Business context and reporting period
GSI Technology, Inc. designs and sells high-performance SRAM and low-latency DRAM, mainly for networking and telecommunications, and is developing in-place associative computing products. This 10-K covers the fiscal year ended March 31, 2018; it also reports the fiscal fourth quarter ended that date. The company operates as one segment and uses a fabless manufacturing model.
Key financial metrics
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $42.6 million | $48.2 million |
| Gross profit / margin | $22.4 million / 52.6% | $26.4 million / 54.8% |
| Operating loss | $4.5 million | $0.5 million |
| Net loss | $4.5 million ($0.21 per share) | $0.1 million ($0.01 per share) |
| Cash from operations | $1.1 million | $2.1 million |
| Cash, cash equivalents and short-term investments | $58.4 million | $49.9 million |
| Working capital | $63.9 million | $57.8 million |
| Total liabilities | $12.7 million | $16.2 million |
The company reported no debt. Cash, cash equivalents and investments including long-term investments totaled $66.3 million at year-end. Fiscal Q4 revenue was $11.2 million, gross profit was $6.3 million, and net income was $265,000 ($0.01 per share), following losses in each of the first three fiscal quarters. No standalone quarterly cash-flow or operating-income figure is clearly provided in the filing text.
Material changes versus the prior comparable period
- Revenue declined 11.5%, principally as total units shipped fell 19.9%; a 4.4% increase in average selling price, reflecting a richer mix, partly offset the volume decline.
- Gross margin decreased 2.2 percentage points, mainly due to product/customer mix and higher inventory obsolescence charges. The excess and obsolete inventory provision rose to $1.6 million from $588,000.
- Research and development expense increased to $17.0 million from $15.8 million, chiefly reflecting investment in associative computing and RadHard product qualification.
- Net loss widened from $115,000 to $4.5 million. The company cited lower revenue and gross profit, continued development spending, and a $453,000 tax provision.
- Operating cash flow declined to $1.1 million from $2.1 million. Inventory fell $2.1 million, while deferred revenue fell $1.7 million.
- Revenue included $2.0 million recognized when distribution agreements were revised to remove certain distributor return/price-protection rights and make selling prices fixed at shipment.
Outlook, commentary, risks and unusual items
- Management expects average selling prices across the product portfolio to rise over the next several quarters due to mix shifting toward higher-density products, even though prices for individual products generally decline over time. No quantitative revenue or earnings guidance is given.
- The company planned to continue substantial R&D investment. It expected initial associative-computing product introduction and customer evaluation in late fiscal 2019, with release timing also described as late calendar 2018. Commercial success, technical completion, customer adoption, and the creation of new markets remain uncertain.
- Management said existing cash, investments and expected operating cash flows should fund working capital and capital expenditures for at least 12 months. Planned fiscal 2019 test-equipment spending for associative computing was approximately $1.0 million.
- Customer concentration is significant: Nokia represented approximately 36% of FY2018 revenue, down from 41%; Nokia sales fell $4.5 million. Avnet Logistics accounted for 35.3% of revenue. Major customers generally have no long-term purchase commitments, and orders can be canceled or deferred on short notice.
- Supply is concentrated: SRAM wafers are sourced from TSMC, LLDRAM wafers from Powerchip, and most products are packaged at ASE. The company has no long-term supply agreements with these providers; Taiwan exposure includes political, natural-disaster and supply-disruption risks.
- Tax reform produced a reported $367,000 transition-tax expense; the company said its assessment remained provisional and that it had not yet determined its GILTI accounting policy. A $5.9 million valuation allowance was recorded against deferred tax assets.
- MikaMonu-related contingent consideration was valued at $5.5 million at March 31, 2018; additional payments depend on retention, development milestones and future revenue, with maximum potential earnouts described in the filing. Goodwill of $8.0 million passed the annual impairment test.
- The filing reports no pending legal proceedings. Prior Cypress patent and antitrust litigation was settled in 2015. The auditor issued an unqualified opinion on the financial statements and internal controls; management also concluded controls were effective.
Important facts for investors to verify
- Whether the $2.0 million revenue recognized after distributor contract revisions is nonrecurring and how the revised terms affect future revenue recognition and channel inventory.
- Customer and distributor concentration, particularly Nokia’s demand and Avnet’s share of sales, as well as customer inventory correction and order variability.
- Associative-computing product milestones, customer evaluations, commercialization costs and the timing and basis for contingent consideration.
- Inventory quality and future obsolescence exposure, given the $1.6 million FY2018 provision and declining shipments.
- Liquidity and cash generation, including the $31.7 million held abroad, planned development spending, and the company’s dependence on single-source Asian suppliers.
- Final tax-reform accounting, GILTI exposure and the recoverability of deferred tax assets subject to a valuation allowance.