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

Robert Martin - Needham & Company Jeff Bernstein - Cowen Kurt Caramanidis - Carl M. Hennig Jim Kennedy - Marathon Capital.

Ladies and gentlemen, thank you for standing by. Welcome to GSI Technology's Third Quarter Fiscal 2018 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 also been asked to advise you that this conference call is being recorded today, January 25, 2018, at the request of GSI Technology.

Hosting the call today is a 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 $11.1 million and gross margin of 51%. All that revenues came in above the range of guidance that we provided earlier in the third quarter while our gross margin came in below the range of guidance primarily due to product mix.

During the fiscal third quarter, sales through our primary telecommunication and the networking markets continued to feel modest declines year-over-year. However, we remain focused on bringing our products to market this year. Our efforts are aligned to support development and marketing efforts for this newest market segment.

The first to market would be our high-performance SigmaQuad radiation-hardened SRAM products, targeted at aerospace and the defense applications. Later this calendar year, we'll launch our patented in-place associative computing technology, or APU.

In terms of achieving milestones for the launch of new products, we now have packaged parts of our SigmaQuad radiation hardened SRAM product. We anticipated completion of the design of our initial APU product by the end of this quarter and we remain on track to have packaged parts of our APU product line by the end of the June quarter.

We now hold 17 US patents and along with of pending patent for our APU technology and as in previous quarters the activity marketed the APU technology to a range of industry experts and potential end market consumers across a range of industries.

We recently presented at Stanford University as part of their EE Computer Systems Colloquium and at the Global Artificial Intelligence Conference, detailing how our APU helps enable Natural Language Processing, Machine Learning, and a Few-Shot Learning.

We also presented an ODSC West Webinar and provided training to multiple organizations in the aerospace and the defense sector. Overall we're confident that we will eschew our primary objective of bringing our RadHard and APU products to market this calendar year.

We anticipate that both products will enable us to enter faster growing market segments and capacity to broaden our customer base and the revenue potential..

For the third quarter of fiscal 2018, we reported a net loss of $1.5 million or $0.07 per basic and diluted share and net revenues of $11.1 million, compared to net income of $348,000 or $0.02 per basic and diluted share and net revenues of $11.5 million for the third quarter of fiscal 2017 and a net loss of $1.7 million or $0.08 per basic and diluted share and net revenues of $9.6 million for the second quarter of fiscal 2018, ended September 30, 2017.

Gross margin was 51%, compared to 56% in the prior year period and 50.4% in the second quarter.

In the quarter gross margins were negatively impacted primarily by product mix and an increase in reserves resulting from the write down in the value of excess inventory, our product restock piled with an assembly vendor was no longer supporting the product line, but we still had forecast in sales.

Unfortunately a sale for this product was never forecasted. This was a unique situation for this particular product; since we've not stock piled our other product lines and are comfortable with current inventory viability.

Our third quarter fiscal 2018 operating loss was $1 million compared to an operating loss of $1.8 million in the prior quarter and operating income of $234,000 a year ago.

Total operating expenses in the third quarter of fiscal 2018 were $6.7 million compared to $6.3 million in the third quarter of fiscal 2017 and $6.7 million in the preceding quarter. Research and development expenses were $4.2 million compared to $3.8 million in the prior year period and $4.2 million in the preceding quarter.

Selling, general and administrative expenses were comparable year-over-year at $2.5 million compared to $2.4 million in the quarter ended December 31, 2016, and $2.5 million in the preceding quarter.

Total second quarter pretax stock-based compensation expense was $535,000 compared to $508,000 in the prior quarter and $429,000 in the comparable quarter a year ago.

Third quarter fiscal 2018 net loss included interest and other income of $99,000 and a tax provision of $590,000 compared to $61,000 in interest and other income and a tax benefit of $53,000 a year ago. In the preceding quarter, net loss included interest and other income of $103,000 and a tax provision of $49,000.

At December 22, 2017, the Tax Cuts and Jobs Act was signed into law, significantly impacted several sections of the internal revenue code. This legislation resulted in net tax provision of $540,000 for the quarter ended December 31, 2017. That is included in the $590,000 mentioned previously.

In addition, the company recorded liability per taxes payable of $68,000 at December 31, 2017, that will be paid over period of up to eight years.

In the third quarter of fiscal 2018, sales from Nokia were $3.9 million or 34.7% of net revenues compared to $2.8 million or 29% of net revenues in the prior quarter and $4.5 million or 39.5% of net revenues in the same period a year ago.

Direct and indirect sales to Cisco Systems were $565,000 or 5.1% of net revenues compared to $506,000 or 5.2% of net revenues in the prior quarter and $1.1 million or 9.8% of net revenues in the same period a year ago.

Military/defense sales were 20.7% of shipments compared to 24.4% of shipments in the prior quarter and 15.9% of shipments in the comparable period a year ago. SigmaQuad sales were 54.5% of shipments compared to 39.4% in the prior quarter and 54.2% in the third quarter of fiscal 2017.

At December 31, 2017, the company had $56.8 million in cash, cash equivalents and short-term investments; $8.2 million in long-term investments; $63.7 million in working capital, no debt; and stockholders' equity of $85.5 million.

Looking forward to the fourth quarter of fiscal 2018, we currently expect net revenues to be in the range of $10 million to $11 million. We expect gross margin of approximately 53% to 55% in the fourth quarter. Operator, at this point, we'll open the call to Q&A..

Thank you. [Operator Instructions] We'll take our first question from [indiscernible]. Your line is now open..

Hi, guys. This is actually Sameer on for Mike.

How are you?.

Hi..

Good..

So I just had a quick follow up question on the opportunity in machine learning from the new APU technology.

Could you kind of try to quantify what you guys see as the kind of net market size in machine learning? Would you guys have from four shot and one shot learning based on this APU technology?.

So this is Didier.

We're still going through market data, but certainly - the market isn't always broken up exactly the way that we're going to be addressing it, depending on the reports we see, but certainly everything that we've seen have been in the billions of dollars for market opportunities and that's outside the training because I think we've talked about certainly the training is an area that we'll be focusing at some point, but in French and natural language processing, data lining, recommend resistance and searches, we'll be addressing first because that's where we have the largest advantages and those markets are certainly in the billions of dollars..

Got it, makes sense.

And could you also give us a sense on - I think you mentioned four shot learning in the call earlier, what about opportunities like one shot or few shot learning?.

Yeah, definitely, I think always few shot is the meaner, one shot and the low shot it will..

Okay, so that's all I had. Thank you for the time. I'll turn the call over..

Thank you..

Thank you. And our next question comes from the line of Robert Martin from Needham & Company. Your line is now open..

Hi, thank you for taking my question. I just wanted to get a little bit more clarity about your SigmaQuad product for the satellite, just sort of your progress on that technology.

You're currently shipping or taking out the product this quarter?.

So first of all let's be clear. Not just for satellite, it is also for missiles and I say that because our first - I kind of find opportunity will actually be for missiles.

And so the products right now - we've had - we have samples, we've had a little bit of push off from the customer and we talked about this on the last earnings call where the dollars have been pushed out 69 months. So it's given us a little bit time to make the party to be more robust and increase the yield. So we do have parts now.

We're making a slight fleet to make it even better, but that will be certainly well ahead of the schedule of our customers, which would be around the December timeframe of this Calendar year..

Okay, great. That's very helpful. And I'm sorry; I think I just missed it. You mentioned a product line that was on the shelf and it will be discontinued.

Can you just give a little bit of clarity there?.

No, it's not a discontinued product, it's our low density LLDRAM product, but a year and a half years ago the vendor that was doing the assembly of that product discontinued supporting the package, the particle system within, so we assembled all the data we had and we just haven't seen the revenue that we had expected - we anticipated at the time materializing to the levels that we would have liked.

So we consciously every quarter look at our inventory and decided that we need to take some inventory reserves, so they did that. There is nothing wrong with the product. That has a very long shelf life, very long product life cycle. It's just that we haven't seen the business that we were anticipating..

Okay, great. Thanks for that clarification. And then just one last one if I could squeeze in, in terms of gross margin with regard to next quarter, is that sort of all we can think about the run rate there? I know some of the businesses are a little bit lumpy, but trying to get an idea of where you guys are at longer term..

Yeah, longer term - let me just talk to a little bit of where we've been. In the recent past or the last couple of years or so, we've been in the mid 50% range and obviously with the RadHard product, we know where our margins are going to be because of the nature of the business and what we're doing in terms of manufacturing.

We know our margins net business will be 85% at the minimum. And then in terms of the APU, we believe that those margins should be better than the corporate average.

So long term the information that we're looking at is that we would expect the gross margin to be somewhere in the 59% to 63% range, so certainly we would hope to be about 60% in the next couple of years..

Okay, great. Thank you so much. I appreciate it..

Thank you..

Thank you. And our next question comes from the line of Jeff Bernstein from Cowen. Your line is now open..

Yeah, hi guys. Just a quick follow up on the RadHard SigmaQuad. I think that you guys said that the revenue - you would expected to maybe have some revenue earlier in the year that that's going to be at year end, but that you had added either another customer or someone else who had interest.

Could you just clarify that and talk about that a little bit? And I think you said that the ASP on that part was going to be 30K, is that right?.

Correct. So we have two offerings, the first one we've been talking about is the 288Mb SigmaQuad-II+ and then we also have introduced or will be introducing shortly a 144 Mb SyncBurst NBT. So that one is not quite that ASP, but the 288 Mb, which is the first one revenue that we're targeting is around numbers of around $30,000 a part.

And when we said, we added a program, what that meant was we - actually there was two different programs that were very similarly natured as far as the design goes. And one of them was funded and it's funded for the end of this year. The other one, it hasn't got the funding yet, but it looks like it may happen.

So we may have both programs shipped in the December quarter. And so if that happens and that number - that revenue number will be just slightly larger than we had anticipated our first production order to be..

Great, thank you..

Welcome..

Thank you. [Operator Instructions] And our next question comes from the line of Kurt Caramanidis from Carl M. Hennig. Your line is now open..

Hi, guys. Can you talk a little bit about how the Stanford relationship is coming? You kind of talked about how Invedia [ph] had did some work with Academia and that kind of helped with different uses and just where that's at with after that conference you went to or the seminar you did I guess at Stanford. .

Yes, it's certainly - that's going to be a focus going forward for us and what I mean is, when we do have EVal or demo boards, we certainly want to put them in Virginia. That's always kind of in the strategy and we certainly are focused on it. The Stanford opportunity came to us and we certainly jumped at the occasion to present there.

So other type of University talks open up and we'll take them on case-by-case basis and certainly Academia will be a focus for us because that's an area that can really help drive our ecosystem for the particular family..

Okay, great. And then could you get on the website the webinar that was recently done, at least a slide, if not the presentation because that was quite interesting and I can't find that anymore to kind of review it because I thought there were some speed demos on some search went by so fast then I didn't get to see it again.

Is that possible?.

Yeah, Chris, this is Didier. I've already put out a request for that. We just haven't gotten it back from the group that we did the webinar with. But we will definitely get and put it on the website..

Okay, great. Yeah, because it showed how - where your niche is and the differences and things and I think that's a good helpful thing. Okay, thanks a lot guys. I appreciate it..

Thanks, Kurt..

Thank you. And our next question comes from the line of Jim Kennedy from Marathon Capital. Your line is now open..

Good afternoon. .

How are you doing Jim?.

Good, quick question for you on APU, when you do - when it is ready to put into some customer's hands or potential customer's hands to look at.

Do you anticipate equal demand at that point from government and non-government sources or would one prefer it over the other in terms of testing it and looking at it?.

There's certainly a line of folks that wants early access and it's both on the Classic 58 guys and the government. So I mean it's certainly - I don't anticipate that's favoring one over the other. The interest is heavy from both sides and we certainly want to make sure that we get boards into both entities or both segments I should say..

Great, okay, that was it from me. Thank you..

Yeah..

Thank you. And that concludes our question-and-answer session today. I would like to turn the call back over to Lee-Lean Shu for closing remarks..

Thank you all for joining us. We look forward to speaking with you again when we report our fourth quarter fiscal 2018 results. Thank you..