues of $6.8 million for the third quarter of fiscal 2021 compared to a net loss of $4.6 million or $0.20 per diluted share on net revenues of $10 million for the third quarter of fiscal 2020 and a net loss of $5.2 million or $0.22 per diluted share and net revenues of $6.7 million for the second quarter of fiscal 2021.

Gross margin was 47.3% compared to 60.2% in the prior year period and 46.7% in the preceding second quarter. The change in gross margin was primarily due to changes in product mix sold in the 3 periods.

Total operating expenses in the third quarter of fiscal 2021 were $8.3 million compared to $10.8 million in the third quarter of fiscal 2020 and $8.3 million in the prior quarter. Research and development expenses were $5.7 million compared to $8.2 million in the prior year period and $5.7 million in the prior quarter. The increase in R&D expenses for the third quarter of fiscal 2020 reflected a charge of $2.7 million for purchased intellectual property that is being incorporated in the next generation of our Gemini chips.

Selling, general and administrative expenses were $2.6 million in the quarter ended December 31, 2020, compared to $2.6 million in the prior year quarter and $2.6 million in the previous quarter. Third quarter fiscal 2021 operating loss was $5.2 million compared to $4.7 million in the prior year period and an operating loss of $5.2 million in the prior quarter.

Third quarter fiscal 2021 net loss included interest and other income of $25,000 and a tax provision of $90,000 compared to $207,000 in interest and other income and a tax provision of $84,000 for the same period 1 year ago. In the preceding second quarter, net loss included interest and other expense net of $16,000 and a tax provision of $62,000.

Total third quarter pretax stock-based compensation expense was $693,000 compared to $629,000 in the comparable quarter a year ago and $653,000 in the prior quarter. At December 31, 2020, the company had $52.3 million in cash, cash equivalents and short-term investments and $10.1 million in long-term investments compared to $66.6 million in cash, cash equivalents and short-term investments and $4.1 million in long-term investments at March 31, 2020.

Working capital was $54.4 million as of December 31, 2020, versus $70.9 million at March 31, 2020, with no debt. Stockholders' equity as of December 31, 2020, was $78.5 million compared to $89.6 million as of fiscal year ended March 31, 2020.

For the upcoming fourth quarter of fiscal year 2021, our current expectations are net revenues in the range of $6.8 million to $7.8 million, with gross margin of approximately 48% to 50%.

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

(Operator Instructions) Our first question will come from Kurt Caramanidis with Carl M. Hennig.

Are you still on lockdown? Or have you recently reopened after inauguration in California?

No, we still work from home. I think the - yes, probably until some earlier.

Yes, the way I think on here, I'd be very surprised that we did come back to work until closer to summertime. But I think everyone is working pretty efficiently. The Gemini-II design is progressing. I've gone through year-end out and several quarter reviews without even seeing the auditors. So it works. It's not as efficient, but it does work.

Well, for sales, I guess, it's still going to be still a problem through the summer? I was just curious when that might. And then facial recognition, has that been banned yet? Or what's the current status of that? I know that was a big part of things, and then there was a few companies getting out. I don't know what the government's position now is, if they want to stop there? What can you say about facial recognition now?

So we're still moving ahead with it. Because again, there's many sectors in the facial recognition. Some of the folks that we've been talking to, when I say folks, potential customers, they're in niche markets under facial recognition. One of them was working on facial recognition for things like conferences, for things like entering arenas like football arenas. So there are a lot of different segments that fall under facial recognition. So I haven't heard of any ban, and we're certainly moving forward under those types of niche applications.

Okay. And then are we looking at, you think, 12 to 18 months before we would see revenue from 1? And then obviously, later than that on 2?

Are you talking Gemini-I and Gemini-II?

Yes. Yes.

So Gemini-I, we'll see some -- certainly in the first half of this year, we'll see some demo boards being purchased still in the first half. It's not clear. Again, we're still in the design-in phase at this point, so it's not clear what kind of volume we'll see in the second half of this year yet. Too early for us to project.

As far as Gemini-II, it's going to be a while, right? As Lee-Lean mentioned, we will see a tapeout at earliest at the end of this year, which means we'll see first silicon sometime in the kind of first, second quarter -- calendar quarter, I should say, of 2022. And then there's a debug process. So I don't see us having a fully functional part on that until sometime in 2023.

Yes. Now is the 600 megahertz, I didn't see a mention of that, but are you working on -- was that going to be for 400 to 600? Is that getting -- or is that (inaudible)?

Yes. Yes. We are still moving forward with New Silicon. And New Silicon is much improved, both in performance and the functionality and also the manufacturing yield. So we're going to take this to the production and with our (inaudible).

Okay. Great. So the final thing, I'm seeing a lot of shortages in silicon, price increases on chips. What effect does that, if any, you have on -- you guys in that? It just seems like everything is tight right now.

You're correct. Everything is tight. So we actually did see some of the tightness late last year already, and we're able to address some of it. As you mentioned, some of our costs have gone up, and certainly, the lead times have gone out. And so we plan accordingly. So we've put in some material. And so far, it affected some revenue, but as you could see by this last quarter and the quarter we've just guided to, we're still managing to grow slightly.

And as far as the price increase, we are going through that process now. Unfortunately, with our cost going up, we have to also increase our resale to the customers. And so that's happening now.

(Operator Instructions) And that does conclude the question-and-answer session. Mr. Shu, I will now turn the conference back over to you for any additional or closing remarks.

Thank you all for joining us today. We look forward to speaking with you again when we report our fourth quarter fiscal 2021 results. Thank you.

Thank you. That does conclude today's conference. We do thank you for your participation. Have an excellent day.