Q3 2024 GSI Technology Inc Earnings Call

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to GSI Technology's Third Quarter Fiscal 2024 financial results conference call. (Operator Instructions)
Before we begin today's call, the Company has requested that I read the following Safe Harbor statements. 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 and on So and uncertainties are described in the company's Form 10-K filed with the Securities and Exchange Commission.
Additionally, I have 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 Lee-Lean Shu, the company's Chairman, President and Chief Executive Officer. With him are Douglas Schirl, 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.

Well afternoon, and thank you for joining us. I am pleased to share several key updates from an eventful third quarter. Starting with the product development, we achieved two major milestones that will keep us on track to advance the Gemini APU family.
First, in November, we successfully completed radiation hardened testing on the Gemini-I APU for compute in space applications. The tested result confirmed that Gemini-I has met that characteristic to be at reducing payroll and processes. We are actively engaged with several start-ups, other companies that need radiation tolerant APUs, and we are encouraged well there's some interest.
Moving to our next generation APU we completely complete the table of Gemini-II in the third quarter. In late February, we will evaluate the initial screens to begin sampling Gemini-II chip in the second half of calendar 2024. Gemini-II has eight times over internal memory and the 10 times better performance than Gemini-I and a lot of already lower cost. This dramatically improve the cost performance, but allow us to target a much broader range of applications. The 96 megabyte of internal memory in Gemini-II can fit many AI models entirely on the chip, enabling increased data processing. We thought at this in a moment, we cannot even this should give Gemini-II tremendous advantage on compact age applications like Dawn and EVA. We anticipate starting initial off-box deployments with a customer in the second half of calendar 2024.
Lastly, in the third quarter, we shipped the Asian hub in essence to two customers for two for two new programs, and we receive a second SPAR Saturn two Phase two contract in the amount of $1.1 million. Looking ahead, we are in the early stage of developing the architecture for our next-generation gen Gemino suite. Should we had a discussion with several hyperscalers of our APU is an option to best address their emerging markets, be it in the data center. In addition to help helping hyperscalers lower data center power consumption behavior can also provide significant benefit to GMAIN. users by reducing insurance costs we initiated preliminary discussion with the two major hyperscalers who have expressed interest in our technology and continue to work with internal teams on various early-stage concept.
Turning to our financial performance the third quarter revenue of $5.3 million met our guidance with a gross margin of 56% was at the midpoint of our guidance. The sequential improvement in gross margin reflects product mix this quarter. Our operating expenses, which increased both year-over-year and sequentially, including a one-time expense of $2.4 million for group production masks for Gemini-II. We view this as a investment in future growth, similar to what Grady can a few markets.
First beach in parallel, we continued discussions with potential strategic partners to support given to lunch and assist with the ministry development as our most ambitious ambition chip. Today, we anticipate that Jim, as we were Newcrest's significant capital investment and partnership could help mitigate our funding from BNDES. We remain focused on prudent financial management to fuel our product roadmap and expansion into new markets. Recently, Cornell University published a research paper spotlighting, the unique efficiency of our Gemini-I APU to assess ratings location futile in DME map. Gideon will discuss the details of the patent implication for GSI in his comments.
In closing, it was an eventful third quarter with tremendous progress or Martina enrollment, prudent expense management in 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, Didier.

Secondly, 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 million undefined bit processors that can be toggled from one bit to 2 million bits cycle by cycle. Our APU can adapt to real time I'm sorry, in real-time to maximize efficiency. This dynamic bit wise configurability can process long strips one bit at a time is ideal for inference. Since research shows a different bit precisions are more efficient for different models. Second, our APU architecture breaks the Von Neumann model by removing the data fetch function. This innovative design delivers higher performance with lower power consumption. As Ilene mentioned, these capabilities directly address the critical needs of data centers and emerging applications by lowering data center power consumption and reducing insurance costs for Gen AI end users.
Importantly, I want to emphasize that our APU represents true in memory I'm sorry, true compute in memory architecture. Unlike competing chips that claim compute and 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 to achieve the transformative speed and efficiency gains we anticipate as we scale our true compute and memory architecture 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 this strategy is helping us promote and monetize Gemini-I 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-I APUs unique performance benefits for genomic applications, leveraging the APUs massively parallel in-memory architecture core now researchers showed up to six 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. This study also revealed strong potential to accelerate 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 datasets. We remain focused on delivering the game-changing in-memory compute performance to customers across multiple industries.
As Lee-Lean mentioned, we anticipate receiving first silicon devices of Gemini-II in February after initial evaluation and debugging, we will target a second spin this summer and initiate benchmarking shortly after. Our $2.3 million in SBIR funding will support this development. As a reminder, this and this includes our recently announced second SBIR direct to Phase 2 $1.1 million contract to create specialized algorithms for the US Air Force Research Laboratory Target applications include and craft applications such as search and rescue object detection, moving target indication, change detection and SSIM and GPS absence situations. GSI will also develop algorithms using data from the U.S. Space Force to showcase the performance benefits of its compute and memory APU to integrated circuits.
In summary, the versatility of architecture, hands-on customer engagements and ecosystem partnerships gives us gives us confidence in our market opportunity. We have a robust product road map 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 product breakdown for the third quarter. In the third quarter of fiscal 2024, sales were $807,000 or 15.2% of net revenues compared to $1.3 million or 20% of net revenues in the same period a year ago, and $1.2 million or 20.3% of revenues in the prior quarter. Military defense sales were 28.2% of quarter shipments compared to 26.2% of shipments in the comparable period a year ago and 34.8% of shipments in the prior quarter. Sigmaquad sales were 46.9% of third quarter shipments compared to 45.2% in the third quarter of fiscal 2023 and 55.8% in the prior quarter.
On one last note, on product sales in the third quarter, we shipped over $600,000 of a prototype radiation hardened S-RAM to two different customers. These will be deployed in two separate satellite programs. I'd like to hand the call over to Doug. Doug ahead, please.

Thank you, Didier. We reported net loss of $6.6 million or $0.26 per diluted share on net revenues of $5.3 million for the third quarter of fiscal 2024 compared to net losses of $4.8 million, or $0.20 per diluted share and net revenues of $6.4 million for the third quarter of fiscal 2023, the net loss of $4.1 million, or $0.16 per diluted share on net revenues of $5.7 million in the second quarter of fiscal 2024.
Gross margin was 55.9% compared to 57.5% in the prior-year period and 54.7% in the preceding second quarter. The changes in gross margin was primarily due to changes in product mix and volume sold in the three periods. Total operating expenses in the third quarter of fiscal 2024 was at $9.7 million compared to $8.5 million in Q3 fiscal 2023 and $7.2 million in the prior quarter. Research and development expenses were $7 million compared to $5.5 million in the prior-year period and $4.7 million in the prior quarter.
Selling, general and administrative expenses were $2.7 million in the quarter ended December 31, 2023, compared to $3 million in the prior year quarter from $2.5 million for the previous quarter. Third quarter fiscal 2024 operating loss was $6.7 million compared to $4.8 million in the prior-year period, an operating loss of $4.1 million in the prior quarter.
Third quarter fiscal 2024 net loss included net interest and other income of $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 tax provision of $33,000. Total third quarter pretax 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.
The December 31, 2023, we had $21.6 million in cash and cash equivalents compared to $30.6 million in cash, cash equivalents and short-term investments at March 31, 2023. Working capital was $23.1 million as of December 31, 2023 versus $34.7 million at March 31, 2023, with no debt and stockholders' equity as of December 31 was $39.6 million compared to $51.4 million as of the fiscal year ended March 31, 2023. For the fourth quarter of fiscal 2024, we anticipate net revenues in the range of $4.8 million to $5.4 million with gross margin of approximately 55% to 57%.
Operator, at this point, we'd like to open the call to Q&A.

Question and Answer Session

Operator

(Operator Instructions) Brett Reiss, Janney Montgomery Scott.

Gentlemen, you can talk to me like some six years old, what could you just explain what is in an infrequent $2.4 million charge for a preproduction mask? I am not an engineer. Just if you can give me some more clarity on that.

So every time we have a product, we have Cabot mass set prepared to run in the fab to to manufacture the wafers. Not typically when we incur charges from asset 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 a massive prepared on a new process technology that we've never run before, what charge had expensed R&D expense. So in this quarter, last quarter, but we take data Gemini-II on a process technology. We've never uses a 16 nanometer process at TSMC that says we've never used that process before we charge that $2.4 million to R&D expense.

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

It will recur in the future when we have a another product that takes out on a process technology that we've never used before. So it's infrequent. It doesn't happen every year. It's at most every two or three years.

Okay. The cash which was my margin of safety in my investment here, keeps dwindling down. And I'm a little concerned about that from some of these initiatives with bringing in other joint venture partners. What's the timetable on that? And how long do we have four we burn through the remaining cash?
We're currently looking at various opportunities and Didier mentioned talking to hyperscalers and others show to come out with our next product that's going to require significant investment. So we're looking for partners or other sources of funding in addition to that, we have a building that we own this worth quite a bit of money in. We'll be looking into potentially selling that building in the near future.

Right on what is the building appraise that and when a base case scenario, what do you think you could sell it for?

We think we can probably get somewhere in the range of $10 million to $13 million. And then I guess tied to that because it's fully paid for.

Could you just give the broad outlines of what the structure of a joint venture partners are capital investment in and GSIT would take would they pay an upfront milestone payment with other payments to follow, which would be an equity investment, what do you think the structure of that would look like?

So I think it could be either of those. I mean what I mean is when Lee-Lean was talking about a partner on for funding the next program, specifically for Gemini three. So Gemini-II was fully funded internally, but for Gemini three, we are looking for a partner for that deal, most likely a customer funding partner, but aside from that would be more of an NRE type of funding. So there would be milestones associated with that. But aside from that, we are also open to equity investments in the company as well.

Operator

Jeff Bernstein, Silverberg Bernstein Capital.

Good afternoon. So just a question on the -- and congratulations on placing those Rad Hard S-RAM. Our 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 those two satellite programs?

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 a quick calculation what the ASPs are on those. And so those are just the the again prototype quantities. So obviously you can multiply by by something we don't have the quantities yet these are programs that they're looking to launch within the next year. And so would be some time, second half of 2025 at the soonest before they release production. But certainly would be north of a prototype is 500,000. You can imagine when a production might be.

And so these would you be like geo satellites. So these are our satellite networks and these are going to be individual larger satellites.

And so these ones are MRX -- one is geo, one is actually Leo.

And will you get a automatic with these evaluation parts. Are you going to get right into space on one of these and actually get sort of provenance from that? Or are we still looking to get that some somewhere else?

So certainly we have as we've spoken in the past, 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. Are these to one of these looks like is fairly accelerated in their time table. So there's a chance. One of the ones we just shipped this last quarter could get up fairly quickly.

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

Their contract manufacturers because we sent within these parts to two 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 a 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've we did this past quarter on yield somewhere in the $1 million, $1.1 million one kind of range a quarter.

And at Needham, I think you also mentioned in addition to looking for a partner, a potential financial partner, potentially a development partner, possibly a hybrid of both of those for Gemini three. I think you also mentioned something about potentially licensing IP on it sounds like for what would probably be an edge kind of case for semi conductor IP for doing it in process in memory processing. Can you just talk about that would that be sort of upfront license and then a royalty stream? Or just some color on that?

Yes. I thought the IP, while we are more focused on the Germanos see. So it could be IPOE. could be the product development for the customer. So fiscal year, I think we have as we mentioned in the conference call. I mean, we've made pretty good progress over the quarter. So yes, we're still working on it.

Operator

Rhere are no further questions at this time, I'd like to hand the call back to Lee-Lean Shu for any closing comments.

Thank you all for joining you. As we look forward to speaking with you again when we report our fourth quarter and full year fiscal 2024 results.

Operator

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.