GSI Technology, Inc.

Ladies and gentlemen, thank you for standing by. Welcome to GSI Technology's third 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. At that time, we will provide instructions for those interested in entering the queue for the Q&A. 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 the 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 31, 2019, 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, everyone, and thank you for joining today's call to review our third physical quarter 2019 results. I am very pleased with the performance of our core business, which exceeds our forecast primarily due to better-than-anticipated S&M sales to our largest customers, which increases 11% sequentially and 72% year-over-year. The revenue for the quarter was $14.7 million above the high end of the guidance that we provided on our second quarter quote of $12.8 to $13.8 million. With growth margins of 68%, both above our guidance of 62% to 64%, and Doug Sherry, our CFO, will provide additional insight into the factors that saw our strong revenue growth and the margin improvement in his commentary. Earlier this month, we provided an update on the APU, our In-Place Associated Processing solution for artificial intelligence applications. We are currently testing Packaged units of the first silicon wafer. These initial tests have identified some bugs which have been fixed now. In the meantime, our hardware and software team are working on demo board with the APU and determine if their performance are ready for testing by our selected other customers. At this time, we expect to receive the next silicon back in a few months and we anticipate being able to perform demos for better customers later in the year. In early November, a member of our APU team hosted a panel on visual research on visual search at the ODSC West Conference. ODSC is a global data science community dedicated to helping foster the exchange of innovative ideas in open data science. The panel led by our Director of Data Science, discussed visual search as the next frontier of search. In the panel discussion with experts in the field from eBay, Google, Walmart Lab, Wayfair, and the Careify. Largely driven by visual content, visual search is ideal for online retail. This search mechanism allows you to replace text enter on the keyboard with image capture on your phone to search for objects, such as clothing or furniture. Similarity search uses a technique called distant metric learning, in which learning algorithms measure how similar or related objects are. GSI's APU is ideal for similarity search because its unique design enables very fast computation speed with improved accuracy and scalability for very large datasets, which is key to improve similarity search capabilities. We are very excited about the similarity search applications for our chip. AI adoption in retail is forecast to grow very rapidly in the next five years, with visual search being one of the fastest-growing segments of similarity search. In software simulation, The APU has demonstrated the ability to increase the rate of computation by orders of magnitude with great accuracy while reducing power consumption significantly. This kind of performance can potentially transfer the online retailer's capabilities and greatly improve the online customer's experience. Other applications of similar research are in drug discovery, drug screening, and Genomic. In drug discovery, the objective is to develop safe and effective drugs, cheaper and faster. One area of exploration has focused on high-performance computing. The goal is to maximize the use of computing through the entire drug discovery process, from the early stage of identifying and designing seed molecules to target disease, all the way to predicting all kinds of clinical trials. Simulation with the GSS APU for this application has shown to improve search speed by orders of magnitude, with a reduction in query time from as much as 10 minutes to as little as 300 milliseconds. The APU's higher speed and increased accuracy In similarity search can potentially lower drug discovery cost. A important goal for research organizations depend on the funding. Drug discovery is very costly with high failure rate. According to a study from the Tufts Center for the Study of Drug Development, the average cost to develop a new drug is about $2.6 billion. Only 10% of new drugs win approval. and those few drugs that do get approved can take at least 10 years to come to market. Technology that could reduce cost, increase drug efficacy and safety, and increase speed to market can potentially save billions of dollars. As a result, the APU is getting the attention of leading pharma and genomics players. I am very pleased with the work our team has done to advance the APU and to increase our visibility with potential key customers. It is still early and we have a lot of work ahead of us, but I remain confident that the APU will be a successful product for GSI. As I have stated before, to offset our mature legacy networking and telecommunication market, the company's resources are focused on the development and the launch of new products. We intend to continue penetrating markets that require high-performance memory technologies for our core products like our Sigma-Quad X1, which are the recognized leaders in the industry with their combination of capacity and performance and transaction rates are unequaled by any competitor. We are waiting on final testing of our Sigma-Quad radiation-hardened X1 products For our first customer, we take the first shipment of our prototype Sigma-Qual radiation hardened S1 in the fourth quarter of fiscal 2019, which with production shipment of fully qualified product later in 2019. Our financial performance this quarter shows that when our high margin sales increase, we can deliver significant leverage in earning per share growth and improve cash flow from operations. As we scale with new products, this operating leverage will continue to improve. And our cash reserves should grow, providing companies with resources to advance opportunities for existing product lines and develop new products. I am proud of the work my team has accomplished and remain confident that GSI is well positioned to return to growth and improve shareholder value in the long run. I will now hand the call over to Doug for a detailed overview of our financial results. Doug? Thank you, Lee-Lean.

We reported net income of $2.3 million, or 10 cents per diluted share, on net revenues of $14.7 million for the third quarter of fiscal 2019, compared to a net loss of $1.5 million, or 7 cents per diluted share, on net revenues of $11.1 million for the third quarter of fiscal 2018. and the net loss of $351,000 or two cents for diluted share on net revenues of $12.8 million for the second quarter fiscal 2019 into September 30th, 2018. Gross margin was 68.3% compared to 51% in the prior year period and 62.6% in the preceding second quarter. Strong revenue growth in the third quarter was driven by increased sales to our largest customer the balance of the shipment of a one-time order for a university supercomputer build-out in Europe, and an increase in sales in our military segment. These factors drove an increase in gross margins, which benefited from a favorable product mix. Total operating expenses in the third quarter of fiscal 2019 were $7.8 million, compared to $6.7 million in the third quarter of fiscal 2018, and $8.4 million in the preceding second quarter. Research and development expenses were $5.2 million compared to $4.2 million in the prior year period and $5.8 million in the preceding quarter. Research and development expenses in the prior quarter included an expense of approximately $1 million related to a non-production mass set for our initial APU product. Selling, general, and administrative expenses were $2.6 million compared to $2.5 million in the quarter ended December 30, 2017. and 2.7 million dollars in the preceding second quarter. Third quarter fiscal 2019 operating income was 2.2 million dollars compared to an operating loss of 1 million dollars in the comparable period a year ago and 394 thousand dollars in the prior quarter. The third quarter fiscal 2019 net income included interest and other income of 96 thousand dollars and a tax provision of 70 thousand dollars compared to the same period a year ago in which net loss included $99,000 in interest and other income and a tax provision of $590,000. In the preceding quarter, net loss included interest and other income of $145,000 and a tax provision of $102,000. Total third quarter pre-tax stock-based compensation expense was $592,000 compared to $535,000 in the comparable quarter a year ago and $552,000 in the prior quarter. In the third quarter of fiscal 2019, sales to Nokia were $6.2 million or 45.2% of net revenue compared to $6 million or 46.6% of net revenues in the prior quarter and $3.9 million or 34.7% of net revenues in the same period a year ago. Military defense sales were 16.7% of shipments compared to 16.4% of shipments in the prior quarter and 20.7% of shipments in the comparable period a year ago. Sigma quad sales were 69.7% of shipments compared to 66.4% in the prior quarter and 54.5% in the third quarter fiscal 2018. At December 31st, 2018, the company had $57.1 million in cash, cash equivalents, and short-term investments 10.2 million in long-term investments, 65.5 million in working capital, no debt, and stockholders' equity of $91.2 million. Looking forward to the fourth quarter of fiscal 2019, we currently expect net revenues to be in the ranges $11.6 million to $12.6 million. We expect gross margin of approximately 60% to 62% in the fourth quarter. Operator will now open the call to Q&A.