Greetings, welcome to the GSI Technology Inc. Q3 fiscal year 2023 results. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Lee-Lean Shu, Chairman, President, and Chief Executive Officer. Thank you, Mr. Shu. You may begin.
Good afternoon, thank you for joining us to review our fiscal Q3 2023 financial results. Q3 revenue of $6.4 million was within guidance, but at the lower end. Revenue growth was impacted this quarter by the uncertain outlook for the global economy. Despite this, we continue to see demand for our ASIC products and interest in our radiation-hardened and radiation-tolerant products. While customer order patterns are variable right now, these fluctuations are related to economy and external factors, not changes in the market requirements for our products. Despite the lower revenue in the quarter, increased sales of higher margin products resulting in gross margin of 57.5%, exceeding the high end of our guidance range.
While research and development costs declined sequentially, we saw an increase in selling, general and administrative expense, primarily related to difference in the level of quarterly adjustments to contingent consideration and the severance expense related to a recent layoff. To ensure success and align our resource within the company goals, we announced several cost reduction initiatives at the end of November 2022. The executive team took a comprehensive approach to identify and implement our expense reduction measures, which include a thorough review of all expenses and ways to streamline process and improve operation efficiency. We have two objectives with this strategy. One, to reduce our cash burn. Two, to align our resource around developing the APU. We are on track to achieve $7 million in savings on an annualized basis through targeted cost reductions.
These measures aim to rightsize our operation and precisely man-manage spending to increase efficiency and focus our resource on advancing the proprietary APU technology. Let me update you on where we are today with APU hardware and the software. The hardware development team is on track to tape out Gemini-II in the first half of this calendar year, which puts us on the schedule to see the first spin by late summer. In that case, we could test the Gemini-II chip by early fall. If everything goes accordingly, we could have a second tape out to fix bugs by early next calendar year. In parallel, once we have a chip that the software team can use, they will start developing the API and the library for Gemini-II.
Keep in mind that it took three spins to fix all bugs in the Gemini-I. The fourth to increase the I/O and the speed. Gemini-II has 8x memory density over Gemini-I and has 30x cost performance improvement. Gemini-II can greatly enhance our market push of APU technology and provide further substantial savings in power and smaller server footprint, while enabling large scale real-time search and HPC workloads. Software for Gemini-I is an area of intense focus currently. We have a full build up GVML library deployed and used by customers. One research institute has been able to write their own library based on it for their project. Our GRL library is developed for SAR applications. We have completed a POC project with IAI/ELTA based on this.
ELTA is also evaluating a GPU solution to benchmark against the APU. We could see some initial sales once the APU performance is proven favorable. In the meantime, we are marketing the SAR solution to other customers. We have recently improved our GSL library for similarity search application. We are engaging with a large corporation for a POC project for an on-prem similarity search project that requires very high accuracy and a low latency. The improved GSL library is perfectly suited for this application. On the compiler front, we have a completed C compiler that customer are using to program APU with C code. We are in the process of completing LPython, a Python compiler, to allow customer to write API.
Application and their library in Python. Currently, LPython is still in internal use and will be released for general use in July. Now I will hand the call over to Didier, who will discuss our business performance further. Please go ahead, Didier.
Thank you, Leland. Let me switch now to customer and product breakdown for the Q3 . In the Q3 of fiscal 2023, sales to Nokia were $1.3 million, or 20.0% of net revenues, compared to $1.9 million or 24.0% of revenues in the same period a year ago, and $1.2 million or 13.6% of net revenues in the prior quarter. Military defense sales were 26.2% of Q3 shipments, compared to 27.1% of shipments in the comparable period a year ago, and 22.4% of shipments in the prior quarter. SigmaQuad sales were 45.2% of Q3 shipments, compared to 40.5% in the Q3 of fiscal 2022 and 58.1% in the prior quarter.
Regarding increased production costs, we are evaluating where we can pass on the increased wafer prices that TSMC announced last year, which became effective starting January of this year. Gemini One hardware is now market ready. We have two board configurations, the Leda-E, which is in production, and the Leda-S, which is an SSD form factor board and is being finalized today. In the Q3 , we shipped one Leda-E board to a potential SAR customer, and we shipped one Leda-E server to a research institute that will explore Gemini One for encryption applications. I'd now like to hand the call over to Doug. Doug, go ahead please.
Thank you, Didier. We reported a net loss of $4.8 million, or $0.20 per diluted share on net revenues of $6.4 million for the Q3 of fiscal 2023, compared to a net loss of $4.6 million or $0.19 per diluted share on net revenues of $8.1 million for the Q3 of fiscal 2022, and a net loss of $3.2 million or $0.13 per diluted share on net revenues of $9 million for the Q2 of fiscal 2023. Gross margin was 57.5% compared to 55.3% in the prior year period and 62.6% in the preceding Q2 . The changes in gross margin were primarily due to changes in product mix sold in the three periods.
Total operating expenses in the Q3 of fiscal 2023 were $8.5 million, compared to $9 million in the Q3 of fiscal 2022 and $8.8 million in the prior quarter. Research and development expenses were $5.5 million, compared to $6.2 million in the prior year period and $6.4 million in the prior quarter. Selling, general and administrative expenses were $3 million in the quarter ended December 31st, 2022, compared to $2.8 million in the prior year quarter and $2.4 million in the previous quarter. Q3 fiscal 2023 operating loss was $4.8 million, compared to $4.5 million in the prior year period and an operating loss of $3.2 million in the prior quarter.
Q3 fiscal 2023 net loss included net interest and other income of $61,000 and a tax provision of $84,000, compared to $15,000 in net interest and other income and a tax provision of $64,000 for the same period a year ago. In the preceding Q2 , net loss included net interest and other income of $14,000 and a tax provision of $37,000. Total Q3 pre-tax stock-based compensation expense was $654,000, compared to $740,000 in the comparable quarter a year ago, and $661,000 in the prior quarter.
December 31, 2022, we had $35.2 million in cash equivalents and short-term investments and $0 in long-term investments, compared to $44 million in cash equivalents and short-term investments, and $3.3 million in long-term investments at March 31, 2022. Working capital was $39.2 million as of December 31, 2022 versus $45.8 million at March 31, 2022, with no debt. Stockholders equity as of December 31, 2022 was $54.8 million, compared to $64.5 million as of the fiscal year ended March 31, 2022. Regarding our outlook for the upcoming fiscal Q4 , we anticipate net revenues in the range of $5 million-$5.6 million, with gross margin of approximately 49%-51%. Operator, at this point, we would like to open the call to Q&A.
Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. The 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 hold for questions. Thank you. Our first question will come from Kurt Caramanidis with Carl M Henning . Please proceed with your question.
Hi, guys. What are you thinking cash burn looks like? Maybe out, kind of looking out this year with the revenues now being looking quite a bit lower per quarter, maybe?
Well, you know, we were looking at somewhere around $12 million or $13 million a year. The cost cutting will save us about $7 million a year. We'll be better off than we were a year ago, I believe.
I mean, is it gonna be like $4 million or $5 million a quarter?
Oh, no, no. I think we'll probably be, you know, something less than the $12 million-$13 million that we were previously saying.
For the year.
For the year.
Oh, okay. Is a sale leaseback an option for the building? Has that been looked into as you're doing other measures?
You know, it's something that we looked at, and it's something that we can consider for the future.
Okay. Sounds good. Well, good luck. Hopefully something with the APU comes through here in the next few quarters for the number one.
Great. Thank you, Kurt.
And our next question is from Luke Bowen, who's a Private Investor. Please proceed with your question.
Hi. Wondering if you all have come across any new application ideas and just generally which APU applications are you most excited about? Just kind of in context of-
We were set up.
Yeah, go ahead.
I'm sorry. Can you?
Yes, sorry. Yeah.
the question?
oh, yeah, I was gonna clarify that maybe in the context of, as you've all been exploring your technology and exploring marketing channels, going to conferences like the Berlin Buzzwords, yeah, just wondering if anything new has arisen or, yeah, light bulb's getting brighter? Yeah.
Right. Right now we're focused on the SAR, as Lee-Lean mentioned. We've done a POC, and we've obtained some, a very nice algorithm to go along with our hardware. You know, the benchmarking we've done against CPUs and GPUs are very promising for us, both on a performance level, a power level, and a form factor level, which is important, depending on where they deploy some of these systems. That's one area that we've not started, but we've been contacting all the SAR players, both on a commercial level and on a government level. As far as, I'm sorry. The other market is the fast vector search, is something that we've already put in a plug-in, we've talked about in the past.
Since then, there are a few other applications that we've had customers come to us with. One of them I mentioned in my, in my script, which was one of the boards or systems, I should say, it was a server that we shipped last quarter, was for encryption application. There are a few others that have recently come up, a little early to talk about about them just because we haven't gone through the process of seeing what are advantages yet. There are certainly no lack of different applications for the Gemini chip.
That's excellent. Yeah, it's really good to hear you're gonna be able to move forward confidently, yeah, checking off more and more boxes. Okay. Well, that kind of, yeah, I think discharges one of my other questions 'cause I know you're. Well, I guess, yeah, I'll just throw it out there as a general prospect, not necessarily for the, yeah, the near term, near term, but I saw that Amazon Prime Air launched their first test sites for their delivery drone program, and I know your advisor was the original leader of that program. Yeah, just curious if that could be looking at mobile data and autonomous vehicles, drones, VTOLs, yes, like small flying vehicles for commercial transportation and personal transportation. Yeah, wonder if you're still seeing that as a potential field, yeah, for coordinating, managing mobile data like that.
We are, but more for the Gemini-II chip. The reason I say that is if you're familiar with our solution, you know, our Gemini-I chip goes on a Leda board, as I mentioned. The leaderboard for the Gemini-I has an FPGA on there that has certain functionality that is critical for our solution. With Gemini-II, we take that functionality that's on the FPGA, and we put it within the Gemini-II chip. Now we can rid ourselves of that large FPGA. Some of the applications you're talking about, you know, the power and form factor being smaller is more important. Being able to rid ourselves of that FPGA will allow us to pursue those markets that were really a bit too challenging for our Gemini-I chip.
Yeah. All right. Yeah, I guess my thinking about that, and those like next step prospects is kind of thinking about the sensitivity of timing in business relationships, especially these advanced fields that are requiring a lot of R&D and might engender kind of a commitment from these large companies that are developing their programs and the component companies and how they're say, making systems on chips that are highly customized and requiring a lot of investment, they hope to get something back on.
Yeah, just trying to think about how they might approach or how you might approach that relationship in terms of holding a place and, you know, for the future development and not having to directly compete with all these very, like, inefficiently developed System-on-Chips, toe-to-toe, but rather, you know, kind of for them to anticipate being able to adopt your hardware and even your software and to kind of have that in mind as they develop these programs. Yeah. I kind of wondering if that is something that you all are seeing in terms of a one to two year, you know, development plan as you talk to potential clients.
I wanna make sure I'm not sure I fully understood your question, but, you know, as far as custom silicon and System-on-Chips and everything out there, most everything has really been geared towards the training portion of the market. As we've discussed in the past, that's not the application we're focused on. We're focused on similarity search, you know, and there are obviously other applications that are, you know, computation and, you know, intensive that our solution lends itself well. Because of the way we've architected our part, where we actually do the, you know, the processing and the search in place, you know, as opposed to having to fetch data and rewrite data, you know.
That technology we have is patent protected, and we haven't seen anybody try to do that at this point. We have carved out a niche in this similarity search. As far as other silicon coming in or other SoCs, it's really like I said, most of the solutions we've seen have really been geared around trying to make the training faster.
All right. I understand that. Thanks for answering. Excited that you all have gotten just confirmation after confirmation. Keep it rolling.
Thanks, Luke.
Our next question is from George Gaspard, who is a Private Investor. Please proceed with your question.
Thanks, good day to everyone there. George Gaspard here. Could you relate a little bit more detail about how many employees you have now versus when you started to disengage employment? How does that relate? How many total people have left, and what is your employment number now? Could you give us an idea of How much of the stock, how many shares of stock were held by the employees that you've let go?
We had approximately a little over 180 in total. Now we're down to, you know, like around, right around 165 or so. The people that left, I don't recall the exact number of options that were canceled upon them leaving, but it wasn't a significant number. I mean, we still have about, I wanna say maybe about 8.5 million or so option shares outstanding.
Yes. Say that again. How many shares are outstanding to employees?
I wanna say it's about 8.5 Million options first that have been granted.
Eight and a half million. The $654,000 of base tax-based stock issuance in this recent quarter, how does that stack up in terms of the total expense for employees? Non-cash and then cash.
Oh, geez. You know, I can get back to you offline. I don't have all that information in front of me right now, but I can get it for if you need it. The stock-based compensation expenses is we've been running around that level for several years, and I don't see it going up significantly. It'll probably be a similar number.
Okay. It's obviously this stock-based stock in issuance is important to stabilize your total expense structure. We have to assume that that's gonna stay in that range of the last quarter, would you say? That $654,000.
Yeah, I would say so. I would say so.
Okay.
Yeah. That isn't. That's not shares that we've issued. That's just assumed value of the options that we've granted to employees, you know. The accounting rules require us to place a value on the option grants and then expense them over a period of time.
Right. Okay. Then this, $654,000, is rated as an expense in terms of your operation on a quarterly basis, correct? In other words,
Yeah, we record that in the income statement every quarter. It's a non-cash expense.
It's a non-cash expense. Okay. Yes. All right. Okay. The gross margin decline that you're looking at for the current quarter, is there some cost structure associated with that in terms of employees that recently have left? Or other things that are going on, you're looking at less sales that you've expressed in your release today. That obviously could easily have a effect on the gross margin decline. Is there something else going on in terms of the cost structure associated with the further development of Gemini-II relative to other quarters? What's the comparison in terms of cost structure relative to what you've done on Gemini-I and now you're doing in Gemini-II?
Well, Leland can talk about your last question, but in terms of the gross margin, the layoffs really didn't impact it that much. Most of the layoffs, other than a couple hundred thousand dollars, are all in the operating expenses, not cost of goods sold. The gross margin is lower because, you know, the revenue is lower, and we still have, you know, the fixed overhead expenses that need to be covered by the margin on sales. That's why the gross margin number's down. The product mix is still a good product mix with good margins associated with each shipment.
I see. Okay. Now, last question would be back on the progress being made in Gemini-II. You know, this has taken a long time for the company to really generate customers, giving you orders as in expanding what they are gonna use it for. Do you feel that you're very close now, and that by the end of the current quarter, say the end of March, that you'll be able to actually have orders for Gemini-II going forward? Or do you envision that it's still gonna take more time into the June quarter or the September quarter? Can you kinda give us an idea of what you're thinking about in terms of really starting to spin out some revenue stream here?
Yeah. At this point, we're still seeding the market and building the pipeline. As I mentioned, we shipped a couple systems last quarter. We're anticipating to ship a few more, and it's building that pipeline now. We don't have any production orders at this point. It's still building that pipeline.
I see. Okay. Have you been affected negatively on the tremendous storm conditions in California from the middle of the state up, has that created any kind of problem for you to deal with?
No, not at all.
Okay. All right. Okay. Well, I think that, you know, this has taken a long time, in terms of years to get this action going forward on to Gemini-I and into Gemini-II. Something's gotta really start to happen here in terms of getting, t he interesting thing is that with this decline that is being seen in your business, generally speaking, I mean, when I say your business, I mean the general business, associated with chips, it would seem like what has been happening in the last two, three quarters generally for the industry, would really put you in a position to take advantage of really getting up on track and going with some business that would be developed from what you've been trying to accomplish in, say, the last year. Can you say anything about that?
I'm not sure we followed the train of thought there. I mean, certainly, you know, we've had the general slowdown in our legacy business, and we're continuing to pursue .
Correct.
You know, the new products, but I'm not sure we followed the, your train of thought there.
Oh, okay. Well, I What I'm just saying is that with business having fallen off and trying to see ways of taking advantage of moving into a broader customer base, as you're, you know, starting to move forward into the Gemini-II area, that it may be the fact that the industry has gotta come out of this decline that it's experiencing. With you having something new to bring to the market that it would be possible for GSIT to really take advantage of maybe some momentum because of what's happened in the industry going downward, and that if you're really getting close now to introducing innovations that you've been working on in Gemini-II, I would think that the shareholders of your company should be certainly looking forward to a turnaround in revenue stream beyond the Q1 .
Beyond this current quarter.
Understood, yeah. Sorry?
Exactly, yeah. Yeah, you know, we do anticipate, even in the legacy, we anticipate a bounce back by the middle of the year.
Yeah.
Revenues go based off of input from customers. Again, it's just we need to continue the process with the APU, continue the, you know, the development we're doing with researchers, with the government applications and continue to just move forward. It's a process.
I see. Okay.
Yeah, in the marketplace we are in, you know, we see the Gemini-I is, has a better solution than all the competing product. The Gemini-II is the leaps and bounds better than the Gemini-I.
I see.
We are pretty confident that could create the market leader for the, you know, for in the, in the area we are in.
I see. Okay. Thank you very much.
Thanks, George.
Thanks, George.
As a reminder, it is star one if you would like to ask a question. As there are no further questions at this time, I would like to turn the floor back over to management for closing comments.
Thank you all for joining us. We look forward to speaking with you again when we report our Q4 and full year fiscal 2023 results. Thank you.
This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.