Ladies and gentlemen, thank you for standing by. Welcome to the GSI Technology's third quarter fiscal 2019 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 involves risk 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 31, 2019, 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 today's call to review our third quarter fiscal 2019 results. I am very pleased with the performance of our core business which exceed all forecast, primarily due to better than anticipated SRAM sales to our largest customer which increased 11% sequentially and 72% year-over-year.

Net revenue for the quarter was $14.7 million, above the high end of the guidance that we provided on our second quarter call of $12.8 million to $13.8 million. With gross margins of 58%, rose above our guidance of 52% to 54%.

Doug Schirle, our CFO, will provide additional insight into the factors that drove our strong revenue growth and the margin improvement in his commentary. Earlier this month, we provided an update on the APU, our in-place associative processing solution for artificial intelligence application.

We are currently testing packaged units of the first silicon wafers. These initial tests have identified some bugs which are being fixed now. In the meantime, our hardware and software teams are working on demo boards with the APU and determine if their performance are ready for testing by our selected alpha customers.

At this time, we hope to receive the next silicon pack in a few months and we anticipate being able to perform payments for beta customers later in the year. In early November, a member of our APU team posted a panel on visual search at ODSC West conference.

ODSC is a global data science community dedicated to helping foster the change of innovative ideas in open data science. The panel led by our director of beta science discussed visual search as the next frontier of search. In a panel discussion with experts in the field from eBay, Google, Walmart Labs, Wayfair and Clarifai.

Largely driven by visual content, visual search is ideal for online retailers. This search mechanism allows you to request text entered on a keyboard with image captured on your phone to search for objects, such as clothing or furniture.

Similarity search use a technique called distance metric learning in which learning algorithm measures how similar or related objects are.

GSI's APU is ideal for similarity search because it's unique design enable very fast computation speed with improved accuracy and scalability for very large datasets, which is a key to improve similarity search capabilities.

We are very excited about the similarity search applications for our chip, AI adoption in the future is forecast to grow very rapidly in the next five years with video search being one of the fastest growing segments of similarity search.

In software simulation, the APU has demonstrated the ability to increase the rate of computation by orders of magnitude with great accuracy while reducing power consumption significantly. This kind of performance can potentially transform the online retailers' capabilities and greatly improve the online customers' experience.

Other applications of similarity search are in drug discovery, drug screening and genomics. In drug discovery, the objective is to develop safe and effective drug cheaper and faster. One area of exploration has focused on high performance computing. The goal is to maximize the use of the computing through the entire drug discovery process.

From the early stage of identifying and designing [indiscernible] molecules to target disease all the way to predicting all kinds of clinical trials.

Simulation with the GSI's APU for this application have shown to improve search speed by orders of magnitude with the reductions in clearing time from as much as 10 minutes to as little as 300 milliseconds. The APU's higher speed and increased accuracy in similarity search can potentially lower drug discovery cost.

Any important goal for research organizations depend on the funding. Drug discovery is very costly with high failure rate. According to a study from the Tufts Center for the Study of Drug Development, the average cost to develop a new drug is about $2.6 billion.

Only 10% of new drugs win approval and those few that do get approved, can take at least 10 years to come to market. Technology that could reduce costs, increase drug efficacy and the safety and increase speed to market can potentially save billions of dollars. As a result, APU is getting attention of leading pharma and genomics players.

And they are pleased with the work our team has done to advance the APU and to increase our visibility with potential key customers. It is still early and we have a lot of work ahead of us. But I remain confident that the APU will be a successful product for GSI.

As I have stated before, to offset our mature legacy they are working in the telecommunication markets. The company's resources are focused on the development and the launch of new products.

We intend to continue penetrating markets that require high-performance memory technologies with our core products like our SigmaQuad SRAM which are the recognized leaders in the industry with their combination of capacity and the performance and the transaction rates unequal by any comparison.

We are waiting on final testing of our SigmaQuad radiation-hardened SRAM product for our first customer. We take the first shipment of our SigmaQuad radiation-hardened SRAM in the fourth quarter of fiscal 2019, which with production shipment will qualify the product later in 2019.

Our financial performance this quarter shows that when our high-margin sales increase, we can deliver significant leverage in earning per growth and improved cash flow from operations. Thus we scale with new products.

This operating leverage will continue to improve and our cash of reserve show growth, providing a company with resources to the defense opportunities for existing product line and develop a new product.

I am proud of the work my team has accomplished and remain confident that CSI is well-positioned to return to growth and improve shareholder value in the long run. I will now hand the call over to Doug for detailed overview of our financial return.

Doug?.

Thank you, Lee-Lean.

We reported a net income of $2.3 million or $0.10 per diluted share on net revenues of $14.7 million for the third quarter of fiscal 2019 compared to net loss of $1.5 million or $0.07 per diluted share on net revenues of $11.1 million for the third quarter of fiscal 2018 and a net loss of $351,000 or $0.02 per diluted share on net revenues of $12.8 million for the second quarter of fiscal 2019, ended September 30, 2018.

Gross margin was 68.3% compared to 51% in the prior year period and 62.6% in the preceding second quarter. Strong revenue growth in the third quarter was driven by increased sales to our largest customer, the balance of the shipment of a one-time order for a university supercomputer build up in Europe and in increase in sales at our military segment.

These factors drove an increase in gross margins, which benefited from a favorable product mix. Total operating expenses in the third quarter of fiscal 2019 was $7.8 million, compared to $6.7 million in the third quarter of fiscal 2018 and $8.4 million in the preceding second quarter.

Research and development expenses were $5.2 million, compared to $4.2 million in the prior year period and $5.8 million in the preceding quarter. Research and development expenses in the prior quarter included an expense in the amount of approximately $1 million related to a non-production mask set for our initial APU product.

Selling, general and administrative expenses were $2.6 million, compared to $2.5 million in the quarter ended December 31, 2017 and $2.7 million in the preceding second quarter.

Third quarter fiscal 2019 operating income was $2.2 million, compared to an operating loss of $1.million in the comparable period a year ago and $394,000 in the prior quarter.

The third quarter fiscal 2019 net income included interest and other income of $96,000 and a tax provision of $70,000 compared to the same period a year ago, in which net loss included $99,000 in interest and other income and a tax provision of $590,000.

In the preceding quarter, net loss included interest and other income of $145,000 and a tax provision of $102,000. Total third quarter pretax stock-based compensation expense was $592,000 compared to $535,000 in the comparable quarter a year ago and $552,000 in the prior quarter.

In the third quarter of fiscal 2019, sales to Nokia were $6.2 million or 45.2% of net revenues compared to $6 million or 46.6% of net revenues in the prior quarter and $3.9 million or 34.7% of net revenues in the same period a year ago.

Military and defense sales were 16.7% of shipments compared to 16.4% of shipments in the prior quarter and 20.7% of shipments in the comparable period a year ago. SigmaQuad sales were 69.7% of shipments compared to 66.4% in the prior quarter and 54.5% in the third quarter of fiscal 2018.

At December 31, 2018, the company had $57.1 million in cash, cash equivalents and short-term investments, $10.2 million in long-term investments, $65.5 million in working capital, no debt and stockholders' equity of $91.2 million.

Looking forward to the fourth quarter of fiscal 2019, we currently expect net revenues to be in the range of $11.6 million to $12.6 million. We expect gross margin of approximately 60% to 62% in the fourth quarter. Operator, we will now open the call to Q&A.

[Operator Instructions]. And we will take our first question from Brian Swift with Sutter Securities..

Hi guys.

Can you clarify one thing for me, in the press release you said your sales to Nokia were $6.6 million and I think I heard you say that they were $6.2 million and I just want to know which one was it?.

No. In the current quarter it was $6.6 million..

Yes. You said $6.2 million, by the way, but it's $6.6 million..

Okay. And I will come back for further ones, but I just wanted to clarify that. Thank you..

[Operator Instructions]. And we will take our next question from Kurt Caramanidis with Carl M. Hennig, Inc..

Hi guys. Congratulations. It's probably the best quarter you have had in about seven years, if I am looking at it correctly. So nice quarter.

On the APU, do you know not really test anything until it's debugged until the second, I think you referred to second silicon in that presentation, until that's back?.

Yes. I am sorry.

Can you repeat that?.

Do you test it, I am wondering if you have any idea if it's looking like the simulators or do not know until you have debugged and run the second silicon as far as how it's performing compared to what you were thinking prior?.

Right. So we have had the assembled units in hand since November and for the first two months, we have been looking at the part on a tester or like on a memory testers, so on a component level. And so that's where we have noticed some of the bugs that we have. So very recently, within the last week or so we have now mounted the APU on to a board.

And this is a board that would be one that we would use for demo. So it includes an FPGA and other components as well. So for the first two months, the testing was done on a component level and now we are actually running software and algorithms through the device as much as we can with the limitations of the bug.

So we are testing at both on the component level and also on a board level..

Okay.

So what kind of in the next quarter, you might have an idea how it's looking on the board? Or what kind of timeline?.

So this is first silicon. And with this first silicon, we are still hoping to demo one of our alpha guys that we have mentioned in past press releases. But for the majority of the folks, we are really waiting for second silicon. Second silicon will be fixing the bugs that we have identified. That should be done within the next couple weeks.

Of course, at that point, you have to go through a series of changing some mask sets and starting new wafers and assembling up the parts. So it will be some time, I would say end of May at the soonest, maybe beginning of June before we have devices in hand, at which point we are look at two different places in parallel.

One, we are going to put them back on the testers and then we are also going to mount those on demo boards immediately. What we are hoping is that we will be able to start doing a more broad scale demoing sometime in the calendar third quarter of this year..

Okay. Great.

Do you have to do another $1 million mask? Or is this using the same mask that you had, you are just tweaking it, if that's proper?.

Just certain levels will be tweaked. It won't be anywhere near $1 million..

Okay..

And just so they recall, that initial masks that we charged are new expensive, future masks on this will be charged to cost of goods sold over a 12-month period. So you will never see any big impact like $1 million on distribution..

Okay. And Lee-Lean mentioned some drug, other drug companies.

So you have the one deal? You have other large drug companies that have expressed interest? Or where is that at?.

So, certainly we have, as we have spoken about in the past, we have the lead alpha customer. They want early access. So they are willing to look at material that they know have some bugs in them.

We are limiting how many people we engage with on first silicon, obviously, because it's very resource intensive to do that because there is workarounds and what have you. But we certainly have seen interest from other folks in the same market but we are going to put them in the second silicon group..

Great. And then, the rad-hard, so you are anticipating a prototype this current quarter.

If that testing goes well with your formula, would that determine the timing of a sale? A real production sale?.

Right. So we actually received an order last quarter in the December quarter for the first prototype. And this week, we actually received a second quarter also for prototype quantity for second program. These are EH units because where we have not finished the qualification internally. We do feel the recipe we have now does meet the requirements.

We still have a few tests to conduct before we can for sure know that. But the prototypes are going to be sent for these two programs for their initial qualification. And so what we are looking at now is probably finishing up the qualifications some time this quarter.

It might spill into early next quarter and then during that time, we are waiting for the customers to finish their qualification with the prototype units that they are ordering now. We will have those shipped out within a month, maybe a month-and-a-half..

Okay.

Then the production orders would follow once everybody is all through qualification?.

Correct..

Okay. Sorry, last one.

Any outreach in the next quarter or so, whether it's an AI conference or any other investor conferences, just curious?.

Yes. We will be going to the Roth Conference and then our IR firm is looking at non-deal roadshow type activities. So we will be out a couple of times in the next two or three months, at least..

Right. And we are attending some of the AI conferences, but it won't be like the ODSC West where we hosted a panel. It will be more in an informal manner..

Okay. Great. I appreciate all the feedback and congratulations and look forward to the future things that are coming up here..

Thank you..

Thanks Kurt..

And next, we will move on to Jeff Bernstein with Cowen and Co..

Hi guys. Just quick questions around the rad-hard business. I think you talked about also having a high-rail or rad-tolerant product that would be at different, a lower price point and addressing things like Leos or other more cost sensitive market niches.

But can you just talk about what the plans are there and what the timeline is there?.

Sure. So that requires a different die and that one could be offered in both plastics and ceramics. With the rad-tolerant, we are actually at a position now where we have actually started qualification. We are a little bit ahead of the rad-hard as far as our internal qual. As far as the customer engagements, we have already started those.

There are a few programs that we are addressing now and they are determining what direction they are going. I would say the nearest potential is actually a program that's sending a probe to Mars to do some mining on the planet. And so that's certainly one that could be a short-term or I should say, our first win.

Certainly, there has been some significant amount of interest in something that' a little robust than the hard..

Got you. Thanks very much..

Thanks Jeff..

And at this time, there are no further questions..

Thank you all for joining us today. We look forward to speaking with you again when we report our fourth quarter fiscal 2019 result. Thank you..

Thank you. That does conclude today's teleconference. We do appreciate your participation. You may now disconnect..