GSI Technology, Inc. — Form 10-Q
Reporting period: Quarter and nine months ended December 31, 2017 (fiscal 2018 Q3). Amounts below are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Business context
GSI is a fabless semiconductor company designing and selling Very Fast SRAM and low-latency DRAM, primarily for networking and telecommunications. It also is developing in-place associative computing products following its MikaMonu acquisition.
Financial performance
| Metric | Three months ended Dec. 31, 2017 | Prior-year quarter | Nine months ended Dec. 31, 2017 | Prior-year nine months |
|---|---|---|---|---|
| Revenue | $11.1 | $11.5 | $31.5 | $37.8 |
| Gross profit / margin | $5.7 / 51.0% | $6.5 / 56.6% | $16.1 / 51.3% | $20.6 / 54.4% |
| Operating income (loss) | $(1.0) | $0.2 | $(4.4) | $1.0 |
| Net income (loss) | $(1.5) | $0.3 | $(4.8) | $1.2 |
| Diluted EPS | $(0.07) | $0.02 | $(0.23) | $0.06 |
| Operating cash flow | Not separately provided | Not separately provided | $(0.6) | $1.3 |
Revenue declined 3.2% year over year in the quarter and 16.8% for the nine-month period. Gross margin fell 5.6 percentage points in the quarter and 3.1 points for the nine months. Management attributed weaker revenue to continued networking and telecom market softness, particularly in Asia, Nokia inventory correction, and lower Cisco-related sales. Higher excess-and-obsolete inventory provisions also weighed on margin: $0.4 million for the quarter and $1.2 million year to date, versus $0.2 million and $0.5 million, respectively, a year earlier.
Quarterly R&D rose 11% to $4.2 million, primarily due to associative processor development payroll. Nine-month R&D increased to $12.7 million. The company recorded a $0.6 million income tax provision in the quarter, including an estimated $0.639 million charge related to U.S. tax reform’s deemed-repatriation transition tax, partly offset by a $0.099 million deferred tax benefit. These tax items contributed to the quarterly loss.
Financial position and liquidity
At December 31, 2017, cash and cash equivalents were $39.7 million, short-term investments $17.0 million, and long-term investments $8.2 million, totaling approximately $65.0 million. Cash plus short-term investments were $56.8 million, compared with $49.9 million at March 31, 2017. Total assets were $99.3 million; total liabilities were $13.9 million; and stockholders’ equity was $85.5 million. Management reported no debt.
Nine-month operating cash use was $0.6 million. Investing activities provided $4.5 million, mainly from investment maturities, and financing activities provided $2.1 million, primarily employee stock-plan proceeds. Cash increased $6.0 million to $39.7 million. Management believes available liquidity and expected operating cash flows should cover working capital and capital expenditures for at least 12 months. Planned headquarters construction expenditures are approximately $1.0 million over the next 12 months.
Outlook, risks and unusual items
- Management expects overall average selling prices to increase over the next several quarters as product mix shifts toward higher-priced, higher-density products; it also expects substantial ongoing R&D spending, which may result in future operating losses. No revenue or earnings forecast was provided.
- Management estimated a fiscal 2018 blended effective tax rate of approximately (3.0%) before discrete items, subject to uncertainty in interpreting and implementing the new tax law.
- Customer concentration is significant: Nokia represented approximately 36% of nine-month revenue and Cisco approximately 6%. Avnet Logistics, a distributor, represented 34.7%. Purchases are generally not secured by long-term customer contracts and may fluctuate or be canceled.
- Manufacturing relies on external suppliers, including TSMC for Very Fast SRAM wafers and Powerchip for LLDRAM wafers; the filing notes supplier concentration and capacity, disruption, and cost risks.
- MikaMonu contingent consideration accrued was $5.9 million, dependent on employee retention and product-development and revenue milestones. The company also reported $2.6 million of facilities/equipment lease and wafer/test purchase obligations.
- The company is assessing the impact of adopting the new revenue standard (ASC 606) on April 1, 2018. It expects the revised guidance may permit recognition of certain distributor sales at shipment, subject to allowances. Revised distribution terms led to $0.848 million of additional shipment-based revenue in the quarter.
- Tax reform estimates may change as regulations and the company’s analysis evolve. The company reported a $0.068 million tax payable liability under the new law. Risk factors were reported as having no material changes from the prior Form 10-K. Management stated disclosure controls were effective and no material internal-control changes occurred during the quarter.
Important facts for investors to verify
- Whether Nokia inventory correction, Cisco softness, and broader Asia market weakness persist, and how customer and distributor concentration affects future sales.
- Whether the planned product-mix shift supports selling prices and margins, and whether inventory provisions remain elevated.
- Progress, commercialization prospects, spending, and milestone risks for the associative computing program and MikaMonu contingent consideration.
- The final effects of U.S. tax reform and ASC 606 adoption on reported earnings, cash taxes, and revenue timing.
- Cash generation relative to ongoing R&D, headquarters construction, supplier obligations, and other commitments.