Ladies and gentlemen, thank you for standing by. Welcome to GSI Technology Second Quarter Fiscal 2023 Rresults 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 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've also been asked to advise you that this conference call is being recorded today, October 27, 2023, 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, and thank you for joining us to review our second quarter fiscal 2023 financial results. Revenue in the second quarter of fiscal year 2023 grew year-over-year by nearly 15% to $9.0 million, the midpoint of our guidance range. Revenue growth was primarily due to increased sales of high-performance SRAMs and the shipment of radiation-hardened SRAMs in the quarter. As a result, our gross margin rose by 900 basis points year-over-year to 62.6%. Higher gross margin, along with flat operating expense year-over-year, led to a lower operating loss for the quarter. Net loss for the second quarter narrowed to $3.2 million.
As of September 30, 2022, GSI Technology's cash balance, which includes cash and cash equivalents, as well as short- and long-term investments, was $38.9 million. We have a number of items in the file with Gemini-I, but our team is primarily focused right now on developing two near-term markets for the APU. The first is synthetic aperture radar or SAR image processing acceleration, and the second is fast vector or neural search optimized for big data applications. Let me help you understand why these two markets are being prioritized. At the end of September, we announced that our synthetic aperture radar image processing acceleration system using GSI's APU was approved for use by Elta, a subsidiary of Israel Aerospace Industries.
This is a chance to showcase the technological superiority of our APU and will open future opportunities for GSI in the field of accelerating SAR image formation with new customers. The features that make our SAR image processing acceleration system solution very attractive are one, scalability, two, low power consumption, and three, portability. First, with respect to scalability, the scalable APU architecture allow expanding to multiple boards on servers for added performance and redundancy without specialized link. The APU platform has the capability to stack servers together and bring near real-time capability to compute-time-consuming, compute intensive process. Second, with respect to lower power consumption, GSI has demonstrated using a large area SAR image processing in 1 second and higher resolution scenarios. That APU use on average 88% less power than CPU or GPU systems and requires significantly fewer servers.
And third, with respect to portability, our solution uses 1/10 the number of servers than a CPU or GPU system, making it small enough to be installed on UAVs and drones. GSI solution can support a broad range of platforms, from 500-meter quadcopters to 750 km satellite, as well as data center deployment. The SAR market is an attractive market where we have existing relationships with prospective targets. Didier will elaborate on the go-to-market strategy for the SAR application in his comments to follow. Our Fast Vector, our neural search product, which I will refer to as our FVS product, supports on-prem, hybrid, and cloud users.
The FVS plugin can be used by customers who are all on-prem and those that may have hybrid storage and/or processing in the cloud. For completely cloud-based customers, the Search and AI website is live and available for trials. We currently have about 12 users exploring the platform. These users are primarily data scientists evaluating search engine's capability for their organizations, meaning they load their database and create a front end for the teams to search. The compelling features of the FVS product are speed combined with a small hardware footprint and lower operating power consumption compared to traditional large platforms used for search in large complex database. We still have work to do on our end in developing business opportunity for the FVS product and scaling the business. The TAM for the specific search market we are pursuing is a very large market.
Google has estimated that more than $300 billion is lost due to search abandonment each year in the U.S. alone. We are providing an accelerator for existing search platforms such as OpenSearch and Elasticsearch that accelerate the search with lower power and less hardware, rather than just adding more traditional computation capability. The Gemini plugin extends search capability beyond text and does it faster using a simple approximate nearest neighbor or KNN vector similarity search. This is Gemini-I sweet spot in performance and an ideal application for the technology. We are ready for production supporting customers on-prem or hybrid solutions. Searchium.ai allow FVS POC customer to try our product prior to committing their workloads or purchasing hardware. It also support full cloud-based customers utilizing the OpenSearch database.
We have launched Searchium.ai and attracted more than 500 visitors and are working with a dozen opportunities. We will have plugins for Elasticsearch database. With these three potential customer sources to grow this market, on-prem, hybrid, and cloud, we are confident that we can see revenue from FVS products in calendar 2023. Last, let me give an update on the compiler stack. We released the Copperhead, the first version of the full- stack LPython compiler for APU code development for alpha users. We plan to migrate APU application library over the next few quarters. Currently, Copperhead is still in alpha mode and is used exclusively for internal development. We are targeting an end of year beta release and expect the compiler to be broadly available this calendar year.
This is a longer timeline than we had originally anticipated, but we are building a fast and efficient tool for use in LPython for rapid code generations. We believe the additional development time will yield a better outcome. Now I will hand the call over to Didier, who will discuss our business performance further. Please go ahead, Didier.
Thank you, Lee-Lean. In the second quarter, we shipped rad-hard chips to a U.S. prime contractor who used them in prototyping a new program. This was a one-off sale, and we do not have visibility for a follow-on order from this customer at this time. However, if a few of the recent prototypes we've shipped move to production, it could add incrementally to the fiscal years 2023 and 2024 revenues. As Lee-Lean mentioned earlier, we have finalized the SAR POC with IAI/Elta. We have finalized all the sales and marketing materials needed for customers, including benchmarking, technical papers, and an online demo. We are now aggressively launching a campaign to engage with the leading players in the SAR market.
It's the early stages of developing this market for Gemini-I, but we have a great solution that is extremely flexible and can support a large variety of use cases. Typically, SAR applications are very specific, but Gemini-I can be used in a wide range of altitudes, resolution, and image sizes. Also, due to the small footprint, our solution can be deployed in small drones or satellites. As a result, we are confident we can successfully build a customer base with this application. Let me switch now to customer and product breakdowns for the second quarter.
In the second quarter of fiscal 2023, sales to Nokia were $1.2 million or 13.6% of net revenues, compared to $1.9 million or 23.8% of revenues in the same period a year ago, and $1.3 million or 14.7% of net revenues in the prior quarter. Military defense sales were 22.4% of second quarter shipments, compared to 27.4% of shipments in the comparable period a year ago, and 22.3% of shipments in the prior quarter. SigmaQuad sales were 58.1% of second quarter shipments, compared to 52.4% in the second quarter of fiscal 2022, and 44.8% the previous quarter.
We remain confident we can fulfill the orders that we have in hand for the upcoming quarters for our SRAM customers, and that we have sufficient capacity to meet the demand. I'd like to hand the call over to Doug. Doug, go ahead, please.
Thank you, Didier. We reported a net loss of $3.2 million or $0.13 per diluted share on net revenues of $9 million for the second quarter of fiscal 2023, compared to a net loss of $4.6 million or $0.19 per diluted share on net revenues of $7.8 million for the second quarter of fiscal 2022 and a net loss of $4 million or $0.16 per diluted share on net revenues of $8.9 million for the first quarter of fiscal 2023. Gross margin was 62.6% compared to 53.6% in the prior year period and 60.2% in the preceding first quarter. The changes in gross margin were primarily due to changes in product mix sold in the three periods.
Total operating expenses in the second quarter of fiscal 2023 were $8.8 million, compared to $8.7 million in the second quarter of fiscal 2022 and $9.3 million in the prior quarter. Research and development expenses were $6.4 million, compared to $5.9 million in the prior year period and $6.6 million in the prior quarter. Selling, general and administrative expenses were $2.4 million in the quarter ending September 30, 2022, compared to $2.8 million in the prior year quarter and $2.7 million in the previous quarter. Second quarter fiscal 2023 operating loss was $3.2 million, compared to $4.5 million in the prior year period and $3.9 million in the prior quarter.
Second quarter fiscal 2023 net loss included interest and other expense, net of $14,000 and a tax provision of $37,000, compared to interest income and other expense, net of $8,000 and a tax provision of $42,000 for the same period a year ago. In the preceding first quarter, net loss included interest and other expenses of $26,000 and a tax provision of $60,000. Total second quarter pre-tax stock-based compensation expense was $661,000 compared to $716,000 in the comparable quarter a year ago, and $638,000 in the prior quarter.
At September 30, 2022, the company had $38.2 million in cash equivalents and short-term investments, and $628,000 in long-term investments, compared to $44 million in cash equivalents and short-term investments and $3.3 million in long-term investments on March 31, 2022. Working capital was $42.2 million as of September 30, 2022 versus $45.8 million at March 31, 2022, with no debt. Stockholders' equity as of September 30, 2022 was $58.7 million compared to $64.5 million as of the fiscal year ended March 31, 2022. Given our current cash burn, we remain confident that we have sufficient funds to cover further R&D in the APU platform as we approach breakeven.
We're also looking at opportunities to monetize other assets on our balance sheet should additional cash be needed. Given the current global economic environment, our current expectations for the upcoming third quarter are net revenues in the range of $6.3 million-$7.3 million, with gross margin of approximately 53%-55%. Operator, at this point, we will open the call for Q&A.
At this time, we'll be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. Our first question comes from Mike Mork with Mork Capital Management. Please proceed with your question.
Hi. Good break out there. My.. Excuse me, my... Excuse me. My question is, your revenues are $35 million-$37 million, but you're spending $25 million on R&D. That seems just exceptionally high. Obviously, hopefully you're gonna get some good products out of that. Are you gonna keep that at that $25 million or is it gonna come down or is it gonna go up with revenues? When do you think you will be at a breakeven point?
Yes, we are looking into it and we will talk about it in the next quarter. I think we will size it down, but we want to keep the product going, so we are reviewing.
Mike, you still there?
Yes, I'm here.
Yeah. Sorry. The response was that we will be reviewing the R&D costs over this quarter, and there'll be some kind of an announcement by the next call.
Okay. How about breakeven? Do you have any guess on as one, two years out or what?
We could break even in a couple of years or so. It really all depends on what we see from the rad-hard, rad-tolerant revenue and APU revenues. They both have very high gross margins and That once we start shipping will lead to breakeven and profitability.
Okay. Well, thank you.
Thanks, Michael.
Our next question comes from Luke Boney. Please proceed with your question.
Hi. Back for another call. Question about the Elta deal. You also got confirmation, I guess all the testing went well for that. Wondering what the timeline is for the initial revenue and then, if you all have a roadmap for expanding into other SAR clients through the Elta platform?
Great question. We delivered the initial system, the POC system to them in the summertime, and they're going through their testing and trials now. They're looking at possibly ordering two more systems that are slightly different in the first half of calendar 2023. I say slightly different 'cause they have many use cases which I talked about in my script. As far as other SARs, absolutely. They're all gonna have a slightly different approach, I'm sure, but the meat of what we've done for Elta will be certainly usable for other SAR manufacturers. As I mentioned, we have everything in line now. We wanted to make sure we had everything available before we put too much hardcore press on them. That is done.
As I mentioned, all the collateral, we've done all the benchmarking versus CPUs and GPUs. We have all the collateral, all the technical data. Very recently, we added a demo on our Gemini website that allows customers to actually run a pre-loaded data set of SAR images so they can see how it works. That's all done now. We've actually have already started the outreach to these customers and have already gotten responses and are setting up meetings now. Yes, this is gonna start happening very quickly.
That's excellent. Do you have any other insight into the SAR market? Thinking about what you said there are multiple different SAR applications, so kind of heterogeneous. Wondering about the kind of timeline of turnover, if you know about the legacy systems and when those are due to be out of date and probably looking to upgrade with you or somebody else. What about that and maybe the total SAR market. You know, with a quick search, looks like about maybe $3.5 billion.
Right. Sure.
Maybe more. Yeah.
Yeah. Yeah. When I mention we have flexible system, the POC we did can put our solution on a quadcopter, it could put it on a satellite. You can have different image sizes from a kilometer to 10K by 10K images. So, yeah, that's very flexible on what we can do. Most of the folks we're gonna deal with are gonna want one, you know, one very specific altitude with one specific image size. That's why we're hoping a little simpler with the guys going forward compared to what we did with the POC with Elta, which was a very broad, widespread POC.
Okay. That's good that you got that work, you know, satisfied there. Yes, do you think you'll be able to or do you have any kind of rough estimate of what percentage of the SAR market you all could possibly address within the next five years?
We should have a better feel for it by the next call. As I mentioned, we've done the hardcore outreach very recently, and we have started setting up the meetings, and so it's early right now for me to make that assessment. By the next call, we should have much more data.
Kind of reminds me of not a broad question, but kind of a general question about whether Gemini-II will vastly increase the performance of Gemini-I, or is Gemini-I, which it seems like to me is like sufficiently representing the power of Gemini for prospective clients and customers that are testing it out.
Gemini-II will be a drastic improvement. Performance will drastically improve, okay? We are looking at maybe a order of magnitude performance improvement. More important is at present, Gemini-I has a FPGA on board, and the Gemini-II, we don't need that. From the cost point of view, it's about one quarter of the cost, Gemini-II over Gemini-I. If you combine performance and the cost and also the footprint, and the Gemini-II, because of the performance, we can have a much, much less cost than the Gemini-I. If you look at the performance, power, footprint, and the cost, we are talking about more than two order of magnitude improvement over Gemini-I. Gemini-I, right now we are very limited on the Edge application. With Gemini-II, you know, we can heavily involve or go into the Edge application. That's a very exciting prospect of the Gemini-II. We are very excited about it.
Excellent. Yeah, I am too. Yeah, it's very low power, the higher profit margin and higher performance. Yeah, I was making sure that what you all have currently, which is, it seems like the platforms you're setting up, the software service platform and. Oh, that leads to the other question. The Muves platform that seems like you all are partnering with and powering. Yeah, that you all are using the Gemini-I are able to represent this and give perspective to our clients a taste of the strength of Gemini so they can extrapolate into what's possible and then potentially start building into those partnerships with you now similar to Elta.
Yeah, absolutely.
Yeah. That was kind of the question then and the thinking out loud, but. Okay, great. Do you have anything to share about the Muves? I saw the video on the website, but didn't get a clear sense of what all is going on in the background and what your relationship is with it.
Relationship with who?
With Muves.
Oh, Muves. Oh.
Muves, yeah.
Yeah. Okay. Yeah, right now, the video you're referring to is the multimodal video. Yes. We have been doing some work with them, and that was the first demo and the first program or project, I should say, we worked with them. Like you said, it was, you know, certainly a very interesting, you know, kind of product solution we'll be able to go with that. We're looking to expand that to do other types of applications as well. Yes, that is. That started kind of in the summertime, and we plan to expand upon that relationship.
Excellent. Yep.
Our next question is from James Pasquale. Please proceed with your question.
Hi. Thanks for taking my questions today. I had a couple of questions regarding the software that Mr. Shu had talked about that I believe it was due in July, and it is pushed out to what date now?
The, the... Are you referring to the compiler?
Yeah, Copperhead. Yes. Yeah.
Oh, okay.
Yeah.
Yeah. Right now we are planning to, you know, the early next year, the calendar year, so we can promote it to the beta customer and the general availability. Yeah, we are very close to it now.
Okay. Very good.
It's being-
Why didn't we get it done in July? What's the reasoning why it's now at the, I guess, in calendar year early 2023 now. What happened? Could you explain to us what's going on?
It actually is being used right now. It's being used internally. All of our algorithms that we're developing now or converting are being used on Copperhead. It is being used internally, and we do have a few alpha customers. We were just wanting to make sure it was bug-free and all the documentation was ready before we released it to beyond that group. The answer is, it is here now. It's being used now. It's just not released to the general public yet.
Well, as the first caller said, he said, you guys are burning through a lot of cash, and right now it's at $39 million. That's not unlimited. You know what I'm saying? Especially when you're not generating more cash flows. Could you tell me more about these rad-hard prototypes, and how they could add incremental sales in 2023 and 2024? How likely is that?
We've already shipped out product to about eight different entities, and a few of the entities have ordered them for multiple programs. They're all prototypes. They're, you know, obviously they need to take the parts. Some of them are going to be actually launched. If you recall, we shipped some. Our first rad-hard was in June of last year, and at the time, we were told that the satellite would be launched at the end of last year, beginning of this year, which would have given us a heritage. It still has not been launched, and that is obviously completely out of our control.
The answer is, you know, these, once they do the proof of concept and the prototyping that it's real, then that's when they go into the production phase. We don't have that visibility yet on those programs. Certainly we anticipate that some of these programs will certainly go into production.
When?
That's a good question. Again, it's you know when
Well, we need income. We need more sales. You know, we're burning through cash. We have delays in the development of the APU, which actually sounds like it's unique technology based on what you said, and I read the marketing pieces online about the GSI's marketing piece, it looks tremendous. You know, we have a share price that's trading at or below liquidation value. You know, stocks don't get at those levels for no reason. Usually it's when there's poor execution or strategy by the management team. I guess my point is, we're trading at liquidation values. We're not getting any valuation from the APU or even the legacy business, it looks like it too.
What can we do about that to get the investors to recognize, like, the benefits of this APU and the technology we have? Maybe get some excitement there because it doesn't seem to be. We don't seem to be getting any traction in that area.
Yeah. APU is a new process coming to the market. It does take a little time from the design to, you know, to the product, to the revenue generation. I know it's been taking a couple years, but, t hat is the barrier, the new device we have to go through and we do have some learning curve going through and hopefully we-
Well, we need to speed up. We need to speed that effort up. One other thing I would like to make comment about January twentieth to twenty-two, the largest institutional investor in the company made some recommendations to the company that I don't believe any of them have been implemented, at least one. His recommendation was, he wrote a letter to the board. He recommended the need for a new leadership who's better qualified to execute and lead the company. Right now, we haven't taken any action on his recommendations, and we have a stock trading at, like, basically liquidation value. I highly suggest that the board of directors and Mr. Shu consider that.
I think the company could use a little boost of some sort to these very exciting technologies, especially APU, 'cause right now I don't see it happening. We are running out of resources. We need to protect that resource so we can get to the next level. Thank you for your time.
Mm-hmm.
Thanks, James.
Thank you.
As a reminder, if you would like to ask a question, please press star one on your telephone keypad. Our next question comes from George Gaspar. Please proceed with your question.
Thank you. Could you zero in on this commentary on the expectation of lower revenue stream in the existing quarter that you're in now? Can you tell us where is the lower revenue coming from? Where are you gonna have lower revenue? What product line within there?
The first one was we shipped a fair amount of revenue associated with that rad-hard prototype that I talked about. As we mentioned, that was a one-off sale until You know, they could go into production. That was certainly some. We had also two programs that did a build-up of inventory from two separate customers that were significant customers for us, and the backlog isn't there for this quarter. We've talked to them and certainly the products are healthy. They just have gotten into an inventory position. That's really the three main areas. They were, you know, they were significant.
Well, if with that being the case, you can't see or be looking for very much of any kind of actual net revenue in this quarter from what you're trying to apply into the Gemini market right now, correct?
Okay, I'll make sure I have the question correct. You're asking if this quarter, if the revenue has any APU in it?
Correct. Yeah.
It has minimal revenue. We do have two customers that we will be shipping a system to, and that's for them to do their trials. It will have minimal revenues. It's really their demo systems for them to evaluate for future production purposes.
I see. There's just nominal. Then, of course, so the outlook is going forward beyond this quarter that we're probably looking at more into what? Like, the second calendar quarter of next year before something can really develop on the Gemini-I in terms of revenue streams, solid revenue stream.
We don't have a timeline exact, because again, we've had systems in multiple companies' hands, and they're doing their evaluations. They haven't given us indication on when that would progress beyond that. To say second quarter next year, I don't know. It could be, it may take a little longer.
I see. Okay, can you answer this question? The relative differential between Gemini-I and II. Now that you're working forward on Gemini-II, do you think that this might deter your potential customers from jumping in and testing and going for actual purchases of Gemini-I until Gemini-II is out there where they could compare it with Gemini-I? Or, can you just explain that a little bit?
Sure. This is gonna expand what Lee-Lean said. Gemini-II is actually gonna really help us more on the edge. I mean, can it do everything Gemini-I can? Yes. What we're using Gemini-I for now is sufficient. I mean, it's, you know, the performance is exceptional. What it lacked, Gemini-I, was, and again, going back to Lee-Lean Shu's comment, because of the FPGA that was on the Leda board with Gemini-I.
Right. The cost of the solution was higher. The power, because of that FPGA, was higher, the form factor was higher. With Gemini-II, we don't need that FPGA. Now the Edge application, which was a very challenging and if not impossible, edge solution with our part. Now with Gemini-II, we'll be able to address those Edge applications that Gemini-I just was not a good fit for. It's really we're trying to address a different market with the Gemini-II.
I see.
I should say a different application really. It's the Edge application.
Yes. Okay. All right. Lastly, as far as the total cost structure associated with the stock that's issued to staff, can you compare the last quarter with the previous quarter and what, how many shares are we talking about that are being cashed into staff on a quarterly basis at this point in time? Considering the fact that the price is down so far now, how do you gonna handle that?
Well, in the most recent quarter, you know, a quarter ago, I think it was only several hundred thousand shares. It wasn't that much. For the most part that is somewhat typical. You know, if you look at the 10-Q, you can see the activity for the most recent quarter, you know, the March, the June quarter. You can also look to the 10-K. It's got all the activity there. That should be somewhat reasonable estimation of what the future might behold.
Well, yeah. Specifically with the price at where it is now versus what the average price is for the 700,000 shares that you're talking about that were issued in the last quarter, does this suggest that your outlay of shares will be a lot more going forward based on the fact that-
No.
The price is lower?
No, we don't issue the shares based on the price. We have a structure within the company based on person's seniority and position and so on.
I see.
How many shares we typically grant to that kind of position. The price has no bearing on the number of shares.
I gotcha. Okay. All right.
That's it.
Well, thanks for that explanation. Thank you.
Our next question comes from Chris McKay. Please proceed with your question.
Yeah, thanks for taking my call. In light of the cash balance, are you expecting a share dilution possibly within the next 12 months? Thanks.
Are we anticipating issuing more shares? Not at this time.
Okay, thanks.
Ladies and gentlemen, we've reached the end of the question and answer session, and I would now like to turn the call back over to Mr. Shu for closing remarks.
Thank you all for joining us. We look forward to speaking with you again when we report our third quarter fiscal 2023 results. Thank you.
This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.