GSI Technology, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and first six months ended September 30, 2017; filed November 3, 2017. GSI is a fabless semiconductor company focused on Very Fast SRAM and LLDRAM, primarily for networking and telecommunications markets. Financial amounts below are in millions unless noted.
Key financial results
| Metric | Three months ended Sep. 30, 2017 | Year-ago quarter | Six months ended Sep. 30, 2017 | Year-ago six months |
|---|---|---|---|---|
| Revenue | $9.647 | $13.358 | $20.334 | $26.304 |
| Gross profit / margin | $4.858 / 50.4% | $7.343 / 55.0% | $10.462 / 51.5% | $14.065 / 53.5% |
| Operating income (loss) | $(1.794) | $0.380 | $(3.323) | $0.769 |
| Net income (loss) | $(1.740) | $0.626 | $(3.252) | $0.886 |
| Diluted EPS | $(0.08) | $0.03 | $(0.16) | $0.04 |
| Operating cash flow | Not presented quarterly | $(0.285) | $0.419 |
Quarterly revenue fell 27.8% year over year; six-month revenue fell 22.7%. Gross margin declined 4.6 percentage points in the quarter and 2.0 points for the six-month period. Six-month R&D expense increased to $8.495 million from $7.781 million, while SG&A decreased to $5.290 million from $5.515 million.
Liquidity, balance sheet and cash flow
- At September 30, cash and cash equivalents were $37.438 million, short-term investments $12.203 million, and long-term investments $14.596 million. Cash, cash equivalents and short-term investments totaled $49.6 million, versus $49.9 million at March 31.
- Total assets were $101.092 million; total liabilities were $15.445 million; stockholders’ equity was $85.647 million. Management stated that the company had no debt.
- Six-month operating cash use was $0.285 million. Investing activities provided $2.403 million, principally from investment maturities net of purchases; financing activities provided $1.584 million, including $2.063 million of employee-plan stock proceeds and a $0.479 million escrow payment. Cash increased $3.702 million to $37.438 million.
- Contractual obligations totaled $2.951 million, including $1.721 million of wafer and test purchase obligations and $1.230 million of facilities and equipment leases. Contingent consideration related to MikaMonu was accrued at $6.3 million.
Drivers, outlook and risks
- Management attributed weaker revenue to continued weakness in global networking and telecommunications, particularly in Asia, and customer inventory correction. Nokia (Alcatel-Lucent) sales fell to $2.8 million in the quarter from $5.7 million; six-month sales fell to $7.3 million from $11.1 million. Cisco sales also declined.
- Gross margin pressure reflected product and customer mix and higher excess-and-obsolete inventory provisions: $0.739 million for the six months, compared with $0.333 million a year earlier.
- Nokia represented approximately 36% of six-month revenue. Avnet Logistics represented 33.1% of six-month revenue, underscoring customer and distribution-channel concentration.
- No specific revenue or earnings guidance was provided. Management said existing liquidity and expected operating cash flow should cover working capital and capital expenditures for at least 12 months, while noting future capital needs could vary and financing may not be available on acceptable terms.
- Management expects substantial continued R&D investment, particularly in new in-place associative computing products using MikaMonu technology; such spending may contribute to losses. Commercialization, market adoption, and development timing remain important uncertainties.
- Other key risks include semiconductor-market cyclicality, order cancellations and price erosion, dependence on major customers and single-source Asian foundries and suppliers, and technology and product-development risks. The filing said risk factors were not materially changed from the FY2017 Form 10-K.
- ASU 2016-16 adoption reduced retained earnings by $0.595 million through derecognition of a prepaid tax asset; the company reported an $11,000 reduction in tax expense in each of the first two fiscal quarters. U.S. deferred tax assets remained subject to a full valuation allowance.
- Disclosure controls were assessed as effective, with no material changes to internal control over financial reporting during the quarter. The filing reported no share repurchases in the quarter.
Important facts for investors to verify
- Whether demand and customer inventory correction, especially at Nokia and in Asia, continue to weigh on sales.
- Whether gross margin stabilizes and inventory provisions decline as product and customer mix changes.
- Progress, costs, milestones and potential customer adoption for the MikaMonu associative-computing products, including contingent-consideration conditions.
- Supplier capacity and continuity at TSMC, Powerchip and other outsourced manufacturers, and the company’s exposure to customer and distributor concentration.
- Cash use, liquidity and the timing or amount of contingent consideration and other contractual commitments.