Lee-Lean Shu - Co-Founder, Chairman, Chief Executive Officer and President Douglas M. Schirle - Chief Financial Officer and Principal Accounting Officer Didier Lasserre - Vice President of Sales.

Brad Hathaway Michael Crawford - B. Riley Caris, Research Division Ian Ing - Lazard Capital Markets LLC, Research Division Brian Freckmann Kurt Caramanidis Anthony Cambeiro.

the matters discussed in this conference call may include forward-looking statements regarding future events and the future performances 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 the conference call is being recorded today, July 25, 2013, 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 Schirle, Chief Financial Officer; and Didier Lasserre, Vice President of Sales. I will now turn the conference over to Mr. Shu. Please go ahead, sir..

Good afternoon, everyone, and thank you for joining us. Our net revenue came in above the range of $15 million to $16 million we had projected early in the first quarter due to stronger-than-expected orders late in the quarter. First quarter gross margin remained strong at 45.5%, well above our operating model, due to a favorable product mix.

However, we did experience higher-than-expected legal expenses during the quarter, resulting in a net loss, our first following 38 consecutive quarters of profitability. As previously reported, on June 7, 2013, following its review of Chief Administrative Law Judge Charles E.

Bullock's initial determination issued on October 25, 2012, the International Trade Commission confirmed Judge Bullock, finding that GSI do not infringe the Cypress patents.

Moreover, the commission reversed a portion of Judge Bullock's determination, finding that [indiscernible] of one of the Cypress patents to have been anticipated back by our end, therefore, invalid.

Although we continue to be involved in litigation, including patent and antitrust litigation with Cypress, with the ITC proceeding behind us, we are hopeful that these expenses will be lower in coming quarters, helping us to return to profitability.

We are hopeful that with the ITC investigation terminated, we can return to competition based on the quality of our products. We continue to predict that we have the most advanced technology in the industry and look forward to competing on the basis of our superior technology and the product performance.

For example, next month, we will tape out our newest family, 2 ADAM SigmaQuad devices. That will be the highest density monolithic SRAM in the market and have the highest cost [ph] speed at 1 gigahertz to improve better bandwidth over our previously industry-leading SigmaQuad device by 40%.

This new device will be the first of our 40-nanometer product family to further improve the performance of our industry-leading SRAM products. The outlook for growth this fiscal year remains positive beyond expectations for increased order from our existing SRAM customers, some of which were on hold during the ITC litigation.

We also continue to expect to benefit from Samsung's exit from SRAM market and to add new customers as they walk to their existing inventory, both Samsung's products. We also are excited by our expansion into the low-latency DRAM. Also, we call it LLDRAM. [indiscernible] We expect to ship products in volume later this year.

We continue to believe LLDRAM will be a significant growth driver in future year. With that, I'll now turn over the call to Doug..

Thank you, Lee Lean. For the quarter ended June 30, 2013, we reported a net loss of $441,000 or $0.02 per diluted share on net revenues of $16.4 million compared to net income of $920,000 or $0.03 per diluted share on net revenues of $16.8 million in the quarter ended June 30, 2012.

In the prior quarter ended March 31, 2013, we reported net income of $950,000 or $0.03 per diluted share on net revenues of $15.7 million.

First quarter direct and indirect sales to Cisco Systems were $2.8 million or 17.1% of net revenues compared to $3.9 million or 24.8% of net revenues in the prior quarter and $4.1 million or 24.2% of net revenues in the same period a year ago.

Military/defense sales were 13.3% of shipments compared to 12.7% of shipments in the prior quarter and 11.9% of shipments in the comparable period a year ago. SigmaQuad sales were 41.6% of shipments compared to 38.9% in the prior quarter and 38% in the first quarter of fiscal 2013.

First quarter fiscal 2014 operating loss was $541,000 compared to operating income of $439,000 or 2.8% of net revenues in the prior quarter and $880,000 or 5.2% of net revenue a year ago.

Total operating expenses in the first quarter of 2014 were $8 million, up from $6.8 million in the prior quarter and up from $5.9 million in the first quarter of fiscal 2013. Research and development expense was $3 million compared to $2.9 million in the prior quarter and $2.8 million in the year ago quarter.

But selling, general and administrative expense of $5 million, which includes litigation-related expenses, was up substantially from $3.9 million in the current quarter and $3 million in the fiscal quarter ended June 30, 2012.

Included in SG&A during these periods were, respectively, $2.3 million, $1.2 million and $455,000 in litigation-related expenses. Total first quarter pre-tax stock-based compensation expense was $565,000 compared to $589,000 in the prior quarter and $562,000 in the comparable quarter a year ago.

At June 30, 2013, the company has $63.8 million in cash, cash equivalents and short-term investments, $41.4 million in long-term investments, $82 million in working capital, no debt, and stockholders' equity of $133.2 million. Accounts payables at June 30, 2013 was $3.5 million compared to $3.8 million at March 31.

Net inventory was $12.2 million at June 30, 2013, down from $13.8 million at March 31, 2013. Inventory turns at June 30, 2013 were 2.9x compared to 2.4 at March 31, 2013. Depreciation and amortization expense was $494,000 for the quarter.

We currently expect net revenues in the second quarter of fiscal 2014 to be in the range of $16 million to $17 million, with gross margin of approximately 45%. We also expect that ongoing legal expenses related to the patent litigation and antitrust litigation will continue to affect operating income and our bottom line.

These expenses are difficult to forecast, but we currently estimate that they will be approximately $1.6 million in the second quarter.

Operating expenses in total are expected to be approximately $8 million and will include approximately $850,000 for an R&D mass set for 288 MB device, which will be our first 40-nanometer tape-out, in addition to the estimated litigation expenses, $1.6 million. Operator, at this point, we'll open the call to Q&A..

[Operator Instructions] We'll go first to Brad Hathaway with Far View Capital Management..

So just a quick question on these Cisco revenues. They seem to be, obviously, much lower than prior trend.

Is there anything specifically you can speak to about this?.

Yes. As we've spoken in the past, in fact, the last 2 quarters, we've spoken that there was some 90-day poll. So if you recall, the way that the Cisco model works is they -- we've consigned parts into an inventory at $0. And when they go to use them, they do what's called a poll.

And when they do a poll, we recognize the bookings and the billings at the same time. Because this is a burden to the suppliers, Cisco realizes that, they put in what's called a 90-day refresh clause.

So if they ask a supplier to put product in there and they don't use it within 90 days, then it turns into an automatic poll, whether Cisco needs it or not. If you recall, we discussed that we had somewhere in the neighborhood of $700,000 in 90-day polls last quarter.

And we had -- I don't have the number in front of me, but it was a similar type number in the December quarter as well. And so certainly, we're working through that inventory. The good news is, in this past June quarter, we had $0 90-day poll.

So it looks like, certainly, the consignment inventory is clean, and it looks like we're working through that excess inventory now..

Okay. Because, I mean -- and I guess if I look back at your kind of historical numbers, it looks like somewhere between, say, $6 million to $8 million a quarter since Cisco seemed to be kind of a more normalized level.

Is there anything to suggest that, that's not -- no longer feasible going forward?.

Yes. So certainly, with the mix that Cisco has right now with some of the CapEx that's going on or not going on, I should say, in the market space, certainly, Cisco's SRAM, along with a few other commodities like TCAM, their TAM is down, certainly.

With that said, we did have a higher market share in some cases due to issues that were happening with other suppliers that we talked about. Certainly, the leftover from the Japanese, the tsunami, we were getting more than our normal-awarded business because the other supplier was having issues.

So certainly, that supplier is no longer having issues, so we're back to a 50-50 split. So some of it has to do with we certainly had inflated splits because of issues with other suppliers. And certainly, the Cisco TAM was a little bit larger back then as well..

Okay. Excellent.

And now that you've got the ITC out of the way, I mean, have you started to see any of the positive impact of business kind of slowing back to you, some of the stuff that didn't kind of -- had been previously kind of prevented from working with you?.

Yes. We are seeing signs of that, yes, both in orders but also in conversations. And what I mean is, certainly, there were a few folks that were -- because of agreements they had put in place at Cypress, had to limit spend.

So certainly, with our victory at ITC, those agreements were torn up, and we already see shifts happening with some of those customers. Interesting enough, there were other customers that were completely not involved in the ITC, and we're not one of the named folks.

And I mentioned that some of those folks did have conversations with us, talking about a bit of their apprehension. But this -- a couple of these customers we've talked to are folks that didn't ever mention their concern and now have said that they kind of had a soft hold on us during this process.

And certainly, that hold is off, so they're moving forward. So yes, I do see some momentum that is going to start happening with ITC behind us..

Okay.

And so that might be kind of the -- in a couple of quarters or so? Or is that -- I mean, how do we think about kind of the time it takes for that to start to translate their business?.

So some of it, we're already qualified. We can hopefully start seeing that maybe end of this quarter into next quarter. The other folks that I mentioned are actually -- we're talking about new quals. So those quals that they were holding us off on that they're not going to start, so that could take longer.

I mean, certainly -- especially on existing platforms that these customers' quals can take up to 6 months, 9 months at least. So we're talking into next year, calendar next year..

Okay.

And just to be clear, when you're talking about this quarter, you're talking about the second quarter of fiscal '14?.

Correct..

Okay. Just to make sure..

The September quarter, yes..

We'll move on to Mike Crawford with B. Riley & Co..

We've seen some signs of communication and networking business picking up with others in the market, probably with Alcatel-Lucent, which I think is destined to become a more important customer for you.

What's -- how is your relationship with that company?.

So for the first time in, it's got to be 12, 14 years, somebody has dethroned Cisco as far as our top customer, and it is Alcatel. So certainly, Alcatel this past quarter was our largest customer. And we are -- as you know, as we talked about in the past, we're certainly well-positioned with Alcatel.

We have our SQ3 in their 7750 and 7950 platforms, which is getting a lot of press for Alcatel right now, and, certainly, early on in those programs. And so we hope to see those ramp as time goes on. So we are certainly in a very good position with Alcatel..

Also, with your $41 million of long-term investments, you have $105 million of cash-like instruments. It seems an awful lot for a company with a $75 million enterprise value.

Has there been any further discussions on what to do with all that cash?.

Well, we continue to believe that a likely use of that will be in acquisition. Didier and others here at the company have their eyes open for opportunities. There's nothing at this point to talk about, but it is something that we're actively looking at. We do have a stock buyback plan in place. There's about $6 million remaining.

At this point, the price has been lower than where the market has been for the last couple of quarters, and there have been no buybacks. But that's something that, potentially, the board could advise us to make some changes, but right now, there haven't been any changes..

Okay. And then last question relates to where you think the market is in terms of getting through whatever remains of Samsung SRAM inventory that's out there to be used.

And as an ancillary to that, when -- if a company had been second-sourcing to Samsung and just moved to that second source as a primary source where you might stand as -- now coming in as a new second source-type opportunity given that Samsung vacuum..

Right. Yes, it's really hard to determine. Certainly, when we're having conversations with customers about new quals or additional business, they're not referring to it as, say, this is the Samsung business. So it's not always easy to determine whether it's market shift from Cypress or Renesas or if it's a new socket.

It's not always simple to determine that. With that said, there are a few customers that we know that were Samsung customers, and they are the ones approaching us now. So certainly, that has something to do with their exit. So I do think it's going to be a continuous process of qualification and market share.

It's just hard to determine again -- I shouldn't say determine. It's hard to quantify exactly when and how it's going to happen, but certainly, we know that there are businesses being transitioned and there's -- qual sockets are being opened because of that. It's just hard for us to quantify it..

We'll now hear from Steve Wallman [ph] with Visor Capital..

Didier, I think you made a comment regarding the ITC case, that you saw some evidence that there were, I guess, that onetime correspondence of yours that were prohibited from buying U.S. part of the release from the case.

Did I interpret that correctly? Have you guys gotten confirmation of that since you won the ITC?.

That's correct..

Okay.

So there are certain customers that are coming back in a pretty immediate way or at least it's obvious why they weren't buying from you in this last several quarters?.

Yes. I mean, certainly, it was -- I mean, I don't want to say it's well-documented because we don't know what the agreement was, obviously, but what we do know is the business we were doing with them before the agreement and the business we were not doing with them after the agreement.

And so it was clear that -- what parts were affected by this agreement. Now we have had confirmation that the agreements were dependent or certainly associated with the outcome, the final determination of the ITC, which obviously we've talked about in GSI's favor. So in that respect, the limitation from these customers due to the agreement are gone.

So the agreement has been torn up. And at the very end of the quarter, we did see a couple of orders for ASAP deliveries on parts that we were no longer getting because of the agreement and that are now back. So certainly, and that's what I mentioned, we have seen some evidence that we should start seeing some of that business returning..

Okay. I appreciate you walking through that again. You mentioned that Alcatel-Lucent was your... [Technical Difficulty].

[Operator Instructions] And we'll move on to Ian Ing with Lazard Capital Markets..

You mentioned some 90-day poll that Cisco ended last year. It looks like 2 quarters of 700k each.

I mean, do you have a sense of how much of that excess inventory is out of Cisco at this moment?.

Really difficult to figure that out. So -- and again, I know $700,000 for the March quarter, and I can't remember exactly what it was in December. It certainly was a number that was hundreds of thousands. I can't remember the number. But certainly, if you add them up, it was $1 million plus. So we know we were certainly working through some of that.

The good news is, as I mentioned, the consignment orders or the parts that are in consignment now look clean because in this June quarter, we had no 90-day poll at all, $0. So certainly, that's positive. So that tells me that we're getting a healthier balance. With that said, we've also seen that our rewards have gone up with Cisco for future quarters.

So we certainly hope that we see Cisco return to -- not to the levels we talked about on the phone but certainly about where they are today..

Okay.

But assuming there is some inventories still at Cisco, you're probably getting orders below true demand at this point still?.

That's correct. I mean, when you say demand, Cisco gives a forecast where they think that their quarterly usage is going to be, and the orders or the polls are below that. That's correct..

Okay, great. And then just my follow-up here. It looks like you have got some antitrust litigation against Cypress regarding the QDR consortium.

Can you give us a sense of how that plays out in the coming quarters and the time frame? Is that sort of a prolonged process?.

Yes. At this point, it looks like we're probably about a year away from trial. If it gets that far, it will be around July time frame of 2014. We've done a lot of work in the past quarter on discovery and data gathering. And going forward, this next quarter, we'll see some fees related to a lot of depositions that we'll be getting..

We'll move again to Steve..

So you mentioned that Alcatel-Lucent was your largest customer in the quarter.

How big where they?.

They were....

Just under 20% for the quarter..

Just under 20%. Okay..

Yes..

That's helpful. And then the last thing. You mentioned that you expected to see some revenue from LLDRAM later this year.

Can you just remind me what your kind of initial expectations were for how that would ramp? My recollection was that you thought that, that wasn't going to be necessarily huge right away but was going to be meaningful relatively quickly because I think you had a win in a relatively high-volume socket..

Right. So what we're finding is that the quals that are closing now are the ones that are new programs. So these are programs that either are non-production or they're very early in the production. The quals that are going to result in much quicker revenues are the ones that are taking much longer.

So we're talking about systems at our end customers that are already in production. And when that's the case, quals take much longer because they need to be qualed into all platforms that use the part.

So the socket you talked about, and I think I mentioned it on the last call, we had submitted -- on the last call, we had parts that were -- had been given -- had just been given to the customers. Now they've started the qual.

Certainly, the initial feedback has been very positive as far as the test results, but they did indicate that it would take -- testing all the different options and all the different boards that take -- or cards, I should say, that take this part, it would be probably close to the end of the year before the full qual is done.

So unfortunately -- fortunately or unfortunately, we're getting qualed, but the existing kind of revenue is going to take longer to really achieve because of the extended qual cycles..

Okay.

Didier, when you say end of this year, are you talking about end of calendar year?.

I'm sorry, yes, calendar year. That's correct..

[Operator Instructions] Brian Freckmann with LS Capital has the next question..

One clean-up question. Back to legal, any just kind of estimate what you think the ongoing quarterly legal expense will be. Maybe just help us out at least for next quarter..

Well, next quarter, we believe it's going to be $1.6 million. When I say next quarter, I'm talking about the September quarter. To go beyond that, it's very difficult. The attorneys have a tough time just telling me what this quarter is going to be. But I would expect that -- I certainly hope it wouldn't be $2 million or more anymore.

I hope that $1.6 million this quarter would be high point. The ITC activity, we had a couple of $3 million quarters. It's a very short process, very time-consuming expenses for us. The district court cases go on for 2 or 3 years or more, so the expense is incurred over a much longer time frame..

Okay. That's good. The second question is, given kind of the history over the last couple of years, I'm trying to parse out some seasonality. Given what you said sort of about Cisco and some of the tsunami orders and such and trying to break out kind of Huawei adding back Alcatel.

Anyway, the better question would be, how much seasonality is there in the September quarter for you guys typically?.

There is not. So we play -- I mean, certainly, if you look at -- our revenues have kind of gone up and down. They've been tied to the telecom cycle or some kind of natural disaster. Seasonality, which is -- it's much more tied to the consumer market.

And our revenue is only something like 2.4%, something like that, or less than -- actually, less than 2% of our revenues right now come from consumer. So we really aren't tied to any calendar seasonal earnings..

Okay. And then you guys -- you did say, I think, twice on this call that you saw that, given the 90-day polls, that the revenue from Cisco, well, not achieving sort of historical tsunami levels, we should start to reaccelerate.

Is that correct?.

Well, we certainly hope that is a low, but it's difficult to predict. But certainly, we hope that this has been a low..

Okay. So this gets me back to just the final thing. There's no seasonality. It sounds like things actually are getting a little bit better. Cisco is going to get better. Your guidance actually is -- kind of straddles where you are right -- what you just did. You just told Steve that there are orders coming in the fourth quarter.

And, actually, the things we were kind of hoping for -- I'm getting ready for the ITC case. Obviously, we've extended past Samsung. What keeps you from buying back a lot of stock? I mean, everything you've simply said says that between now and, let's say, the end of the year, things are going to get better, not worse.

So presumably, your stock will go up and not down. So what keeps you guys from reengaging more than $6 million? I mean, I know you guys are trying to be cute with maybe buying it lower.

But if you guys execute on everything you've just said to me that we've kind of gone through, there's no reason to think that the stock shouldn't go higher, given the -- everything I just laid out.

So how many on the buyback?.

It's a good question. It's a board issue. And at this point, the board hasn't authorized us to repurchase any additional shares..

Well, and to add to that, too, Brian, we certainly were given advice by our legal teams that during the ITC process, we really shouldn't be making changes because, again, this a 10b5-1 plan that's in place. We really shouldn't be making changes to that, even in open windows. So this is a discussion we have to have with our legal team.

Now that ITC is behind us, we still have some other legal suits that are still active. It is something we can make changes to. So certainly, up until now, they've asked us not -- or advised us, I should say, not to make any changes..

Okay. And so I assume the board can make this decision sort of ad hoc.

They don't have to wait for a meeting or -- so is it possible that we could -- are you guys meeting after this? Is our typical board meeting after every quarter? Or are you guys meeting this week?.

We met earlier this week. We have a meeting before earnings results go out, and we'll typically have at least one additional at a minimum every quarter before we file SEC documents..

Okay. Well, I assume they're on this call. Hopefully, they will agree with my sentiments that more than $6 million would be good for both shareholders and for you guys as well. But good luck going forward..

[Operator Instructions] Kurt Caramanidis with Carl M. Hennig..

All my questions have pretty much been answered except where do you think we are? There's lots of talk about that telco spending, which was very light the last couple of years. Are we first, second, third inning? It seems like now, there's a lot of competition, and the spending is going up.

Do you this is a multi-year story? Maybe that -- that's really my main question. Everybody got everything else..

So we've probably done no much more than the rest of you folks out there. Certainly, we were reading similar journals as you are. It sounds like the spend, it's certainly in the LTE. It's supposed to be going up in 2014, 2015. We've also heard some positive feedback from China mobile a couple of months ago about what their spend is going to be.

So certainly, the signs are there. I think everyone's a bit shy just because we've been hearing this 6 months out for 2 years now, and it just never seems to come to fruition. But certainly, we are seeing signs that say that the expenditures for the infrastructure looks like is going to start happening.

And it looks like -- certainly, at least, it looks like one year to 2 from what I'm reading, but again, you guys know as much as I do..

Okay. And I appreciate that, and I do agree with the prior caller on the buyback. I think that would be a very good use of capital, especially with what's going to be taking place in the next year or 2..

Moving on to Anthony Cambeiro with Anthology Capital..

I'd just like to also add my agreement to Brian's comments about the buyback. I think he laid it out pretty well, and I'm in full agreement with his sentiment. My question, I guess, is on SG&A, just to get a sense for what a good level is going forward, excluding the legal. It looks you've been around $2.7 million or so, $2.8 million.

Is that a good number? What's going to move that around to the extent that you have -- I don't know the percentage variable versus fixed, your sales and marketing expense but maybe you could talk about that..

Yes. That's pretty -- you're pretty close. You're right, $2.7 million or so is a reasonable number for a base at this revenue level. It doesn't really vary much quarter-to-quarter, but it will grow as revenues grow. The independent sales reps that we work with, they get in the range of about $0.025 for every $1 they bring us.

And I think you can make a reasonable assumption that as revenues grow, about $0.025, $0.03 of every $1 can go to them..

Okay. Great. And then R&D, again, in the $3 million range. Any reasons why that's going to tick up or tick down meaningfully over the next few quarters and year..

Yes. Again, that's a number that is relatively constant. You're right on the $3 million amount. I think we have reasonable resources at this point. I don't think we need to go out and hire people unless we come up with some new product idea or area that we don't have resources for or the knowledge or know-how.

But there is one thing that can cause that to change. And we mentioned already in this call today that we're going to do a 40-nanometer tape-out this quarter, and we expect to be built for those -- that mass set this quarter to the tune of about $850,000. That is really the one thing.

As we work with a process technology, do tape out for the very first time, we typically charge us to R&D expense. So there is one expected this quarter, and there's one expected a little bit later this year on another product, a larger LLDRAM product, that -- more advanced technology than we're currently working with.

And we expect to charge that to R&D also..

Terrific. That's great. One question on the -- you had -- one of your distributors was named in the suit, and then they backed out or they stopped distributing you. And I forget if it's between Avnet and the other one. I don't remember the names because they sounded so similar.

Could you talk about whether you're reengaging with the one that backed out or if you're just going to stick with the 1 distributor that you've been working with?.

So the one that backed out, as you say, is Arrow..

Arrow..

Yes. And so, no, we have no plans to reengage with Arrow. Certainly, what we found was, when we lost Arrow, we transitioned a very high percentage of that business to Avnet, and in return, they gave us more mind share. So it actually ended up being a win for us. Just last quarter, we were actually the largest SRAM supplier at Avnet.

We surpassed Cypress, who certainly had that position for quite some time. So at this point, I don't see us, for sure, not adding Arrow, and I don't see much reason to add anybody else at this point..

Gentlemen, no further questions at this time. I'll turn the conference back to you for closing remarks..

Thank you all for joining us. We look forward to speaking with you in October when we were -- before our second quarter results. Bye..

Thank you, Mr. Shu. Again, ladies and gentlemen, that does conclude our conference for today. We thank you all for your participation..