GSI Technology, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended September 30, 2012 (the second quarter of fiscal 2013; fiscal year ends March 31). Financial statements are unaudited.
Business context
GSI designs and sells integrated circuits, primarily Very Fast SRAMs and low-latency DRAMs, mainly to networking and telecommunications equipment makers. It operates as a fabless semiconductor company and relies on outside manufacturers. Sales are cyclical and concentrated: Cisco Systems represented approximately 27% of revenue in the six-month period.
Financial performance
| Metric | Three months ended Sep. 30, 2012 | Year-over-year change | Six months ended Sep. 30, 2012 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $16.0 million | Down 23.0% | $32.8 million | Down 25.2% |
| Gross profit / margin | $7.2 million / 45.0% | Profit down 20.5%; margin up from 43.6% | $14.0 million / 42.6% | Profit down 27.4%; margin down from 43.9% |
| Operating income | $1.5 million | Down from $1.9 million | $2.4 million | Down from $6.1 million |
| Net income / diluted EPS | $1.1 million / $0.04 | Down from $1.7 million / $0.06 | $2.1 million / $0.07 | Down from $4.9 million / $0.16 |
| Operating cash flow | Not separately provided | — | $4.5 million | Down from $5.3 million |
Liquidity and balance sheet: At September 30, cash and cash equivalents were $34.8 million, short-term investments $32.2 million, and long-term investments $26.1 million; total cash and investments were approximately $93.2 million. Current assets were $101.3 million versus current liabilities of $9.7 million. Total liabilities were $11.8 million; the filing reports no debt. Total assets were $140.9 million. Management said existing liquidity and expected operating cash flow should cover working capital and capital expenditures for at least 12 months.
Cash flows and capital allocation: Six-month investing activities provided $1.5 million, principally reflecting investment maturities and sales exceeding purchases. Financing activities used $2.8 million, including $3.2 million of stock repurchases; the company repurchased 286,232 shares during the September quarter at an average $4.68 per share. Cash increased $3.2 million to $34.8 million.
Changes and management commentary
- Revenue weakness reflected softer orders from the three largest customers, European network-equipment spending pressure, customer inventory drawdowns, and lower Cisco purchases. Cisco sales declined $3.0 million in the quarter and $8.5 million in the six-month comparison.
- Quarterly gross margin improved, while the six-month margin declined; management attributed margin variation to product and customer mix and the effect of lower revenue on fixed manufacturing costs.
- R&D expense increased 6.4% for the quarter and 7.0% for six months. SG&A declined 36.5% and 25.1%, respectively, primarily because Cypress-related legal fees were lower than in the prior-year periods.
- Management expects overall average selling prices to increase over the next several quarters as product mix shifts toward higher-priced, higher-density products, despite expected price erosion on individual products. It expects R&D and certain business-support costs to rise; legal costs may increase depending on litigation developments.
- No specific revenue or earnings guidance was provided. Management cautioned that interim results are not necessarily indicative of full-year results.
Risks, contingencies, and unusual items
- Cypress patent litigation: On October 25, 2012, after quarter-end, an ITC administrative law judge issued a favorable initial determination finding no violation concerning the four patents at issue. The full Commission could review it; the target date for completing the ITC matter was February 25, 2013. The related federal patent case remains stayed. An adverse final outcome could result in sales restrictions, damages, or royalties. The company has not accrued a loss because it cannot estimate the outcome or potential loss.
- Antitrust case: GSI’s antitrust claims against Cypress survived a motion to dismiss in July 2012. GSI expects substantial legal expense pursuing the claims over the next one to two years; litigation also diverts personnel and may affect customer demand.
- Tax items: A California tax audit settlement produced a $168,000 discrete tax benefit in the six-month period. The estimated annual effective tax rate was 29.3%. Unrecognized tax benefits totaled $2.591 million; management said up to $154,000 could be reduced within the next 12 months.
- Operating exposures: Revenue depends on a small number of customers, including Cisco, and distributor Avnet Logistics represented 28% of six-month revenue. GSI also relies on single-source or concentrated suppliers, including TSMC for Very Fast SRAM wafers and Powerchip for LLDRAM wafers. Semiconductor cyclicality, customer order variability, price erosion, international operations, and litigation remain material risks.
- Contractual obligations totaled $6.2 million, primarily wafer, test, and mask purchase commitments. The company reported no off-balance-sheet arrangements. Disclosure controls were assessed as effective, with no material change in internal control reported.
Important facts for investors to verify
- Whether the ITC’s favorable initial determination is reviewed or changed, and the eventual outcome and cost of both Cypress cases.
- Whether revenue stabilizes after customer inventory reductions and European network-equipment weakness, particularly given Cisco’s 27% share of six-month revenue.
- Whether margins and earnings recover as product mix shifts, while tracking price erosion, capacity costs, and continued R&D spending.
- Whether operating cash generation remains adequate alongside stock repurchases, legal costs, and the company’s supplier and customer concentration.
- The resolution and timing of the $2.591 million in unrecognized tax benefits.