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spk03: 2021 results conference call for the quarter ended December 31st, 2020. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session. At that time, we'll provide instructions for those interested in entering the queue for the Q&A. 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 Li-Ling Chu, the company's chairman, president, and chief executive officer. With him are Douglas Shirley, chief financial officer, and Ndidi A. Lusher, vice president of sales. I would now like to turn the conference over to Mr. Chu. Please go ahead, sir.
spk00: 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 were a year ago, I am pleased with our progress. GSI entered the first quarter of calendar year 2021 with the Gemini AVU launch in progress. Our team is building new relationships with customers in many sectors where the AVU can deliver radical performance improvement in search applications. We have engaged a PR firm to build awareness and improve our revolutionary technology's feasibility. 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 and training facility at our Sunnyvale, California headquarters. Unfortunately, COVID has made this option unavailable. And instead of bringing groups into our facilities, 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 Somerville. These servers allow customers to remotely load their 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. As I stated on our last earning call, our software capability makes APU highly adaptable to new applications. Software enhancements continue to improve the device's performance, and we have successfully doubled, in some cases, tripled the system performance on response time. Next month, we will release the compiler stack for Python, a critical stack for growing the APU ecosystem. We plan to follow with a compiler stack for C++ later this year. CSI has built an exceptional software team, as evidenced by their superlative work to win first place in the Israeli Ministry of Defense Marfa Challenge. The challenge goes was to explore the potential of advanced data science methods to improve the Israeli Ministry of Defense current data products. The challenge was to distinguish between humans and animals in radar signal segments with the greatest accuracy. This was a complex challenge for the GSIT who had no prior experience in radar systems or signals. When they initiated research from very few referable words, it was clear that this challenge required a unique solution. Leveraging the algorithms we have developed on other search projects, we developed an algorithm to train a CNN model to best predict the outcome. As a result of winning all the market challenges, MAFET has introduced GSI to key Israeli aerospace and defense companies for several defense projects, as well as providing opportunities to work with MAFET to explore several computation projects employing our APU. We are pursuing a new opportunity with the development of an Elasticsearch plugin Elasticsearch is a popular open source full-text search engine that can search many types of documents. Elasticsearch recently added a dense vector that determines the document's relevance. This new addition opens the door to semantic search. Semantic search allows for a better understanding of the searcher's intent and provides better quality search results. than traditional keyword search. However, the lack of scalable or or ANN solution in ElastiSearch that can leverage the field has created an opportunity for GSI. Since many companies already use ElastiSearch, supporting ANN in ElastiSearch could be valuable especially a high-performance Elasticsearch solution that scales to a billion scale vector similarity search. In response, we developed an Elastic AMM plugin, Elasticsearch plugin as a way to enhance the core Elasticsearch functionality in a customizable manner. This plugin paved 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 Gemini One APU and lead up all in qualifications in the second quarter of this calendar year. This will be the Gemini One system that we take to marketplace. Our ultimate goal in 2021 is to win design from new customers for Gemini 1 in our top search categories, aerospace and defense, big data and e-commerce, job discovery, and facial recognition. For the next generation APU, Gemini 2, we anticipate finishing the design in the second half of 2021 and taking out the master by year end. We plan to launch Gemini 2 in late calendar 2022, with orders of magnitude performance cause improvement over January 1. The go-to-market timeline 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 federal shareholder, for your continued support. Now I hand the call over to Didier, who will discuss our business performance in further detail. Please go ahead, Didier.
spk04: Thank you, Lillian. As Lillian just explained, in addition to a novel architecture, the 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 Biobia for drug discovery, facial recognition, image processing, and Hashcap for password recovery. Two, machine learning algorithms, which allows users to develop neural network algorithms to enhance APU applications. Three, KPIs, which are application interfaces for specific application acceleration applications. by developers. And then lastly, our compiler stack, which is the stack for algorithm conversion, framework support, and simplified low level code generation. Our first compiler stack will focus on Python. Shifting to the sales breakdown for the third quarter of fiscal 2021, sales to Nokia were 2.8 million, or 42% of net revenues, compared to 2.6 million, or 26.3% of revenues in the same period a 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. Sigma quad 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 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 allowing 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.
spk01: Thank you, DDA. We reported a net loss of $5.2 million for 22 cents per diluted share a net revenues of $6.8 million for the third quarter fiscal 2021, compared to a net loss of $4.6 million for $0.20 per diluted share, a net revenues of $10 million for the third quarter fiscal 2020, and a net loss of $5.2 million for $0.22 per diluted share, a net revenues of $6.7 million for the second quarter 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 three 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 into the next generation of our Gemini chips. Selling general and administrative expenses were $2.6 million and 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 rate provision of $90,000 compared to $207,000 in interest and other income and a tax provision of $84,000 for the same period a 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 pre-tax stock-based compensation expense was $693,693 compared to $629,000 in a comparable quarter a year ago, and $653,000 in the prior quarter. At December 31st, 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 31st, 2020. Working capital was 54.4 million as of December 31st, 2020 versus 70.9 million at March 31st, 2020 with no debt. Stockholders' equity as of December 31st, 2020 was 78.5 million compared to 89.6 million as the fiscal year ended March 31st, 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 will open the call to Q&A.
spk03: Thank you. If you would like to signal with questions, please press star 1 on your touchtone telephone. If you're joining us today using speakerphone, please make sure new function is turned off to allow your signal to reach our equipment. Once again, that is star one if you would like to ask questions. Again, that is star one if you would like to ask questions. Our first question will come from Kurt Karmanis with Carl M. Henning.
spk02: Hey, guys. Are you still on lockdown or have you recently reopened after inauguration? In California?
spk00: No, we still work from home. Yeah, probably until summer.
spk02: Until summer?
spk01: Oh. Yeah, the way things are going here, I'd be very surprised if we didn't come back to work until closer to summertime, but I think everyone is working pretty efficiently. You know, the Gemini 2 design is progressing, you know, I've gone through a year-end audit and several quarterly reviews without even seeing the auditor. So it works. It's not as efficient, but it does work.
spk02: Well, for sales, I guess it's still going to be still a problem through the summer. I was just curious on that one. 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 companies getting out. I don't know what the government's position now is, if they want to stop that or What can you say about facial recognition now?
spk04: 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.
spk02: And then are we looking at, you think, 12 to 18 months before we would see revenue from one, and then obviously later than that on two?
spk04: You're talking Gemini 1 and Gemini 2?
spk02: Yeah.
spk04: Yeah. So Gemini 1, you know, we'll see some, certainly in the first half of this year, we'll see, you know, 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, truly, for us to project. As far as Gemini 2, it's going to be a while, right? As Levine mentioned, we will see a tape out 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, you know, there's a debug process. So I don't see us having a, you know, fully functional part on that until sometime in 2023. Yeah.
spk02: Now, is the 600 megahertz, I didn't see a mention of that, but are you working on it? Was that going to be from 400 to 600? Is that getting, where's that at, or am I wrong on that?
spk00: Yes, 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 one to the production, and we saw what we were needable. Okay, great.
spk02: So final thing, I'm seeing a lot of shortages in silicon, price increases on chips. What effect does that, if any, have on you guys in that? It just seems like everything's tight right now.
spk04: 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, you know, we've planned accordingly, so we've put in some material. And so far, you know, it affected some revenue, but as you can 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. Fortunately, you know, with our costs going up, we have to also increase our resale to the customers, and so that's happening now.
spk02: Okay, great. Thanks, guys.
spk03: Thanks, Kurt. Thank you. Once again, if you would like to signal with questions, please press star 1 on your touchtone telephone. Again, that's star 1 if you would like to ask questions. We'll pause for just a moment. Again, ask star one if you would like to ask questions. And that does conclude the question and answer session. Mr. Hsu, I'll now turn the conference back over to you for any additional or closing remarks.
spk00: Thank you all for joining us today. We look forward to speaking with you again when we report our fourth quarter physical 2021 result. Thank you.
spk03: Thank you. That does conclude today's conference. We do thank you for your participation.
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