GSI Technology, Inc. — Form 10-Q Summary
Reporting period: Three months ended June 30, 2018, the first quarter of fiscal 2019. Financial statements are unaudited; amounts below are in U.S. dollars unless noted.
Business context and financial performance
GSI is a fabless semiconductor company focused on very fast SRAM and low-latency DRAM, primarily for networking and telecommunications markets. It reported one operating segment. Approximately 97% of quarterly revenue came from SRAM products.
| Metric | Q1 FY2019 | Q1 FY2018 |
|---|---|---|
| Revenue | $11.266 million | $10.687 million |
| Gross profit / margin | $5.788 million / 51.4% | $5.604 million / 52.4% |
| Operating expenses | $7.447 million | $7.133 million |
| Operating loss | $1.659 million | $1.529 million |
| Net loss | $1.646 million | $1.512 million |
| Diluted loss per share | $0.08 | $0.07 |
| Cash used in operating activities | $2.031 million | $1.323 million |
Liquidity, debt and cash flow
- At June 30, cash and cash equivalents were $36.426 million, short-term investments $16.166 million and long-term investments $11.921 million—$64.513 million combined. Cash, cash equivalents and short-term investments totaled $52.6 million, down from $58.4 million at March 31.
- Total assets were $100.037 million and total liabilities $12.833 million. Management stated the company had no debt.
- Operating cash outflow was primarily associated with the quarterly net loss and a $1.596 million increase in accounts receivable. Investing cash outflow was $3.287 million, including $1.239 million of property and equipment purchases; employee stock plans provided $1.503 million in financing cash.
- Management said existing cash, investments and expected operating cash flow should be sufficient for working capital and capital expenditures for at least 12 months, while noting future funding needs could arise.
Changes versus the prior comparable quarter
- Revenue rose 5.4%; management attributed the increase to a 4.0% higher overall average selling price, reflecting product mix, and higher sales to Nokia. SigmaQuad products were 59.7% of shipments, versus 51.1% a year earlier.
- Gross profit increased 3.3%, but gross margin declined by 1.0 percentage point, primarily due to a larger excess-and-obsolete inventory provision. That provision was $678,000, up $230,000 year over year.
- R&D expense increased 11.9% to $4.850 million, mainly from associative-computing development costs. SG&A decreased 7.1% to $2.597 million, primarily due to lower professional fees.
- Operating and net losses widened. Other income and expense was less favorable, including $115,000 of foreign-exchange losses versus a $1,000 gain in the prior-year quarter.
Outlook, risks and unusual items
- Management expects significant ongoing R&D investment, particularly in its new in-place associative-computing products, and said these expenses may contribute to operating losses. No specific revenue or earnings guidance was provided.
- Management expects overall average selling prices to rise over the next several quarters as product mix shifts toward higher-priced, higher-density products, while acknowledging that individual product prices generally decline over time.
- Customer concentration is significant: Nokia represented approximately 47% of quarterly revenue, and sales through distributors and contract manufacturers represented approximately 54% and 44%, respectively. The largest distributor, Avnet Logistics, accounted for 25.6% of revenue. The filing notes that orders are generally not protected by long-term purchase commitments and may fluctuate, be deferred or be canceled.
- Key risks include semiconductor and networking-market cyclicality; dependence on Nokia and other major customers; reliance on outsourced, single-source manufacturing, including TSMC for Very Fast SRAM wafers and Powerchip for LLDRAM wafers; and execution, market-adoption and cost risks in the associative-computing development program. The filing says risk factors were not materially changed from the prior Form 10-K.
- MikaMonu acquisition contingent consideration was recorded at $5.550 million, payable over time through December 31, 2025, subject to employee retention and product-development and revenue milestones. Its fair-value remeasurement increased SG&A expense by $36,000 in the quarter.
- The company adopted ASC 606 using the modified retrospective method; management said adoption had no significant financial-statement impact and did not change opening retained earnings. The company also disclosed provisional tax accounting related to the 2017 Tax Cuts and Jobs Act; estimates may be adjusted as guidance and analysis develop.
- Contractual commitments totaled $2.619 million, including $1.712 million for wafer and test purchases and $907,000 for facilities and equipment leases. No shares were repurchased during the quarter; $4.4 million remained authorized under the repurchase program.
Important facts for investors to verify
- Whether Nokia’s approximately 47% revenue contribution and the 25.6% contribution from Avnet Logistics persist or change materially.
- Whether revenue growth and the higher-priced product mix can offset price erosion, inventory charges and manufacturing costs while restoring gross margin.
- Progress, commercialization timing, customer traction and further required spending for the associative-computing products.
- Cash conversion and working-capital trends, particularly receivables, and whether liquidity remains adequate under weaker demand.
- Potential changes in MikaMonu contingent consideration, tax estimates and the company’s ability to maintain supply from key manufacturing partners.