GSI - Q4 2024

Transcript

Operator (participant)

Ladies and gentlemen, thank you for standing by, and welcome to the GSI Technology's fourth quarter fiscal 2024 financial results conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and we'll 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've been advised to advise you that this conference call is being recorded today, May 2nd, 2024, 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.

Lee-Lean Shu (Chairman, President, and CEO)

Good afternoon, and thank you for joining us today. Let's start with some highlights from our fourth quarter activities. During the quarter and subsequently, we achieved significant milestones across our key initiatives. First, we launched 2 high-capacity, low-power, 1U and 2U servers, integrated with the powerful Gemini-I APU, designed specifically for SaaS and fast vector search applications. These servers can enable mobile applications such as plane and satellite, and will offer enterprise-level processing at edge. In addition, we now have a benchmark on ANSYS lead boards for SaaS, providing crucial tools for our follow-up efforts with our customers, our SaaS targets over the past year. We are finalizing marketing materials and plan to begin sales promotion to target the customers by the end of second quarter, second calendar year, year quarter.

Second, we made considerable progress with chips from the first spin of Gemini-II, presently undergoing rigorous testing and debugging. The results showcased during the testing was significant for the integration of the chip onto a board. Having a chip mounted on a board has enabled comprehensive performance assessment. The chip can perform the basic functions in the processing core and is able to move data between the processing array and the L1 and L2 local memories. It verifies that the instruction can be successfully executed through the embedding processor and that the data path is also working. So far, we are pleased with the chip's result, which has been better than we anticipated. We aim to conclude the phase by the end of calendar Q2, and then proceed with the second spin. We anticipate receiving the next chip by fall and initiate benchmarking shortly after.

This could allow us to begin preliminary customer sampling with the expectation of starting alpha testing with target customers before year-end, along with further, further software development and the writing of libraries. Due to the huge model size requirement introduced by large language models, there are many efforts in the AI industry to reduce model size, notably binary neural networks and the bit-level. Those algorithms reduce the model weight to 1 bit or 1.58 bit, instead of a 16-bit and 8-bit in the present models. The reduced weight size relieves the memory storage requirement and simplifies the computation. Thus, simplify the computation is especially beneficial to APU architecture over the traditional GPU architecture. GPU architecture are based on high-resolution matrix multiplication for computation that is good for high-resolution model size.

However, bit-level and the BNN require pooling operation and integer addition for computation instead of matrix multiplication. APU architecture has a pooling operation and the integer addition as the basic building blocks. That means that the APU is well suited for this kind of, this kind of operation and offers advantage for higher performance and lower power. Our plan with Gemini-II is to target these algorithms and demonstrate to users of BNN and the bit-level, that APU can fit a small model entirely into the chip for edge applications. We expect to begin this demonstration early next calendar year, once the next spin of the chip becomes available. Another important development since the close of Q4 is the sale and leaseback of our headquarters in Sunnyvale, California.

The sale, expected to close in early June, will provide additional funding to support the finalization of Gemini-II and other R&D projects. Last, our ongoing engagement with the hyperscalers continue to show promise. We have received great feedback on what we need to focus on as we start to discuss the design and application for Gemini-III. We are seeking a technical partner for Gemini-III. We are pleased with the progress we have made in our conversations with some potential partners who could provide technology to support the functionality of Gemini-III with high-bandwidth memory. Now, I will hand the call over to Doug, to Didier, who will discuss our business performance further. Please go ahead, Didier.

Didier Lasserre (VP of Sales)

Thank you, Lee-Lean. Starting with fiscal year 2025, I would like to highlight several strategic goals and initiatives we will work on with each of the APU generations. First, we aim to sustain our legacy sales at the current run rate, and now with two APU servers available, we're primed to pursue Gemini-I sales, particularly focused on SAR/SaaS solution. It's our intention to achieve the first sales of Gemini-I in the second half of fiscal 2025. With Gemini-II, we are actively writing libraries to develop new applications on the edge or near edge. The second generation of our APU brings significant performance enhancements with more than 10x the processing power, with 8 times the memory density compared to Gemini-I. Gemini-II offers substantial processing capabilities, being suitable for both low-power data center expansion and enabling data center functions at the edge.

This empowers the local execution of computational-intensive tasks, increasing the edge application capabilities like advanced driver assistance systems for automobiles and HPC in delivery drones, autonomous robots, unmanned aerial vehicles, and satellites. Additionally, Gemini-II memory can hold a small database, a potential door opener for enhanced performance in several applications. One example could be an off-the-shelf facial recognition solution, potentially in hardware with on-prem software or SaaS. This is the year, we are highly committed to further engaging with potential Gemini-III partners, including customers for the chip and technology partners for HBM integration. Getting partner funding for Gemini-III development is also a key priority. In addition, I am pleased to share that we shipped parts for a new prototype for a European Space Agency robotic space mission to intercept a comet.

Before I conclude, I'd like to emphasize the key objectives that the GSI team and I are actively pursuing. First, securing sales for Gemini-I, advancing Gemini-II for its second iteration, which will enable us to commence customer sampling later this year. And then lastly, actively seeking strategic partnerships for Gemini-III. Achieving these objectives will build awareness of the APU brand, improve our financial standing, and position us to enter large, high-growth markets related to AI. Let me close with the customer and product breakdown for the fourth quarter, fiscal 2024.

Sales to Nokia were $694 thousand, or 13.5% of revenues, compared to $1.2 million, or 21.8% of revenues in the same period a year ago, and $807 thousand, or 15.2% of net revenues in the prior quarter. Military defense sales were 35.5% of fourth quarter shipments, compared to 44.2% of shipments in the comparable period a year ago, and 28.2% of shipments in the prior quarter. Semi-custom sales were 42.4% of fourth quarter shipments, compared to 46.3% in the fourth quarter of fiscal 2023, and 46.9% in the prior quarter. I'd like to hand the call over to Doug. Doug, go ahead, please.

Douglas Schirle (CFO)

Thank you, Didier. Before I cover the fourth quarter and full year fiscal 2024 results, I want to reference the business update that was in the earnings release issued today after the market closed. In the press release, we announced that we have initiated a broad strategic review to maximize stockholder value. The review will be administered by a special committee of the board of directors to bring focus on strategic alternatives while the company's management focuses on the development of its family of compute and memory solutions for high-performance computing and artificial intelligence. The company plans to consider a wide range of options, including equity or debt financing, divestiture of assets, technology licensing, or other strategic arrangements, including the sale of the company.

Over the course of the last eight years, the company has invested approximately $150 million of internally generated capital to develop its novel associative processor architecture and build a team of approximately 80 engineers in hardware and software development. The company's board of directors is of the opinion that the market has yet to recognize the progress and promise of the company's position. Any actions taken as a result of this strategic review will be directed at driving shareholder value. The company has retained Needham and Company, LLC, as our strategic and financial advisor in addressing these alternatives. There can be no assurance that this strategic review process will result in the completion of any transaction. The company has not set a timetable for completion of the strategic review process at this time.

Turning to the fourth quarter results, we reported net loss of $4.3 million or $0.17 per diluted share on net revenues of $5.2 million for the fourth quarter of fiscal 2024, compared to a net loss of $4 million or $0.16 per diluted share on net revenues of $5.4 million for the fourth quarter fiscal 2023, and a net loss of $6.6 million or $0.26 per diluted share on net revenues of $5.3 million for the third quarter of fiscal 2024. Gross margin was 51.6% in the fourth quarter fiscal 2024, compared to 55.9% in both prior year-end and the preceding third quarter.

The decrease in gross margin in the fourth quarter of 2024 was primarily related to, due to product mix and the effect of lower revenue on the fixed costs and our cost of revenues. Total operating expenses in the fourth quarter of fiscal 2024 were $7.2 million, compared to $6.9 million in the fourth quarter fiscal 2023 and $9.7 million in the prior quarter. Research and development expenses were $4.8 million, compared to $5 million in the prior year period and $7 million in the prior quarter. Selling general and administrative expenses were $2.4 million in the quarter ended March 31, 2024, compared to $1.9 million in the prior year quarter and $2.7 million in the previous quarter.

Fourth quarter fiscal 2024 operating loss was $4.5 million, compared to an operating loss of $3.9 million in the prior year period, and an operating loss of $6.7 million in the prior quarter. Fourth quarter fiscal 2024 net loss included interest and other income of $108 thousand and a tax benefit of $85 thousand, compared to $101 thousand in interest and other income, and a tax provision of $191 thousand for the same period a year ago. In the preceding third quarter, net loss included interest and other income of $155 thousand, and a tax provision of $71 thousand.

Total fourth quarter pre-tax stock-based compensation expense was $693,000, compared to $515,000 in the comparable quarter a year ago, and $649,000 in the prior quarter. For the fiscal year ended March 31, 2024, we reported a net loss of $20.1 million or $0.80 per diluted share, on net revenues of $21.8 million, compared to a net loss of $16 million or $0.65 per diluted share on net revenues of $29.7 million in the fiscal year ended March 31, 2023. Gross margin for fiscal 2024 was 54.3%, compared to 59.6% in the prior year.

The decrease in gross margin was primarily due to product mix and the effect of lower revenue on the fixed cost and our cost of revenues. Total operating expenses were $32.3 million in fiscal 2024, compared to $33.5 million in fiscal 2023. Research and development expenses were $21.7 million, compared to $23.6 million in the prior fiscal year. Selling general and administrative expenses were $10.6 million, compared to $9.9 million in fiscal 2023. The decline in research and development expenses was primarily due to cost reduction measures announced by the company in November 2022. Total operating loss for fiscal 2024 was $20.4 million, compared to an operating loss of $15.8 million in the prior year.

The fiscal 2024 net loss included interest and other income of $414,000 and a tax provision of $70,000, compared to $202,000 in interest and other income, and a tax provision of $372,000 in the prior year. At March, we had $14.4 million in cash and cash equivalents, compared to $30.6 million in cash, cash equivalents and short-term investments at March 31, 2023. Working capital is $19.1 million as of March 31, 2024, versus $34.7 million on March 31, 2023, with no debt.

Stockholders' equity as of March 31, 2024, was $36 million, compared to $51.4 million as of the end of the fiscal year ended March, ended March 31, 2023. Concluding with the outlook for the first quarter of fiscal 2025, we anticipate net revenues in the range of $4.6 million-$5.2 million, with gross margin of approximately 52%-54%. Operator, at this call, we'd like to open the call to Q&A.

Operator (participant)

Thank you, presenters. Ladies and gentlemen, we will now begin the question-and-answer session. Should you have a question, please press the star followed by the number one on your touch-tone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press the star followed by the number two. If you're using a speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question. Again, if you would like to ask a question, please press star one. Presenters, I don't see any questions at this time. I would now like to turn the call to our CEO, Lee-Lean Shu, for closing remarks.

Douglas Schirle (CFO)

Thank you all for joining us. Please check out my recent published article in Forbes, "The Untold Story of AI's Huge Carbon Footprint." You can find it on the Forbes website at forbes.com. We look forward to speaking with you again when we report our first quarter fiscal 2025 results. Thank you.

Operator (participant)

Thank you so much, ladies and gentlemen. This concludes today's conference call. Thank you for listening. You may now disconnect. Have a great day.