Earnings Call: Q1 2022

Jul 29, 2021

Good day, ladies and gentlemen, and thank you for standing by. Welcome to GSI Technology's First Quarter Fiscal 2022 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 and 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 ks filed with the Securities and Exchange Commission. Additionally, I have also been asked advise you that this conference call is being recorded today, July 29, 2021, at the request of GSI Technology. Hosting the call today is Leland Xu, the company's Chairman, President and Chief Executive Officer. With him are Douglas Shirley, Chief Financial Officer and Didier Lasserre, Vice President of Sales. I would now like to turn the conference over to Mr. Xu. Please go ahead, sir. Good afternoon, everyone, and thank you for joining us to review our Q1 2022 financial results. 1st quarter revenue improved year over year and sequentially due to a higher sales to Lokea, Our largest customer, there was increased demand for our SigmaQuad products, which improved gross margin and narrowed our operating loss. We ended the quarter with over $55,000,000 of liquid assets, More than sufficient funds to achieve our goals of building successful business for new products. The net revenues from our legacy SM business continue to support our new product categories, Primary radiation tolerant devices and the GEMIGNA APU solutions. We shipped our 1st radiation tolerant devices In the Q1, A increased our better customer engagement for Gemini 1 system. Our effort to build market recognition of this new product category yielded several promising results in the Q1. 1st, winning 1st place in the market challenge. As opened the door to his already prime contractor With whom we successfully demonstrated Gemini's overall value proposition for synthetic aperture, Capture radar or SAR applications leading to a proof of concept engagement for SAR systems. 2nd, The partnership with Space Micro for the Phase 1 LASA Small Business Innovation Research or SBIR program Let's get gotten underway. We expect to submit a Phase 2 proposal to develop an Optimum Real Time Data Sorting Influence Processing Unit for Earth Organization Mission later this year. In the Q1, we shipped off 1st radiation tolerance instrument devices At Essential Step, we're getting space heritage for our radiation hardened and tolerant devices. Didier will provide detail on our progress in each of these new engagements in his remarks to follow. Last week, AWS launched OpenSearch 1.0, the first production ready versions of OpenSearch, The project that AWS first introduced in April 2021, the OpenSearch project is a community driven, Open Source Search and Analytics Suite Derived From Open Source Elasticsearch and Kibama, Elasti's data visualization dashboard software. Since the spring, we have been working with AWS On this project demonstrating GSS, Elasticsearch KNN Plocking. Elasticsearch was initially designed as a text and document search engine. The Gemini Elasticsearch KAM parking extension extends Elasticsearch's ability to search beyond just text. The parking opens the door to other data types like image, video, audio. Any data types that can be represented as compact, semantically rich, humanical vector. Vectrus can be used to search for the most similar items or layers labels to acquire. Making a set of remarkable applications such as the visual search, face recognitions, natural language processing and the recommendation systems. Our extension provides a high performance, low latency, low power, Text filters with Flexasearch queries. Here's the problem we solved. Core Elasticsearch use a match all functionality, which makes it too slow to handle the large Initial retrieval step in the vector similarity search pipeline. This limits core Elasticsearch to scoring Talking about on the small filtered effectors, instead of using the toxicity match or search, The GSI parking performed an approximate nearest label or K and N vector similarity search. This allowed the GSI extension to scale to billions of documents and handle the essential initial retrieval step In the search pipeline, multi model search, where image and text can combine to form a powerful search It's a rapidly emerging trend. Online fashion and the home design use multimodal search because They're really heavily on visual search since style is often difficult to describe using text. In addition to visual search, Text search is also required because production product information like item description, category and brand It's generally used to filter the return results as part of the video search. A solution that allows for multimodal search is needed. Open Source Search Library do not handle multimodal search well. The popular open source vector search library Such as face and NMS library are good at the latest level of vector search, but lack support for efficient data filtering. For example, it could be given to use texture filters to filter the results previously returned from various labor Thank you, sir. GSI solved this problem with its Elasticsearch plug in by allowing multi model searches To be performed efficiently and effectively, our extension provides high performance, low latency, low power solution That combines traditional Elasticsearch, text filters with vectorsearch queries, solving the imaging And tech search problem in our solution is compelling because we require fewer resource for a better outcome. After successfully proving that the Gemini APU significantly accelerated vector search performance, Amazon OpenSearch service included TSI as one of its service partner in the project. AWS recently released version 1.0 of OpenSearch for users of Elasticsearch and developers Building products and service based on Elasticsearch. AWS has select partner They offer software and extension desktop OpenSearch in various applications like our Elasticsearch KMM plug in That explains Elasticsearch's ability to search beyond just text. We are excited to be a part of this team. We are in the early stage of developing this opportunity and we still have a lot of work to do. We still need to finalize business model and are setting up the data center in Silicon Valley With the Gemini APU server in the GSI cloud to connect to the AWS data center nearby. Once the setup is complete and successfully demonstrated, we could now to install more servers And get better users by year end and if all goes well, open up to all customers in calendar 2022. Long term, we may install Gemini APU servers at the data centers in many locations around the world. The Q1 has been productive for GSI, nineteen here in California Southwest Airlines in Israel and Taiwan are all highly committed to our goal of lending customers and building successful business For our radiation tolerant devices and the GEMINI APU, we are progressing and remain optimistic That we will be successful in executing our long term strategy. I sincerely thank you for your support as a fellow GSI shareholder. Now I hand the call over to Didi, who will discuss our business performance in further detail. Please go ahead, Didi. Thank you, Lilleen. I would like to provide an update on 2 product categories, our radiation tolerant or rad tolerant chip That shift in the June quarter and our progress on the APU and government projects. Last quarter, we shipped our first RAD tolerant SRAM for an initial satellite flight expected to occur at the end of this calendar year. If the initial fly is successful, then a larger satellite constellation build is expected to start later in calendar 2022. We now anticipate a companion satellite project that will use the same class of rad tolerant SRAM. This is a substantial opportunity for us and also brings the key benefit of establishing heritage for our RadHard and Rad Tolerant SRAMs in space. We anticipate that having Heritage will be a growth catalyst for this product category. Shifting gears to the APU. As we previously announced, we partnered with Space Micro for our Phase 1 NASA SBIR program. We believe this project can serve as a catalyst for APU sales in this sector. In this project, the APU will function as the main engine for a single board computer in Base, which for this project is being referenced as an IPU or an inference processing unit. Phase 1 is officially underway after the initial kickoff meeting and is expected to be completed before year end. The next step is to submit a Phase 2 proposal, which will probably happen in early calendar 2022. This is an exciting opportunity to put APU in the hands of multiple government agencies and prime contractors for space applications. Lastly, another exciting APU development is the outcome of winning the Moffat challenge at the end of last year. Since then, Moffat has gotten to know GSI and the team has had the opportunity to work on our APU with Moffat to demonstrate the scope of functionality of Notably, we have demonstrated the APU's capability to perform SAR operations that our APU functionality exceeds that of the CPU and the GPU by a factor in some cases 100 times better, including lower power and lower overall system cost. As a result, we are now working with an Israeli defense prime contractor to deliver proof of concept servers to perform SAR operations. We expect to deliver the servers in early calendar 2022. If the effort is successful, we hope to leverage the success into other projects. Shifting to the sales breakdown for the Q1 of fiscal 2022, sales to Nokia were $3,800,000 or 42.7 percent of net revenues compared to $1,800,000 or 26.9 percent of net revenues in the same period a year ago and $2,800,000 or 36.5 percent of net revenues in the prior quarter. Q1 fiscal 2022 net revenues include orders for buffer stock shipped to Nokia amounting at approximately $1,100,000 that were made in anticipation of continued market tightness. Military Defense sales were 20.1 percent of 1st quarter shipments compared to 30.1% of shipments in the comparable period a year ago and 22.5% of shipments in the prior quarter. SigmaQuad sales were 63.6 percent of 1st quarter shipments compared to 46.3 in the Q1 of fiscal 2021 $52,900,000 in the prior quarter. I'd now like to hand the call over to Doug. Go ahead, Doug. Thank you, DDA. We reported a net loss of $4,200,000 or $0.17 per diluted share, a net revenues of 8,800,000 dollars for the Q1 of fiscal 2022 compared to a net loss of $6,100,000 or $0.26 per diluted share, Net revenues of $6,600,000 for the Q1 of fiscal 2021 and a net loss of $5,000,000 or $0.21 per diluted share, a Net revenues of $7,700,000 for the Q4 of fiscal 2021. Gross margin was 54.4% compared to 46.1% in the prior year period and 50.2% in the preceding 4th quarter. Improvement in gross margin was primarily due to changes in product mix sold in the quarter, which reflects an increase in higher margin SigmaQuad sales as compared to the prior periods. Total operating expenses in the Q1 of fiscal 2022 were $9,100,000 compared to $8,700,000 in the Q1 of fiscal 2021 at $9,100,000 in the prior quarter. Research and development expenses were $6,100,000 compared to $5,800,000 in the prior year period at $6,100,000 in the prior quarter. CellLink general and administrative expenses were $3,000,000 in the quarter ended June 30, 2021 compared to $2,900,000 in the prior year quarter and $3,000,000 in the previous quarter. 1st quarter fiscal 2022 operating loss was $4,400,000 compared to $5,700,000 in the prior year period and $5,300,000 in the prior quarter. Q1 fiscal 2022 net loss was $4,200,000 compared to net loss of $6,100,000 in the Q1 of fiscal 2021 $5,000,000 in the Q4 of fiscal 2021. 1st quarter fiscal 2022 net loss included interest and other expense of $20,000 and a tax benefit of $172,000 Compared to interest and other income of $106,000 and a tax provision of $487,000 from the prior year, primarily resulting from the settlement of a tax audit in Israel, fiscal years 2017 through 2019. In the preceding 4th quarter, net loss included interest and other expense of $21,000 and a tax benefit of $304,000 Total first quarter pre tax stock based compensation expense was $823,000 compared to $755,000 in the comparable quarter a year ago and $753,000 in the prior quarter. At June 30, 2021, the company had $51,500,000 in cash, cash equivalents and short term investments and $4,300,000 in long term investments compared to $54,000,000 in cash, cash equivalents and short term investments $5,800,000 in long term investments at March 31, 2021. Working capital was $54,800,000 as of June 30, 2021 versus $56,000,000 at March 31, 2021 with no debt. As of June 30, 2021, stockholders' equity was $73,000,000 compared to $75,600,000 as of the fiscal year ended March 31, 2021. For the upcoming Q2 fiscal year 2022, Our current expectations are net revenues in the range of $6,900,000 to $7,900,000 with gross margin of approximately 51 Percent to 53%. Supply chain shortages and the impact of rising COVID infections in Operator, at this point, we'll open the call to Q and A. Thank First, we'll go to Jeff Bernstein from Cowen. Your line is open. Hi, guys. So I just wanted to make sure I understood the news with regard to the AWS OpenSearch Partnership. So just correct me where I'm wrong if I haven't understood. So AWS is offering an open source search capability in their facilities. And Without your product and software extensions to use the APU, that open source search capability was pretty limited. And I think you said you were bringing the capability to do a lot more things and Add the efficiency, both power efficiency and speed, of APU. If I've got that right, where are these APUs Going to run your software extensions, are they going to run-in the Amazon cloud and be a facility for people To use or are people going to pre process in the Amazon Cloud and then buy APUs from you to run search on their premises How does all this work? And most specifically, how does this relationship convert to APU sales and revenue for you? Yes. Amazon user will use Amazon Cloud. They will feel like they are in Amazon Cloud. But when they send the request to the Amazon, the query was sent to GSI Cloud And then we will return the results back to Amazon. And so for user point of view, they are operating in the Amazon Environment. Okay. We do the acceleration and we provide the search function to it. I see. So in this case, you will be offering a service where you build your own GPU I'm sorry, your own APU cloud with the Gemini APUs. And then you use that to Accelerate and also expand the capabilities of search that would have been done in the AWS open source search Cloud. Yes, perfect. Yes, I think yes, you've got it. Got it. So in the positive of this is Amazon is becoming very aware of what your capabilities are as a result of this or at least part of Amazon is. And customers who want to use this facility may help you build a standalone business of your own in providing an accelerated cloud, a little like how some of the like IBM is trying to do with Quantum. Yes, you're absolutely right. In the meantime, we are discussing and working with Several other companies, the Vector Search, SaaS space, as you will, just like Amazon, and we are working on it. And hopefully, Amazon It's the first one and open the door for the much bigger business for us. Understood. Thank you. And we have no further questions in the queue. Thank you all for joining us. We look forward to speaking with you again when we report our Q2 fiscal 2022 results. Thank you. And that does conclude our call for today. Thank you for your participation. You may now disconnect.