GSI Technology Q3 2024 Earnings Call Transcript

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January 25, 2024

There are 6 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to GSI Technologies Third Quarter Fiscal 20 24 Financial Results Conference Call. 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 GSI Technology 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 ks filed with the Securities and Exchange Commission.

Operator

Additionally, I've been asked to advise you that this conference call is being recorded today, January 25, 2024, at the request of GSI Technology. Hosting the call today is Liuline Xu, the company's Chairman, President and Chief Executive Officer. With him are Douglas Shirley, Chief Financial Officer and Didier Lasser, Vice President of Sales, I would now like to turn the conference over to Mr. Xu. Please go ahead, sir.

Speaker 1

Good afternoon and thank you for joining us. I am pleased to share several key updates from an eventful Q3. Starting with the product development, we achieved 2 major milestones that will keep us on track to advance the GEMINI APU family. 1st, in November, we successfully complete radiation hardened testing on the Gemini 1 APU for compute in space applications. The test results confirm that GEMIGNA-one has met the characteristics to be a radiation tolerant processor.

Speaker 1

We are actively engaged with several satellite companies that need radiation tolerant APUs and we are encouraged That led some interest. Moving to our next generation APU. We complete the table of Gemini 2 in the Q3. In late February, we will evaluate the initial spins and expect to In sampling Gemini 2 chip in the second half of calendar twenty twenty four, Gemini 2 has 8 times of internal memory and the 10x better performance than Gemini 1 at a lower volume lower cost. This dramatically improved in cost performance, allow us to target a much broader range of applications.

Speaker 1

The 96 megabyte of internal memory in Gemini 2 can fit many AI models entirely on the chip, enabling in place data processing without accessing external memory external DRAM. This show gives Gemini 2 tremendous advantage on compact edge applications like ZON and ADAS. We anticipate starting initial RFAC deployment with select customers in the second half of calendar twenty twenty four. Lastly, in the Q3, we shipped radiation hardened instruments to 2 customers for 2 new programs and we received a second SBIR direct to Phase 2 contract in the amount of $1,100,000 Looking ahead, we are in the early stage of developing the architecture For our next generation Gemini 3 chip, we had a discussion with several hyperscalers Our APU is an option to best address their emerging markets lead in the data center. In addition to help Helping hyperscalers lower data center power consumption, the APU can also provide significant benefit to Gen AI end users By reducing inference costs, we initiated preliminary discussion with the 2 major hyperscalers who have expressed interest in our technology and continue to work with internal teams on various early stage concepts.

Speaker 1

Turning to our financial performance. The 3rd quarter revenue of $5,300,000 met our guidance With a gross margin of 56% was at the midpoint of our guidance, the sequential improvement in gross margin Product mix this quarter. Our operating expenses, which increased both year over year and sequentially, including a one time expense of $2,400,000 for preproduction mass For Gemini 2, we view this as an investment in future growth as Gemini 2 will greatly expand APU market In parallel, we continue discussion with potential strategic Partner to support Gemini to launch and assist with the Gemini 3 development. As our most ambitious chip today, We anticipate that GMV will require significant capital investment and partnership to help mitigate our funding needs. We remain focused on prudent financial management to fuel our product roadmap and expansion into new markets.

Speaker 1

Recently, Cornell University published a research paper spotlighting the unique efficiency of our JEMEA-one APU To accelerating location filtering in DMM MP, DDL will discuss the detail of the paper and its implication for GSI in his comments. In closing, it was an eventful 3rd quarter with tremendous progress on our Gemin enrollment, prudent expense management and action to increase our financial flexibility To support our growth, we remain laser focused on bringing our innovative APUs to market and driving long term value creation. Now I'll hand the call over to Didier, who will discuss our business performance further. Please go ahead, Didi.

Speaker 2

Thank you, Lilleen. I want to provide some additional context on why we are so confident in the market potential for our APU architecture, especially for inference workloads. First, the unmatched flexibility of our variable bit processing is key. With 2,000,000 undefined bit processors that can be toggled from 1 bit to 2,000,000 bits cycle by cycle, our APU can adapt to real time I'm sorry, in real time to maximize efficiency. This dynamic bitwise configurability can process long strips 1 bit at a time is a deal for inference since research shows that different bit precisions are more efficient for different models.

Speaker 2

2nd, our APU architecture breaks the Von Neumann model by removing the data fetch function. This innovative design delivers higher performance with lower power As Lalin mentioned, these capabilities directly address the critical needs of data centers and emerging applications by lowering data center power consumption and reducing inference costs for GenAI end users. Importantly, I want to emphasize that our APU represents true in memory I'm sorry, True compute in memory architecture. Unlike computing chips that claim compute in memory, they are actually near memory compute And our APU has logic physically integrated in the memory. This fundamental difference in architecture will ultimately enable our APU to achieve the transformative speed and efficiency gains we anticipate as we scale.

Speaker 2

Our true gives us a sustained competitive advantage. To accelerate ecosystem development, we are focusing on getting APU in the hands of key partners in the military, hyperscalers and academia. The real world deployment and libraries will showcase the benefits, expand use cases and support our go to market capabilities. One example of the strategy is helping us promote Monetize Gemini 1 is a recently published research paper from Cornell University. We are pleased to announce that the Cornell paper demonstrates our APU-one I'm sorry, our Gemini 1 APU's unique performance benefits for genomic applications.

Speaker 2

Leveraging the APU's massively parallel in memory architecture, Cornell researchers showed up to 6 times faster DNA sequencing filtering compared to a 16 core CPU. This showcases our technology's advantage for data intensive workloads requiring rapid low precision comparisons. The study also revealed strong potential to other applications with similar data matching needs, including medical data analysis, search, security and more. With simple scaling, our APU can be packed into cost effective high density servers to multiply this performance for real world deployments that can lower power budgets for hyperscalers compared to GPU solutions. These results enforce I'm sorry, reinforce our significant market opportunities across sectors that rely on efficiently finding patterns and similarities within massive data sets.

Speaker 2

We remain focused on delivering the game changing in memory compute performance to customers across multiple industries. As Lilleen mentioned, we anticipate receiving 1st silicon devices of Gemini 2 in February. After initial evaluation and debugging, we will target a second spin this summer and initiate benchmarking shortly after. Our $2,300,000 and SBIR funding will support this development. As a reminder, this includes our recently announced second SBIR Direct to Phase 2, dollars 1,100,000 contract to create specialized algorithms for the U.

Speaker 2

S. Air Force Research Laboratory. The target applications include in craft applications such as search and rescue, object detection, moving target indication, change detection and SSIM in GPS absent situations. GSI will also develop algorithms using data from the U. S.

Speaker 2

Space Force to showcase the performance benefits of its compute and memory APU2 integrated circuit. In summary, the versatility of architecture, hands on customer engagements and ecosystem partnerships gives us confidence in our market opportunity. We have a robust product roadmap to deliver continuous innovations that we can that we believe will capitalize APU adoption across multiple industries in the coming years. Let me switch now to customer and breakdown for the Q3. In the Q3 of fiscal 2024, sales to Nokia were $807,000 or 15.2% of net revenues compared to $1,300,000 or 20 percent of net revenues in the same period a year ago and $1,200,000 or 20.3 percent of revenues in the prior quarter.

Speaker 2

Military defense sales were 28.2 percent of 3rd quarter shipments compared to 26.2 of shipments in the comparable period a year ago and 34.8% shipments in the prior quarter. SigmaQuad sales were 46.9 percent of 3rd quarter shipments compared to 45.2% in the Q3 of fiscal 2023 55.8% in the prior quarter. On one last note on product sales in the Q3, we shipped over $600,000 of a prototype radiation hardened SRAM to 2 different customers. These will be deployed in 2 separate satellite programs. I'd like to hand the call over to Doug.

Speaker 2

Doug, go ahead please.

Speaker 3

Thank you, Didier. We reported net loss of $6,600,000 or $0.26 per diluted share on net revenues of $5,300,000 for the Q3 fiscal 2024 compared to net losses of $4,800,000 or $0.20 per diluted share and net revenues of $6,400,000 for the Q3 2023 and a net loss of $4,100,000 or $0.16 per diluted share on net revenues of $5,700,000 in the Q2 of fiscal 2024. Gross margin was 55.9 percent compared to 57.5% in the prior year period and 54.7% in the preceding Q2. The changes in gross margin were primarily due to changes in product mix and volume sold in the three periods. Total operating expenses in the Q3 of fiscal 2024 were $9,700,000 compared to $8,500,000 in the Q3 of fiscal 2023 and $7,200,000 from the prior quarter.

Speaker 3

Research and development expenses were $7,000,000 compared to $5,500,000 in the prior year period and $4,700,000 in the prior quarter. Selling, general and administrative expenses were $2,700,000 in the quarter ended December 31, 2023 compared to $3,000,000 in the prior year quarter and $2,500,000 in the previous quarter. 3rd quarter fiscal 2024 operating loss was $6,700,000 compared to $4,800,000 in the prior year period and operating loss of $4,100,000 in the prior quarter. 3rd quarter fiscal 2024 net loss included net interest and other income $155,000 and a tax provision of $71,000 compared to net interest and other income of $61,000 and a tax provision of $84,000 for the same period a year ago. In the preceding second quarter, net loss included net interest and other income of $71,000 and a cash provision of $33,000 Total 3rd quarter pre tax stock based compensation expense was $649,000 compared to $655,000 in the comparable quarter a year ago and $676,000 in the prior quarter.

Speaker 3

At December 31, 2023, we had $21,600,000 in cash and cash equivalents compared to $30,600,000 in cash, cash equivalents and short term investments at March 31, 2023. Working capital was $23,100,000 as of December 31, 2023 versus $34,700,000 at March 31, 2023. With no debt, stockholders' equity as of December 31 was $39,600,000 compared to $51,400,000 as of the fiscal year ended March 31, 2023. For the Q4 of fiscal 2024, anticipate net revenues in the range of $4,800,000 to $5,400,000 with gross margin of approximately 55% to 57%. Operator, at this point, we'd like to open the call to Q and A.

Operator

Thank you. We will now be conducting a question and answer Our first question is from Brett Wright with Janney Montgomery Stocks. Please proceed with your question.

Speaker 4

Hi, gentlemen. You can talk to me like I'm 6 years old. Could you just explain what is in an infrequent 2,400,000 dollar charge for a preproduction mask. Yes, I'm not an engineer. Just if you can give me Some more clarity on that.

Speaker 3

Yes. So every time we have a product, we have to have a mess set prepared to run-in the fab to manufacture the wafers. Now typically when we incur charges for masks that for production product, we will capitalize that into prepaids and amortize it over a 12 month period. However, the one exception to that is when we have Masset prepared on a new process technology that we've never run before, we'll charge that expense to R and D expense. So in this quarter well, last quarter, we taped out Gemini 2 on a process technology we've never used.

Speaker 3

It's a 16 nanometer process at TSMC. Now since we've never used that process before, we charge that $2,400,000 to R and D expense.

Speaker 4

All right. So this is one shot. It's not going to be reoccurring?

Speaker 3

No, no, no. It will recur in the future when we have another product that tapes out on the process technology that we've never used before. So it's in frequent, it doesn't happen every year, it's at most every 2 or 3 years.

Speaker 4

Okay. Okay. The cash, which was my margin of safety in my investment here, keeps dwindling down. I'm a little concerned about that. Some of these initiatives with bringing in other joint venture partners, what's the timetable on that?

Speaker 4

And how long do we have Before we burn through the remaining cash?

Speaker 3

Well, we're currently Looking at various opportunities and Didier mentioned talking to hyperscalers and others to come out with our next product that's going to require significant investments. So We're looking for partners or other sources of funding. In addition to that, we have a building that's we own that's worth quite a bit of money and we'll be looking into potentially selling that building in the near future.

Speaker 4

Right. What is the building appraised at? And in a base case scenario, what do you think you could sell it for?

Speaker 3

We think we can probably get somewhere in the range of $10,000,000 to $13,000,000

Speaker 4

Right.

Speaker 3

And there's no debt tied to that because it's fully paid for.

Speaker 4

Right. Could you just give me a broad outlines of what the structure Other joint venture partners, capital investment in GSIT would take, would they pay an upfront milestone payment With other payments to follow, would it be an equity investment? What do you think the structure of that would look like?

Speaker 2

So it could be either of those. And what I mean is, when Yulin was talking about a partner For funding the next program, that's specifically for Gemini 3. So Gemini 2 was fully funded internally. But for Gemini 3, we are looking for a partner for that, most likely a customer funding partner. But aside from that, that would be more of an NRE type of funding.

Speaker 2

So there would be milestones associated with that. But Aside from that, we are also open to equity investments in the company as well.

Speaker 4

Okay. I'll drop back in queue. Thanks for taking my questions.

Speaker 1

Thank you. Thanks,

Operator

Our next question is from Jeff Bernstein with Silverberg Bernstein Capital. Please proceed with your question.

Speaker 5

Yes. Hi, good afternoon.

Operator

So just

Speaker 5

a question on the and congratulations on placing Those RadHard SRAM parts for evaluation. If you were to win those programs, about how much revenue and over what time period might you be able to gain from those 2 satellite programs?

Speaker 2

Sure. So, one of the programs was, and again, this is just a prototype quantity For demonstration purposes, one of them was just over 500,000 And the other one was about 150,000 and it totaled 41 parts that we shipped. You can do calculation what the ASPs are on those. And so those are just the, again, prototype quantities. So obviously, you can multiply by something.

Speaker 2

We don't have the quantities yet. These are programs that they're looking to launch within the next year. And so it

Speaker 1

would be

Speaker 2

sometime second half of twenty twenty five at the soonest before they release production. But certainly it would be north if the prototype is 500,000, you can imagine what a production might be.

Speaker 5

And so these would be like geo satellites. So these aren't satellite networks, these are going to be individual larger satellites?

Speaker 2

So these ones are ex one is GEO, one is actually LEO.

Speaker 5

Okay. And Will you get an automatic with these evaluation parts? Are you going to get a ride into space on one of these and actually get sort of provenance From that or are we still looking to get that somewhere else?

Speaker 2

No. So certainly we have as we've spoken in the As we have other prototype devices, we've shipped out already in the last couple of years. And so It could be any of the programs we said in the past or these 2. One of these, looks like is Fairly accelerated in their timetable. So there's a chance one of the ones we just shipped this last quarter could get up fairly quickly.

Speaker 5

Okay. And then just on Nokia lowest revenue from them in forever, What's the story on Nokia and the outlook for that router that you sell into?

Speaker 2

So the contract manufacturers, Because we send these parts to 2 separate contract manufacturers and they were both had a little bit of inventory, so they were burning through some inventory. As far as the we get I think we've talked in the past 12 month rolling forecast from Nokia And those still are coming in around the run rate we've been seeing for the last couple of quarters. So just a little bit north of what we did this past quarter, Somewhere around the $1,000,000 $1,100,000 kind of range a quarter.

Speaker 5

Okay. And at Needham, I think you also mentioned in addition to looking for a partner, potentially a financial partner, potentially a Development partner, possibly a hybrid of both of those, for Gemini 3. I think you also mentioned something about potentially licensing IP, it sounds like for what would probably be an edge kind of case for semiconductor IP for doing in memory processing. Can you just talk about that? Would that be sort of an upfront License and then royalty stream or just give some color around that?

Speaker 1

Yes. So the IP, well, we are more focused on the Gemini 3. So it could be IP or it could be the Product development for the customer. So basically, I think we have as we mentioned in the conference call, I mean, we made Pretty good progress over the quarter. So, yes, so we're still working on it.

Operator

Thank you. There are no further questions at this time. I'd like to hand the call back to Li Lin Shu for any closing comments.

Speaker 1

Thank you all for joining us. We look forward to speaking with you again when we report our Q4 End of full year fiscal 2024 results.

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