GSI Technology, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended September 30, 2016; filed November 4, 2016. Amounts below are in U.S. dollars. The company designs and sells integrated circuits, principally Very Fast SRAM and LLDRAM, and reports one business segment.
Financial performance
- Quarter revenue: $13.36 million, down 1.6% from $13.58 million in the prior-year quarter. Gross profit was $7.34 million; gross margin improved to 55.0% from 50.9%.
- Quarter earnings: Operating income was $0.38 million, versus an operating loss of $0.30 million. Net income was $0.63 million, or $0.03 per diluted share, versus a net loss of $0.35 million, or $0.02 per share.
- Six-month results: Revenue was $26.30 million, down 4.7% year over year; gross profit was $14.07 million and gross margin was 53.5%, compared with 51.5%. Operating income was $0.77 million versus an operating loss of $1.31 million; net income was $0.89 million versus a net loss of $1.26 million. Diluted earnings per share were $0.04 versus a loss of $0.06.
- Cash flow: Six-month operating cash flow was $0.42 million, compared with cash used of $0.14 million in the prior-year period. Investing activities provided $2.52 million; financing activities used $6.10 million, primarily for share repurchases. Cash and cash equivalents declined $3.16 million to $28.80 million.
- Liquidity and debt: Cash, cash equivalents and short-term investments totaled $47.83 million at September 30, down from $55.11 million at March 31. Including long-term investments, these holdings totaled $60.37 million. Management reported no debt and believes available liquidity and expected operating cash flow will cover working capital and capital expenditures for at least 12 months.
- Balance sheet: Total assets were $103.23 million and total liabilities were $17.66 million. Current assets were $67.84 million against current liabilities of $11.10 million. Inventory increased to $8.98 million from $7.17 million.
Material changes and management commentary
- Quarter revenue was slightly lower, while six-month revenue declined, reflecting weakness in networking and telecommunications markets, particularly in Asia. Alcatel-Lucent sales increased; China sales declined. Cisco sales were lower in the quarter but unchanged for the six-month period.
- Alcatel-Lucent represented approximately 42% of six-month revenue; Cisco Systems represented approximately 9%. Management says sales to these customers can fluctuate significantly and neither is bound by a long-term purchase contract.
- Gross-margin improvement was attributed primarily to favorable product and customer mix. SigmaQuad products accounted for 56.5% of shipments in the six-month period, up from 53.0%.
- Research and development expense rose to $4.28 million for the quarter and $7.78 million for six months, primarily due to payroll and purchased intellectual property associated with associative-processor development. Management expects R&D spending to increase in future periods.
- Selling, general and administrative expense fell substantially year over year, mainly because Cypress-related litigation expenses declined following the May 2015 settlement.
- The company repurchased 579,703 shares during the quarter for approximately $2.6 million; six-month repurchases totaled $6.62 million at an average $4.29 per share. Approximately $4.86 million remained authorized at September 30.
Outlook, risks and contingencies
- Management expects overall average selling prices to rise over the next several quarters as product mix shifts toward higher-priced, higher-density products, while noting that individual product prices typically decline over time. This is an expectation, not formal financial guidance.
- Management plans substantial investment in MikaMonu’s in-place associative-computing technology. Commercialization entails development, market-acceptance, timing and cost risks.
- Key risks include customer and distributor concentration, semiconductor-market cyclicality, order cancellations or timing shifts, price erosion, and reliance on single-source suppliers. TSMC supplies Very Fast SRAM wafers; Powerchip exclusively supplies LLDRAM wafers. The company has no long-term supply agreements with these suppliers.
- MikaMonu contingent consideration was recorded at approximately $5.9 million. Potential contractual payments depend on employee retention and product-development and revenue milestones; the maximum potential earnout and certain retention amounts could be substantially higher than the recorded liability.
- The filing reports $254,000 of long-term unrecognized tax benefits and says a reduction of up to $438,000, including interest and penalties, could occur within 12 months. Tax examination periods remain open in the U.S. and California.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. The filing states that risk factors were not materially changed from the prior Form 10-K.
Important facts for investors to verify
- Whether Alcatel-Lucent demand and the weakness in China and broader networking markets persist, given the company’s customer concentration.
- Whether inventory growth supports planned LLDRAM shipments and whether qualification of the new assembly vendor proceeds as expected.
- Progress, spending and commercial milestones for MikaMonu technology, including the assumptions underlying the $5.9 million contingent-consideration valuation.
- Cash generation and liquidity after share repurchases, and the balance of remaining repurchase authorization.
- Whether gross-margin gains from product mix continue to offset lower revenue and ongoing price erosion.