GSI Technology, Inc. — Q2 FY2023 Form 10-Q
Business context and reporting period. The quarter and six-month period ended September 30, 2022 (fiscal Q2 and first half of FY2023). GSI designs and sells integrated circuits, principally Very Fast SRAM; it is also developing associative processing unit (APU) products for AI and high-performance computing. Figures below are in U.S. dollars; financial statement amounts are generally in millions.
Financial performance and liquidity
- Quarter revenue: $9.0 million, up 14.8% year over year. Six-month revenue: $17.9 million, up 7.7%. Growth was attributed to increased shipments of high-performance and radiation-hardened SRAM.
- Profitability: Quarterly gross profit was $5.6 million and gross margin 62.6%, versus $4.2 million and 53.6% a year earlier. Six-month gross profit was $11.0 million and gross margin 61.4%, versus $9.0 million and 54.0%.
- Operating expenses and losses: Quarterly R&D was $6.4 million and SG&A $2.4 million; operating loss was $3.2 million and net loss $3.2 million ($0.13 per share). For six months, R&D was $13.0 million, SG&A $5.1 million, operating loss $7.1 million and net loss $7.2 million ($0.29 per share).
- Cash flow: Six-month operating cash use was $8.4 million, compared with $7.4 million in the prior-year period. Investing activities provided $4.0 million, primarily from investment maturities; financing provided $0.2 million. Cash and cash equivalents declined by $4.2 million to $32.8 million.
- Liquidity and obligations: Cash, cash equivalents and investments totaled $38.9 million at September 30, including $5.4 million of short-term and $0.6 million of long-term investments. The company reported no debt, current assets of $50.2 million and current liabilities of $8.0 million. Operating lease liabilities were $0.9 million; contingent consideration was $1.9 million. Management said available liquidity and expected operating cash flows should cover working capital and capital spending for at least 12 months.
- Other metrics: Inventories were $5.5 million, up from $4.7 million at March 31, 2022. Stock-based compensation was $1.3 million for the six-month period.
Material changes versus prior comparable periods
- Revenue increased while unit shipments rose 16.6% for the quarter and 11.6% for the six-month period; average selling prices fell 1.0% and 3.6%, respectively, primarily reflecting product mix.
- Gross margin improved, which management attributed mainly to product and customer mix, including radiation-hardened SRAM shipments, and higher revenue alongside lower cost of revenues.
- Net losses narrowed year over year: $3.2 million versus $4.6 million for the quarter and $7.2 million versus $8.8 million for six months. The six-month operating cash outflow nevertheless increased.
- R&D spending increased 8.3% for the quarter and 8.4% for six months, largely from consulting and software maintenance costs for next-generation APU development. SG&A declined, including the effect of a lower contingent-consideration valuation.
- Nokia accounted for 14% of revenue in both the quarter and six-month period, versus 24% and 34%, respectively, in the comparable prior-year periods. Nokia sales were $1.2 million for the quarter and $2.5 million for six months.
Outlook, commentary and risks
- No specific revenue or earnings guidance is provided. Management expects substantial R&D investment to continue and acknowledges that it may contribute to operating losses.
- Management expects supply-chain constraints to persist through at least the end of FY2023, with manufacturing cost increases continuing into calendar 2023. The company reported a 20% wafer-cost increase received in early 2022 and expected a further 6% increase in early 2023.
- Management cited COVID-19-related customer-access and demand challenges, inflation, rising interest rates, the Ukraine conflict and weaker global economic conditions as potential pressures on demand, results, liquidity and asset values. GSI depends on single-source suppliers, including TSMC for wafers, and orders are generally cancellable or deferrable.
- SRAM represented approximately 96% of six-month revenue. The company also disclosed significant distributor concentration: Avnet Logistics represented 45.4% of six-month revenue. Customer and channel exposure, particularly to Nokia and distributors, may cause results to fluctuate.
- Management reported no goodwill impairment trigger through September 30, 2022, but warned that sustained stock-price declines, customer losses or weaker demand could lead to impairment charges. Failure to meet APU revenue forecasts could also impair finite-lived intangible assets.
- Control weakness: A material weakness involving management review of forecasts used for contingent consideration and intangible-asset recoverability remained unremediated at September 30, 2022. Management concluded disclosure controls and procedures were not effective and described remediation work in progress.
- The company disclosed $3.3 million of purchase obligations, of which $2.0 million was payable within 12 months, and $1.9 million of contingent consideration payable at various dates through December 31, 2025. It reported no off-balance-sheet arrangements.
Important facts for investors to verify
- Progress and testing of remediation for the material weakness, and whether subsequent filings report effective controls.
- Cash burn relative to management’s 12-month liquidity assessment, including investment maturities and committed obligations.
- Revenue, order trends and receivables concentration for Nokia and key distributors, alongside the disclosed dependence on cancellable orders.
- Actual wafer and assembly cost changes, supply availability, and resulting effects on gross margins and fulfillment.
- Commercial adoption and forecast performance of APU products, and any resulting impairment assessments for goodwill or intangible assets.
- Effects of macroeconomic, geopolitical and Taiwan-related risks on customers, suppliers and manufacturing operations.