GSI Technology, Inc. — Form 10-Q Summary
Reporting period: Three months ended June 30, 2017 (fiscal 2018 first quarter); filed August 4, 2017. GSI designs and sells SRAM and low-latency DRAM integrated circuits, principally for networking and telecommunications. Comparisons below are with the three months ended June 30, 2016 unless stated otherwise. Dollar amounts are in millions unless indicated.
Financial performance
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Revenue | $10.687 | $12.946 |
| Gross profit / margin | $5.604 / 52.4% | $6.722 / 51.9% |
| Operating expenses | $7.133 | $6.333 |
| Operating income (loss) | $(1.529) | $0.389 |
| Net income (loss) | $(1.512) | $0.260 |
| Net loss per share, basic and diluted | $(0.07) | $0.01 |
| Cash used in operating activities | $(1.323) | $(3.106) |
- Revenue fell 17.4%. Management attributed the decline to continuing weakness in networking and telecommunications, especially in Asia, and lower sales to Nokia (Alcatel-Lucent) and Cisco.
- Gross margin improved by 0.5 percentage points, chiefly due to product and customer mix. Gross profit nevertheless declined 16.6%; the quarter included a $448,000 excess and obsolete inventory provision, versus $85,000 a year earlier.
- Research and development expense rose 23.9% to $4.335 million, primarily from $595,000 of increased payroll costs associated mainly with associative processor development. Selling, general and administrative expense was approximately flat at $2.798 million.
- Income tax expense was $81,000 despite the pretax loss; U.S. valuation allowances and the mix of income among jurisdictions affect tax results.
Balance sheet, cash flow and liquidity
- At June 30, 2017, cash and cash equivalents were $31.871 million, short-term investments $17.220 million and long-term investments $14.096 million. Cash plus short-term investments totaled $49.091 million, compared with $49.935 million at March 31, 2017; cash, cash equivalents and all investments totaled approximately $63.2 million.
- Total assets were $101.470 million and total liabilities $14.850 million. The filing reports no debt; management describes the company as having no debt. Current assets were $66.655 million and current liabilities $9.070 million.
- Cash decreased $1.865 million during the quarter. Operating activities used $1.323 million; investing activities used $1.874 million, principally net purchases of investments; financing activities provided $1.332 million, including $1.811 million of employee stock-plan proceeds.
- Management believes existing liquidity and expected operating cash flows will meet working capital and capital expenditure needs for at least 12 months, while noting funding could be sought or elected earlier. Contractual obligations totaled $3.105 million, including $2.442 million for wafer, test and mask purchases.
Material changes and notable items
- Nokia accounted for approximately 42% of revenue and Cisco approximately 8% in the quarter. Avnet Logistics, a distributor, accounted for 30.5% of revenue. Nokia-related sales declined from $5.4 million to $4.5 million year over year; Cisco-related sales declined from $1.5 million to $852,000.
- Accrued contingent consideration related to the MikaMonu acquisition was approximately $6.2 million at June 30, 2017, subject to employee retention and product development and revenue milestones.
- Adoption of ASU 2016-16 derecognized a $595,000 prepaid tax asset with an offsetting reduction to retained earnings. The company said this reduced quarterly income tax expense by $11,000 and is expected to reduce fiscal 2018 tax expense by $43,000. Adoption of ASU 2016-09 increased the NOL deferred tax asset and valuation allowance by $654,000. Adoption of the inventory standard had no material impact.
- Disclosure controls were deemed effective, with no material changes in internal control over financial reporting. The company said risk factors had no material changes from its prior Form 10-K.
Outlook, commentary and risks
- No specific revenue or earnings guidance was provided. Management expects overall average selling prices to increase over the next several quarters as product mix shifts toward higher-priced, higher-density products, while noting that individual product prices generally decline over time.
- Management expects substantial future R&D spending, particularly on MikaMonu-derived in-place associative computing products, and cautions that this spending may result in operating losses. Commercialization entails technology, cost, timing and market-creation risks.
- Results are exposed to semiconductor and end-market cyclicality, customer order and inventory fluctuations, and significant reliance on a small number of customers and distributors. The company has no long-term purchase commitments from major customers.
- Manufacturing is outsourced, with key wafer supply dependent on TSMC for Very Fast SRAM and Powerchip for LLDRAM; the company lacks long-term supply agreements. Other stated risks include price erosion, competition, product development and yield issues, foreign operations and currency exposure, and potential intellectual property claims.
- Warranty costs and liabilities were not material. The filing describes conditional indemnification obligations but does not provide a clear maximum potential payment. No off-balance-sheet arrangements were reported.
Important facts for investors to verify
- Whether demand and inventory corrections at Nokia, Cisco and in Asian networking markets continue to pressure revenue, and whether customer concentration changes.
- Whether the planned associative computing products meet development milestones, attract customers and generate revenue; review the related $6.2 million contingent consideration accrual.
- Whether inventory reserves, gross margin and operating expenses remain appropriate as revenue changes; the quarter’s inventory provision was $448,000.
- Liquidity and cash consumption trends, including operating cash flow, investment maturities and the company’s 12-month liquidity assessment.
- Future effects of tax accounting changes, valuation allowances and uncertain tax positions, as well as the timing and amount of contingent acquisition payments.