GSIT - GSI Technology Demonstrates Something Concrete

Summary

• APU revenues are still negligible with the company just starting to offer their product but to premier companies like the Israel Aerospace Industries that need to test it.
• The Synthetic Aperture Radar market is interesting, and GSIT's Gemini is well suited for the algorithms involved in this kind of image generation. This is concrete.
• Their SRAM products are also dealing with sitting in inventory, with backlogs apparently low on customers being slow with satellite launches, so revenues are guided to slow.
• Still lots of challenges - they need to finish the Gemini-II in order for it to be produced properly.
• Thankfully, the cash balances should cover another 2 years from today of cash burn at this rate, more if the company manages to control R&D costs. Looks very good.

Published on the Value Lab 1/20/23

GSI Technology ( GSIT ) has seen its stock price continue to decline. The reason appears to be a lack of delivery on major contracts in their legacy SRAM business, where they promised large Rad-Hard orders that didn't really come in. Moreover, their expenses are high and they're a little slow with getting customers and the market to realise the value of their APU which ignores the von Neumann bottleneck. The company is now trading at less than 2x their cash value, and probably are trading at around liquidation value. We think though that the clarity from management actually is enough in this latest call where shareholders made their thoughts clear on management performance, and that the company remains extremely advantaged as per the initial thesis. While it has felt like throwing good money after bad so far, these emerging opportunities take time, and we plan on seeing it through as cash burn remains limited enough to keep them a going concern without needing equity raises. The company remains a strong buy based on the facts.

Q2 Call

Let's go through some quotes from the call, starting with their radiation resistant chips, which is actually a growth area for the company among their legacy SRAM products.

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 the heritage. And it still has not been launched, and that is obviously completely out of our control. And so the answer is 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.

Didierre Lasserre, CFO of GSIT

Basically, the stockpiling reversal and changes in customer conditions and inventory management practices are hurting GSIT, as well as the fact that customers are behind on their own satellite launch schedules, perhaps blowback from supply chain issues. Still, as for this quarter, revenue still grew 15% thanks to orders of new prototypes. It just won't continue at this pace next quarter according to management, and we already see a fall-off of momentum among defense customers with share declining 5% in the mix.

Rad-Hard was mentioned, which is still a prototype but is supposed to close large orders that could double GSIT revenues - at least that was what was said in previous quarters .

So the first one was we shipped a fair amount of revenue associated with that Rad-Hard prototype that I talked about. And as we mentioned, that was a one-off sale until they can go into production. So that was certainly some – we had also two programs that did a buildup of inventory from two separate customers that were significant customers for us and the backlog isn't there for this quarter. So we've talked to them and certainly the products are healthy. They just have gotten into an inventory position. And so that's really the three main areas, and they were significant.

Didier Lasserre

It's still a prototype, and they need their customers to move forward with more purchases for it to become the revenue contributor they expected. For now, the Rad-Hard contribution was basically a one-off to help the current quarter which showed substantial growth compared to the last quarter which showed flattish YoY growth, but if the products are desirable they should order more, and they expect that customers will follow up and the company will be able to get them into production.

Then there's developments with the APU which is the growth area. The cloud platform for partnered researchers to use at Searchium.ai is available. They are building libraries and finally the APU is in customers' hands, specifically Elta which is a subsidiary of Israeli Aerospace Industries which is Israel's resident aeronautical company, which can now use the APU. They delivered on their promise here from last quarter. The application is in SAR or synthetic aperture radar , which we will explain in a moment.

Great question. So we delivered the initial system, the POC system to them in the summertime. And they're going through their testing and trials now. And so they're looking at possibly ordering two more systems that are slightly different in the first half of calendar 2023. And I'd say slightly different because they have many use cases, which I talked about in my script.

Didier Lasserre

To be clear, APU revenues are negligible as of this moment, but there is a proof of concept in the hands of a real, even marquee customer for an important and complex task of building high resolution images from radar with SAR and all the associated methods and algorithms. The GSIT APU is supposed to use 88% less power than a CPU or GPU system and require much fewer servers to do the convolutions necessary for SAR. SAR improves the resolution of conventional radar with algorithms, requiring some conditions for imaging that are not hard to accommodate (flying in a straight line etc.). All of it works on Python with the compiler that GSIT has developed, so the APU is going to be working on numpy arrays on the IDE side of things - as far as we understand it. The performance is great, and this is an important application with a prototype in the hands of a difficult customer, an Israeli aeronautical company. The APU could be put on and powered by a UAV.

Bottom Line

The Elta development is important. This is the first tangible sign for shareholders that there is commercial interest in the APU. We are on track to seeing if it's the real deal - already now there's little to doubt it. SAR is an interesting application and there'll be more markets with incrementally little to do to get POCs in new customers' hands.

In terms of cash burn , annualising the 6 month figures for GSIT and looking at the cash balances, it looks like there's two years of runway. In less than a year the company has promised their Gemini-II will be ready, which is when they can start selling their APU at scale. Now, people need to dip their toes into this new technology, but there's time for them to do that with no expectations of equity raises.

Are we anticipating issuing more shares? Not at this time.

Didier Lasserre

We will hold them to this.

In the meantime, revenue could still pick up with Rad-Hard and bolster the cash flows, as well as a hopefully building backlog in their other SRAM products which seem to be in destocking at the customers. They are also looking to cut costs in R&D, which was understandably high as they make the APU, but still looked too high given the actual results.

Yes. Sorry, the response was that we will be reviewing the R&D costs over this quarter, and it will be – there'll be some kind of an announcement by the next call.

Didier Lasserre

Cost control will do a fair bit to control the cash burn as well, although even at current run-rates we are not that concerned.

For now, we focus on the clear start with Elta, and hope that Elta commits to ordering more APUs. Moreover, we want the Gemini-II, which will be ready for large scale production, to be finished soon - within a year according to management. At this point we expect the market to start being met with the APU technology.

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