Business context and reporting period
GSI Technology, Inc. filed this unaudited Form 10-Q for the three months ended June 30, 2019, its first quarter of fiscal 2020 (not calendar 2019 Q1). The fabless semiconductor company designs and sells SRAMs, primarily for networking and telecommunications. Figures below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Key financial metrics
| Metric | Three months ended June 30, 2019 | Prior-year quarter |
|---|---|---|
| Revenue | $13.019 million | $11.266 million |
| Gross profit / margin | $8.243 million / 63.3% | $5.788 million / 51.4% |
| Operating expenses | $8.472 million | $7.447 million |
| Operating loss | $(0.229) million | $(1.659) million |
| Net loss / diluted loss per share | $(0.125) million / $(0.01) | $(1.646) million / $(0.08) |
| Cash used in operating activities | $(1.247) million | $(2.031) million |
Revenue rose 15.6%; gross profit increased 42.4%, and gross margin expanded 11.9 percentage points. Cash and cash equivalents were $46.435 million, short-term investments $18.282 million, and long-term investments $7.264 million at June 30. Cash plus short-term investments totaled $64.7 million; cash, cash equivalents, and all investments totaled $72.0 million. The company reported no debt. Total assets were $108.266 million, total liabilities $12.184 million, and stockholders’ equity $96.082 million. Current assets were $80.564 million against current liabilities of $7.440 million.
Investing activities provided $2.837 million, mainly from investment maturities net of purchases; financing activities provided $2.350 million, primarily employee-plan stock issuance. Cash increased $3.940 million during the quarter. The filing reports no off-balance-sheet arrangements.
Changes versus the prior-year quarter
- Revenue increased $1.753 million even though units shipped declined 13.5%; average selling price rose 35.2%, reflecting a shift toward higher-density, higher-priced products.
- Cost of revenue fell 12.8%, while gross margin rose from 51.4% to 63.3%. Management attributes the improvement mainly to product and customer mix and different inventory-reserve charges; the prior-year quarter included a $678,000 excess-and-obsolete inventory provision, versus $89,000 this quarter.
- Research and development expense increased 15.4% to $5.595 million, primarily from associative-processor development. Selling, general and administrative expense increased 10.8% to $2.877 million.
- The net loss narrowed to $125,000 from $1.646 million. Operating cash use also narrowed, from $2.031 million to $1.247 million.
Outlook, commentary, risks and unusual items
- Management expects overall average selling prices to increase over the next several quarters as product mix shifts toward higher-priced products. It expects substantial ongoing R&D spending, particularly for in-place associative computing, which may result in operating losses in some periods. No specific revenue or earnings guidance is provided.
- Management believes existing cash, cash equivalents, short-term investments, and expected operating cash flow will meet working-capital and capital-expenditure needs for at least 12 months, while noting that additional funding could be sought or required and may not be available on acceptable terms.
- Customer concentration is material: Nokia represented approximately 46% of quarterly revenue, up from 45% in fiscal 2019. SRAM products generated approximately 99% of revenue. The filing also identifies Avnet Logistics as 34.6% of quarterly revenue, reflecting distributor concentration.
- Management highlights volatile quarterly demand, cancelable orders, cyclical networking and telecom markets, product price erosion, dependence on single-source suppliers (including TSMC and Powerchip), and risks to the development and commercialization of associative-computing products.
- Operating lease accounting was adopted April 1, 2019. The company recorded approximately $1.1 million of right-of-use assets and lease liabilities at adoption; June 30 lease liabilities were $939,000. Contingent consideration related to the MikaMonu acquisition was $4.235 million at fair value, payable over time through December 31, 2025 subject to conditions.
- Management reported effective disclosure controls and no material changes in internal control during the quarter. The filing says its risk factors had no material changes from the fiscal 2019 Form 10-K.
Important facts for investors to verify
- Whether revenue and gross-margin improvement can persist given lower unit shipments, quarterly order volatility, and the quarter’s favorable product mix and inventory-reserve comparison.
- How much future revenue depends on Nokia, Avnet Logistics, and the networking and telecommunications market.
- Progress, required spending, and commercial prospects for the associative-computing product initiative.
- Cash generation and liquidity needs, including lease payments, supplier commitments, and the conditional MikaMonu contingent consideration.
- Exposure to supplier capacity, product price declines, and changes in demand or customer purchasing patterns.