GSI Technology, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended December 31, 2018; comparative periods ended December 31, 2017. Amounts below are in U.S. dollars. Balance-sheet comparisons are to March 31, 2018.
Business context
GSI is a fabless semiconductor company that designs and sells Very Fast SRAM and LLDRAM products, primarily for networking and telecommunications markets. SRAM products generated approximately 99% of revenue in the first nine months. Nokia represented approximately 46% of nine-month revenue. The company is also investing substantially in development of in-place associative computing products.
Financial performance
| Metric | Three months ended Dec. 31, 2018 | Three months ended Dec. 31, 2017 | Nine months ended Dec. 31, 2018 | Nine months ended Dec. 31, 2017 |
|---|---|---|---|---|
| Revenue | $14.7m | $11.1m | $38.8m | $31.5m |
| Gross profit / margin | $10.0m / 68.3% | $5.7m / 51.0% | $23.9m / 61.5% | $16.1m / 51.3% |
| Operating income (loss) | $2.2m | $(1.0)m | $0.2m | $(4.4)m |
| Net income (loss) | $2.3m | $(1.5)m | $0.3m | $(4.8)m |
| Diluted earnings (loss) per share | $0.10 | $(0.07) | $0.01 | $(0.23) |
Quarterly revenue rose 32.2%; nine-month revenue rose 23.4%. Management attributed growth mainly to a higher mix of higher-density, higher-priced products, including SigmaQuad, and increased Nokia sales. Units shipped declined 4.8% for the quarter and 2.1% for the nine months, while average selling prices rose 61.3% and 23.9%, respectively. Gross-margin improvement reflected product and customer mix and changes in inventory-reserve charges.
Research and development expense increased 22.2% for the quarter to $5.2m and 23.9% for the nine months to $15.8m, principally reflecting associative processor development costs, including non-production masks, consultants and payroll. SG&A was $2.6m for the quarter and $7.9m for the nine months.
Cash flow, liquidity and obligations
- Cash and cash equivalents were $40.5m; short-term investments were $16.6m and long-term investments $10.2m. Cash plus short-term investments totaled $57.1m, versus $58.4m at March 31, 2018. Management reported no debt. Current assets were $73.8m and current liabilities $8.2m.
- Nine-month operating cash flow was positive $0.8m, compared with negative $0.6m a year earlier. Cash generation was offset mainly by a $2.9m increase in receivables and $1.3m increase in inventory. Ending cash increased $0.3m to $40.5m.
- Investing cash outflow was $1.8m, including $1.9m of property and equipment purchases, largely offset by net investment maturities. Financing cash inflow was $1.3m, including $2.5m from employee stock plans and payments related to MikaMonu consideration and escrow.
- Contractual obligations totaled $3.2m, including $1.0m of facility leases and $2.2m of wafer, software and test purchase commitments. MikaMonu contingent consideration was recorded at $4.5m and is payable at various dates through December 31, 2025.
Management said existing liquidity and expected operating cash flows should cover working capital and capital expenditure needs for at least 12 months, while noting that additional financing could be needed and may not be available on acceptable terms.
Outlook, risks and notable items
- No numerical revenue or earnings guidance was provided. Management expects product mix to continue shifting toward higher-priced products, while individual product selling prices generally decline. It expects substantial R&D spending to continue and said it may result in operating losses in some periods.
- Management described networking and telecommunications markets as cyclical and noted that future Nokia sales may fluctuate substantially. Nokia accounted for approximately 46% of nine-month revenue; two customers represented 62% and 18% of accounts receivable at December 31, 2018.
- Key risks include customer and market concentration, order cancellations or deferrals, price erosion, competition, dependence on outsourced and single-source suppliers (including TSMC and Powerchip), and execution and commercialization risks for associative computing products.
- Other notable items included a $0.9m nine-month provision for excess and obsolete inventory, $0.2m of nine-month foreign-exchange losses, and a $0.7m contingent-consideration payment. The company reported no goodwill impairment trigger since its last annual assessment and no material warranty liability.
- ASC 606 was adopted effective April 1, 2018; management said it had no significant financial-statement impact. Management expected lease accounting adoption to recognize operating lease right-of-use assets and liabilities. Disclosure controls were assessed as effective, with no material change in internal control reported for the quarter.
Important facts for investors to verify
- Whether higher average selling prices and product mix can sustain revenue and margin gains despite lower unit shipments and industry price erosion.
- How Nokia’s large contribution to revenue and receivables, along with distributor and contract-manufacturer exposure, affects future sales and collections.
- Progress, timing, remaining development costs and commercial prospects for the associative computing program.
- Inventory quality and working-capital trends, especially receivables, inventory reserves and operating cash flow relative to reported earnings.
- Terms, timing and potential changes in MikaMonu contingent consideration, and the effect of stock-based compensation and employee equity issuance on dilution.