Ladies and gentlemen, thank you for standing by. Welcome to the GSI Technology's Second Quarter Fiscal 2020 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, October 24, 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 us to review our second quarter 2020 financial results. Net revenue for the quarter were 11.7 million within the range of our guidance provided on the first quarter’s call of 11.6 million to 12.6 million.

Gross margin in the second quarter was 56% at the high end of our guidance 54% to 56% provided earlier last quarter. Doug Schirle, our CFO, will provide additional comments on our financial results in his commentary. This is an exciting time for GSI Technology. In the second quarter, we successfully advanced our Gemini-1 chip on numerous fronts.

We are on track for upcoming customer training sessions in similarity search applications at our U.S. headquarters. We have also begun benchmarking our device against industry standard benchmarks.

We are currently testing our device against the 1 million item database benchmark and will soon be testing against benchmarks with larger databases of 10 million, 100 million and 1 billion items, all of which we expect to complete before calendar year-end.

We are also preparing to run the large database benchmark from the multiple CAST systems early next calendar year to demonstrate the scalability of our device. The third silicon spin of Gemini-I is expected back from TSMC later in the third fiscal quarter.

In addition, we are bringing up the production boards in preparation for customer demonstrations and are expecting the boards to be ready early next calendar year. Our AI team continues to develop the software libraries and algorithms for our expected release of Gemini-1 in calendar 2020.

We are very fortunate that our core business generates sufficient cash to support our new product roadmap and the funding of our ongoing R&D budgets. The focus of our R&D spending and the work that our engineering team is the Gemini roadmap which includes Gemini-I and the Gemini-II.

All of the preliminary work that we have done with our customers and our benchmarking shows that our device will increase data processing speed with very low operating power and a scalable architecture.

The most distinct feature of Gemini is the memory circuit design combining GSI’s core capability in memory chip designs with our AI software expertise. Gemini has impressive capability including the program interface that allows multiple levels of custom programming from assembly core up to [indiscernible] python.

We have made tremendous progress on our path to launch our new products by sustaining solid financial performance in our core business [indiscernible]. There are numerous exciting new market opportunities ahead for the company and we are making clear progress on obtaining our goals and we are making clear progress on obtaining our goals.

I would like to thank my team for all their hard work and the commitment to our vision. Now I'll hand the call to Didier who will discuss our business performance in further detail. Please go ahead, Didier..

Thank you, Lee-Lean. Switching gears to our new product category. We have made significant progress on our radiation-hardness SRAM. The RadHard device continues to track completion of our internal qualifications by the end of this year. RadHard sales, however, have been delayed.

The prime contractor who awarded the program has made a decision to stay with a legacy design due to the aggressive time schedule of the program. On the radiation tolerant family, we are currently tracking two programs that we anticipate to close in the next two quarters. Looking at our sales breakdown.

In the second quarter of fiscal 2020, sales to Nokia were 5.3 million or 45.2% of revenue compared to 6.0 million or 46.6% of revenue a year ago and 6 million or 45.7% of revenue in the prior quarter. Military and defense sales were 23.4% of second quarter shipments compared to 16.4% a year ago and 21.0% in the prior quarter.

SigmaQuad continues to be our best-performing product category with sales of 63.5% of second quarter shipments compared to 66.4% last year and 67.9% in the preceding quarter. I'd like now to hand the call over to Doug. Doug, go ahead please..

Thank you, Didier.

For the second quarter of fiscal 2020, we reported a net loss of $1.8 million or $0.08 per diluted share on net revenues of $11.7 million compared to 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 and a net loss of $125,000 or $0.01 per diluted share on net revenues of $13 million in the first quarter of fiscal 2020.

Gross margin was 55.9% compared to 62.6% in the prior year period and 63.3% in the prior quarter. Total operating expenses in the second quarter of fiscal 2020 were $8.5 million compared to $8.4 million in the second quarter of fiscal 2019 and $8.5 million in the preceding quarter.

Research and development expenses were $5.8 million compared to $5.8 million in the prior year period and up from $5.6 million in the prior quarter.

Selling, general and administrative expenses were $2.7 million in the quarter ended September 30, 2019 compared to $2.7 million in the prior year quarter, and down sequentially from $2.9 million in the previous quarter.

Second quarter fiscal 2020 operating loss was $1.9 million compared to $394,000 in the year ago period and $229,000 in the prior quarter.

Second quarter fiscal 2020 net loss included interest and other income of $210,000 and a tax provision of $55,000 compared to $145,000 in interest and other income and a tax provision of $102,000 for the same period a year ago. In the preceding quarter, net loss included interest and other income of $147,000 and a tax provision of $43,000.

Total second quarter fiscal 2020 pre-tax stock-based compensation expense was $642,000 compared to $552,000 in the comparable quarter a year ago and $651,000 in the prior quarter.

At September 30, 2019, the company had $68.1 million in cash, cash equivalents and short-term investments and $4.8 million in long-term investments compared to $61.8 million in cash, cash equivalents and short-term investments and $9 million in long-term investments at fiscal year ended March 31, 2019.

For the upcoming third quarter fiscal 2020, our current expectations are net revenues in the range of $9.7 million to $10.7 million, with gross margin of approximately 60% to 62%. Operator, at this point, we'll open the call to Q&A..

Thank you. [Operator Instructions]. It appears there are no questions at this time. I’d like to turn the call back to you for additional remarks. Pardon me. We do have a question from Ari Shusterman of Needham & Company. Please go ahead..

Hi, guys. Thank you for taking my questions. So the first one to start off with the delay. Can you provide a bit more color on this? And what will be the timeline now for delivering the product and how can we be sure that no more delays in the future? Thank you..

I’m assuming you’re talking about the radiation-hardened product?.

Correct..

So there is multiple entities involved and what I mean is the prime contractor who’s ultimately responsible for the shipment or the delivery of the assets made the decision. So the part of the program that we’re in is actually with a subcontractor. It’s actually also a prime contractor, but in this case it’s a sub.

The sub was pushing for our solution because obviously it gave the program a much higher performance.

At the end of the day, the ultimate prime contractor was up against the wall for a schedule and what they ended up doing was any new products – and it didn’t affect just GSI, it affected other companies as well – all new products that hadn’t been tested in this space yet were not allowed in the system. And so they went with an old legacy design.

With that said, what we need to do is continue with our qualification, which I mentioned will be completed at this end of this year. And then we need to push for some heritage which is getting into space so that when the next deployment of the program gets put in place, we can be part of it. As far as the timing, unclear.

But it will be sometime in calendar 2020..

Okay. Thank you. That makes sense.

When it comes to your cooperation with the Weizmann Institute, how has that been segueing into something larger? How has your cooperation with them being ongoing?.

Weizmann helped us to identify a Bioinformatics as a viable market for us and we do demonstrate – we have covered all magnitude to improvement of [indiscernible] today. So that’s helped us tremendous to demonstrate our capability.

And I think from the marketing point of view, we go to Weizmann, we can get in touch with big biopharmaceutical company and establish [ph] a marketing campaign to go into that market space..

That makes sense.

And then it comes to the expected contribution of the hardened product in 2020, what would be – just for modeling purposes what would be a reasonable estimate given the delay?.

Hard to say. We’re trying to get a feel for that now because we’re trying to understand when the next release would be. So I don’t want to put a number out there yet until I feel comfortable with it. So I’m trying to get both a number and more of a timeframe because this is all fairly new news.

So at this point, I’m going to hold off before I give you a number..

Okay, makes sense.

And one more question just with regards to the APU, when it comes to modeling that for 2020 what can you say on calendar year 2020?.

No. I think that 2020 most likely will be our – the benchmarking and demonstrating all the capability to the market. So you will more – I think any volume you will be also in the assembling phases. I think that significant volume will come up more likely in 2021 period..

So we’ve had customers who have already mentioned that they would like to buy the boards for the evaluation and for the testing internally. So we will be selling individual boards for those purposes for basically trial kind of testing. It’s hard to predict when the actual production will kick in..

All right, thank you. That’s all from me today. Thanks..

Thanks, Ari..

Our next question comes from Kurt Caramanidis of Carl M. Hennig. Please go ahead..

Hi, guys. When will we get something and can you put some color on what you’re seeing with your testing that you’ve got now? You said by the end of the year you’ll have some more.

What are you seeing now on – I’m talking on APU? And then will we get a release in the next month or two on how that’s tracking with your other testing?.

Yes. I mentioned earlier, the present quarter I think we can pretty much complete the benchmark, but right now we still expecting our fully functional silicon coming back.

So all the benchmark we are doing right now is we use our initial silicon [indiscernible] package, but even with the silicon, I think we can see significant improvement I think I will say in the case of tensor [ph] factor over the existing solutions.

But for us to put a complete benchmark number and I think we better to hold it back until we see that the silicon to demonstrate our capability. In other words, we don’t want to publish a half-baked number and then we have to change the number again.

But anyway, in general, I definitely think we have a much better solution, although a magnitude better than fiber solution today..

Kurt, to add to that, besides the AP itself, we’re also putting them on boards and the first boards we’re doing now is an off-the-shelf FPGA board and we’ve created a [indiscernible] card for it. And that has limitations on performance on that off-the-shelf board.

We have designed our own custom board which will be the one that we would use in production. We do have samples of that production board in hand now and we’re going through a debug process.

So we also have to take that into consideration on the benchmarking what we release to the public because as Lee-Lean said, we want to make sure we show the best numbers. The numbers on the off-the-shelf board, there the performance is limited because of the board, there’s still very good improvement over current solutions.

But as far as what we’re going to produce, we’re going to decide internally but we may hold-off to release the full benchmark space off of the production board..

So that wouldn’t be this year..

If it’s not this year, it would spill to early next year..

Yes, we still talk about the latest year – early next year. It’s not very far away..

So are you testing your second silicon or are you testing the third silicon, is that why you’re waiting or you’re using second silicon with the board that you’re making and that’s kind of been a little bit of a delay?.

There are two factors. One, to get a more concrete picture then we have a silicon wafer cast and we also have a software [indiscernible]. So right now we are testing all three tests. So I think the first report we probably will come out [indiscernible] on the second silicon, but with the production boards. So that will be the first phase of data.

And then of course a few months later, we will come out with the first silicon – the first silicon we will get it back end of quarter, so probably more like end of next quarter that we can get the data published..

Okay. So when will you have your – because there’s a couple of things timelines, when are you having the training at the office because you’re saying that January or so you’ll be having it for customers your board with the chip and then you’re saying you’re on schedule for similarly research training at the headquarters.

When is that going to take place?.

So the training – we’re going to be an internal run through in beginning of November and what we’re targeting for the customers was either going to be the last week or November or the beginning of December. It’s dependent also on the folks that we’re having in the first training.

So we’ll be using obviously the off-the-shelf board for that, which is going to fine for the training. Again, for the benchmarking we don’t want to have the performance limitations of the off-the-shelf board, but for training and workshops that board is fine.

So you’ll see – well, I’m not saying we’ll see but we’ll have the workshops sometime like I said best case would be end of November, but it’s looking like the first or second week or December right now..

And how many parties have expressed interest in that? I think it was a handful a few months ago.

Has that increased or how is that looking?.

Yes, it’s more than a handful. The room that we’re going to be doing the training in holds 32 and it will probably have – mostly capacity..

Okay. And I guess I would go back in queue but I’m not sure if there’s anyone waiting, so I apologize. If you want, I can do that. Facial recognition was something recently in the news that there are some areas that it doesn’t work very well.

Have you gotten any indication that your chip may be able to do better for facial recognition? Detroit comes to mind. There was a hullabaloo with the Detroit police chief and the accuracy of the facial recognition software.

Do you have any commentary around that because I think that was an area you were looking at or is it too early to tell?.

So we do have a partner in that space that we’re working with kind of a Weizmann for the cheminformatics. And right now what we’ve done is we actually haven’t – we’ve done a quick demo on our first silicon which as you all know was very buggy. We haven’t done a demo with them on the second silicon.

What we have done though is actually use some of our algorithms on their current hardware platforms to show that not only do we have – again, the upcoming hardware which we’ll show them but we also have a very strong software solution as well. So we have done a demo based off of our algorithms which impress them.

So we are at a point now where we’re shortly going to be showing them a demo on the second silicon.

But we haven’t gotten into the level of detail that we’re talking about of how does that improve accuracy? Certainly they have an accuracy target and they have a performance target and we certainly feel like we’re going to hit both of them very easily..

Okay. And then can you just talk about quickly Gemini-II. So Gemini-I is one board, one chip.

What would Gemini-II do and then what’s the magnitude difference?.

Okay. First of all, this is the second chip we are doing, so we have a lot of learning curve going along the way. So we think we can – the performance can be improved tremendously, probably more like one mode of magnitude. And of course we can do better integration with Gemini-II because on the Gemini-I we have FPGA interface.

So Gemini-II integrates that, so that’s another hold of magnitude of cost improvement. So I think Gemini-II on the performance cost point of view, it will be probably a couple of magnitude better than the Gemini-I, but across the [indiscernible].

Hopefully, Gemini-I we can establish the market position and then the Gemini-II is much better cost performance of product..

Okay. Would you say you’ve improved out concept? That’s kind of what your goal was with Gemini-I.

Do you feel that you’ve improved the concept or is it still too early that it’s working?.

Even though we think that Gemini-II is a much bigger product, but the Gemini-I compared to a viable solution are in the market, we have [indiscernible] into a pivot and the viable solution already. So even Gemini-I itself is a very revolutionary product in my mind.

So hopefully, we can demonstrate the capability and then establish the Gemini roadmap among the customers..

So we have done some benchmarking and again it’s on the limited board, limited off-the-shelf FPGA board. So we’re not releasing those numbers. But the best marking does show that yes, our technology and architecture is unique and certainly has much better performance. And it’s not just on a pure performance but also on the power side.

The power side we have much lower power which is also important to this market space. So the answer is yes. We do feel like we’ve proven that out. We just haven’t released those benchmarks yet, as I mentioned, because we’re waiting to do it with our production board which is not limited in performance..

Okay, fair enough. Finally, will you be getting a Web site soon that matches the new technologies? That’s not really doing that at this point. You have something in the works that can be more applicable to what you’re actually doing..

I do know we’re going through some upgrades for the Web site now. I don’t have all those details, but there will be some changes coming..

Okay. Certainly it doesn’t really do much for Gemini which I think it certainly should. I saw you got a new marketing person in your Board and certainly there’s lots of opportunity with the Web site for improvement to show more about where you’re kind of going. Okay. Thanks a lot. I appreciate it..

Thanks, Kurt..

Our next question comes from Jeff Bernstein of Cowen. Please go ahead..

Yes. Hi, guys.

Just wanted to get an update on your Nokia outlook?.

Nokia this quarter will be down which also explains why our quarter will be down. We’ve received the forecast for them. They usually give us a 12 months rolling forecast. And for the next two quarters it’s really I guess solid, so the next two quarters which would be the calendar first and calendar second quarter of 2020.

It looks like it’s going back to the normal run rate. So they have forecasted that this quarter will be down and then will be returning to normal run rate in first and second quarter of next year..

Okay, all right. That’s great. Thanks very much..

Thanks, Jeff..

Our next question comes from Shoran T. [ph], private investor. Please go ahead..

Hi. I had a question regarding the training.

So is it going to be only in – training in your office or is there going to be a place like you can – anyone else can play it online by using – you can have a solution app cloud or somewhere [indiscernible] how is it going to be?.

Yes. It will be both. So the workshop will be a hands-on workshop, but we understand the limitations of attendance. So I can’t tell you if the first workshop will be through the cloud or not, but certainly not to long down the road we will be having training that would also be cloud based..

And what about the software solution you’re talking about? Is it like -- how it will be?.

So the software, it’s libraries and algorithms specifically for device and depending on application. As Lee-Lean mentioned earlier, it can be from the very low level all the way through the python. So it’s more library and algorithm based.

So that will be part of the workshop too to train folks on how they can write their own libraries specifically for the device..

You mentioned the software package you have are performing well even with the current – even with the hardware [ph].

So are you going to be more concerned with software or is it going to be solution from your side?.

It’s a python – so the example I gave was an algorithm. It wasn’t the library. So the libraries that we have are specific for the APU/Gemini. So those cannot be used on a separate hardware platform. The algorithm, however, could be. So that’s a different – it’s not apples-to-apples.

As far as the software package, we’ll have a package that’s deliverable with the device. But as I mentioned, it’s not going to have every possible library or every possible algorithm but we can show folks how to write their own..

Okay.

And what about going for the market, what is your future plan? Is it going to be cloud-based solution like for example [indiscernible] or what is your market strategy?.

It would be market and customer driven. So there are going to be folks that are going to want an [indiscernible] hardware solution and there are going to be folks that are going to be going through the cloud. So it will be a combination depending on the customer and the market..

Okay. Thank you. That’s all I have..

You’re welcome..

Our next question comes from Kurt Caramanidis of Carl M. Hennig. Please go ahead..

Like you haven’t had enough. I forget one.

Collaborations, do you see any collaboration with other larger companies? Is it too early meeting someone that has a large IT department and your hardware can work together and do you see any service revenue opportunities as you’re kind of starting to engage?.

So the answer is yes. The collaboration that we’re actually focusing on initially isn’t probably what you’re talking to. So we’re looking to do some collaboration more right now in the cheminformatics. As we mentioned, Weizmann Institute with their solution right now they’re using software packages specifically for this market.

So we’re working with – there’s a couple of known folks in those markets that we’re starting to work with now to make sure that we kind of integrate and collaborate with them.

What you’re talking about, we’ve started having internal discussions about that but it’s way too soon to talk about what collaboration we may do as far as the data center type of approach..

Okay, great. Thank you..

Thanks, Kurt..

It appears there are no further questions at this time. I’d like to turn the conference back to you for any additional remarks..

Thank you all for joining us. We look forward to speak with you again when we report our third quarter fiscal 2020 results. Thank you..

This concludes today's call. Thank you for your participation. You may now disconnect..