GSI Technology, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended September 30, 2018; filed November 2, 2018. Financial amounts below are in U.S. dollars unless noted. GSI designs and sells integrated circuits, primarily Very Fast SRAM products. It reports one business segment.
Financial performance
| Metric | Three months ended September 30, 2018 | Six months ended September 30, 2018 |
|---|---|---|
| Revenue | $12.832 million, up 33.0% year over year | $24.098 million, up 18.5% |
| Gross profit / margin | $8.031 million / 62.6% | $13.819 million / 57.4% |
| Operating expenses | $8.425 million | $15.872 million |
| Operating loss | $394,000 | $2.053 million |
| Net loss | $351,000; $0.02 per share | $1.997 million; $0.09 per share |
- Quarterly revenue growth reflected higher average selling prices and a shift toward higher-density products. Average selling price increased 12.6% for the quarter and 8.3% for the six-month period year over year.
- Sales to Nokia were $6.0 million for the quarter and $11.2 million for the six months; Nokia represented approximately 47% of six-month revenue. SigmaQuad products were 66.4% of quarterly shipments and 63.2% of six-month shipments.
- R&D expense rose 38.3% to $5.752 million in the quarter and 24.8% to $10.602 million for six months, primarily due to associative-computing development, including pre-production mask costs. SG&A was $2.673 million for the quarter and $5.270 million for six months.
- Six-month interest and other income, net, was $168,000, down from $201,000, largely reflecting foreign-exchange losses of $124,000. Income tax provision was $112,000 for the six months despite the pretax loss; management cites jurisdictional income mix and valuation allowances.
Cash, liquidity, and obligations
- At September 30, cash and cash equivalents were $37.890 million, short-term investments $18.662 million, and long-term investments $8.960 million. Cash, cash equivalents, and short-term investments totaled $56.552 million, versus $58.365 million at March 31. Total assets were $102.346 million.
- Current assets were $72.057 million and current liabilities $8.782 million. Total liabilities were $14.225 million. The filing reports no debt.
- Six-month operating cash use was $620,000, compared with $285,000 a year earlier. Investing cash use was $3.204 million, including $1.656 million of capital expenditures; financing cash provided was $1.473 million. Cash decreased $2.351 million.
- Management said existing liquidity and expected operating cash flows should cover working capital and capital expenditures for at least 12 months, while noting additional funding could be required or elected. Contractual obligations totaled $3.471 million, principally wafer and test purchase commitments of $2.667 million.
- MikaMonu contingent consideration was recorded at $4.838 million, payable at various dates through December 31, 2025. The company paid $720,000 during the six-month period.
Changes, outlook, and risks
- Compared with the prior-year quarter, gross margin rose from 50.4% to 62.6%, while net loss narrowed from $1.740 million to $351,000. For six months, gross margin rose from 51.5% to 57.4% and net loss narrowed from $3.252 million to $1.997 million. Higher revenue and product mix supported improvement, while elevated R&D spending continued to drive operating losses.
- Management expects substantial R&D spending to continue, particularly on its new in-place associative-computing products, and says this may result in operating losses. The filing provides no numerical revenue or earnings guidance.
- Key risks include dependence on Nokia and other major customers, cyclical networking and telecommunications demand, order volatility and cancellable purchase orders, declining product prices, and reliance on single-source suppliers including TSMC and Powerchip. Nokia accounted for approximately 47% of six-month revenue; Avnet Logistics accounted for 28.5%.
- The company recorded approximately $1.0 million of R&D expense for a non-production mask set in the quarter as part of the transition to a 28-nanometer SRAM process for its APU product. It also accrued approximately $1.0 million for a non-production mask set.
- ASC 606 was adopted April 1, 2018 using the modified retrospective method, with no significant financial-statement impact. Management reported effective disclosure controls and no material change in internal control over financial reporting. Risk factors were described as materially unchanged from the prior 10-K.
Important facts for investors to verify
- Whether Nokia-related demand and the higher-priced product mix persist, given Nokia’s 47% share of six-month revenue.
- Progress, timing, costs, and commercial prospects for the associative-computing/APU program, including further mask spending and milestone obligations.
- Cash conversion and receivables: accounts receivable increased to $7.839 million, and the six-month operating cash outflow included a $2.604 million increase in receivables.
- The filing’s gross-margin figures are inconsistent: the statements and percentage table show 62.6% for the September quarter, while the MD&A narrative states 62.4%.
- Potential tax adjustments under the Tax Cuts and Jobs Act and the $619,000 long-term unrecognized tax benefit; management said resolution timing is uncertain.