GSI Technology, Inc. — FY2015 Form 10-K
Reporting period: Fiscal year ended March 31, 2015. The filing also reports the quarter ended March 31, 2015; it is not a fiscal 2014 annual report.
Business context
GSI designs and sells high-performance SRAM and low-latency DRAM memory, primarily for networking and telecommunications equipment. It operates a fabless model, relying principally on TSMC for SRAM wafers and Powerchip for LLDRAM wafers. Sales are concentrated among a small number of OEMs and distributors.
Financial performance and liquidity
| Metric | FY2015 | FY2014 |
|---|---|---|
| Revenue | $53.5 million | $58.6 million |
| Gross profit / margin | $25.1 million / 47.0% | $26.1 million / 44.6% |
| Operating expenses | $31.2 million | $31.9 million |
| Operating loss | $6.0 million | $5.8 million |
| Net loss | $5.0 million | $6.2 million |
| Operating cash flow | $1.1 million | $8.4 million |
For the March 2015 quarter, revenue was $13.1 million, gross profit was $6.5 million and net loss was $2.7 million. Comparable March 2014 quarter figures were $12.8 million, $5.9 million and $5.4 million, respectively.
At March 31, 2015, cash and cash equivalents were $36.8 million, short-term investments $22.2 million and long-term investments $21.7 million—$80.7 million combined. Working capital was $66.2 million; total liabilities were $12.5 million. The company reported no debt. Management said existing liquidity and expected operating cash flow should cover working capital and capital expenditures for at least 12 months. Capital expenditures were $0.5 million.
FY2015 investing activities provided $23.2 million, mainly from investment maturities and sales. Financing activities used $29.1 million, principally for $30.0 million of share repurchases. The company repurchased 4.66 million shares during FY2015; $8.5 million remained authorized at year-end.
Changes versus prior periods
- Revenue fell 8.7% year over year, reflecting weak networking and telecommunications demand, particularly in Asia. Alcatel-Lucent sales rose to $13.2 million; Cisco sales declined to $7.1 million.
- Gross margin improved 2.4 percentage points to 47.0%, helped by product/customer mix, lower variable manufacturing costs and smaller excess-inventory write-downs.
- Operating loss widened slightly, while net loss narrowed. FY2015 SG&A remained high, partly due to litigation-related costs; R&D decreased to $11.9 million.
- Operating cash flow decreased substantially from $8.4 million to $1.1 million. Cash, cash equivalents and short-term investments declined from $80.9 million to $59.0 million, in part reflecting the tender offer and repurchases.
- Alcatel-Lucent represented about 25% of FY2015 revenue and Cisco about 13%. Avnet Logistics alone accounted for 35.2% of revenue.
Outlook, risks and unusual items
- Management expected overall average selling prices to rise over the next several quarters as sales mix shifted toward higher-priced, higher-density products, despite expected price declines for individual products. It also expected R&D spending to increase over time; the filing provides no numerical revenue or earnings guidance.
- New products included 288-megabit SRAMs shipped in early 2015; faster SigmaQuad-IVe SRAM and expanded LLDRAM products were planned for later in 2015. Adoption and commercial contribution were uncertain.
- The company cited continuing market weakness, cyclical demand, price erosion, order cancellations and dependence on a few customers and distributors. It has no long-term wafer supply agreements and depends on single-source foundries, with manufacturing and testing concentrated in Taiwan.
- On May 6, 2015, after fiscal year-end, GSI and Cypress Semiconductor settled their patent and antitrust lawsuits, agreeing to dismiss claims with prejudice and release related claims; both denied liability. GSI expected Cypress-related legal costs to cease after the June 2015 quarter, but said costs in unrelated pending litigation could remain substantial, with a trial then scheduled for October 2015.
- GSI recorded a full valuation allowance against approximately $6.0 million of deferred tax assets following cumulative U.S. tax losses. A previously identified inventory-control material weakness was reported as remediated; management and the auditor concluded internal control over financial reporting was effective at March 31, 2015.
Important facts for investors to verify
- Whether revenue stabilizes and the planned higher-density and next-generation products generate customer adoption and profitable sales.
- Continuing customer concentration and changes in Alcatel-Lucent, Cisco and Avnet-related demand.
- Cash generation, investment balances and the pace of further share repurchases amid operating losses.
- Foundry capacity, single-source supplier exposure and any disruption or cost changes in Taiwan-based manufacturing.
- Costs and outcomes of unrelated litigation, and whether the Cypress settlement has any material financial effects not quantified in the filing.
- Inventory valuation and demand assumptions, tax-asset realizability, and continued effectiveness of financial reporting controls.