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spk01: Greetings, and welcome to the GSI Technology Inc. Third Quarter Fiscal Year 2023 results. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Leland Hsu, Chairman, President, and Chief Executive Officer. Thank you, Mr. Hsu. You may begin.
spk00: Good afternoon, and thank you for joining us to review our physical third quarter 2023 financial results. Third quarter revenue of $6.4 million was within guidance, but at the lower end. Revenue growth was impacted this quarter by the uncertain outlook for the global economy. Despite this, we continue to see demand for our SM products, an interest in our radiation-hardened and radiation-tolerant products. While customer order patterns are variable right now, these fluctuations are related to economic and external factors. not changes in the market requirements for our products. Despite the low revenue in the quarter, increased sales of higher margin products resulting in gross margin of 57.5%, exceeding the high end of our guidance range. While research and development caused decline sequentially, we saw an increase in selling, general and administrative expenses primarily related to the difference in the level of quarterly adjustments to contingent considerations and surveillance related to recent layoffs. To ensure success and align our resources within the company goals, we announced several cost reduction initiatives at the end of November 2022. The executive team took a comprehensive approach to identify and implement all expense reduction measures, which include a thorough review of all expenses and ways to streamline process and improve operation efficiency. We have two objectives with this strategy. One, to reduce all cash burn, and two, to align our resource along developing the APU. We are on track to achieve $7 million in savings on an annualized basis to target cost reductions. These measures aim to right-size our operations and precisely manage spending to increase efficiency and focus our resources on advancing the proprietary APU technology. Let me update you on where we are today with APU hardware and software. The hardware development team is on track to take out Gemini 2 in the first half of this calendar year, which puts us on the schedule to see the first spin by late summer. In that case, we could test the Gemini 2 chip by early fall. If everything goes accordingly, we could have a second table to fix bugs by early next calendar year. In parallel, once we have a chip that the software team can use, They will start developing the API and the library for Gemini 2. Keep in mind that it took 3 spins to fix all bugs in Gemini 1 and 4 to increase the yield and speed. Gemini 2 has 8x memory density over Gemini 1 and has 30x cost performance improvement. Gemini 2 can greatly enhance all market push of APU technology. and provide further substantial savings in power and smaller server footprint while enabling large-scale real-time search and HPC workloads. Software for Gemini 1 is an area of intense focus currently. We have a full built-up GVML library deployed and used by customers, and one research institute has been able to run their own library based only for their project. Our GRL library is developed for SAR applications, and we have completed a POC project with IAI slash ELTA based only. ELTA is also evaluating a GPU solution to benchmark against the APU. We could see some initial sales once the APU performance is proven favorable. In the meantime, we are marketing the SAR solution to other customers. We have recently improved our GSL library for similarity search applications. We are engaging with a large corporation for a POC project for an on-prem similarity search project that requires very high accuracy and low latency. The improved GSL library is perfectly suited for this application. On the compiler front, we have a completed C compiler that customers are using to program APU with C code. We are in the process of completing L-Python, a Python compiler to allow customers to run API applications and their libraries in Python. Currently, L-Python is still in internal use and will be released for general use in June 9. Now I will handle hand the call over to Didier, who will discuss our business performance further. Please go ahead, Didier.
spk03: Thank you, Lillian. Let me switch now to customer and product breakdown for the third quarter. In the third quarter of fiscal 2023, sales to Nokia were $1.3 million, or 20.0% of net revenues, compared to $1.9 million, or 24.0% of revenues in the same period a year ago, and $1.2 million, or 13.6%, of net revenues in the prior quarter. Military defense sales were 26.2% of third quarter shipments compared to 27.1% of shipments in the comparable period a year ago and 22.4% of shipments in the prior quarter. Sigma quad sales were 45.2% of third quarter shipments compared to 40.5% in the third quarter of fiscal 2022 and 58.1% in the prior quarter. Regarding increased production costs, we are evaluating where we can pass on the increased wafer prices that TSMC announced last year, which became effective starting January of this year. Gemini One hardware is now market-ready. We have two board configurations, the LITA-E, which is in production, and the LITA-S, which is an SSD form factor board, and is being finalized today. In the third quarter, We shipped one LIDA-E board to a potential SAR customer, and we shipped one LIDA-E server to a research institute that will explore Gemini One for encryption applications. I'd now like to hand the call over to Doug.
spk04: Doug, go ahead, please. Thank you, DDA. We reported a net loss of $4.8 million for $0.20 per diluted share on net revenues of $6.4 million for the third quarter of fiscal 2023. compared to a net loss of $4.6 million, or $0.19 per diluted share, on net revenues of $8.1 million for the third quarter fiscal 2022, and a net loss of $3.2 million, or $0.13 per diluted share, on net revenues of $9 million for the second quarter fiscal 2023. Gross margin was 57.5% compared to 55.3% in the prior year period and 62.6% in the preceding second quarter. The changes in gross margin were primarily due to changes in product mix sold in the three periods. Total operating expenses in the third quarter of fiscal 2023 were $8.5 million compared to $9 million in the third quarter of fiscal 2022 and $8.8 million in the prior quarter. Research and development expenses were $5.5 million compared to $6.2 million in the prior year period and $6.4 million in the prior quarter. Selling general and administrative expenses were $3 million in the quarter ended December 31, 2022 compared to $2.8 million in the prior year quarter and $2.4 million in the previous quarter. Third quarter fiscal 2023 operating loss was $4.8 million compared to $4.5 million in the prior year period and an operating loss of $3.2 million in the prior quarter. Third quarter fiscal 2023 net loss included net interest and other income of $61,000 and a tax provision of $84,000. Compared to $15,000 in net interest and other income and a tax provision of $64,000 for the same period a year ago. In the preceding second quarter, net loss included net interest and other income of $14,000 and a tax provision of $37,000. Total third quarter pre-tax Stock-based compensation expense was $654,000 compared to $740,000 in the comparable quarter a year ago and $661,000 in the prior quarter. December 31st, 2022, we had $35.2 million in cash, cash equivalents and short-term investments and $0 in long-term investments compared to $44 million in cash, cash equivalents and short-term investments at $3.3 million in long-term investments at March 31, 2022. Working capital was $39.2 million as of December 31, 2022, versus $45.8 million at March 31, 2022, with no debt. Stockholders' equity as of December 31, 2022, was $54.8 million, compared to $64.5 million as of the fiscal year ended March 31, 2022. Regarding our outlook for the upcoming fiscal fourth quarter, we anticipate net revenues in the range of $5 million to $5.6 million, with gross margin of approximately 49% to 51%. Operator, at this point, we would like to open the call to Q&A.
spk01: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. The confirmation tone will indicate that your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
spk02: One moment, please, while we hold for questions.
spk01: Thank you. And our first question will come from Kurt Karamanenis. with Carl Henning, Inc. Please proceed with your question.
spk07: Hi, guys. What are you thinking cash burn looks like maybe out kind of looking out this year with the revenues now being looking quite a bit lower per quarter maybe?
spk04: Well, you know, we were looking at somewhere around $12 or $13 million a year, and the cost cutting will save us about $7 million a year. We'll be better off than we were a year ago, I believe.
spk07: I mean, is it going to be like $4 or $5 million a quarter?
spk04: Oh, no, no, no. I think we'll probably be something less than $12 or $13 million that we were previously seeing for the year.
spk07: Oh, okay. Is a sale leaseback an option for the building? Or has that been looked into as you were doing other measures?
spk04: It's something that we looked at, and it's something that we can consider for the future.
spk07: Okay. Sounds good. Well, good luck. Hopefully something with the APU comes through here in the next few quarters for number one.
spk06: Great. Thank you, Kurt.
spk02: And our next question is from Luke Bowen, who's a private investor. Please proceed with your question.
spk06: Hi.
spk05: I'm wondering if you all have come across any new application ideas and just generally which APU applications are you most excited about?
spk06: And this is kind of in context with... So we're set up... Yeah, go ahead. I'm sorry, can you finish your question?
spk05: Yeah, I was going to clarify that maybe in the context of, as you've all been exploring your technology and exploring marketing channels, going to conferences like the Buzzwords conference, I just wondered if anything new has arisen or light bulbs getting brighter.
spk03: Right. So right now we're focused on the SAR, as Leline mentioned. So we've done a POC and we've obtained some a very nice algorithm to go along with our hardware. So the benchmarking we've done against CPUs and GPUs are very promising for us, both on a performance level, a power level, and a form factor level, which is important depending on where they deploy some of these systems. And so that's one area that we've started, well, not started, but we've been contacting all the SAR players, both on a commercial level and on a government level. Um, as far as, um, I'm sorry, and the other market is the fast vector search, um, is something that we've already put in a plugin we've talked about in the past. Uh, since then, there are a few other applications that we've had customers come to us with. Uh, one of them, we, I mentioned in my, in my script, which was, uh, one of the boards or systems, I should say it was a server that we shipped last quarter was for encryption application. And there are a few others that have recently come up. I'm a little early to talk about them just because we haven't gone through the process of seeing what our advantage is yet. But there are certainly no lack of different applications for the Gemini chip.
spk05: That's excellent. Yeah, it's really good to hear. You're going to be able to move forward confidently, checking off more and more boxes. Okay, well, that kind of, yeah, I think discharges one of my other questions, because I know you're, well, I guess, yeah, I'll just throw it out there as a general prospect, not necessarily for the near term, but I saw that Amazon Prime Air launched their first test sites for their delivery drone program, and I know your advisor was the original leader of that program. Yeah, so just curious if that could be Looking at mobile data and autonomous vehicles, drones, VTOLs, yes, like small flying vehicles for commercial transportation and personal transportation. Yeah, I wonder if you're still seeing that as a potential field for coordinating, managing mobile data like that.
spk03: So we are, but more for the Gemini 2 chip. And the reason I say that is if you're familiar with our solution, our Gemini 1 chip goes on a LIDA board, as I mentioned. And the LIDA board for the Gemini 1 has an FPGA on there that has certain functionality that is critical for our solution. With Gemini 2, we take that functionality that's on the FPGA and we put it within the Gemini 2 chip. And so now we can rid ourselves of that large FPGA. And so some of the applications you were talking about, you know, power and form factor being smaller is more important. And so being able to rid ourselves of that FPGA will allow us to pursue those markets that were really a bit too challenging for our Gemini 1 chip.
spk06: Yeah. All right.
spk05: Yeah, I guess my thinking about that and those, like, next step prospects is, kind of thinking about the sensitivity of timing in business relationships, especially these advanced fields that are requiring a lot of R&D and might engender kind of a commitment from these large companies that are developing their programs and the component companies and how they're, say, making systems on chips that are highly customized and requiring a lot of investment. They hope to get something back on and just trying to think about how they might uh approach or how you might approach that relationship in terms of um holding a place and uh you know for the future development and not having to directly compete with all these very like inefficiently developed system on chips uh toe-to-toe but rather um it kind of for them to anticipate being able to adopt your your hardware and even your software and to kind of have that in mind as they develop these programs yeah i'm wondering if that's is something that you are seeing in terms of a one- to two-year development plan as you talk to potential clients?
spk03: So I want to make sure I – I'm not sure I fully understood your question, but as far as custom silicon and system-on-chips and everything out there, most everything has really been geared towards the training portion of the market. And as we've discussed in the past, that's not the application we're focused on. We're focused on similar research, you know, and there are obviously other applications or, you know, computation and, you know, intensive that our solution lends itself well. And because of the way we've architected our part where we actually do the, you know, the processing and the search in place as opposed to having to fetch data and rewrite data, you know, we – That technology we have is patent protected, and we haven't seen anybody try to do that at this point. And so we have carved out a niche in this similarity search. And so as far as other silicon coming in or other SOCs, it's really, like I said, most of the solutions we've seen have really been geared around trying to make the training faster.
spk06: All right. Yeah, I understand. Yeah, thanks for answering. And excited that you all have gotten just confirmation after confirmation. Keep it rolling. Thanks, Luke.
spk01: Our next question is from George Gaspar, who is a private investor. Please proceed with your question.
spk09: Good day to everyone there. George Gaspar here. Could you relate a little bit more detail about how many employees you have versus when you started to disengage employment, and how does that relate? How many total people have left, and what is your employment number now? And could you give us an idea of how many shares of stock were held by the employees that you've let go?
spk04: So we had approximately a little over 180 in total. Now we're down to, you know, like right around 165 or so. The people that left, I don't recall the exact number of options that were canceled upon them leaving, but it wasn't a significant number. I mean, we still have about, I want to say maybe about 8.5 million or so option shares outstanding.
spk09: Say that again. How many shares are outstanding to employees?
spk04: I want to say 8.5 million offers that have been grounded. 8.5 million? And then the 654,000 of tax-based stock issuance in this recent quarter.
spk09: How does... How does that stack up in terms of the total expense for employees?
spk06: Non-cash and then cash.
spk04: Oh, geez. I can get back to you offline. I don't have all that information in front of me right now, but I can get it for you if you need it. But the stock-based compensation expenses is – We've been running around that level for several years, and I don't see it going up significantly. It'll probably be a similar number. Okay.
spk09: Obviously, this stock-based stock issuance is important to stabilize your total expense structure, and We have to assume that that's going to stay in that range of the last quarter, would you say? That's $654,000? Yeah, I would say so.
spk04: I would say so. Okay. And that's not shares that we've issued. That's just assumed value of the options that we've granted to employees. The accounting rules require us to place a value on the option grants and then expense them over a period of time.
spk09: Right. Okay. And then this $654,000 is rated as an expense in terms of your operation on a quarterly basis, correct?
spk04: In other words... We record that in the income statement every quarter. It's a non-cash expense.
spk09: It's a non-cash expense. Okay. Yes. All right. Okay. And the gross margin decline that you're looking at for the current quarter, is there some cost structure associated with that in terms of employees that recently have left or other things that are going on? you're looking at less sales that you've expressed in your release today. So that obviously could easily have an effect on the gross margin decline. But is there something else going on in terms of the cost structure associated with further development of Gemini 2 relative to other quarters? What's the comparison in terms of cost structure relative to what you've done on Gemini 1 and now you're doing in Gemini 2?
spk04: Well, Leland can talk about your last question, but in terms of the gross margin, the layoffs really didn't impact it that much. Most of the layoffs, other than a couple hundred thousand dollars, are all in the operating expenses, not cost of goods sold. The gross margin is lower because, you know, the revenue is lower, and we still have, you know, fixed overhead expenses that need to be covered by the margin on sales. So that's why the gross margin number is down. The product mix is still a good product mix with good margins associated with each shipment. I see.
spk09: Okay. Last question would be back on the progress being made in Gemini 2. You know, this has taken a long time for the company to really generate customers giving you orders and expanding what they are going to use it for. Do you feel that you're very close now and that by the end of the current quarter, say the end of March, that you'll be able to actually have orders for Gemini 2 going forward? Or do you envision that it's still going to take more time into the future the June quarter or the September quarter, can you kind of give us an idea of what you're thinking about in terms of really starting to spin out some revenue stream here?
spk03: Yeah, so at this point, we're still seeding the market and building the pipeline. As I mentioned, we shipped a couple systems last quarter. We're anticipating to ship a few more, and it's building that pipeline now. And so we don't have any production orders at this point. It's still building that pipeline.
spk09: I see. Okay. And have you been affected negatively on the tremendous storm conditions in California from the middle of the state up? Has that created any kind of problem for you to deal with?
spk03: No, not at all.
spk09: Okay. All right. Okay, well, I think that, you know, this has taken a long time in terms of years to get this action going forward to Gemini 1 and into 2. And something's got to really start to happen here in terms of getting... And the interesting thing is that with this decline that is being seen in your business, generally speaking, I mean, when I say your business, I mean the general business associated with chips, it would seem like what has been happening in the last couple, three quarters, generally, for the industry, would really put you in a position to take advantage of of really getting up on track and going with some business that would be developed from what you've been trying to accomplish in, say, the last year. Can you say anything about that?
spk03: I'm not sure we followed the train of thought there. I mean, certainly, you know, we've had the general slowdown in our legacy business And we're, you know, concerning to pursue the new products. But I'm not sure we follow your train of thought there.
spk09: Okay. Well, what I'm just saying is that with business having fallen off and in trying to see ways of taking advantage of moving into a broader customer base as you're, you know, starting to move forward, into the Gemini II area, that it may be the fact that the industry has got to come out of this decline that it's experiencing. But with you having something new to bring to the market, that it would be possible for GSIT to really take advantage of maybe some momentum because of what's happened in the industry recently. going downward, and that if you're really getting close now to introducing innovations that you've been working on into Gemini 2, I would think that the shareholders of your company should be certainly looking forward to a turnaround in revenue stream beyond the first quarter, beyond this current quarter.
spk03: Right, exactly, yeah. Yeah, we do anticipate, even in the legacy, we anticipate a bounce back by the middle of the year as far as the revenues go based off of input from customers. And again, it's just we need to continue the process with the APU, continue the development we're doing with researchers, with the government applications, and continue to just move forward. It's a process.
spk09: I see.
spk00: Okay. In the marketplace, we are in. We see that Gemini 1 has a better solution than all the competing products. And Gemini 2 is the least in bounds, better than Gemini 1. We are pretty confident that could create the market leader in the area we are in. I see. Okay. Thank you very much.
spk06: Thanks, George. Thanks, George.
spk02: As a reminder, it is star one if you would like to ask a question.
spk01: As there are no further questions at this time, I would like to turn the floor back over to management for closing comments.
spk06: Thank you all for joining us.
spk00: We look forward to speaking with you again when we report our fourth quarter and full year fiscal 2023 results. Thank you.
spk01: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
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