GSI Technology Q1 2025 Earnings Call Transcript

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July 25, 2024

There are 7 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the GSI Technologies First Quarter Fiscal 2025 Results Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. At this time, we will provide instructions for those interested in entering the queue for Q and A.

Operator

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 that involves risks and uncertainties that would 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. Additionally, I have also been asked to advise you that this conference call is being recorded today, July 25, 2024, at the request of GSI Technology. Hosting the call today is Leland Xu, the company's Chairman, President and Chief Executive Officer.

Operator

With him are Douglas Shirley, Chief Financial Officer and Didier Lysser, Vice President of Sales. I would now like to turn the call over to Mr. Hsu. Please go ahead, sir.

Speaker 1

Good day, everyone, and welcome to our Q1 FY 2025 earnings call. Let's start with the Q1 results. Our first quarter revenue of $4,700,000 was within our guidance range lower Sigma cost sales and lower sales to our military plant contractors. Additionally, the mix of products we sold affected our gross margin, causing gross margin to come in at a low guidance range. Right now, our team is focused on generating new revenue from our Geminis APU to address the expected decline in our legacy SM business.

Speaker 1

Our main goal this year is to launch new business line with Gemini 1 and secure more SBIR contract with Gemini 2. This will help us reverse the revenue decline, achieve financial stability and ultimately return to growth when we bring Gemini 2 online. Let me explain how we are working towards this goal. We are preparing to launch our new GXL platform for fast factor search built on Gemini 1, which will be available as a cloud based or on premise solutions. Our home breaking technology significantly reduced the time needed to create and update large factor database index increasingly using gem AI and e commerce, providing a critical advantage for companies that rely on timely data updates.

Speaker 1

Didier will provide more detail on this. Additionally, we are expanding our Department of Defense Small Business Innovation Research or SBIR, proposed pipeline for the Gemini APU. This contract can range from $75,000 to over $2,000,000 typically pay off over 9 to 18 months. So far, we announced Phase 1 and Phase 2 SBIR contracts where we are meeting our milestones and our own track to complete them in calendar 2025. Didier will expand further on these SBIR opportunities in his comments.

Speaker 1

We are also on track to begin customer sampling Gemini 2 software in early calendar 2025. The chip has been successfully mounted onto a goal, allowing our software team to work with it. Our goal is to finalize the firmware and complete the software library by December 2024. We have uncovered 9 box on the first silicon. The good news is that they are work along for all of those to continue firmware and software development without mask change.

Speaker 1

Same to our success in working with the chip at multiple labels, We are actively seeking a strategic partner to scale resource, funding and expertise for future development. To increase our chances of successful engagement, the team is preparing to demonstrate more than 10 times improvement in 1 bit and 2 bit processing with Gemini 2. We aim to validate this concept by the December quarter with a 1 bit and 2 bit computing memory demo. Successfully showcasing Display 2 will enable us to have a more productive discussion with potential strategic partners. As I stated earlier, we are diligently working to launch and monetize the Gemina 1 and 2 platforms.

Speaker 1

We are preparing to launch the GXL platform to establish a recurring revenue stream in the fast vector search market. In addition, we are actively writing multiple SBIR proposals to build pipeline of future revenue stream and offset the remaining development costs of Gemini 2. With these unique computing memory capabilities, our computing memory APU promises to deliver essential power and time saving solution to the rapidly changing AI market. Now, I hand the call over to Didier, who will discuss our business development and sales activities. Please go ahead, Didier.

Speaker 2

Thank you, Lyleen. I want to expand on 2 topics that Lyleen highlighted, the pending launch of GXL and the building of our SBIR pipeline. Let's start with a fast vector search and our new platform for this market called GXL. First, let me explain the problem GXL solves and why it's important. The size of vector basis is growing fast, especially with GenAI and Vector Similarity Search for e commerce.

Speaker 2

Many of these databases use the HNSW algorithm to build indexes because it provides quick and accurate search results. However, building an HNSW index takes a long time, which is a problem for databases needing fast and accurate information. One way to fix this is by speeding up the calculations needed to build or refresh the index by running them in parallel. These calculations take most of the time, so making them faster is crucial. Our in compute memory APU technology is designed for this.

Speaker 2

It enables massive parallel processing, solving the slow index building issue. The APU processes data directly in memory at the bit level with millions of bit processors working simultaneously. This means it can handle large amounts of data quickly, reducing the index build time by about 85% compared to traditional CPU based solutions. The three main benefits of our GXL solution are scalability, it provides fast access to information for Gen AI and e commerce recommendations even as these application grow to billions of vectors. 2nd benefit is lower operational cost.

Speaker 2

By using computational resources for less time, especially in cloud computing, where costs are billed hourly, it saves money. And the last benefit is faster updates. New products can be added or deleted into the index more quickly in e commerce applications, leading to timely recommendations and increased revenue opportunities. We recently published a white paper and a blog on Medium about efficient HNSW indexing. Be sure to check those out for more information.

Speaker 2

The GXL platform is being prepared for launch, and we aim to begin connecting with the vector database companies that we have identified and then expand to larger e commerce players. Switching to the build out of our SBIR this strategy as a highly efficient and effective way of increasing awareness of GSI's APU within the DoD. These SBIR awards validate our statements regarding the APU's performance and benefits with many large divisions within the DoD and can bring a significant multiplier effect for future opportunities as many of these applications will have dual use for defense and commercial. This is why we have focused resources on submitting proposals and then prioritizing the execution of these contracts. We are working on a Phase 1 excuse me, we are working on a Phase 2 SBIR contract with the Air Force worth $1,100,000 which we started in 2023 and are now over 25% complete.

Speaker 2

Additionally, we have a Phase 2 SBIR contract with a space development agency valued at $1,250,000 and we are over 50% complete on this project. We recently secured a new Phase 1 SBIR with 1 of the largest divisions of the DoD, a division that's new to GSI APU's technology. It has a value up to $250,000 We will give more details on this latest win once the contract is signed. We are currently preparing several other SBIR proposals adding up to a total pipeline of $6,000,000 Our next submission will be for a Phase 2 SAR space level onboard contract worth $1,250,000 In addition to SBIRs, we have initiated the process of seeking additional government funding to enhance the resources we could dedicate to further developing G2. This funding will enable us to expand the Gemini 2 product line by creating a version for advanced edge AI applications.

Speaker 2

On a final note regarding APU opportunities, we sold a Gemini 1 Lida car to a major aerospace and defense contractor who will evaluate this technology for various underclosed applications. We shipped the card in June quarter and the PO also provides GSI software training in the September quarter. Although these sales generate minor revenue, this opportunity is valuable for prospecting engagement with this prominent contractor. We are excited to see this customer using our technology. Regarding the 2 SAR prospects we've mentioned in previous calls, one is on hold as we finalize some documentation with that customer.

Speaker 2

The other is looking to expand the scope of our services that we can provide in different areas of their operation where they could possibly use the APU. Our team is actively investigating how to accelerate the delivery of these additional services. Now let me switch to the Q1's customers and product breakdown. In the Q1 of fiscal 2025, sales to Nokia were $998,000 or 21.4 percent of net revenues compared to $1,900,000 or 33.5 percent of net revenues the same period a year ago and $694,000 or 13.5 percent of revenues in the prior quarter. Military and defense sales were 31.9% of first quarter shipments compared to 33.8% of shipments in this comparable period a year ago and 35.5% of shipments in the prior quarter.

Speaker 2

SigmaQuad sales were 36.3 percent of 1st quarter shipments compared to 58.6 percent in the Q1 of fiscal 202442.4 percent in the prior quarter. Regarding our SRAM business outlook, while our largest customer has announced some business challenges, our current expectations for orders from them remain stable for the remainder of the calendar year. Several other SRAM customers are currently managing their inventory levels, and we anticipate they will resume placing orders before the end of the calendar year. Additionally, we believe that the customers who were previously reducing their use of SRAMs have now stabilized. SRAMs have now stabilized.

Speaker 2

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

Speaker 3

Thank you, Didier. The company reported net revenues of $4,700,000 for the Q1 of fiscal 2025 compared to $5,600,000 for the Q1 of fiscal 2024 and $5,200,000 for the 4th quarter fiscal 2024. The decline in revenue was due to lower SigmaQuad sales and lower sales for our military prime contractors. Gross margin was 46.3 percent in the Q1 of fiscal 2025 compared to 54.9% in the year ago 1st quarter of fiscal 2024 and 51.6 percent in the preceding Q4 of fiscal 2024. The decrease in gross margin in the Q1 of fiscal 2025 was primarily due to product mix and the effect of lower revenue on fixed costs and our cost of revenues.

Speaker 3

Total operating expenses in the Q1 of fiscal 2025 were $6,800,000 compared to $8,200,000 in the first quarter of fiscal 2024 and $7,200,000 in the prior quarter. Research and development expenses were $4,200,000 compared to $5,200,000 in the prior period and $4,800,000 in the prior quarter. Selling, general and administrative expenses were $2,600,000 in the quarter ended June 30, 2024 compared to $3,000,000 in the prior year quarter and $2,400,000 in the previous quarter. Q1 of fiscal 2025 operating loss was $4,700,000 compared to an operating loss of $5,100,000,000 in the prior year period and an operating loss of $4,500,000 in the prior quarter. Q1 fiscal 2025 net income included interest and other income of $55,000 and a tax provision of $57,000 compared to $80,000 in interest and other income and a cash provision of $51,000 for the same period a year ago.

Speaker 3

In the preceding 4th quarter, net loss included other income of $108,000 and a tax benefit of $85,000 Net income in the Q1 of fiscal 2025 was $1,100,000 or $0.04 per diluted share, reflecting a one time gain of $5,700,000 on the sale and leaseback transaction related to the sale of the company's headquarters, compared to a net loss of $5,100,000 or $0.21 per diluted share for the Q1 of fiscal 2024 and a net loss of $4,300,000 or 0 point 17 dollars per diluted share for the 4th quarter fiscal 2024. Total first quarter pre tax stock based compensation expense was 650 $1,000 compared to $820,000 in the comparable quarter a year ago and $693,000 in the prior quarter. At June 30, 2024, the company had $21,800,000 in cash and cash equivalents compared to $14,400,000 at March 31, 2024. Working capital was $25,700,000 as of June 30, 2024, compared to 19 $100,000,000 at March 31, 2024. Stockholders' equity as of June 30, 2024 was $38,000,000 compared to $36,000,000 as of the fiscal year ended March 31, 2024.

Speaker 3

During our Q4 earnings call in May, we announced that the company had initiated a comprehensive strategic review and established a special committee of the Board to evaluate various strategic alternatives. We have engaged Needham and Company as our strategic and final financial advisor to assess in this process. Currently, we are in discussions regarding potential strategic opportunities and are encouraged by the direction of these preliminary discussions. Operator, at this point, we'll open the call to Q and A.

Operator

Thank you. We will now be conducting a question and answer Our first question comes from Luke Foehn. Please proceed with your question.

Speaker 4

Hi. I'm wondering if you all could do a brief kind of skim over the cost benefit and contemplations about potential leasing or sale or going this more diverse route, which it seems like you were laying out in this call, as well as potential for a key partnership. If you could give kind of a succinct, yes, current refinement of all those prospects and your leading direction? Thanks.

Speaker 3

What exactly are you asking? You're asking about how we decided to sell the building?

Speaker 4

No, not the building. I'm referring to the GPU or the APUs, sorry Gemini APU yes, yes, hopefully a decision on a route for funding and development to progress into Gemini 3. Yes, I just wondered if you had kind of a way of like, yes, succinctly describing what your current leading prospects are for either the major funding or leasing of that technology?

Speaker 1

Yes. We have still continued discussion on GMV and SUV with hyperscaler and HVM vendors. But the key is really we need to demonstrate our GPU, APU capability on the 1 bit and 2 bit processing. So that's how we are focused doing this and we want to prove it on the G2 and by the end of this year, the calendar year.

Speaker 3

Yes. So there's definitely interest, but they'd like

Speaker 2

to see the capabilities of the

Speaker 3

parts, so where we can show them some benchmarks. So we're working on that now.

Speaker 4

Okay, excellent. Yes, that's the same. We handled all the questions. Thanks.

Speaker 1

Thanks, Luke.

Operator

Our next question comes from Michael Cooper. Please proceed with your question.

Speaker 5

Hi, guys. Can you tell me with these benchmarks, have you validated these benchmarks in house and now you have to formalize the process for outside clients and then start showing them? Do you know the answers to these questions that are coming down the pipe?

Speaker 1

Yes. We have a calculation, but it's just a calculation. And right now, we are trying to get the G2 working, so we can run the on the H2 device. That's what we are doing basically right now.

Speaker 3

Yes, we're actually working with the first silicon and the first silicon has turned out to be very solid for first silicon. And I think as we've mentioned before, there are no major bugs, nothing that we can't work around. And we're right now accessing the part they've been mounted on boards and trying to gather as much data and information as we can working with what we

Speaker 2

have. And in order to be able to run those benchmarks, we just need all of the algorithms and the libraries on the software set complete. So, on the hardware side, as Lyleen said in his section, there have been no bugs that are our showstopper at this point. And so it's just getting the libraries completed, so we can run those benchmarks.

Speaker 5

And in those libraries and the algorithms, there's less critical pinch points, if you will?

Speaker 2

Well, it's just different, right? It's with the hardware, you have a lot of moving parts and you have a lot of potential bugs with the software and the libraries, it's just time. It's just the folks that's being done by our Israeli facility and it's just a matter of time to complete those libraries.

Speaker 5

And if I could just extend one more question about, okay, let's say you achieve all this. What does the market look like? How large potentially within your channels? And what's the gross margin? And is it like the hyperscalers might buy 100 or 1,000 of a $30,000 system or what does that

Speaker 2

exposure look like? Sure. So Gemini 2 is a little different going to market than Gemini 1. So Gemini 1, if you recall, we have some cloud based usage models and then we also sold some boardsystems. Gemini 2 is a little different.

Speaker 2

I shouldn't say a little different. We can expand to that. So we're some of the models we're looking at will be cloud based usage kind of revenue. We will be selling some boards and some systems, but we also have, which is very key to some of the markets we're looking at, the opportunity to sell actual chips. So with Gemini 1, a chip sale was not viable.

Speaker 2

And we've talked about the dependence on an FPGA that was on the original leaderboard with Gemini 1. With Gemini 2, there's not that restriction. So we can sell the chip as well. And so depending on the customer, they may want to buy a chip, they may want to buy a board, they may want to buy a server that has multiple boards. And then in some of our revenue streams, it will be, like I said, the cloud based kind of revenue.

Speaker 2

Yes.

Speaker 1

The Gemini 2 is targeting at the edge AI processing market. Okay. We are not targeting at a cloud basis. But anyway, the HAI market, I do the research before is the whole edge AI computing is like a mid-twenty $1,000,000,000 market right now in 2024 and growing at mid-twenty to mid-thirty depending on who is publishing the data. So I think it's a fastest payment market and that's where the market we are targeting.

Speaker 5

Okay, great. Thank you very much.

Speaker 1

Thanks, Michael.

Operator

Our next question comes from Greg Greenberg. Please proceed with your question.

Speaker 2

Yes.

Speaker 6

Can you give us an update on the radiation hardened programs, anything that's happened in the last quarter and what you see it to be 1, 2, 3 years from now?

Speaker 2

Sure. So we shipped a prototype order this past quarter to a customer actually out of Europe. And so that's going to be further ongoing testing. There's still some active programs that we have set some samples into over the last couple of years. And so those are just waiting to go into production.

Speaker 2

And then there are a few others that we're still targeting. Hard to say, we've always said that we kind of are looking for the kind of the $10,000,000 a year kind of run rate. And again, we talked about this is north of 90% gross margin on this product. So we're still saying that in the years ahead. It's just been as you know, if you've been on these calls in the past, it's just been a much slower process than we had ever anticipated.

Speaker 6

And I think you mentioned maybe a few quarters ago that you didn't need it to go up in space or has it been already up in space? What's the status there?

Speaker 2

No. So we so you're referring to heritage. Yes, so as far as I know, we don't have Heritage yet. And so we're waiting for some of these launches. And I know that we're also seeing what we can do about possibly getting some parts in the space just for the heritage only.

Speaker 2

It would not be this is going to sound a little strange. It's not associated with the program we're working on now, would just be a way to exercise the parts and space just to prove that they actually work in those environments. I mean, all the testing we've done, which simulates that environment, it's done on earth. And so, we certainly all the tests are done tells you that it will work, but these folks want actual proof. So we're looking for a mechanism now to try and get the parts up, so we can have that official heritage stamp on our parts.

Speaker 6

Okay. And then back to ABU, so you're still expecting a second spin, when would you expect that back?

Speaker 2

So we're yes, so we're not actively spinning the part yet. So as we discussed, First Silicon looks very solid. There are some minor bugs. They've all had software workarounds at this point. And so as we continue to finish up these libraries and algorithms we talked about, we'll be able to determine whether or not there are any other bugs.

Speaker 2

And once that's done, then we'll do the spin. So as of now, we're holding off on any spin until we can identify any other minor bugs. So I can read into

Speaker 6

that strategic alternatives doesn't require a partner

Speaker 1

to be able to see

Speaker 6

a second spin to know what you guys have so far, correct?

Speaker 2

Correct. Yes, the strategic partnership is more for the next generation part and also just to expand our business in general, but we won't need that for just for the 2nd spin. That's correct.

Operator

Our next question comes from Robert Christian. Please proceed with your question.

Speaker 4

Yes. Have you guys identified any possible companies that are interested in licensing your technology?

Speaker 2

So we are actually working with right now a so this is on a customer side, not on a I'm not sure if you're talking about potential competitors or customers. So on a customer side, we do have a major networking telecom customer that is looking at our technology to be able to incorporate some of the IP into their ASIC. And those are conversations we've been having for a bit some time now, and it looks like it's getting further along there. We actually started the conversations before we had Gemini 2. And obviously Gemini 1 was what they're looking for, it had to be Gemini 2 technology.

Speaker 2

And now that it's out, looking for, it had to be Gemini 2 technology. And now that it's out and once we get some of the benchmarks, then that will progress even faster. Okay, good. And is there any other companies out there you

Speaker 3

know, now? Well, we've been having a lot of discussions with Needham and things are encouraging, but there's nothing to talk about yet.

Operator

It appears that there are no further questions at this time. I would now like to turn the floor back over to Mr. Xu for closing comments.

Speaker 1

Thank you all for joining us. We look forward to speaking with you again when we report our Q2 fiscal 2024 results. Thank you.

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