Lee-Lean Shu - Chairman, President and CEO Douglas Schirle - CFO Didier Lasserre - VP, Sales.

Kurt Caramanidis - Carl M. Hennig Craig Lukin - Roumell Asset Management Jeff Bernstein - Cowen Prime Advisors Frank Barresi - Ameriprise.

Ladies and gentlemen, thank you for standing by. Welcome to GSI Technology's third quarter fiscal 2017 results conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. At that time, we will provide instructions for those interested in entering the queue for the Q&A.

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 been asked to advise you that this conference call is being recorded today, January 26, 2017 at the request of GSI Technology.

Hosting the call today, 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 revenue of 11.5 million. That came in below the range of guidance that we have provided earlier in the quarter. But for the third consecutive quarter, we were profitable at both the operating income and net income levels.

During the third quarter, we continued to see slowness in our primary telecommunications and networking markets and continued weak sales in Asia. Third quarter revenues were also impacted by an inventory correction at our largest customer.

These factors have continued to affect sales in the fourth quarter and we expect that fourth quarter revenue will once again be below sequentially. However, based on awards of business, orders received to date and orders expected, we currently anticipate a substantial rebound in revenues during the first quarter ending June 30, 2017.

As in recent previous quarters, we continued to see improvement in our gross margin, which came in at 56.6%, driven by a continuing very favorable mix of higher margin products.

We remain focused on expanding our market position in the high speed SRAM and low-latency DRAM segments, including our extremely high performance SigmaQuad radiation-hardened SRAM products targeted at aerospace and the defense applications and developing new products based on our associative computing technologies [indiscernible]..

We reported net income of $348,000 or $0.02 per diluted share on net revenues of $11.5 million for the third quarter of fiscal 2017, compared to a net loss of $819,000 or $0.04 per diluted share, on net revenues of $12.9 million in the third quarter of fiscal 2016 and net income of $626,000 or $0.03 per diluted share on net revenues of $13.4 million in the second quarter of fiscal 2017, ended September 30, 2016.

Gross margin was 56.6% compared to 49.4% in the prior year period and 55% in the preceding second quarter. Third-quarter fiscal 2017 operating income was $234,000, compared to $380,000 in the prior quarter and an operating loss of $1.6 million a year ago.

Total operating expenses in the third quarter of fiscal 2017 were $6.3 million, compared to $7.9 million in the third quarter of fiscal 2016 and $7 million in the preceding second quarter. Research and development expenses were $3.8 million, compared to $2.8 million in the prior year period and $4.3 million in the preceding quarter.

The increase in R&D expenses compared to the prior year quarter was related to the development of a new product based on our associated computing technology and intellectual property.

Selling, general and administrative expenses, which include litigation-related expenses, were down substantially year-over-year to $2.4 million compared to $5.2 million in the quarter ended December 31, 2015, and down sequentially from $2.7 million in the preceding quarter.

Total third-quarter pre-tax stock-based compensation expense was $429,000 compared to $487,000 in the prior quarter and $414,000 in the comparable quarter a year ago. Depreciation and amortization expenses was $368,000 in the third quarter.

Sales to Alcatel-Lucent were $4.5 million, or 39.5% of net revenues, during the third quarter, compared to $5.7 million or 42.8% of net revenues in the prior quarter and $4.8 million or 37.1% of net revenues in the same period a year ago.

Third-quarter direct and indirect sales to Cisco Systems were $1.1 million or 9.8% of net revenues, compared to $936,000 or 7% of net revenues in the prior quarter and $1.1 million or 8.9% of net revenues in the same period a year ago.

Military/defense sales were 15.9% of shipments compared to 16.1% in the prior quarter and 15.8% in the comparable period a year ago. SigmaQuad sales were 54.2% of shipments compared to 57.2% in the prior quarter and 54.9% in the third quarter of fiscal 2016.

Our Board of Directors has authorized us to repurchase, at management's discretion, shares of our common stock. During the quarter ended December 31, 2016, we repurchased 100,000 shares under the repurchase program at an average cost of $4.95 for a total cost of $494,500.

To date, the company has repurchased a total of 11,983,942 shares at an average cost of $5.06 per share for a total cost of $60.6 million, including 3,846,153 shares acquired for purchase, at a purchase price of $6.50 per share, under a modified Dutch auction self-tender offer completed in August 2014.

At December 31, 2016, management was authorized to repurchase additional shares of our common stock with a value of up to $4.4 million under the repurchase program.

At December 31, 2016, the company had $47 million in cash, cash equivalents and short-term investments, $14.1 million in long-term investments, $55.8 million in working capital, no debt, and stockholders' equity of $86.2 million. Accounts payable at December 31, 2016 was 2.1 million compared to 2.5 million at March 31, 2016.

Net inventory was 9.2 million at December 31, 2016, up from 7.2 million at March 31, 2016. Inventory turns at December 31, 2016 were 2.2 times compared to 3.4 times at March 31, 2016. Looking forward to the fourth quarter of fiscal 2017, we currently expect net revenues to be in the range of $10 million to $10.8 million.

We expect gross margin of approximately 50% to 52% in the fourth quarter. As Lee-Lean noted above, based on very preliminary data, we expect sales to improve substantially in the first quarter of fiscal 2018, with net revenues in the area of $13 million. Operator, at this point, we’ll open the call to Q&A..

Thank you. [Operator Instructions] We do have a question from Kurt Caramanidis from Carl M. Hennig..

Very good pronunciation. Hi, guys.

Question for you, you’re presenting today at the Deep Learning or Avi is at the Deep Learning Summit?.

Yes. Avidan, he presents today at 4 o clock..

From the work I’ve done, that’s a pretty, is that a pretty significant conference..

Yeah. For the space we’re in, it is, it’s correct. It’s a rework as a significant conference. They have a show every year in San Francisco about the time period and so we’re very excited to be presenting to that group today..

Yeah. Because you’ve got what Google, Facebook and Intel today as well? I think when I looked at the agenda..

Pretty much everybody in this space will be at this show..

And this is really your launch of anybody other than a couple of little investor conferences as far as displaying that new technology?.

Yeah. So we’ve spoken with large potential users, directly one-on-one and as you mentioned, we’ve spoken on a very high level at our investor conferences. This will be the first time that we actually give a technical overview of the device in a public environment. So, yeah, this will be our first public conference..

Yeah. Because this is pretty much a daily CNBC throughout the day machine learning artificial intelligence, it’s pretty much the number one topic. So I would think that would be, that would get some pretty good grip.

And Doug, just a question for you, when we talk about 60 million in cash, that really includes those bonds which are part of your cash bond portfolio?.

We have very little bond show. For a number of years now, it’s been tough to find a lot of investments with much of any yield. So, a lot of our investors, the largest percentage is probably in CDs, their weights are actually coming back a little bit, they’re fully insured. We’re limited to $250,000 to any one bank.

So we are very, very low risk investments. I think at this point, there might be just one municipal bond that we have for around $1 million or so..

Okay.

But I mean that 60 is a number that is cash and CDs bonds?.

Well, that’s everything. Yeah. Short-term bonds..

Yeah. So we’re not more than, not much more than two times that number with market cap. And then so is it fair to say Q4 or calendar Q1 that we bottom out due to a inventory issue. And then really we start ramping from there, we bounce in calendar Q2, but then, some of that military stuff starts kicking in.

So do you see kind of a bottom here and then a ramp as far as you can kind of see?.

Not that quick. So we anticipate having our first prototype orders for that aerospace market in the calendar third quarter of this year. But it will be limited, it might be $1 million. It’s only prototypes. And then we anticipate having our first production order, I was hoping to have it by the end of this year, that might be a little aggressive.

It might spill in to our last fiscal quarter or the first calendar quarter of 2018 and that could be anywhere in the, no less than 2 million, probably no more than 4 million for that first production order and then we’ll ramp from there in that market..

Okay. I think that’s all I got for now. Thanks..

[Operator Instructions] We’ll go next to Craig Lukin with Roumell Asset Management..

Hi, Doug. Hi, Didier. This is Jim. Just to clarify the conference that you’re at right now.

What you’re showing publically in terms of functionality, it has been shown to some of the names we’ve discussed before, Amazon, Google, et cetera, you’re showing publically what you have shown internally previously, is that correct?.

And more. And so the answer is yes, certainly, on a technical level, we’ve talked with those larger OEMs, what our device does.

But since then, we also have gotten some more data, we’ve gotten some more software simulation that shows our advantages in certain sectors, which we’ll be sharing with them and also we have now a true software simulated model of what our port can do and so that will be new.

We haven’t shown that to the OEMs yet because that’s something that we've just developed, but we will be showing it at our booth not during the presentation itself because we're limited in time, but we have a booth there and we will be showing that - our demonstration at the booth..

Got it. And can you, Didier, make any comments about the comments you're getting in these presentations you're making to these OEMs. Can you just share the flavor and the level of confidence you have that this is - will be a differentiated chip particularly in the search category. .

Once they understand the you know certainly just obviously discuss what our advantages are that we calculated, but once they understand how we're implementing our solution it becomes more evident to those folks why we have this advantage.

And so they do understand why we have this significant advantage like you said in the search recommender systems, data mining and those kinds of areas. And so yeah it's clear to them what are advantages at this point for them it's just about seeing product in their hands..

[Operator Instructions] We did have another question come in sir if you'd like to take that..

Yes..

We'll go next to Jeff Bernstein with Cowen Prime Advisors..

Just wanted to get a little color on the SigmaQuad RadHard products and how the uptick is going there?.

We've chosen our partner we made that announcement earlier this month. We're going through now getting all the manufacturing steps in place because it requires a - it's a new manufacturing partner for us, it require a totally different package and obviously different types of testing.

Along with that we're working with the DLA folks to get the qualifications because obviously right now it's our first product.

And as I mentioned in the calendar third quarter this year what we’ll be shipping is just a prototype unit, while at the end of this year or early next year calendar will be shipping a production part and so the production part could be QML-Q certified or QML-V certified, And so what we're doing is making sure that our product will be certified under those two callouts because that's where you know certainly the production can kick in and also that's where the ASPs go up.

So again we're targeting for having a device ready for shipment about mid-year and then production by the end of this year..

And gentlemen we did have a couple more queue up, we do have a follow up from Kurt Caramanidis with Carl M. Hennig..

Just a quickie, May 8 through 11, there is GPU Tech conference, is that anything that we would be involved in or not?.

No. I do not believe we are part of that..

And we have a question from Frank Barresi with Ameriprise..

I have read quite a bit of your prior comments where you have the fastest parts, the densest parts.

What prevents - is there anything that prevents some of your competitors from matching this performance any time in the near term?.

I don't see it just. Certainly we have the advantage now that’s something that we're focused on. Obviously, SRAMs is our primary revenue driver, while if you look at our competitors it's less important to them. If you look at our largest competitor in the market space who is also the largest supplier, market share wise in the market.

And my understanding is they don't have an SRAM roadmap anymore. From my understanding it's what they have is what their will have going forward. So as of right now they have no roadmap, so I don't see how anyone catches us any time soon without any active designs at this point..

So the other competitors aren't trying to upgrade their product lines as well?.

From my understanding the largest supplier in the market space is not..

And this litigation that you said was still being in the press release, it’s all being appealed. There were mixed results.

You had sued the other two companies and are they appealing or you appealing is everybody you know?.

No, the only appeal right now is that UMI is appealing. They filed their paperwork with the court, we filed our paper with the court. I think we have one final bit of paperwork that gets filed in the next couple of months or so. But our attorneys, they don't see a lot coming out of this.

We have to see where it goes, but we're a little bit surprised that appeal has actually taken place. We’ll have to see how it happens but we're hopeful that we're essentially done with the process..

You don't feel threatened by these other companies, you don't see as a serious threat to your position or leadership in the high speed area?.

Not at all..

And just one thing about the associate processor, I mean the claims you make they seem wow, I mean they're unbelievable. And you've gotten really good feedback I guess from some of these users. I mean, Didier said that when they see what you do, they understand, they expect to see these advantages actually improve when silicon is produced..

Right. So the way that we're going after the solution is much different than the way that is being addressed today in the market space with the GPGPUs and banks of DRAM. So we're not taking that approach, we're taking a completely different approach.

And when we explain to these customers how we're doing it, it becomes evident to them why we have this advantage..

And I guess it’s the biggest holdup and the reason that you won't have silicon for a year or so is trying to write these software library is that the hardest part or…?.

It's a hardware and software library, so we're - we actually have to do the hardware design of the chip. And then we also have to put the libraries in place for all the different applications. So it’s a combo effort, it’s not one or the other..

Typically with the complicated ship it takes a year and a half to two years to do the design and get it taped out. And we did the acquisition a year ago in November and our tape-out target that's been presented to the board has been by December of 2017 and we've been in the process for over a year now and that’s still is the target.

In fact there is a - one of the payments that will be made based on the acquisition, there is a target based on making tape-out deadline and everyone is extremely focused on making that date..

And I guess the market potential of this product I mean, is there any way to estimate what it is?.

Yeah. I mean, the [indiscernible] is aimed at, they are all growing 30% to 40% a year, it's big data, cyber computer vision, a lot of areas that this part can address.

And we're not really talking about revenues but we did file a document with SEC a year ago that the new breaks the payments that will be made based on meeting a lot of revenue milestones and the largest of which is the shareholders of the company that we acquired will receive 5% of $600 million in revenue.

[indiscernible] revenue to be achieved within ten years of the acquisition date, by the time we get a part out it will be a little over two years, so these people they feel very strongly about the market that this part will be sold into and the capabilities of the parts and obviously you know there's been a lot of due diligence in our part and working with potential customers and talk to them over the last year that these guys feel pretty good about their prospects and they could have gotten more money elsewhere but the timing of the acquisition from another company that was also interested in the technology, but they elected to go with us.

And I think at the end of the day if they meet all the requirements in the agreement they're going to a lot of money. That's not all we're seeing right now in terms of revenue but that kind of puts it into perspective..

And as part of the power saving that you talk about, do you use SRAM as a memory as opposed to DRAM or…?.

The majority of the power savings is the fact that we're doing the processing and the computation, the search in place.

Well if you look at the existing solution they have to go off chip and they have to retrieve the data from banks of DRAM and so it's just the back and forth searching for the data the IO power that's where the fact that we've taken that out of the equation is where you see tremendous power savings..

And so that's a really large chip I guess in terms of memory capacity?.

It has a fair amount of memory on there, that's correct..

And we do have a follow-up question coming through from Jeff Bernstein with Cowen Prime Advisors..

Just a quick one about how much is the mask set here for the new part and in case you sort of have to go back for another rev?.

Yeah. I think that the [indiscernible] associated with table, we probably know they are a couple of million dollars. But just the revise of the table I think probably half a million in that neighborhood..

Normally these guys do a pretty good job and when they tape-out a product and nothing's ever perfect but fortunately we don't usually have to acquire second complete mass that is usually just two or three different, a dozen or more [indiscernible] technologist how many masses are in a complete set, but typically it's not a complete redo..

Mr. Shu there are no further questions, I'll turn the call back over to you for any closing remarks..

Thank you all for joining us, we look forward to speaking with you again when we report our fiscal fourth quarter and full-year 2017 results. Thank you..

Ladies and gentlemen this does conclude today's conference, we appreciate your participation..