GSI Technology, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended December 31, 2015. The company designs and sells integrated circuits, primarily Very Fast SRAMs and low-latency DRAMs, serving networking and telecommunications and other markets. Figures below are in U.S. dollars; financial statement amounts are unaudited.
Financial performance
| Metric | Three months ended Dec. 31, 2015 | Three months ended Dec. 31, 2014 | Nine months ended Dec. 31, 2015 | Nine months ended Dec. 31, 2014 |
|---|---|---|---|---|
| Revenue | $12.9 million | $14.2 million | $40.5 million | $40.4 million |
| Gross profit / gross margin | $6.4 million / 49.4% | $6.7 million / 46.7% | $20.6 million / 50.8% | $18.7 million / 46.1% |
| Operating expenses | $7.9 million | $7.3 million | $23.5 million | $21.8 million |
| Operating loss | $(1.6) million | $(0.7) million | $(2.9) million | $(3.2) million |
| Net income (loss) | $(0.8) million | $0.1 million | $(2.1) million | $(2.2) million |
| Basic and diluted loss per share | $(0.04) | $0.01 income per share | $(0.09) | $(0.09) |
- Cash flow: Operating activities used $3.2 million in the nine-month period, versus providing $1.9 million a year earlier. Investing activities provided $0.4 million, including investment maturities, partly offset by investment purchases, acquisition spending, and capital expenditures. Financing activities used $3.3 million, primarily for $4.1 million of share repurchases.
- Liquidity and debt: At December 31, cash and cash equivalents were $30.7 million, short-term investments $19.4 million, and long-term investments $15.5 million. Current assets were $68.9 million and current liabilities $8.5 million; total liabilities were $15.8 million. Management reported no debt and stated that available liquidity and expected operating cash flows should meet working-capital and capital-expenditure needs for at least 12 months.
- Balance sheet changes: Compared with March 31, 2015, cash and short-term investments declined; goodwill rose to $8.0 million following the MikaMonu acquisition. Total assets were $108.2 million, versus $108.9 million at March 31. Stockholders’ equity was $92.4 million.
Material changes versus the prior comparable period
- Quarterly revenue declined 9.2%, while nine-month revenue was essentially flat. In the quarter, sales to Alcatel-Lucent rose to $4.8 million, while Cisco sales fell to $1.1 million; management attributed the latter decline to weaker demand for Cisco switches and routers. China revenue also declined amid weakness in networking and telecommunications markets, particularly in Asia.
- Gross margin improved in both periods, which management attributed mainly to favorable product and customer mix. SigmaQuad products represented 53.6% of shipments in the nine months, up from 40.6% a year earlier.
- Quarterly SG&A rose 15.9% to $5.2 million; the company cited an $883,000 increase in legal fees. Nine-month SG&A increased 13.9%, primarily due to higher legal costs, partly offset by lower travel and stock-based compensation expense.
- The company repurchased 239,508 shares during the quarter for approximately $1.0 million. Approximately $4.4 million remained authorized under its repurchase program at December 31, 2015.
Outlook, commentary, risks, and unusual items
- Outlook: The filing provides no specific revenue or earnings guidance. Management expects overall average selling prices to increase over the next several quarters as product mix shifts toward higher-priced, higher-density products, while acknowledging continuing price declines for individual products. It expects continued significant R&D investment and says expenses may increase.
- Customer and market exposure: Alcatel-Lucent represented approximately 32% of nine-month revenue and Cisco approximately 9%. The company warned that customer orders and sales can fluctuate significantly, that orders are generally cancelable or deferrable, and that the semiconductor and networking markets are cyclical. A distributor, Avnet Logistics, accounted for 28% of nine-month revenue.
- Acquisition: On November 23, 2015, GSI acquired MikaMonu Group Ltd., an Israel-based developer of associative computing technology, for initial cash consideration of approximately $5.0 million. The preliminary allocation included $3.5 million of patents and $8.0 million of goodwill. Contingent consideration had a recorded fair value of $5.8 million; potential retention and earnout payments could total up to approximately $38.8 million. The technology’s commercial and product-development potential is uncertain, and the liability will be remeasured.
- Legal and tax items: GSI and Cypress settled their patent and antitrust litigation in May 2015, with mutual dismissals and releases and no admission of liability. Separately, legal expenses related to commercial and trade-secret litigation remained substantial through the quarter; its trial concluded in November 2015. A $698,000 tax benefit in the quarter resulted from the lapse of statutes of limitations on uncertain tax positions.
- Other risks and controls: Key risks include reliance on outsourced, single-source wafer suppliers (including TSMC and Powerchip), technology and product-transition challenges, price erosion, customer concentration, and international and supply-chain exposures. Management said disclosure controls were effective at period-end and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether demand from Alcatel-Lucent, Cisco, and customers in China subsequently stabilized or changed, and how customer concentration affects revenue.
- Whether improved gross margins persisted despite product pricing pressure and changes in product mix.
- Progress, commercialization prospects, and impairment assumptions for MikaMonu technology, including the contingent consideration valuation and possible future payments.
- Subsequent legal costs and any material developments in the commercial and trade-secret litigation whose trial concluded in November 2015.
- Cash generation, investment balances, repurchases, and management’s liquidity assessment, especially given nine-month operating cash outflow.
- Whether the company’s supplier capacity and inventory reserves remain adequate as demand and manufacturing conditions change.