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.

Anthony Cambeiro Brad Hathaway.

Ladies and gentlemen, thank you for standing by. Welcome to the GSI Technology's Third Quarter Fiscal 2014 Conference Call. [Operator Instructions] 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 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 this conference call is being recorded today, January 30, 2014, 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 would now like to turn the conference over to Mr. Shu. Please go ahead, sir..

Good afternoon, everyone, and thank you for joining us. Today, we reported third quarter net revenue of $13.8 million, slightly below our guidance for the quarter due to continuing softness in the telecommunication market. However, third quarter growth margin of 44.2% was above our operating model due to a favorable product mix.

Litigation-related expenses in the third quarter were $2.1 million, up from $1.7 million in the previous quarter and up from $1.1 million in the same period a year ago. The litigation-related expenses, again, were primarily associated with pending patent infringement and antitrust litigation involving Cypress Semiconductor.

Both lawsuits are currently in the discovery phases. We currently expect litigation-related expense to be approximately $1.5 million in the current quarter ending March 31, 2014.

We continue to believe that we have the most or the best technology in the SRAM industry and we continue to compete on the basis of our superior technology and the product performance. In this regard, we expect to see growth in orders for our SigmaQuad-IIIe in the coming quarters.

During the December quarter, we tape-out our newest family, the 288-megabit SigmaQuad device that will be the highest density monolithic SRAM in the market. This new device will be the first of our 40-nanometer product to further improve the performance of our industry-leading SRAM products.

Beyond our expectation for increased orders for our existing SRAM customers, we are also excited about our entry into the low-latency DRAM space, in which we expect to ship products in volumes in fiscal 2015. We continue to believe LLDRAM will be a significant growth driver in future years. With that, I now turn the call over to Doug..

We reported a net loss of $210,000 or $0.01 per diluted share on net revenues of $13.8 million in the third quarter of fiscal 2014 compared to net income of $844,000 or $0.03 per diluted share on net revenues of $17.5 million in the prior year quarter ended December 31, 2012, and net income of $386,000 or $0.01 per diluted share on net revenues of $15.5 million for the preceding second quarter.

Third quarter direct and indirect sales to Cisco Systems were $2.5 million or 18.4% of net revenues compared to $3.4 million or 22.2% of net revenues in the prior quarter, and $6.5 million or 37% of net revenues in the same period a year ago.

Sales to Alcatel-Lucent were $2.3 million or 16.5% of net revenues during the quarter, compared to $3.2 million or 20.4% of net revenues in the prior quarter. Military/defense sales were 14.2% of shipments compared to 12.3% of shipments in the prior quarter and 11% of shipments in the comparable period a year ago.

SigmaQuad sales were 39.8% of shipments compared to 42.3% in the prior quarter and 33.7% in the third quarter of fiscal 2013. Third quarter fiscal 2014 operating loss was $1.4 million compared to operating income of $241,000 in the prior quarter and operating income of $595,000 a year ago.

Total operating expenses in the third fiscal quarter of 2014 were $7.5 million, up from $6.7 million in the third fiscal quarter of 2013 and up from $7.2 million in the prior quarter. Research and development expenses were $2.9 million compared to $3 million of the prior quarter and the $2.9 million in the prior year period.

But selling, general and administrative expense, which included the litigation-related expenses, was up year-over-year to $4.6 million compared to $3.9 million in the fiscal quarter ended December 31, 2012, and up sequentially from $4.2 million in the prior quarter.

Included in SG&A during these periods were, respectively, $2.1 million, $1.1 million and $1.7 million in litigation-related expenses. Total third quarter pretax stock-based compensation expense was $516,000 compared to $563,000 in the prior quarter, and $565,000 in the comparable quarter a year ago.

Depreciation and amortization expense was $488,000 for the quarter. Our Board of Directors has authorized us to repurchase, at management's discretion, shares of our common stock. On August 20, 2013, the board increased the dollar value of shares that may be repurchased by $10 million.

Under the repurchase program, we may repurchase shares from time to time on the open market or in private transactions. The specific timing and amount of the repurchases will depend on market conditions, securities laws limitations and other factors. The repurchase program may be suspended or terminated at any time without prior notice.

During the quarter ended December 31, 2013, we repurchased 383,477 shares at an average cost of $6.61 per share, for a total cost of $2.5 million. To date, we have repurchased 4,014,707 shares at an average cost of $4.15 per share, for a total cost of $16.6 million.

At December 31, 2013, we had $74.8 million in cash, cash equivalents and short-term investments; $34.2 million in long-term investments; $89.7 million in working capital; no debt; and stockholder's equity of $134 million. Accounts payable at December 31, 2013, was $3 million compared to $3.7 million at September 30, 2013.

Net inventory was $10 million at December 31, 2013, down from $11.2 million at September 30, 2013. Inventory turns at December 31, 2013, were 2.9x, unchanged from September 30, 2013.

Looking forward to the fourth quarter, we currently expect net revenues to be in the range of $12.5 million to $13.5 million, with gross margin of approximately 38% to 40%. We also expect that ongoing legal expenses related to the patent litigation and antitrust litigation will continue to affect our operating income and our bottom line.

These expenses are difficult to forecast, but we currently estimate that they will be approximately $1.5 million in the fourth quarter.

Operating expenses in total are expected to be approximately $8.5 million and will include approximately $1.5 million in total related to R&D mask sets, one for a 288 MB device, which will be our first 40-nanometer tape-out, and the second for the next-generation -- for our next-generation LLDRAM device, in addition to the estimated litigation-related expenses of $1.5 million.

Operator, at this time, we'll open the call for Q&A..

[Operator Instructions] And we'll go first to Anthony Cambeiro with Anthology Capital..

I was just wondering if you could comment a little bit about what you think is kind of causing the weakness? Is it the market, are you losing share or are you picking up share alternatively, and the market -- telecom equipment market is even softer than your numbers would indicate?.

So for the December quarter, it was really a function of the softness. So if you look at 2 of the high-driving parts for our revenues, one is at Alcatel, one is at Cisco, that we talked about these parts in the past. One of them were sole-sourced, the other one we split 50-50. We didn't lose market share in either one of those.

But certainly, their volumes were down, so it would be a softness in our customers. If I look forward, in this particular quarter, I do see that softness still reoccurring. The good news is, from the forecast and some of the orders being loaded, it looks like that the June quarter is certainly going to start recovering over.

But at this point, it certainly is not a market share loss as much as it's a softening..

Okay. Great.

And of the 10 customers or so that were named in the old ITC case, where they were not able to buy from you during that period of time, do you have any sense for what your allocations are looking like there, albeit we're not seeing the revenue because of the softness? But b, can you comment at all on how the allocations look for you?.

Sure. So I'm not going to talk about individual names, but I'll talk about some of the folks[ph]. We've seen both ends of the spectrum, but mostly good. What we've seen is we've actually seen our presence within those customers increase. So while in the past, we may have been an accepted supplier, we have now been elevated to a preferred supplier.

And we are seeing our -- kind of our allocation going forward increasing. There are a couple of guys that are on the list right now that we actually have not returned to previous levels at this point. But in general, if I were to average it all, it's certainly trending up positively..

Perfect. And then, finally, on the quals, have you started to see any pickup on customers to do qualifications or has that been further delayed? And any sense on when that could change? And I'm talking about new quals for people who have gone sole-sourced after losing Samsung and/or people that you've been trying to get into..

Sure. So we've certainly have seen some of that. I think, I mentioned it on the last call that we are finally starting to see some of those customers that we know, who have historically been Samsung customers, have come to us. But certainly, the most activities has come from the LL family.

We've actually -- we finally have closed a few quals that we've been tracking. We've actually -- we've gotten the orders now and it's just a matter of getting the material in place to ship the product.

It looks like it's going to be more of a June -- just based more on our lead times than it is the backlog coverage, it'll be more of a June time frame or June quarter time frame, I should say, before we see that revenue hit.

Another exciting development is there was one of the top tier 1 telecom companies, who had not committed to qualifying our LL, has committed at this point. They've actually already started the process and they're a fairly large user of this technology. So it's certainly very good news.

It's going to take a couple of quarters for them to qualify the part, but this is not an opportunity that we've discussed in the past, as they had not committed yet..

[Operator Instructions] And there are no other questions in the queue at this time. [Operator Instructions] And we'll go back to Anthony Cambeiro with Anthology Capital..

All right. I guess a question on the gross margin looking forward. It seems like it's going to be a bit soft compared to what you've seen lately.

Any reason -- I mean, do you really expect the mix to be that detrimental to the margin or is there something else going on?.

No. It's the softness in the market. Two things on the lower revenue, the impact of fixed related expenses has caused fixed[ph] of close to 2%, the margin. In addition, a couple of our top customers have seen some weakness. And there are some very high-margin, high-ASP business that is going to be down next quarter due to that weakness.

Or at least, we're not currently seeing or expecting as much business on those products as of the December quarter. But long-term, we still see that we should be at the mid-45% range and if we can get revenues back up over $20 million, I think, we can stay there for at least a year or more. It shouldn't be an issue..

Perfect. Okay. And then on the buyback, obviously, nice to see you guys buying some stock back. But I think it would be great if you guys could find a way to really deploy a lot of capital doing a Dutch tender or something along those lines.

Because I think with all that you have going on, buying the stock now would be better than just kind of slowly buying it over time. So those are my two cents. But anyway -- go ahead and comment, sorry..

We do have the 10b5-1 plan in place, as you know. And I guess the sad thing about that is we're more willing to spend as much money as possible. The board has allocated the resources to do that.

But unfortunately, even though we have the plan with a target amount of shares that we'd like to purchase every day, we're not getting near that level because of SEC regulations. We can only buy 25% of the prior week's average volume. So that's been what's been limiting our purchases..

Right. No, so that's why I'm saying just go do a Dutch tender, put a price out there and see if you can buy a whole bunch in 1 slug..

Obviously, that's something to consider and we'll bring it up to the board and see if we can have a discussion with them. No commitment, but obviously it's something that we understand some of our shareholders are interested in and we'll discuss it with them..

And we'll go next to Brad Hathaway with Far View Capital Management..

So just to kind of follow-up on that last question Anthony was asking.

I guess, has anything really changed when you think about how the longer-term outlook, both in terms of I guess kind of your opportunity to get back above that $20 million revenue bogie that you've talked about?.

Could you repeat the question, Brad?.

I guess, if we're looking out toward the longer term, has anything really changed in terms of your outlook in terms of Samsung or recovery in the market or LLDRAM that would suggest maybe a lower amount of optimism about getting back above that kind of $20 million at some point in the future?.

Yes. So we don't -- in general, we don't discuss book-to-bill ratios just because of the way that our company is set up, as far as revenues, because 2 of our larger customers are set up as consignment warehouses. But we do still track it internally the best we can. And certainly, the last couple of quarters, the booking trend has been down.

Now this quarter, so far, I mean we're 4 weeks into the quarter, that booking trend is up. So certainly, for the first time in a couple of quarters. So that would indicate that, hopefully, I mean, again, it's early in the quarter, but hopefully that shows the trend that we are hopefully seeing this recovery coming back.

So that, along with, as I mentioned earlier, specifically the SQ3, that the forecast that we've seen from our customers for the June quarter is up over the December quarter end and this March quarter we're in now. So certainly, we are seeing some indicators that are saying that some of the current business should start recovering.

With that said, we should also start seeing some of the LLDRAM revenue start kicking in for the first time. We've had relatively little revenue in that new product line. It's been pretty much qualification processes up until now.

But we are, as I mentioned, starting to quote some of these quals and so we anticipate that, that should start adding to the revenue. So between some of the recovery on our core product SRAM and then again, the new revenues, we're certainly hoping that we could start trending back up..

Okay. Great. So it sounds like you're still relatively optimistic in terms of nothing's changed, at least, in terms of that. It's just a question of when it actually happens..

[indiscernible].

Okay. Great. So then, I guess, given that -- given that we're at what would be considered a low part in your cycle, I would definitely reiterate what Anthony said about this is a great chance for the board and management to add a lot of value here by using the capital to repurchase a significant slug of stock.

I mean, I understand the restrictions that have prevented you from doing it in the past, and that's why I would push you to consider alternative -- alternate ways to really use the capital.

Because, I mean, you bought back about as much as you probably could in the most recent quarter, yet net cash actually went up slightly, if my numbers are correct..

Well, down a little bit. We're still at 109[ph] , 110[ph], but [indiscernible]....

Sorry, flat. Sorry, apologies, it's my fault. But anyway, yes, net cash effectively did not change, despite buying back as much as you could. And maybe buying back -- finding a way to buy back more at this kind of difficult period might be very value-enhancing for shareholders..

Again, we've heard this recurring theme and it's something that -- we're certainly bringing it up to the board..

And there are no other questions at this time. I'd like to turn the conference back to our speakers for any closing remarks..

Thank you, all, for joining us. We look forward to speaking with you in May, when we will report our fourth quarter results. Thank you..

Thank you, everyone. That does conclude today's conference. We thank you for your participation..